<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement (Amendment No. 2)
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c)
or Section 240.14a-12
UNITED MAGAZINE COMPANY
------------------------------------------------
(Name of Registrant as Specified in its Charter)
UNITED MAGAZINE COMPANY
------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules O-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(j)(2)
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
O-11
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule O-11:
---------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule O-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
--------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------
(3) Filing Party:
-------------------------------------------------
(4) Date Filed:
---------------------------------------------------
<PAGE> 2
UNITED MAGAZINE COMPANY
5131 Post Road
Dublin, Ohio 43017
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held Wednesday, September 3, 1997
Notice is hereby given that an Annual Meeting of Shareholders of United
Magazine Company, an Ohio corporation (the "Company"), will be held at the
Holiday Inn, 2350 Westbelt Drive, Columbus, Ohio 43228, on Wednesday, September
3, 1997, at 10:00 a.m. Eastern Time, for the following purposes:
1. To consider and act upon a proposal to approve the Stock
Transfer and Exchange Agreement among the Company, Michiana News
Service, Inc. ("Michiana"), and all of its shareholders, and the
transfer by the Michiana shareholders of all of the stock of Michiana
to the Company in exchange for shares of Common Stock of the Company
and Senior and Subordinated Debentures issued by the Company in
accordance with the terms of such Stock Transfer and Exchange
Agreement.
2. To consider and act upon a proposal to approve the Stock
Transfer and Exchange Agreement among the Company, The Stoll Companies
("Stoll"), and all of its shareholders, and the transfer by the Stoll
shareholders of all of the stock of Stoll to the Company in exchange
for shares of Common Stock of the Company and Senior and Subordinated
Debentures issued by the Company in accordance with the terms of such
Stock Transfer and Exchange Agreement.
3. To consider and act upon a proposal to approve the Stock
Transfer and Exchange Agreement among the Company, Ohio Periodical
Distributors, Inc. ("OPD") and all of its Shareholders and, pursuant to
such agreement, to adopt a merger agreement between the Company and OPD
pursuant to which OPD will be merged with and into the Company and the
shareholders of OPD will receive shares of Common Stock of the Company
and Senior and Subordinated Debentures issued by the Company in
accordance with the terms of such Stock Transfer and Exchange
Agreement.
4. To consider and act upon a proposal to approve the Asset
Transfer and Exchange Agreement between the Company and Northern News
Company ("Northern") and the acquisition by the Company of such of the
assets and the assumption of such of the liabilities of Northern as
they relate to the wholesale distribution of magazines and periodicals
[including the capital stock of MacGregor News Company, Inc.
("MacGregor") owned by Northern] in exchange for shares of Common Stock
of the Company and Senior and Subordinated Debentures issued by the
Company in accordance with the terms of such Asset Transfer and
Exchange Agreement.
5. To consider and act upon a proposal to approve the Stock
Transfer and Exchange Agreement among the Company, Scherer Companies
("Scherer Companies") and all of its shareholders and the transfer by
the Scherer Companies shareholders of
<PAGE> 3
all of the stock of Scherer Companies to the Company in exchange for
shares of Common Stock of the Company and Senior and Subordinated
Debentures issued by the Company in accordance with the terms of such
Stock Transfer and Exchange Agreement.
6. To consider and act upon a proposal to approve the Asset
Transfer and Exchange Agreement between the Company and Wholesalers
Leasing, Corp. ("Wholesalers"), and the acquisition by the Company of
such of the assets and the assumption of such of the liabilities of
Wholesalers as they relate to the wholesale distribution of magazines
and periodicals in exchange for shares of Common Stock of the Company
and Senior and Subordinated Debentures issued by the Company in
accordance with the terms of such Asset Transfer and Exchange
Agreement.
7. To consider and act upon a proposal to approve the Stock
Transfer and Exchange Agreement among the Company, The George R. Klein
News Co., Central News Co., and Newspaper Sales, Inc. ("The Klein
Companies"), and their shareholder, and the transfer by The Klein
shareholder of all of the stock of The Klein Companies to the Company
in exchange for shares of Common Stock of the Company and Senior and
Subordinated Debentures issued by the Company in accordance with the
terms of such Stock Transfer and Exchange Agreement.
8. If all of the acquisitions set forth in Items One, Two,
Three, Four, Five, Six and Seven, above, and Item Ten below, are
approved by the shareholders at the Annual Meeting and not otherwise
abandoned, to fix the number of directors at thirteen and to elect the
following ten persons to the Board of Directors: Ronald E. Scherer,
Eugene J. Alfonsi, Thaddeus A. Majerek, David B. Thompson, R.L.
Richards, Richard H. Stoll, Sr., Nancy Stoll Lyman, George R. Klein,
William D. Parker and Robert H. Monnaville, each to serve for a term of
one year or until such time as his or her successor is duly elected and
qualified.
9. If all of the acquisitions set forth in Items One, Two,
Three, Four, Five, Six and Seven, above, and Item Ten below, are not
approved by the shareholders at the Annual Meeting or are otherwise
abandoned, to fix the number of directors at seven and to elect the
following five persons to the Board of Directors: Ronald E. Scherer,
Eugene J. Alfonsi, Thaddeus A. Majerek, David B. Thompson and Robert H.
Monnaville, each to serve for a term of one year or until such time as
his successor is duly elected and qualified.
10. To consider and act upon a proposal to amend the Company's
Articles of Incorporation to effect a one-for-ten reverse stock split
of the shares of Common Stock of the Company, without par value. (This
one-for-ten reverse stock split is necessary to give the Company a
sufficient number of authorized shares to complete the acquisitions
described above. The Company will not conduct an odd-lot redemption
program in connection with this reverse stock split. No fractional
shares will be issued as a result of the reverse stock split and the
Company will pay the fair cash value of such shares. For this purpose,
the Company intends to pay the amount of $1.50 per share, on a
pre-reverse split basis, for the fractional shares, which is the per
share post-acquisition but pre-reverse split value used by the Company
for purposes of the various acquisition agreements referred to above.)
11. To consider and act upon a proposal to amend the Company's
Articles of Incorporation, as amended, to change the Company's
principal place of business referenced in the Articles to Dublin, Ohio.
12. To consider and act upon a proposal to ratify the
appointment of the firm of Arthur Andersen LLP as independent public
accountants for the current fiscal year.
<PAGE> 4
13. To transact such other business as may properly come
before the Meeting and any adjournments thereof.
In advance of the Annual Meeting, the Company has begun, effective in
July, 1996 (September, 1996 for The Klein Companies), managing the operations of
each of the companies to be acquired under joint operating agreements or
management arrangements entered into by them, and under these arrangements, the
operations of Michiana, Stoll, OPD, Northern, MacGregor, Wholesalers, Scherer
Companies, and The Klein Companies (collectively, the "Acquisition Parties")
have been combined and operated as a single integrated business. There were no
joint operating agreements with Klein, Scherer Companies or Wholesalers,
however, provisions of the Exchange Agreements with these entities provide for
management by the Company. The operations of each of the Acquisition Parties
have been included in the Company's audited financial statements beginning as of
July 31, 1996 (Klein as of September 14, 1996). From and after those dates, no
separate financial statements are being maintained by the various Acquisition
Parties, and it would be virtually impossible to compile separate financial
statements for the Acquisition Parties after those dates. Despite the
combination of operations described above, it is the opinion of the Company's
legal counsel, Baker & Hostetler LLP, that "the stock, asset, and merger
Acquisitions have not been legally consummated. None of the stock of the
entities being acquired has been transferred to the Company, nor has legal title
to any of the assets of the entities being acquired been transferred to the
Company, nor has the entity being acquired pursuant to a merger been merged into
the Company." The Company's legal counsel further opined that "a de facto merger
between the Company and the acquisition parties has not occurred as of this time
under Ohio law" and that "the vote of the shareholders of the Company . . . is
significant and a legally necessary condition to the completion of the
Acquisitions." The Company's legal counsel also opined that "neither Ohio law,
the Company's articles of incorporation, as amended, nor the Company's code of
regulations, as amended, required the board of directors of the Company to seek
approval of the shareholders of the Company prior to entering into the
management arrangements resulting in the integration and combination of
operations . . ." described above. The opinion of the Company's legal counsel is
annexed to the Proxy Statement as Exhibit A. There are no provisions in the
acquisition agreements providing for the unwinding of the transactions. If the
shareholders do not approve the proposed acquisitions, it would be very
burdensome to separate the operations of the Acquisition Parties from one
another; however, it could be accomplished. In fact, the Company's individual
operations have not been integrated to a great degree with the Acquisition
Parties' operations, and could be separated with some effort. Rather, it is the
operations of the various entities proposed to be acquired that have been
integrated and which would be difficult to separate. The Company is unable to
estimate a cost of such a disassociation; however, the Company believes such
costs will not be material, although there can be no assurance that such costs
would not be material. One possible outcome, if shareholders do not approve of
the acquisitions, is that each of the Acquisition Parties would proceed with the
acquisitions in a new entity separate from the Company so that their integrated
operations would not need to be disassociated.
Proposals One through Seven and Proposal Ten are all conditioned upon
one another and must all be approved for any of them to be approved, and they
each require the affirmative vote of holders of a majority of the outstanding
shares of Common Stock of the Company. Proposal Eight will only be voted upon if
Proposals One through Seven and Ten are approved. Proposal Nine will only be
voted upon if Proposals One through Seven and Ten are not approved. With respect
to each of Proposals Eight and Nine, the nominees receiving the greatest number
of votes will be elected as directors. Proposal Eleven requires the affirmative
vote of holders of a majority of the outstanding shares of the Company. Proposal
Twelve requires the affirmative vote of holders of a majority of the shares
present at the meeting in person or by proxy. Only shareholders of record at the
close of business on July 25, 1997 will be entitled to notice of and to vote at
the Annual Meeting or any adjournment thereof. A list of shareholders will be
available for examination by any shareholder at the Annual Meeting.
<PAGE> 5
Under Ohio law, shareholders who vote against or abstain from voting
for any of Proposals One through Seven are entitled to exercise dissenters'
rights of appraisal and to receive the fair cash value of their shares
determined as of the day prior to the day on which the vote of the shareholders
is taken, which value excludes any appreciation or depreciation in the value of
the stock resulting from the proposed acquisitions. In order to exercise these
rights, shareholders must strictly follow the procedures described under
"Dissenters' Rights." See page 43 of the Proxy Statement.
By Order of the Board of Directors,
---------------------------------------
Ruth Hunter Smith, Secretary
Dublin, Ohio
August 11, 1997
<PAGE> 6
UNITED MAGAZINE COMPANY
5131 Post Road
Dublin, Ohio 43017
PROXY STATEMENT
FOR
THE ANNUAL MEETING OF SHAREHOLDERS
to be held Wednesday, September 3, 1997
Proxies in the form enclosed with this Proxy Statement are being
solicited by the Board of Directors of United Magazine Company, an Ohio
corporation (the "Company" or "UNIMAG"), for use at the Annual Meeting of
Shareholders (the "Annual Meeting") to be held Wednesday, September 3, 1997, at
10:00 a.m. Eastern Time, at the Holiday Inn, 2350 Westbelt Drive, Columbus, Ohio
43228, for the following purposes:
1. To consider and act upon a proposal to approve the Stock
Transfer and Exchange Agreement among the Company, Michiana News
Service, Inc. ("Michiana"), and all of its shareholders, and the
transfer by the Michiana shareholders of all of the stock of Michiana
to the Company in exchange for shares of Common Stock of the Company
and Senior and Subordinated Debentures issued by the Company in
accordance with the terms of such Stock Transfer and Exchange
Agreement.
2. To consider and act upon a proposal to approve the Stock
Transfer and Exchange Agreement among the Company, The Stoll Companies
("Stoll"), and all of its shareholders, and the transfer by the Stoll
shareholders of all of the stock of Stoll to the Company in exchange
for shares of Common Stock of the Company and Senior and Subordinated
Debentures issued by the Company in accordance with the terms of such
Stock Transfer and Exchange Agreement.
3. To consider and act upon a proposal to approve the Stock
Transfer and Exchange Agreement among the Company, Ohio Periodical
Distributors, Inc. ("OPD") and its Shareholders and, pursuant to such
agreement, to adopt a merger agreement between the Company and OPD
pursuant to which OPD will be merged with and into the Company and the
shareholders of OPD will receive shares of Common Stock of the Company
and Senior and Subordinated Debentures issued by the Company in
accordance with the terms of such Stock Transfer and Exchange
Agreement.
4. To consider and act upon a proposal to approve the Asset
Transfer and Exchange Agreement between the Company and Northern News
Company ("Northern") and the acquisition by the Company of such of the
assets and the assumption of such of the liabilities of Northern as
they relate to the wholesale distribution of magazines and periodicals
[including the capital stock of MacGregor News Company, Inc.
("MacGregor") owned by Northern] in exchange for shares of Common Stock
of the Company and Senior and Subordinated Debentures issued by the
Company in accordance with the terms of such Asset Transfer and
Exchange Agreement.
5. To consider and act upon a proposal to approve the Stock
Transfer and Exchange Agreement among the Company, Scherer Companies
("Scherer Companies") and its shareholders and the transfer by the
Scherer Companies shareholders of all of the stock of Scherer Companies
to the Company in exchange for shares of Common
<PAGE> 7
Stock of the Company and Senior and Subordinated Debentures issued by
the Company in accordance with the terms of such Stock Transfer and
Exchange Agreement.
6. To consider and act upon a proposal to approve the Asset
Transfer and Exchange Agreement between the Company and Wholesalers
Leasing, Corp. ("Wholesalers"), and the acquisition by the Company of
such of the assets and the assumption of such of the liabilities of
Wholesalers as they relate to the wholesale distribution of magazines
and periodicals in exchange for shares of Common Stock of the Company
and Senior and Subordinated Debentures issued by the Company in
accordance with the terms of such Asset Transfer and Exchange
Agreement.
7. To consider and act upon a proposal to approve the Stock
Transfer and Exchange Agreement among the Company, The George R. Klein
News Co., Central News Co., and Newspaper Sales, Inc. ("The Klein
Companies"), and their shareholder, and the transfer by the Klein
shareholder of all of the stock of The Klein Companies to the Company
in exchange for shares of Common Stock of the Company and Senior and
Subordinated Debentures issued by the Company in accordance with the
terms of such Stock Transfer and Exchange Agreement.
8. If all of the acquisitions set forth in Items One, Two,
Three, Four, Five, Six and Seven, above, and Item Ten, below, are
approved by the shareholders at the Annual Meeting and not otherwise
abandoned, to fix the number of directors at thirteen and to elect the
following ten persons to the Board of Directors: Ronald E. Scherer,
Eugene J. Alfonsi, Thaddeus A. Majerek, David B. Thompson, R.L.
Richards, Richard H. Stoll, Sr., Nancy Stoll Lyman, George R. Klein,
William D. Parker and Robert H. Monnaville, each to serve for a term of
one year or until such time as his or her successor is duly elected and
qualified.
9. If all of the acquisitions set forth in Items One, Two,
Three, Four, Five, Six and Seven, above, and Item Ten, below, are not
approved by the shareholders at the Annual Meeting or are otherwise
abandoned, to fix the number of directors at seven and to elect the
following five persons to the Board of Directors: Ronald E. Scherer,
Eugene J. Alfonsi, Thaddeus A. Majerek, David B. Thompson and Robert H.
Monnaville, each to serve for a term of one year or until such time as
his successor is duly elected and qualified.
10. To consider and act upon a proposal to amend the Company's
Articles of Incorporation to effect a one-for-ten reverse stock split
of the shares of Common Stock of the Company, without par value. (This
one-for-ten reverse stock split is necessary to give the Company a
sufficient number of authorized shares to complete the acquisitions
described above. The Company will not conduct an odd-lot redemption
program in connection with this reverse stock split. No fractional
shares will be issued as a result of the reverse stock split and the
Company will pay the fair cash value of such shares. For this purpose,
the Company intends to pay the amount of $1.50 per share, on a
pre-reverse split basis, for the fractional shares, which is the per
share post-acquisition but pre-reverse split value used by the Company
for purposes of the various acquisition agreements referred to above.)
11. To consider and act upon a proposal to amend the Company's
Articles of Incorporation, as amended, to change the Company's
principal place of business referenced in the Articles to Dublin, Ohio.
12. To consider and act upon a proposal to ratify the
appointment of the firm of Arthur Andersen LLP as independent public
accountants for the current fiscal year.
<PAGE> 8
13. To transact such other business as may properly come
before the Meeting and any adjournments thereof.
Proposals One through Seven and Proposal Ten are all conditioned upon
one another and must all be approved for any of them to be approved, and they
each require the affirmative vote of holders of a majority of the outstanding
shares of Common Stock of the Company. Proposal Eight will only be voted upon if
Proposals One through Seven and Ten are approved. Proposal Nine will only be
voted upon if Proposals One through Seven and Ten are not approved. With respect
to each of these Proposals, the nominees receiving the greatest number of votes
will be elected as directors. Proposal Eleven requires the affirmative vote of
holders of a majority of the outstanding shares of the Company. Proposal Twelve
requires the affirmative vote of holders of a majority of the shares present at
the meeting in person or by proxy. Only shareholders of record at the close of
business on July 25, 1997 will be entitled to notice of and to vote at the
Annual Meeting or any adjournment thereof. A list of shareholders will be
available for examination by any shareholder at the Annual Meeting. There is no
active trading market in the Company's Common Stock. The Company currently does
not meet the requirements for listing the stock on a stock exchange or on the
NASDAQ stock market and no arrangements have been made with any market makers to
make a market in the Company's stock. The Company does not have any current
plans or arrangements with market makers to establish a market in the Company's
stock or to obtain a listing on an exchange or stock market and there can be no
assurance that a market in the Company's Common Stock will develop or that the
Company will obtain a listing on an exchange or stock market.
If the acquisitions described in Proposals One through Seven are
approved by the shareholders, the aggregate consideration to be paid by the
Company in connection with all the acquisitions will be 48,261,057 shares of
Common Stock (Pre-reverse split), $39,677,604 principal amount of 8% Senior
Debentures due 2002, and $18,465,113 principal amount of 10% Subordinated
Debentures due 2004.
The consideration to be paid by the Company in connection
with each of the foregoing Acquisitions is as follows:
<TABLE>
<CAPTION>
- ------------------------------- ---------------------- -------------------------- --------------------------
ACQUISITION PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF SHARES OF COMPANY COMMON
SENIOR DEBENTURES SUBORDINATED DEBENTURES STOCK
- ------------------------------- ---------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Stoll Shareholders $16,800,000 $9,105,267 19,584,662
- ------------------------------- ---------------------- -------------------------- --------------------------
OPD Shareholders 7,404,807 76,013 10,190,773
- ------------------------------- ---------------------- -------------------------- --------------------------
Northern News Company 1,423,384 501,199 1,335,425
- ------------------------------- ---------------------- -------------------------- --------------------------
Scherer Companies 62,614 561,386 432,980
- ------------------------------- ---------------------- -------------------------- --------------------------
Wholesalers 306,799 388,711 482,599
- ------------------------------- ---------------------- -------------------------- --------------------------
Michiana Shareholders 3,500,000 2,334,256 5,355,811
- ------------------------------- ---------------------- -------------------------- --------------------------
Klein Shareholder 10,180,000 5,498,281 10,878,807
- ------------------------------- ---------------------- -------------------------- --------------------------
TOTALS $39,677,604 $18,465,113 48,261,057
- ------------------------------- ---------------------- -------------------------- --------------------------
</TABLE>
Shareholders are urged to read the detailed information and financial
statements regarding the acquisitions and each of the Acquisition Parties
included in this proxy statement. Shareholders should note that the report of
the independent auditors issued in connection with the Michiana financial
statements contains a going concern qualification.
Only shareholders of record as of July 25, 1997 will be entitled to
notice of and to vote at the Annual Meeting and any adjournment thereof. As of
that date, 26,760,334 of the Company's
<PAGE> 9
common shares, without par value ("Common Stock"), were issued and outstanding.
Each share of Common Stock outstanding as of the record date will be entitled to
one vote on each matter submitted to shareholders for a vote, and shareholders
may vote in person or by proxy. Shares represented by properly executed proxies
will be voted at the Annual Meeting in accordance with the choices indicated on
the proxy. Execution of a proxy will not, in any way, affect a shareholder's
right to attend the meeting and vote in person. Any shareholder giving a proxy
has the right to revoke such proxy at any time before the proxy is exercised by
giving notice of revocation to the Company in writing or in open meeting or by
duly executing and delivering to the Secretary of the Company a proxy card
bearing a later date. A shareholder's presence at the Annual Meeting does not by
itself revoke the proxy.
The mailing address of the principal executive offices of the Company
is 5131 Post Road, Dublin, Ohio 43017. The approximate date on which this proxy
statement and form of proxy are first being sent or given to shareholders is
August 11, 1997.
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
I. INTRODUCTION AND SUMMARY.......................................................1
A. Overview of Business to be Conducted at the Annual Meeting............1
B. Overview of the Acquisitions..........................................3
C. Combination of Operations Prior to Annual Meeting.....................6
D. Benefits to Directors, Officers and Related Parties of
Proposed Acquisitions........................................8
E. Resolution of Related Party Issues....................................9
F. Overview of the Company...............................................11
G. Overview of the Acquisition Parties...................................11
H. Certain Federal Income Tax Consequences...............................14
I. Recommendations of the Board of Directors.............................14
II. THE STOCK AND ASSET EXCHANGES..................................................15
A. Background of the Acquisitions........................................16
B. Reasons for Proposed Acquisition Transactions.........................19
C. The Exchange Agreements...............................................21
D. Material Provisions of Exchange Agreements............................23
E. Debentures............................................................24
F. Material Provisions of the Debentures.................................24
G. Approvals and Consents................................................26
H. Opinion of the Financial Advisor......................................27
I. Certain Federal Income Tax Consequences...............................33
J. Conflicts of Interest and Related Party Transactions ................37
K. Dissenters' Rights....................................................45
L. Pro Forma Selected Financial Data.....................................46
M. Principal Holders of Voting Securities and Ownership
of Shares by Directors and Executive Officers................55
III. THE WHOLESALE PERIODICAL DISTRIBUTION INDUSTRY.................................61
A. Industry Overview.....................................................61
B. Product Management....................................................61
C. Industry Trends.......................................................62
IV. THE COMPANY AND THE COMBINED COMPANY...........................................64
A. Background............................................................64
B. Business .............................................................64
C. Combined Revenue......................................................65
D. Employees.............................................................65
E. Products .............................................................66
F. Suppliers and Pricing.................................................67
G. Distribution System...................................................67
H. Marketing and Sales...................................................68
I. The SMARTS System.....................................................69
J. Customers.............................................................70
K. Competition...........................................................70
L. Financing Arrangements................................................72
M. Facilities............................................................72
N. Additional Information Regarding the Company..........................74
V. SHAREHOLDER PROPOSALS - PROPOSAL ONE...........................................76
A. General .............................................................76
B. Michiana News Service, Inc............................................76
C. Market for Common Equity and Shareholder Matters......................78
</TABLE>
i
<PAGE> 11
<TABLE>
<S> <C> <C>
D. The Exchange Transaction; Certain Provisions of the Michiana
Exchange Agreement....................................................78
E. Purposes and Effect of the Exchange...................................81
F. Accounting Treatment..................................................81
G. Rights of Dissenting Shareholders of the Company......................81
H. Interests of Certain Persons..........................................81
I. Effectiveness.........................................................81
J. Voting................................................................82
K. Michiana Financial Information........................................82
L. Management Discussion and Analysis....................................82
M. Inflation.............................................................83
N. Seasonality...........................................................83
VI. SHAREHOLDER PROPOSALS - PROPOSAL TWO...........................................98
A. General .............................................................98
B. The Stoll Companies...................................................98
C. Business .............................................................98
D. Market for Common Equity and Shareholder Matters......................100
E. The Exchange Transaction; Certain Provisions of the
Stoll Exchange Agreement..............................................100
F. Purposes and Effect of the Exchange...................................103
G. Accounting Treatment..................................................103
H. Rights of Dissenting Shareholders of the Company......................104
I. Interests of Certain Persons..........................................104
J. Effectiveness.........................................................104
K. Voting .............................................................104
L. Stoll Financial Information...........................................105
M. Management Discussion and Analysis....................................105
E. Inflation.............................................................106
F. Seasonality...........................................................106
VII. SHAREHOLDER PROPOSALS - PROPOSAL THREE.........................................127
A. General .............................................................127
B. OPD .............................................................127
C. Business .............................................................127
D. Market for Common Equity and Shareholder Matters......................129
E. The Merger Transaction; Certain Provisions of the OPD Merger Agreement129
F. Purposes and Effect of the Merger.....................................132
G. Accounting Treatment..................................................132
H. Rights of Dissenting Shareholders of the Company......................132
I. Interests of Certain Persons..........................................132
J. Voting .............................................................133
C. Scherer Affiliates Financial Information..............................133
D. Management Discussion and Analysis....................................133
E. Inflation.............................................................134
F. Seasonality...........................................................134
VIII. SHAREHOLDER PROPOSALS - PROPOSAL FOUR..........................................156
A. General .............................................................156
B. Northern .............................................................156
C. Business .............................................................156
D. Market for Common Equity and Shareholder Matters......................158
E. The Asset Transfer and Exchange Transactions; Certain
Provisions of the Asset Transfer and Exchange Agreement...............158
F. Purposes and Effect of the Exchange Transaction.......................161
G. Accounting Treatment..................................................162
H. Rights of Dissenting Shareholders of the Company......................162
I. Interests of Certain Persons..........................................162
</TABLE>
ii
<PAGE> 12
<TABLE>
<S> <C> <C>
J. Effectiveness.........................................................162
K. Voting .............................................................162
L. Financial Information.................................................163
IX. SHAREHOLDER PROPOSALS - PROPOSAL FIVE..........................................164
A. General .............................................................164
B. Scherer Companies.....................................................164
C. Business .............................................................164
D. Market for Common Equity and Shareholder Matters......................166
E. The Stock Transfer and Exchange Transaction; Certain Provisions
of the Stock Transfer and Exchange Agreements....................166
F. Purposes and Effect of the Exchange...................................169
G. Accounting Treatment..................................................169
H. Rights of Dissenting Shareholders of the Company......................169
I. Interests of Certain Persons..........................................169
J. Effectiveness.........................................................169
K. Voting .............................................................170
L. Financial Information.................................................170
X. SHAREHOLDER PROPOSALS - PROPOSAL SIX...........................................171
A. General .............................................................171
B. Wholesalers...........................................................171
C. Business .............................................................171
D. Market for Common Equity and Shareholders Matters.....................172
E. The Asset Transfer and Exchange Transaction; Certain Provisions
Of the Asset Transfer and Exchange Agreement..........................172
F. Purposes and Effect of the Exchange Transactions......................174
G. Accounting Treatment..................................................174
H. Rights of Dissenting Shareholders of the Company......................175
I. Interests of Certain Persons..........................................175
J. Effectiveness.........................................................175
K. Voting .............................................................175
L. Financial Information.................................................176
XI. SHAREHOLDER PROPOSALS - PROPOSAL SEVEN.........................................177
A. General .............................................................177
B. Klein .............................................................177
C. Business .............................................................177
D. Market for Common Equity and Shareholder Matters......................179
E. The Exchange Agreement................................................179
F. Purposes and Effect of the Exchange...................................182
G. Accounting Treatment..................................................182
H. Rights of Dissenting Shareholders of the Company......................182
I. Interests of Certain Persons..........................................182
J. Effectiveness.........................................................182
K. Voting................................................................182
L. Klein Financial Information...........................................183
M. Management Discussion and Analysis....................................183
N. Inflation.............................................................184
O. Seasonality...........................................................184
XII. SHAREHOLDER PROPOSALS - PROPOSAL EIGHT.........................................204
A. Number and Election of Directors......................................204
B. Nominees for Election.................................................205
C. Executive Compensation................................................207
D. Compensation of Directors.............................................209
</TABLE>
iii
<PAGE> 13
<TABLE>
<S> <C> <C>
XIII. SHAREHOLDER PROPOSALS - PROPOSAL NINE..........................................210
A. Number and Election of Directors......................................210
B. Nominees for Election.................................................210
C. Executive Compensation................................................211
D. Compensation of Directors.............................................211
XIV. SHAREHOLDER PROPOSALS - PROPOSAL TEN...........................................212
XV. SHAREHOLDER PROPOSALS - PROPOSAL ELEVEN........................................215
XVI. SHAREHOLDER PROPOSALS - PROPOSAL TWELVE........................................216
XVII. SENIOR AND SUBORDINATED DEBENTURES.............................................217
XVIII. ADDITIONAL INFORMATION ABOUT THE COMPANY.......................................223
XIX. OTHER SHAREHOLDER INFORMATION..................................................272
A. Shareholder Proposals.................................................272
B. Expenses and Solicitation.............................................272
C. Other Business........................................................272
XIII. EXHIBITS
Exhibit A: Opinion of Legal Counsel
Exhibit B: Fairness Opinion of BankBoston, N.A.
Exhibit C: Dissenting Shareholder Rights
Exhibit D: Amended and Restated Articles of Incorporation
</TABLE>
iv
<PAGE> 14
INTRODUCTION AND SUMMARY
OVERVIEW OF BUSINESS TO BE CONDUCTED AT THE ANNUAL MEETING
The Company is proposing to effect stock acquisitions 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 wholesale magazine, book, and newspaper
("periodical") distributors. Additionally, the Company is proposing to effect
business acquisitions with the following companies affiliated with Ronald E.
Scherer ("Ronald E. Scherer"), Chairman of the Board of Directors of the
Company, which are also engaged in wholesale periodical distribution
(collectively, the "Scherer Affiliates"): a merger of Ohio Periodical
Distributors, Inc., an Ohio corporation ("OPD") into the Company, an acquisition
of certain assets of Northern News Company, a Michigan corporation ("Northern")
(including, as an asset of Northern, the capital stock of MacGregor News Agency,
Inc. ("MacGregor")), and of certain assets of Wholesalers Leasing Corp., a
Delaware corporation ("Wholesalers") and an acquisition of the stock of Scherer
Companies, a Delaware corporation ("Scherer Companies"). In connection with the
acquisitions involving the Scherer Affiliates, it is anticipated that the
Scherer Affiliates will contribute total assets of approximately $29,822,000 and
total liabilities of $37,855,000 to the Company. The foregoing entities are
sometimes herein collectively referred to as the "Acquisition Parties" and the
foregoing transactions are hereinafter referred to sometimes as the
"Acquisitions."
In connection with the transactions described above: (a) Company
counsel has advised the Company that the acquisitions of the stock and assets
of OPD, Northern, Wholesalers and the Scherer Companies would be treated as one
acquisition under Ohio law, and such position was taken because the parties
intended these acquisitions to be treated as one acquisition; (b) shareholder
approval would not be required for the acquisitions of the stock and assets of
Northern, Wholesalers and the Scherer Companies if all four of the above
acquisitions were not treated as one acquisition; (c) certain of the Company's
directors have interests in all four transactions; and (d) the Company and its
directors and related parties would likely assert shareholder approval as a
defense to any action brought by shareholders to challenges to transactions or
the decisions of the directors in approving the transactions.
Each of the Acquisitions must be approved by the shareholders of the
Company at the Annual Meeting of Shareholders in order for the Company to
complete the Acquisitions. The consideration to be paid by the Company in the
Acquisitions is Common Stock of the Company and debt securities of the Company
in the form of Senior and Subordinated Debentures. The Company does not
currently have enough authorized and unissued shares of Common Stock to complete
the Acquisitions. In order to have a sufficient number of shares of Common Stock
to issue in the Acquisitions, the Company is proposing a one-for-ten reverse
stock split, which also must be approved by the shareholders of the Company. If
shareholders approve the Acquisitions (and the reverse stock split), then the
Company proposes to expand its Board of Directors and to nominate a number of
the representatives of the Acquisition Parties, along with additional qualified
persons, for election to the Board of Directors. If shareholders do not approve
the Acquisitions (and the reverse stock split), then the existing five Board
members will be nominated for re-election. At the Annual Meeting, the
shareholders will also be asked to approve of some routine or other minor
matters. One of these is the ratification of the independent auditors. Another
of these items is the correction of the Company's Articles of Incorporation to
reflect that its principal place of business is Dublin, Ohio.
Shareholders are urged to read the detailed information and financial
statements regarding the Acquisitions and each of the Acquisition Parties
included in this proxy statement. Shareholders should note that the report of
the independent auditors issued in connection with the Michiana financial
statements contains a going concern qualification.
The following table is a summary of the matters to be voted on at the
Annual Meeting, the vote required, which matters are conditioned upon other
matters being approved and the consideration to be paid in connection with each
Acquisition:
1
<PAGE> 15
<TABLE>
<CAPTION>
- -------------------------------- ------------------------ -------------------------------- --------------------------
Matter to be Conditioned Upon Approval Consideration to be
------------- ------------------------- -------------------
Voted On Vote Required of Other Matters paid by the Company
-------- ------------- ---------------- -------------------
- -------------------------------- ------------------------ -------------------------------- --------------------------
<S> <C> <C> <C> <C>
1. The Acquisition of More than 50% of the Proposals 2, 3, 4, 5, 6, 7 and 5,355,811 shares of
the stock of Michiana outstanding shares 10 must also be approved for Common Stock, $3,500,000
this to be effective. of 8% Senior Debentures
and $2,334,256 of 10%
Subordinated Debentures
- -------------------------------- ------------------------ -------------------------------- --------------------------
2. The Acquisition of More than 50% of the Proposals 1, 3, 4, 5, 6, 7 and 19,584,662 shares of
the stock of Stoll outstanding shares 10 must also be approved for Common Stock,
this to be effective. $16,800,000 of 8% Senior
Debentures, $9,105,267
of 10% Subordinated
Debentures.
- -------------------------------- ------------------------ -------------------------------- --------------------------
3. The Merger of OPD More than 50% of the Proposals 1, 3, 4, 5, 6, 7 and 10,190,773 shares of
into the Company outstanding shares 10 must also be approved for Common Stock, $7,404,807
this to be effective of 8% Senior Debentures,
$76,013 of 10%
Subordinated Debentures
- -------------------------------- ------------------------ -------------------------------- --------------------------
4. The Acquisition of More than 50% of the Proposals 1, 2, 3, 5, 6, 7 and 1,335,425 shares of
Periodical Assets of outstanding shares 10 must also be approved for Common Stock, $1,423,384
Northern this to be effective. of 8% Senior Debentures,
$501,199 of 10%
Subordinated Debentures
- -------------------------------- ------------------------ -------------------------------- --------------------------
5. The Acquisition of More than 50% of the Proposals 1, 2, 3, 4, 6, 7 and 432,980 shares of Common
the stock of Scherer outstanding shares 10 must also be approved for Stock, $62,614 of 8%
Companies this to be effective. Senior Debentures and
$561,386 of 10%
Subordinated Debentures
- -------------------------------- ------------------------ -------------------------------- --------------------------
6. The Acquisition of More than 50% of the Proposals 1, 2, 3, 4, 5, 7 and 482,599 shares of Common
Periodical Assets of outstanding shares 10 must also be approved for Stock, $306,799 of 8%
Wholesalers this to be effective. Senior Debentures and
$388,711 of 10%
Subordinated Debentures
- -------------------------------- ------------------------ -------------------------------- --------------------------
</TABLE>
2
<PAGE> 16
<TABLE>
<CAPTION>
- -------------------------------- ------------------------ -------------------------------- --------------------------
Matter to be Conditioned Upon Approval Consideration to be
------------- ------------------------- -------------------
Voted On Vote Required of Other Matters paid by the Company
-------- ------------- ---------------- -------------------
- -------------------------------- ------------------------ -------------------------------- --------------------------
<S> <C> <C> <C> <C>
7. The Acquisition of More than 50% of the Proposals 1, 2, 3, 4, 5, 6 10,878,807 shares of
the stock of The outstanding shares and 10 must also be approved Common Stock,
Klein Companies for this to be effective. $10,180,000 of 8% Senior
Debentures and
$5,498,281 of 10%
Subordinated Debentures
- -------------------------------- ------------------------ -------------------------------- --------------------------
8. Election of Ten The nominees receiving Proposals 1 through 7 and 10
Directors the greatest number of must be approved or this
votes are elected Proposal will not be
effective.
- -------------------------------- ------------------------ -------------------------------- --------------------------
9. Election of Five The nominees receiving This proposal will not be
Directors the greatest number of effective unless Proposals 1
votes are elected through 7 and 10 are not
approved.
- -------------------------------- ------------------------ -------------------------------- --------------------------
10. 1 for 10 Reverse More than 50% of the Proposals 1 through 7 must be
Stock Split outstanding shares approved or this Proposal will
not be effective.
- -------------------------------- ------------------------ -------------------------------- --------------------------
11. Change of Principal More than 50% of the Not Applicable
Place of Business outstanding shares
- -------------------------------- ------------------------ -------------------------------- --------------------------
12. Ratification of A majority or more of Not Applicable
Auditors the shares present at
the meeting
- -------------------------------- ------------------------ -------------------------------- --------------------------
</TABLE>
As the foregoing table indicates, Proposals One through Seven and
Proposal Ten are all conditioned upon one another and must all be approved for
any of them to be approved, and they each require the affirmative vote of
holders of a majority of the outstanding shares of Common Stock of the Company.
Proposal Eight will only be voted upon if Proposals One through Seven and Ten
are approved. Proposal Nine will only be voted upon if Proposals One through
Seven and Ten are not approved. With respect to each of Proposals Eight and
Nine, the nominees receiving the greatest number of votes will be elected as
directors. Proposal Eleven requires the affirmative vote of holders of a
majority of the outstanding shares of the Company. Proposal Twelve requires the
affirmative vote of holders of a majority of the shares present at the meeting
in person or by proxy. Only shareholders of record at the close of business on
July 25, 1997 will be entitled to notice of and to vote at the Annual Meeting or
any adjournment thereof. A list of shareholders will be available for
examination by any shareholder at the Annual Meeting.
OVERVIEW OF THE ACQUISITIONS
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 and liabilities 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 1,335,425 shares of Common Stock of the Company, $1,423,384 principal amount
of 8% Senior Debentures of the Company
3
<PAGE> 17
Due 2002, and $501,199 principal amount of 10% Subordinated Debentures of the
Company Due 2004. 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 5,355,811 shares of Common Stock of the Company and $3,500,000
principal amount of 8% Senior Debentures of the Company Due 2002, and $2,334,256
principal amount of 10% Subordinated Debentures of the Company Due 2004.
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 19,584,662 shares of Common Stock
of the Company and $16,800,000 principal amount of 8% Senior Debentures of the
Company Due 2002, and $9,105,267 principal amount of 10% Subordinated Debentures
of the Company Due 2004. Effective August 1, 1996, the Company entered into an
Asset Transfer and Exchange Agreement with OPD and the shareholders of OPD (the
"OPD Shareholders"), subsequently modified to a Stock Transfer and Exchange
Agreement. This Agreement has been amended to provide for the Acquisition to be
effected in the form of a merger, pursuant to which OPD will merge with and into
the Company and, in the merger, the stock of OPD will be exchanged for
10,190,773 shares of Common Stock of the Company and $7,404,807 principal amount
of 8% Senior Debentures of the Company Due 2002, and $76,013 principal amount of
10% Subordinated Debentures of the Company Due 2004. Effective August 2, 1996,
the Company entered into an Asset Transfer and Exchange Agreement with
Wholesalers, pursuant to which the Company is to acquire certain of the assets
of that company as are related to the wholesale distribution of periodicals in
exchange for 482,599 shares of Common Stock of the Company and $306,799
principal amount of 8% Senior Debentures of the Company Due 2002, and $388,711
principal amount of 10% Subordinated Debentures of the Company Due 2004.
Effective August 2, 1996, the Company entered into a Stock Transfer and Exchange
Agreement with Scherer Companies and all of 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 432,980 shares of Common Stock of the Company and
$62,614 principal amount of 8% Senior Debentures of the Company Due 2002, and
$561,386 principal amount of 10% Subordinated Debentures of the Company Due
2004. 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 10,878,807 shares of
Common Stock of the Company and $10,180,000 principal amount of 8% Senior
Debentures of the Company Due 2002, and $5,498,281 principal amount of 10%
Subordinated Debentures of the Company Due 2004. The foregoing agreements are
sometimes herein collectively referred to as the "Exchange Agreements."
The Stoll Senior Debentures are payable prior to payment of any other
Senior Debentures. The Company is pursuing financing to pay off the Senior
Debentures and intends to pay off the Senior Debentures with this financing as
soon as possible and prior to maturity. There can be no assurance that the
Company will be able to obtain such financing. Interest on the Senior and
Subordinated Debentures is being accrued through the date of the Annual Meeting.
Interest accrued through June 30, 1997 is approximately $5,016,000. The
Debenture Agreement provides for quarterly principal payments on the Senior
Debentures beginning April 1, 1997; however, all payments are deferred under the
Debenture Agreement until the final closings after the annual shareholders
meeting. As a result, no principal or interest payments have been made on the
Senior and Subordinated Debentures to date.
Finally, in accordance with the terms of the Debenture Agreement, a
five person executive committee (the "Executive Committee") was formed,
consisting of two members appointed by the Stoll Shareholders, currently Richard
Stoll, Sr. and Richard Stoll, Jr., one person appointed by Ronald E. Scherer,
currently Ronald E. Scherer, one person appointed by the Michiana Shareholders,
currently Thaddeus S. Majerek, and one person appointed by the Klein
Shareholder, currently George R. Klein. Until at least $12,000,000 in principal
amount of the Stoll Senior Debentures and all accrued interest thereon have been
paid in full, if the Company proposes to acquire any additional businesses, it
must give notice to the members of the Executive Committee. Upon the request of
any member of the Executive Committee, the proposed acquisition must be reviewed
by the Executive Committee, and the Company is not permitted to proceed with the
proposed acquisition unless at least a majority of the members of the Executive
Committee approves of such acquisition. If no member of the Executive
4
<PAGE> 18
Committee requests a review of the proposed acquisition within ten days after
the Company gives them notice of the proposal, then the Company is permitted to
proceed with the proposed acquisition.
It is anticipated that in order to obtain operating efficiencies, the
Company will consolidate the operations of the Company, Stoll, Michiana, Klein
and the Scherer Affiliates, and, where appropriate, eliminate duplication of
facilities and personnel. Under the Debenture Agreement, until at least
$12,000,000 in principal amount of the Stoll Senior Debentures and all accrued
interest thereon have been paid in full, if the Company proposes to close a
facility or otherwise consolidate an operation that is material to the
operations of Stoll, Michiana, Klein or the Scherer Affiliates, then it is
required to give notice to the member(s) of the Executive Committee who was
(were) appointed by the shareholders of the Acquisition Party whose former
operations could be adversely affected by such consolidation. Upon request of
one of the adversely affected entity's appointee(s) to the Executive Committee,
the proposed consolidation must be reviewed by the entire Executive Committee,
and the Company is not permitted to proceed with the proposed consolidation
unless at least a majority of the members of the Executive Committee approves of
such consolidation. If none of the adversely affected entity's appointee(s) to
the Executive Committee requests a review of the proposed consolidation within
ten days after the Company gives them notice of the proposal, then the Company
is permitted to proceed with the proposed consolidation. See "Senior and
Subordinated Debentures - `Description of Securities'."
In connection with the proposed Acquisitions, the Company is also
consummating other transactions which will not be submitted to a vote of
shareholders. The Company is acquiring approximately $80,000 of transportation
assets and assuming approximately $80,000 of related liabilities for a $1
purchase price from Toman Distribution Services, Inc. (an affiliate of
Michiana). The Company is also acquiring the remaining 21% of MacGregor News
Agency, Inc. from Arthur C. Foster, Sr. for the assumption by the Company of all
obligations due to the former owners of MacGregor News Agency, Inc. from Mr.
Foster, Sr., which amount is approximately $513,512. The Company will purchase
the stock of Read-Mor Bookstores, Inc. (Read-Mor), a retail bookstore chain,
managed by Scherer Companies, for 233,702 shares (pre-reverse split) of Common
Stock of the Company, $242,211 principal amount of 8% Senior Debentures due 2002
and $94,594 principal amount of 10% Subordinated Debentures due 2004. The
shareholder of Read-Mor owns less than 1% of the outstanding shares of the
Scherer Affiliates and the Company.
The Stock and Asset Exchange Agreements for Proposals One through Seven
require adjustments to the original purchase price for subsequent valuations of
tangible net worth based on a review of June 30, 1996 balance sheets (August 23,
1996 for The Klein Companies). The foregoing information includes adjustments
based on the results of these reviews. As a result of these valuations, the
Company anticipates approximately $139,000,000 of goodwill will be recorded in
connection with the Acquisitions. The approximate goodwill amounts to be
recorded are $50,000,000 for Stoll, $33,000,000 for Klein, $31,000,000 for OPD,
$17,000,000 for Michiana and $8,000,000 for Northern.
All of the Acquisitions have been closed into escrow pending a
favorable vote of the shareholders of the Company on each of these transactions.
If the shareholders vote to approve all of the Exchange Agreements at the Annual
Meeting (and the reverse stock split), then closing documents will be released
from escrow and the transactions will be consummated. Ronald E. Scherer, 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 of
Common Stock of the Company to approve the Exchange Agreements with Stoll,
Michiana, Klein and each of the Scherer Affiliates. Together, these shareholders
are entitled to vote more than 50% of the Common Stock of the Company, so the
Company believes that approval of the Acquisitions by the Shareholders is
assured. Since approval of the Acquisitions is assured and the Company had
effective control over the operations of the Acquisition Parties, their
financial information has been included in the consolidated financial statements
of the Company beginning on July 31, 1996 (September 14, 1996 for Klein). Since
that date, separate financial statements have not been maintained by the
Acquisition Parties. See "Principal Holders of Voting Securities and Ownership
of Shares by Directors and Executive Officers."
KDR Limited, an Ohio limited liability company ("KDR"), is owed
$5,000,000 by OPD. Interest of $48,958 is being paid monthly. Since July 1,
1996, the Company paid KDR interest in the aggregate amount of $589,496, and
interest accrued for the month of July 1997 was $48,958. The Company has agreed
with KDR to issue a $4,500,000 10% Subordinated Debenture and $500,000 in
5
<PAGE> 19
cash to KDR in exchange for this $5,000,000 demand note owed by OPD. The owners
of KDR include R. David Thomas, a principal shareholder of the Company, and R.
L. Richards, a nominee for director of the Company. Mr. Thomas has also agreed
to purchase 333,333 shares of Common Stock of the Company at a price of
$500,000. Mr. Thomas' involvement with the Company is limited to being a
shareholder and an investor; Mr. Thomas also is a creditor of OPD. Additionally,
Mr. Thomas' participation as a purchaser of common stock is required to meet the
80% control test of Section 351 of the Code to qualify the Acquisitions for
tax-free treatment. See "Certain Federal Income Tax Consequences."
If the Acquisitions are completed, the proposed transactions will
represent a major step in the Company's consolidation strategy. Management
believes that the Company, together with Michiana, Stoll, Klein, OPD, MacGregor,
Northern, Wholesalers and Scherer Companies (collectively the "Combined
Company"), will have a estimated market share for the Ohio, Indiana, Michigan
and western Pennsylvania region estimated by management at greater than 50%, and
will be well positioned to pursue complementary acquisitions as the wholesale
periodical distribution industry continues to consolidate.
COMBINATION OF OPERATIONS PRIOR TO ANNUAL MEETING
The Board of Directors of the Company decided that due to the rapid
changes occurring in the periodical distribution industry, it was in the best
interests of the Company and its Shareholders, particularly given the agreement
of principal shareholders to vote in favor of the Acquisitions, to begin
operating the Company and the Acquisition Parties as a single integrated
business. Therefore, in advance of the Annual Meeting, the Company began,
effective in July, 1996, (except for Klein, effective in August, 1996) managing
the operations of each of the companies to be acquired under joint operating
agreements and management arrangements entered into by them, and under these
arrangements the operations of Michiana, Stoll, OPD, Northern, MacGregor,
Wholesalers, Scherer Companies, and Klein have been combined and operated as a
single integrated business. There were no joint operating agreements with Klein,
Scherer Companies, or Wholesalers, however, provisions of the Exchange
Agreements with Klein, Scherer Companies, and Wholesalers provide for management
by the Company. The operations of each of the Acquisition Parties have been
included in the Company's audited financial statements beginning as of July 31,
1996 (Klein as of September 14, 1996). From and after those dates, no separate
financial statements are being maintained by the various Acquisition Parties and
it would be virtually impossible to compile separate financial statements for
the Acquisition Parties after those dates. Despite the combination of operations
described above in this section, it is the opinion of the Company's legal
counsel, Baker & Hostetler LLP, that "the stock, asset, and merger Acquisitions
have not been legally consummated. None of the stock of the entities being
acquired has been transferred to the Company, nor has legal title to any of the
assets of the entities being acquired been transferred to the Company, nor has
the entity being acquired pursuant to a merger been merged into the Company."
The Company's legal counsel further opined that "a de facto merger between the
Company and the acquisition parties has not occurred as of this time under Ohio
law" and that "the vote of the shareholders of the Company . . . is significant
and a legally necessary condition to the completion of the Acquisitions." The
Company's legal counsel also opined that "neither Ohio law, the Company's
articles of incorporation, as amended, nor the Company's code of regulations, as
amended, required the board of directors of the Company to seek approval of the
shareholders of the Company prior to entering into the management arrangements
resulting in the integration and combination of operations. . ." described in
this section. The opinion of the Company's legal counsel is annexed to the proxy
statement as Exhibit A.
There are no provisions in the Exchange Agreements providing for the
unwinding of the transactions. If the shareholders do not approve the proposed
acquisitions, it would be very difficult and burdensome to separate the
operations of the Acquisition Parties from one another; however, it could be
accomplished. In fact, the Company's operations have not been integrated to a
great degree with the Acquisition Parties' operations and could be easily
separated; rather it is the operations of the various Acquisition Parties that
have been integrated and would be difficult to separate. The Company is unable
to estimate a cost of such a disassociation; however, it believes such costs
would be immaterial to the
6
<PAGE> 20
Company, although there can be no assurance that such costs could not be
material to the Company. One possible outcome, if shareholders do not approve
of the Acquisitions and related reverse stock split, is that each of the
Acquisition Parties would proceed with the acquisitions in a new entity
separate from the Company so that their integrated operations would not need
to be disassociated.
Under the joint operating agreements and the management arrangements
under the Exchange Agreements, the operations of Michiana, Stoll, Scherer
Affiliates and Klein were combined and operated as a single integrated business.
Prior to the effective date of the Exchange Agreements, the Acquisition Parties
were responsible for their own costs and expenses retained for their own account
all profits or losses from their operations. The results of operations are
reflected in the separate company interim financial statements as of June 30,
1996. The Exchange Agreements also provide for the Company to manage the
operations of the Acquisition Parties as if the acquisitions had occurred. Since
the effective date of each Acquisition Agreement, the Company has managed the
Acquisition Parties for the risk and reward of the Company's shareholders, with
the Company responsible for all operations and risk of loss prior to closing.
Shareholders are being asked to approve the Exchange Agreements.
As of July 1, 1996 (August 24, 1996 for Klein), the Company began
managing all aspects of the combined entities, including implementation of
synergistic strategies such as consolidation of warehouse locations, the
streamlining of overlapping functions, and the termination of certain personnel.
Marketing and distribution operations were commingled with respect to customers
and operations of the Acquisition Parties. The Acquisition Parties' computer and
management information systems have also been integrated into the Company's
systems. The Company's letterhead and business cards were used for the
Acquisition Parties' communications including the Workers Adjustment and
Retraining Notification Act ("WARN") sent to Michiana employees in September of
1996, and the Acquisition Parties' phones were answered "United Magazine
Company, XXX Division" at all locations.
The parties have begun to consolidate warehouse and office functions
and each of the Acquisition Parties has created "depot" facilities in place of
distribution facilities. In the first fiscal quarter of 1997, Stoll absorbed the
warehouse and office functions of Michiana (Niles, Michigan), Northern
(Petoskey, Michigan) and MacGregor (Mt. Pleasant, Michigan) into its Jackson
warehouse and office facility. Stoll previously had converted its Toledo and
Grand Rapids operations to depots and also closed its Galesburg, Michigan
location. In addition to transferring its warehouses and office functions to
Jackson, Michigan, Michiana also reduced the scope of its Fort Wayne operations
and combined parts of those operations with Stoll's Indianapolis operations. In
March of 1997 the warehouse and office functions of OPD's Columbus operations
were transferred to Cincinnati. In February of 1997 Klein transferred its Akron
warehouse and office operations to Cleveland. The warehouse facilities receive
books and periodicals in bulk from publishers or national distributors. At the
distribution facility, they are repackaged with other products on a weekly or
monthly basis for delivery to retailers within a particular region. These
distribution operations have been consolidated into one location. There is also
another activity which has been consolidated into the Stoll warehouse facility.
When product is returned by retailers, it is shredded and baled, and additional
revenue is generated from the sale of the bales of scrap paper to a recycler.
This activity has also been consolidated into the distribution facility.
Certain of the Acquisitions Parties have also had reductions in work
force with corresponding gross payroll savings, excluding payroll taxes and
fringe benefits, including as follows: Michiana - 45 positions for annual
savings of $650,000; OPD - 35 positions for annual savings of $583,000; Northern
- - 32 positions for annual savings of $401,000.
Since the fleet of trucks and computer equipment owned by Wholesalers
is already provided to the Scherer Affiliates pursuant to lease arrangements,
no significant actions to integrate the operations of Wholesalers with the
Company and the other Acquisition Parties was necessary.
In addition to the foregoing activities, the following additional
operational actions have been taken: management is being done on a divisional
approach versus a separate company approach; functional meetings for marketing
and finance are being held; there is joint decision making in operational and
accounting areas; future business planning is in an integrated mode; the
Company is holding combined general management meetings; management is working
on a consolidated benefits plan; a systems committee has been formed to work on
consolidating systems in such areas as payroll and accounts payable; management
is synchronizing year-end audit procedures; a customer committee has been
formed for joint marketing; ongoing computer upgrades are taking place; the
Company has consolidated book buying; some reassignment of personnel has
occurred; some equipment has been reallocated between divisions; and the
Company is developing a general ledger for all entities to be on a single
system.
The Exchange Agreements states that the Company should manage and
oversee the operation of the business of each of the Acquisition Parties as if
the Acquisition had already occurred. The joint operating agreements indicate
that the Company and each Acquisition Party will "work together in all areas
necessary to address existing, changing and future market conditions as if the
managing company had already successfully become an existing subsidiary of the
Company."
Subsequent to June 30, 1996, the operations of Michiana, Stoll and
Scherer Affiliates were commingled to such an extent that it would be difficult
and burdensome to separate their operations from one another because the Company
transferred business from Michiana and Scherer Affiliates into Stoll. As a
result, accurate "separate company" financial information was not maintained
after the transfers, and reconstruction of the Acquisition Parties business
operations, especially Michiana, would be difficult and burdensome and it would
be virtually impossible to compile separate company financial information for
the Acquisition Parties. The acquisition agreements did not contemplate any
unwinding, and there are no provisions in the agreements for unwinding the
transactions.
The Company has not kept separate records for the costs of integration
and cannot estimate these costs, and the Company does not have plans to
establish a cost system to separately track costs allocable to integration of
operations. The Company has not and will not determine how much it will cost to
integrate operations of the Acquisition Parties. In all cases, the integration
of operations has resulted in a net reduction of operating expenses both in the
aggregate and as a percentage of net revenue.
The Michiana, Stoll and Scherer Affiliate Debentures began to accrue
interest on July 1, 1996 (Klein as of August 24, 1996) because the Company and
the Acquisition Parties believed that was the date the Acquisition Parties
relinquished effective control and had no rights to the future risks and
7
<PAGE> 21
rewards of ownership, and therefore, should obtain an economic return on their
consideration from those dates. Although the interest on the Debentures has
begun to accrue, no interest (or principal) has actually been paid, nor will it
be paid until after a favorable vote of the shareholders.
As stated previously, if the shareholders do not approve the proposed
acquisitions, it would be very difficult and burdensome to separate the
operations of the Acquisition Parties from one another; however, it could be
accomplished. The Company is not presently able reasonably to estimate the costs
of separating the operations. The operations of the Company are based in
Connecticut, Pennsylvania and North Carolina. As a result, those operations have
not been integrated with the Acquisition Parties to a great extent and could be
segregated from the operations of the Acquisition Parties, which are based
primarily in Ohio, Michigan and Indiana. If the Company's shareholders do not
approve the acquisitions and related reverse stock split, one possible method of
separating operations is for all of the Acquisition Parties to sell their
companies to a new entity to be formed by them, thereby quickly separating the
operations from the Company but not from the various Acquisition Parties. If
that method of separation is not used, then the following discussion is a likely
scenario for separation of the combined operations.
After the product is processed at a distribution facility, it is
loaded into trucks and shipped to the depot facilities. In the depot facilities,
the pre-bundled products are reallocated into smaller trucks for delivery to
retailers. The depot facilities being utilized by the Acquisition Parties
could be re-opened as distribution facilities. Such re-opening would take
approximately ninety days. Each of the Acquisition Parties would need to buy
necessary equipment and hire additional personnel in order to convert these
depots back to distribution facilities. Also, national distributors would need
to be notified as to where to deliver product in bulk. This process could also
take up to approximately ninety days.
In order to separate the operations of the Acquisition Parties, each of
them would need to re-establish their former computer and management information
systems. Again this would be difficult and a burden, but it could be done.
Finally, the revenues and operating expenses of each of the Acquisition Parties
would need to be separated. This would take a great deal of cooperation among
the Acquisition Parties. Revenue could be allocated based upon the revenue
generated by the various customers of each of the Acquisition Parties. Operating
expenses could be allocated among the parties based upon a percentage of revenue
or another basis agreed upon by all of the Acquisition Parties.
BENEFITS TO DIRECTORS, OFFICERS AND RELATED PARTIES OF PROPOSED ACQUISITIONS
The proposed transactions can provide benefits to several parties to
the transaction. The current Company shareholders, which include Directors
Ronald E. Scherer, David B. Thompson, Eugene J. Alfonsi and Robert H. Monnaville
and Officer Thomas L. Gerlacher, have an opportunity for increased earnings per
share and share value as a result of the Acquisitions, as do all shareholders
generally. Each of these parties will have a reduced percentage of ownership;
however, the ownership will be of a larger Company with greater potential for
future financial success.
The proposed transactions will benefit the shareholders of the
Acquisition Parties to the extent that they will receive publicly held stock
(although inactively traded at present) and interest bearing debentures in
exchange for their ownership in previously privately held companies. There may
be tax benefits to these selling shareholders through the 351 Exchange,
described under the heading "Certain Federal Income Tax Consequences", and there
is the potential for future increases (or decreases) in the value of their share
holdings.
Five of the Director nominees will receive three year employment or
management agreements at specified annual salaries: Ronald E. Scherer,
($491,000), David B. Thompson ($224,000), Eugene J. Alfonsi ($195,000), Thaddeus
A. Majerek ($160,000), and George R. Klein ($159,000). However, these agreements
are generally at lesser amounts than previous compensation levels as officers of
privately held companies. Additionally, Richard Stoll, Sr., who is a nominee for
election as a director, entered into a 12-year deferred compensation agreement
valued at $1,373,000 at June 30, 1996 prior to the date of the Stoll Exchange
Agreement. The Company will assume this liability as part of the acquisition of
Stoll. An additional eleven individuals, three of whom will be receiving shares
of the Company's common stock as part of the Acquisition transactions, also will
receive three year employment contracts. All of these individuals are actively
involved in day-to-day management and provide the Company with an experienced
management team through the transition process.
Some of the facilities which the Company will occupy are owned by
parties to the Acquisitions. The Company will enter into a lease with Northern,
which is owned by a Scherer family Trust at a rental rate of $51,000 per year,
for a 17,000 square foot warehouse facility and will assume a lease of Scherer
Companies with NRS Equities, Inc., an entity owned by Ronald E. Scherer, for
17,800 square feet of office space at a rental rate of $258,100 per year. Stoll
leases a 78,000 square foot facility from Richard Stoll, Sr., for rental of
$144,000 per year, and seven additional parcels of real estate from a Stoll
family trust. Two of these leases provide total annual rental of $300,000 and
are for the wholesale operations. Three of these leases are used for retail
operations and provide for a month to month rental amount of $5,090. The two
remaining leases were terminated in 1997. Michiana leases a 46,800 square foot
facility from A. Marie Majerek at a rental rate of $144,000 per year and the
Company is purchasing a 14,200 square foot facility from her for the approximate
price of $250,000. Leases have been reviewed and adjustments have been made to
lease rates to create terms no less favorable than could be obtained from
non-affiliated parties.
Related parties who are owed debt by the Acquisition Parties will have
an opportunity to have that debt repaid when the Company obtains refinancing,
although refinancing is not presently assured.
Thaddeus S. Majerek and A. Marie Majerek have guaranteed loans of
$1,501,000 owned by Michiana to First Source Bank. The George R. Klein News
Company has guaranteed $320,940 to a company 50% owned by George R. Klein.
To the extent these debts are repaid, or the Company pays on the guaranty,
the individuals could benefit.
The Company has entered into a five year agreement for the supply of
periodicals and books to Hall of Cards and Books, Inc., which is owned by eight
of the principal shareholders of Michiana.
See also "The Stock and Asset Exchanges - Conflicts of Interest and
Related Party Transactions."
RESOLUTION OF RELATED PARTY ISSUES
Because a number of the proposed acquisitions are with related parties,
in connection with the consideration of the proposed Acquisitions, the Company's
Board of Directors took several steps to help assure itself that the
Acquisitions are on terms no less favorable to the Company as they would be if
they were with independent unrelated parties.
First, although the option agreements with Stoll, Michiana and OPD
were dated March 1, 1996, and contain the purchase price for the acquisitions of
Stoll, Michiana and OPD, the initial Exchange Agreement that was negotiated was
the agreement with Stoll. Stoll was totally unrelated and was represented by
competent legal counsel, and accordingly, it was thought that Stoll would serve
as a good benchmark for all of the other Acquisitions. The other Exchange
Agreements are substantially similar to the Stoll Exchange Agreement. The
Exchange Agreement between the Company and Michiana was entered into prior to
the Exchange Agreement with Stoll. Although management evaluated the potential
acquisition of the Scherer Affiliates during the summer of 1995, the Stoll and
Michiana agreements were used as a basis for the agreements with the Scherer
Affiliates.
Second, interested persons on the Company's Board of Directors
abstained with respect to any decision relating to a company in which a Director
had an interest. Thaddeus A. Majerek, a Director of the Company, is a principal
shareholder, a Director and an Officer of Michiana. He abstained with respect to
the Company's deliberations regarding Michiana. Ronald E. Scherer, Chairman of
the Board and a principal shareholder of the Company, is also a principal
shareholder, Director and Officer of the various Scherer Affiliates. David B.
Thompson and Eugene J. Alfonsi, two of the other members of the Company's Board
of Directors, are employees of the various Scherer Affiliates. These Directors,
along with Mr. Scherer, are also involved in the management of the Company.
Robert H. Monnaville, another Director of the Company, is employed by Yankee, a
subsidiary of the Company. In an effort to provide for independence on the Board
with respect to the Scherer Affiliates, the Board formed an independent
Director's Committee consisting of Thaddeus A. Majerek. Mr. Majerek was deemed
independent for this purpose because he was not an employee of the Company and
he had no ties to Mr. Scherer or the Scherer Affiliates. However, he will
benefit as a result of the Michiana Exchange Agreement, which is conditioned
upon closing of the Scherer Affiliate Acquisitions. He will receive an
employment agreement providing for an annual salary of $160,000. He will receive
stock ownership in the Company and members of his family will benefit. See
"Benefits to Directors, Officers and Related Parties of Proposed Acquisition."
Any major issues that arose during the negotiations of the Exchange Agreements
with the Scherer Affiliates were decided by Mr. Majerek in his capacity on the
independent Director Committee.
Third, the company retained BankBoston, N.A., formerly the First
National Bank of Boston, Boston, Massachusetts (BankBoston), to act as a
financial advisor to it in connection with the Acquisitions and to render
an opinion as to the fairness, from a financial point of view, of the
consideration to be paid in connection with the Acquisitions.
Under Section 1701.60 of the Ohio Revised Code, if a Director has an
interest in a particular transaction, it will not be a void or voidable
transaction if any of the following three conditions are met:
1. the material facts as to his or their relationship or
interest and as to the contract, action or transaction are disclosed or
are known to the Directors or the Committee and the Directors or
Committee, in good faith reasonably justified by such facts, authorizes
the contract, action or transaction by the affirmative vote of a
majority of the disinterested Directors, even though the disinterested
Directors constitute less than a quorum of the Directors or the
Committee;
2. the material facts as to his or their relationship or
interest and as to the contract, action or transaction are disclosed or
are known to the shareholders entitled to vote thereon, and the
contract, action, or transaction is specifically approved at a meeting
of the shareholders held for such purpose by the affirmative vote of
the holders of shares entitling them to exercise a majority of the
voting power of the corporation held by persons not interested in the
contract, action, or transaction; or
3. the contract, action or transaction is fair as to the
corporation as of the time it is authorized or approved by the
Directors, a committee of the Directors, or the shareholders,
Although a determination of whether any of these conditions has been
satisfied would ultimately be determined by a court of law, the Company believes
that the approval of the independent Directors, as discussed above, meets the
first of these tests. Although the Company is not soliciting a vote of
shareholders who are independent with respect to the transactions, if a majority
of the shareholders who are independent with respect to the transactions (for
example, excluding shares held by Mr. Scherer with respect to the Scherer
Affiliate transactions) approve of the Acquisitions, the Company believes the
second of the three tests also could be satisfied. Additionally, the Company
believes that the opinion of BankBoston may indicate the fairness of the
transactions, from a financial point of view, as indicated by the third test.
Approval by the shareholders of the various Acquisitions would likely be
asserted as a defense by the Company or the Directors, Officers or related
parties in the event any shareholder or other interested person were to
challenge the transactions or the decisions of the Directors in approving the
transactions.
In addition to claims under the Ohio Statute reference above,
shareholders may have other claims against the Company and its directors under
other theories of law with respect to the proposed transactions.
8
<PAGE> 22
OVERVIEW OF THE COMPANY
The Company, through its subsidiaries, currently operates wholesale
periodical distribution operations primarily in central Connecticut, eastern
North Carolina, and western Pennsylvania. Upon completion of the Acquisitions,
the Company will add 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 will acquire and operate
retail bookstores in connection with these operations.
OVERVIEW OF THE ACQUISITION PARTIES
The Acquisition Parties are well established, family-owned periodical
wholesalers centered in Michigan, Ohio, and Indiana. Each Acquisition Party is
centrally located around a major metropolitan area with an outreach of services
to surrounding rural areas. For many years, all of the wholesaler Acquisition
Parties have enjoyed a long-standing vendor relationship with the retailers in
the areas they service. More complete information on these companies is included
later in this proxy statement. Summary information with respect to each
Acquisition Party is as follows:
MICHIANA NEWS SERVICE, INC.
Michiana News Service, Inc. is a Michigan corporation
headquartered in Niles, Michigan. Michiana was incorporated in July,
1971, and has been engaged in the wholesale magazine and book
distribution business. During 1995 Michiana distributed over 3,000
different periodicals to over 2,000 retail outlets through a
distribution facility located in Niles, Michigan, and a depot located
in Ft. Wayne, Indiana. For the year ended June 30, 1996, Michiana
generated net sales in excess of $25 million.
The following selected historical financial data of Michiana
should be read in conjunction with Michiana's financial statements,
which include in the auditor's report an explanatory fourth paragraph
on "going concern," contained in Shareholder Proposals - Proposal One,
included herein. Per share data is omitted because it is not
applicable.
MICHIANA
<TABLE>
<CAPTION>
(in 000's) Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
6/30/96 6/30/95 6/30/94 6/30/93 6/30/92
- ------------------------------------------ ------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales $25,625 $26,889 $25,398 $20,915 $19,507
Income from Continuing Operations
Before Taxes and Extraordinary $ 123 $ 644 $ 418 $ 174 $ 387
Items
Balance Sheet Data:
Total Assets $12,800 $14,571 $13,822 $11,593 $ 9,077
Long-Term Debt Obligations $ 2,815 $ 3,241 $ 5,796 $ 4,323 $ 1,939
</TABLE>
See Shareholder Proposals - Proposal One for additional
information regarding business, properties, and financial matters
related to Michiana. See also "The Stock and Asset Exchanges Conflicts
of Interest and Related Party Transactions."
9
<PAGE> 23
THE STOLL COMPANIES
The Stoll Companies, an Ohio corporation headquartered in
Toledo, Ohio, has been engaged in the wholesale magazine and book
distribution business. During 1995 Stoll distributed over 3,000
different periodicals to over 3,750 retail outlets through two
distribution facilities located in Jackson, Michigan and Indianapolis,
Indiana and through four depots located in Wyoming, Michigan, Toledo,
Ohio, Galesburg, Michigan, and Ludington, Michigan. Stoll also operated
13 retail bookstores, totaling approximately 58,000 sq. ft., through
which it sold magazines, books, newspapers and related products. For
the fiscal year ended September 30, 1995, Stoll generated net sales in
excess of $84 million.
The following selected historical financial data of Stoll
should be read in conjunction with Stoll's financial statements
contained in Shareholder Proposals -Proposal Two, included herein. Per
share data is omitted because it is not applicable.
STOLL
<TABLE>
<CAPTION>
(in $000's) Nine Mths. Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended Ended
6/28/96 9/30/95 9/30/94 9/30/93 9/30/92 9/30/91
- ------------------------------------- ------------ ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales (Including Other Income) $ 59,565 $ 84,235 $ 82,533 $ 78,528 $ 76,469 $ 70,247
Income from Continuing Operations $ (7,791) $ 1,379 $ 2,281 $ 2,678 $ 1,785 $ 2,193
Before Taxes and Extraordinary
Items
Balance Sheet Data:
Total Assets $ 37,292 $ 36,045 $ 36,436 $ 31,907 $ 30,793 $ 29,001
Long-Term Debt Obligations $ 301 $ 0 $ 190 $ 373 $ 346 $ 0
</TABLE>
See Shareholder Proposals - Proposal Two for additional
information regarding business, properties, and financial matters
related to Stoll. See also "The Stock and Asset Exchanges - Conflicts
of Interest and Related Party Transactions."
THE SCHERER AFFILIATES: OHIO PERIODICAL DISTRIBUTORS, INC., NORTHERN
NEWS COMPANY, MACGREGOR NEWS AGENCY, INC., WHOLESALERS LEASING, CORP. AND
SCHERER COMPANIES
Ohio Periodical Distributors, Inc., an Ohio corporation;
Northern News Company, a Michigan corporation, and its subsidiary,
MacGregor News Agency, Inc., a Michigan corporation; Wholesalers
Leasing Corp., a Delaware corporation; and Scherer Companies, a
Delaware corporation; have been companies either directly engaged in
the wholesale distribution of magazines and books or engaged in the
management of such companies. During 1995, the Scherer Affiliates
distributed over 3,000 different periodicals to over 3,250 retail
locations through four facilities located in Columbus, Ohio,
Cincinnati, Ohio, Petoskey, Michigan, and Mt. Pleasant, Michigan. For
the calendar year ended December 31, 1995, the combined Scherer
Affiliates, excluding MacGregor, which was acquired by Northern in
1996, generated net sales in excess of $61 million.
The following selected historical financial data of Scherer
Affiliates should be read in conjunction with the Scherer Affiliates'
financial statements contained in Shareholder Proposals Proposal Three,
included herein. Per share data is omitted because it is not
applicable. The following selected historical financial data does not
include any financial information on MacGregor.
10
<PAGE> 24
THE SCHERER AFFILIATES (excludes MacGregor for 1995 and prior)
<TABLE>
<CAPTION>
(in $000's) Six Months Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended Ended
6/28/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
- --------------------------------- --------------- -------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Combined Income Statement Data:
Net Sales $ 31,742 $ 61,413 $ 59,572 $ 58,426 $ 57,106 $ 54,279
Income (Loss) from Continuing
Operation Before Taxes and
Extraordinary Items $ (450) $ 2,194 $ 2,942 $ 2,226 $ 4,238 $ 2,784
Combined Balance Sheet Data
Total Assets $ 29,822 $ 19,553 $ 20,154 $ 14,325 $ 17,615 $ 15,892
Long-Term Debt Obligations $ 2,798 $ 1,320 $ 1,000 $ 6,060 $ 6,135 $ 4,093
</TABLE>
See Shareholder Proposals - Proposals Three through Six for
additional information regarding business, properties, and financial
matters related to the Scherer Affiliates. See also "The Stock and
Asset Exchanges - Conflicts of Interest and Related Party
Transactions."
THE KLEIN COMPANIES
The George R. Klein News Co., an Ohio corporation
headquartered in Cleveland, Ohio, was incorporated in 1958 and has been
engaged in the wholesale magazine and book distribution business.
Central News Co., an Ohio corporation headquartered in Akron, Ohio, was
incorporated in 1959 and has been engaged in the wholesale magazine,
book and newspaper distribution business. Newspaper Sales, Inc., an
Ohio corporation headquartered in Cleveland, Ohio, was incorporated in
1981 and has been engaged in the newspaper distribution business. The
stock of these three companies is owned by George R. Klein. During 1995
Klein distributed over 3,000 different periodicals to over 3,000 retail
outlets through these companies. For the year ended December 31, 1995,
Klein generated net sales in excess of $46 million.
The following selected historical financial data of Klein
should be read in conjunction with Klein's financial statements
contained in Shareholder Proposals - Proposal Seven, included herein.
Per share data is omitted because it is not applicable.
KLEIN
<TABLE>
<CAPTION>
(in 000's) Six Months Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended Ended
6/28/96 12/31/95 12/31/94 12/31/93 12/31/92 12/31/91
- --------------------------------- ------------ -------------- -------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Combined Income Statement Data:
Net Sales $ 24,248 $ 46,242 $ 44,772 $ 43,493 $ 44,159 $ 42,352
Income (Loss) from Continuing
Operations Before Taxes and $ (1,163) $ 1,659 $ (315) $ (405) $ 694 $ (804)
Extraordinary Items
Combined Balance Sheet Data:
Total Assets $ 19,991 $ 14,210 $ 15,046 $ 11,920 $ 13,586 $ 9,586
Long-Term Debt Obligations $ 1,555 $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
See Shareholder Proposals - Proposal Seven for additional
information regarding business, properties, and financial matters
related to Klein. See also "The Stock and Asset Exchanges - Conflicts
of Interest and Related Party Transactions."
11
<PAGE> 25
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The proposed acquisitions may have material federal income tax
consequences to the Company and its shareholders, including shareholders of the
Company exercising dissenting shareholder rights. The material federal income
tax consequences are discussed under the heading "Certain Federal Income Tax
Consequences" beginning on page 30.
12
<PAGE> 26
RECOMMENDATIONS OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has reviewed the rationale for
the Acquisition transactions and has determined that the best interests of the
shareholders of the Company are served by entering into the contemplated
transactions. The reasons for the recommendations by the Board of Directors are
the same reasons the Board approved the Exchange Agreements as discussed under
"Background of the Acquisitions -- Reasons for Proposed Acquisition
Transactions." As a consequence, the Board of Directors recommends that
shareholders of the Company vote in favor of Proposals One through Eight and Ten
through Thirteen. The Board of Directors of the Company includes two Officers,
Directors and Stockholders of the Acquisition Parties, Ronald E. Scherer and
Thaddeus A. Majerek. The Board of Directors of the Company also includes two
other Officers and Directors of the Scherer Affiliates, David B. Thompson and
Eugene J. Alfonsi; however, they are not owners of any of the stock of the
Scherer Affiliate companies. Each of these four Directors will receive
employment agreements in the transaction. See "The Stock and Asset Exchanges -
`Conflicts of Interest and Related Party Transactions'."
THE STOCK AND ASSET EXCHANGES
The following table presents the proposals being submitted for
shareholder approval with Proposals One through Seven relating to the Stock and
Asset Exchanges and Proposals Eight through Twelve relating to various other
matters.
<TABLE>
<CAPTION>
- ----------------------------- ---------------------- -------------------------- ---------------------------------
Conditioned Upon
-----------------
Matter to be Approval of Other Consideration
------------- ----------------- -------------
Voted On Vote Required Matters to be paid by the Company
--------- ------------- ------- -------------------------
- ----------------------------- ---------------------- -------------------------- ---------------------------------
<S> <C> <C> <C> <C>
1. The Acquisition of More than 50% of the Proposals 2, 3, 4, 5, 6, 5,355,811 shares of Common
the stock of outstanding shares 7 and 10 must also be Stock, $3,500,000 of 8% Senior
Michiana approved for this to be Debentures and $2,334,256 of
effective. 10% Subordinated Debentures
- ----------------------------- ---------------------- -------------------------- ---------------------------------
2. The Acquisition of More than 50% of the Proposals 1, 3, 4, 5, 6, 19,584,662 shares of Common
the stock of Stoll outstanding shares 7 and 10 must also be Stock, $16,800,000 of 8% Senior
approved for this to be Debentures, $9,105,267 of 10%
effective. Subordinated Debentures.
- ----------------------------- ---------------------- -------------------------- ---------------------------------
3. The Merger of OPD More than 50% of the Proposals 1, 2, 4, 5, 6, 10,190,773 shares of Common
into the Company outstanding shares 7 and 10 must also be Stock, $7,404,807 of 8% Senior
approved for this to be Debentures, $76,013 of 10%
effective. Subordinated Debentures
- ----------------------------- ---------------------- -------------------------- ---------------------------------
4. The Acquisition of More than 50% of the Proposals 1, 2, 3, 5, 6, 1,335,425 shares of Common
Periodical Assets outstanding shares 7 and 10 must also be Stock, $1,423,384 of 8% Senior
of Northern approved for this to be Debentures, $501,199 of 10%
effective. Subordinated Debentures
- ----------------------------- ---------------------- -------------------------- ---------------------------------
</TABLE>
14
<PAGE> 27
<TABLE>
<CAPTION>
- ----------------------------- ---------------------- -------------------------- ---------------------------------
Conditioned Upon
-----------------
Matter to be Approval of Other Consideration
------------- ----------------- -------------
Voted On Vote Required Matters to be paid by the Company
--------- ------------- ------- -------------------------
- ----------------------------- ---------------------- -------------------------- ---------------------------------
<S> <C> <C> <C> <C>
5. The Acquisition of More than 50% of the Proposals 1, 2, 3, 4, 6, 432,980 shares of Common Stock,
the stock of outstanding shares 7 and 10 must also be $62,614 of 8% Senior Debentures
Scherer Companies approved for this to be and $561,386 of 10%
effective. Subordinated Debentures
- ----------------------------- ---------------------- -------------------------- ---------------------------------
6. The Acquisition of More than 50% of the Proposals 1, 2, 3, 4, 5, 482,599 shares of Common Stock,
Periodical Assets outstanding shares 7 and 10 must also be $306,799 of 8% Senior
of Wholesalers approved for this to be Debentures and $388,711 of 10%
effective. Subordinated Debentures
- ----------------------------- ---------------------- -------------------------- ---------------------------------
7. The Acquisition of More than 50% of the Proposals 1, 2, 3, 4, 5, 10,878,807 shares of Common
the stock of The outstanding shares 6 and 10 must also be Stock, $10,180,000 of 8% Senior
Klein Companies approved for this to be Debentures and $5,498,281 of
effective. 10% Subordinated Debentures
- ----------------------------- ---------------------- -------------------------- ---------------------------------
8. Election of Ten The nominees Proposals 1through 7
Directors receiving the must be approved or this
greatest number of Proposal will not be
votes are elected effective.
- ----------------------------- ---------------------- -------------------------- ---------------------------------
9. Election of Five The nominees This proposal will not
Directors receiving the be effective unless
greatest number of Proposals 1through 7 are
votes are elected not approved.
- ----------------------------- ---------------------- -------------------------- ---------------------------------
10. 1 for 10 Reverse More than 50% of the Proposals 1 through 7
Stock Split outstanding shares must be approved or this
Proposal will not be
effective.
- ----------------------------- ---------------------- -------------------------- ---------------------------------
11. Change of More than 50% of the Not Applicable
Principal Place of outstanding shares
Business
- ----------------------------- ---------------------- -------------------------- ---------------------------------
12. Ratification of A majority or more Not Applicable
Auditors of the shares
present at the
meeting
- ----------------------------- ---------------------- -------------------------- ---------------------------------
</TABLE>
BACKGROUND OF THE ACQUISITIONS
The periodical wholesale distribution industry has undergone
significant consolidation during 1996. 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. During
1996, large retailers began 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 both in a
smaller
15
<PAGE> 28
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 be able to compete effectively for large retail accounts
while providing additional value-added services to the retailers.
To address the developing changes in the wholesale periodical
distribution industry and the Company's desire to expand it operations to a more
competitive level, the Board determined, at a regular meeting on March 29, 1995,
that senior management of the Company should explore the Company's potential to
combine with, or acquire, other wholesale periodical distribution companies. The
Company's initial focus was placed on those companies operating in geographical
areas contiguous to the areas already serviced by the Company.
At several previous meetings of the Board of Directors, and again at
the Board meeting on May 15, 1995, senior management presented the Board with
potential stock acquisitions in Connecticut, none of which would progress to a
written acquisition agreement. At its May, 1995 meeting, however, the Board did
form a committee comprised of Directors Alfonsi, Monnaville and Majerek to
evaluate the possibility of an acquisition of the Majerek's reship operations in
Michigan.
The potential transaction between the Company and the reship company
owned by the Majerek family was never consummated because management determined
that the reship operations, apart from the balance of Michiana's operations,
would not significantly enhance the wholesale distribution operations of the
Company. However, senior management recognized the need to continue its efforts
to achieve a combination of the Company's operations with those of other
distributors. Management evaluated the potential acquisition of the Scherer
Affiliates during the summer of 1995. The Company and the Scherer Affiliates
share the same management team, and discussions of a possible business
combination or acquisition were conducted on an informal basis by Ronald E.
Scherer, David B. Thompson, and Eugene J. Alfonsi, initially. The primary focus
of these discussions was to what extent such an acquisition would be responsive
to the changes taking place in the periodical distribution industry. At this
early stage of consideration, the amount and structure of potential purchase
price was not a topic of discussion. Management did discuss the fact that such
an acquisition, when combined with the Company's management of the Wilmington
agency, would significantly increase the volume of annual net sales controlled
by the Company. Management discussed its expectation that this increase in
annual sales could not only enhance the stature of the Company within the
wholesale periodical distribution industry and its ability to service its
customers in a more cost efficient manner, but would also position the Company
to meet the developing trend for consolidation among its customers. Management
also discussed the importance of acquiring other contiguous wholesale
distribution businesses to maximize the value that might be realized through the
acquisition of the Scherer Affiliates.
In late summer of 1995, the management of both the Company and the
Scherer Affiliates agreed that the greatest value in a consolidation of their
businesses could only be achieved if management were successful in bringing
other contiguous wholesale distributors into the Company. Discussions between
the Company and the Scherer Affiliates were suspended while the Company pursued
its discussions with Stoll and Michiana.
Therefore, on September 24, 1995, management met separately with the
management of Michiana and with the management of Stoll to discuss the
possibility of structuring a transaction between the Company and each of the
Acquisition Parties which would not require substantial outside financing or
drain off cash flow from the Company's current operations. On September 26,
1995, the financial advisors of the Acquisition Parties met in Dublin, Ohio to
discuss the valuation of the companies and the tax ramifications of the
acquisitions. These advisors were David Berkenes, CFO of Michiana, John
Heiniger, CFO of Stoll, and Daniel Kaiser, CFO of the Scherer Affiliates. They
determined that it should be possible to structure a tax free transaction
between the Company and the Acquisition Parties. On September 30, 1995, the
principal shareholders of Stoll and the principal shareholders of Michiana came
to Columbus to meet with the Company's senior management. Also, discussions
between management and the Scherer Affiliates were resumed at this time.
Discussions with the Acquisition Parties were focused on the desire of the
Company and the Acquisition Parties to consolidate their operations in response
to the rapid changes in the industry and to achieve this consolidation on the
basis of a tax-free transaction. Management initially considered structuring all
of the transactions as stock acquisitions. At this time, however, the Company
and the Acquisition Parties narrowed the transactions under discussion to the
acquisition of the stock of Stoll and Michiana and the acquisition of the
periodical assets of the Scherer Affiliates because the Company did not wish to
acquire non-periodical distribution assets from the Scherer Affiliates.
On January 29, 1996, management of the Company met with the management
of Michiana and reached an agreement in principle to provide the Company with an
option to purchase all of the capital stock of Michiana, at a purchase price
calculated at 60% of Michiana' net annual sales plus or minus its tangible net
worth, payable 57.93% in common shares of the company and 42.07% in cash. This
agreement was contingent upon the ability of the Company to acquire Stoll and
the Scherer Affiliates. At this time, the Company also met with Stoll's
management and reached an agreement in principle to provide the Company with
an option to purchase all of the capital stock of Stoll, at a purchase price
calculated at 60% of Stoll's net annual sales plus or minus its tangible net
worth, payable 53.14% in common shares of the Company and 46.86% in cash. This
agreement was contingent upon the ability of the Company to acquire Michiana and
the Scherer Affiliates.
16
<PAGE> 29
During February of 1996, the Company's management team continued to
meet with Michiana, Stoll and the Scherer Affiliates to finalize the terms
of the option agreements. Option agreements with Stoll and Michiana were then
executed on March 1, 1996. At the same time, the Company also signed an option
agreement to acquire, at the election of the Company, either the capital stock
or the periodical assets of OPD and Northern at a purchase price equal to 60% of
net annual sales plus or minus the tangible net worth of the companies and
payable 51% in common shares of the Company and 49% in cash. This agreement was
contingent upon the acquisition by the Company of Stoll and Michiana. No option
agreements or joint operating agreements were entered into with Wholesalers or
Scherer Companies.
Thereafter, the Company continued to meet informally with Stoll,
Michiana, and their respective stockholders at various industry functions to
negotiate the business terms of the acquisition agreements which would be
executed in the event the Company exercised its options. Since the top members
of the Company's management and the management of the Scherer Affiliates are the
same, the Scherer Affiliates were included in these discussions. On June 12,
1996, several members of the Company's management team met in Chicago with the
principal shareholders of Stoll to present the Company's proposal to exercise
its option with the issuance of senior and subordinated debentures by the
Company in lieu of the cash portion of the purchase price. During this same
period of time, management also had discussions with the management of Michiana
and made a proposal to exercise its option to acquire the stock of Michiana with
the issuance of senior and subordinated debentures by the Company in lieu of the
cash portion of the purchase price.
At a regular meeting of the Board of Directors of the Company on June
29, 1996, management presented the Board with the final business terms of the
proposed acquisitions of Stoll, Michiana and the Scherer Affiliates in exchange
for a combination of common shares of the Company and senior and subordinated
debentures issued by the Company. The Board authorized the officers of the
Company to proceed with the transactions and to do all things necessary and
proper to complete the transaction documents and obtain all regulatory approvals
necessary for closing on the Acquisitions. The Board also authorized the
officers of the Company to enter into negotiations with other acquisition
targets.
On July 8, 1996, management first met with the sole shareholder of
Klein for formal discussion of an acquisition of the capital stock of the Klein
companies under the same terms and conditions as agreed upon with Stoll,
Michiana and the Scherer Affiliates. Unlike Stoll, Michiana, OPD and Northern,
there was no joint operating agreement or option agreement entered into with
Klein; the parties negotiated the Exchange Agreement directly. The parties
agreed that the purchase price would be calculated at 60% of net annual sales
plus or minus net worth of the companies and would be payable in common shares
of the Company and senior and subordinated debentures issued by the Company.
During July of 1996, the Company's management and legal counsel held
several negotiating sessions with the management and legal counsel of each of
Stoll, Michiana and the Scherer Affiliates. These meetings focused on the
negotiation and execution of the actual Exchange Agreements. The essential terms
of the Exchange Agreements were negotiated primarily with Stoll and their legal
counsel. Due to Stoll's independence and bargaining position, the Company
believed an agreement with Stoll would serve as a good benchmark for all other
acquisition agreements. The same form of agreement was then presented to and
negotiated with Michiana. Due to the fact that senior management of the Company
is affiliated with the Scherer Affiliates, the Board of Directors appointed
Thaddeus A. Majerek as a independent director to resolve any conflicts arising
in the Scherer Affiliates transactions. Legal counsel for the Company then
prepared an asset purchase agreement for the Northern transaction on the same
terms as the Stoll agreement. As particular issues arose, legal counsel
discussed those issues with Mr. Majerek and he resolved them in his capacity as
independent director.
Management then met again with Klein on August 2, 1996, August 21,
1996, August 28, 1996 and August 29, 1996 to complete negotiations of the
acquisition of the Klein companies. During these meetings, the parties
discussed the structure and the timing of the possible acquisition of the Klein
operations. It was agreed that the Klein transaction would be structured as a
stock acquisition on the same terms and conditions as the Stoll and Michiana
acquisition agreements. The parties agreed that the value and the structure of
the purchase price would also conform to the other pending acquisitions by the
Company. Management and the sole shareholder of Klein also agreed upon an
acquisition agreement to be executed by the parties.
REASONS FOR PROPOSED ACQUISITION TRANSACTIONS
The following factors were considered by the Company's Board of
Directors in connection with the approval of the various acquisitions. These
factors were significant reasons for the Board of Directors approval of the
proposed transactions.
DOMINANT MARKET POSITION
Following the proposed transactions, the Combined Company will
have an estimated market share in the Ohio, Indiana, Michigan and
western Pennsylvania 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.
OPERATING SYNERGIES
Through the consolidation of contiguous wholesalers,
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. Management of
the Company and of the Acquisition Parties have analyzed the cost
components of the Acquisition Parties and management of the Company has
determined estimates of anticipated cost savings. There are
approximately $3,750,000 in owner related expenses which are not
17
<PAGE> 30
expected to continue. The Company also has subsequently eliminated 175
full-time positions at an annual gross payroll savings of $2,725,000
(excluding payroll taxes, benefits and other related costs). The
Company also anticipates continued cost reductions as facilities are
closed and consolidated, however, these are not quantified as of yet.
Anticipated cost reductions, which could be material, have not been
quantified at this time and cannot be guaranteed.
As part of the consolidation, nine warehouse locations in
the States of Michigan, Ohio and Indiana have been converted to
delivery depots by consolidating the majority of office and warehouse
functions into three locations. The cost to eliminate this redundant
overhead and to consolidate was reflected in the periods in which the
changes were made. Savings occurred from the elimination of duplicate
administrative and distribution functions, and additional savings
resulted from spreading the costs of technology over a larger customer
base. Additionally, the consolidation of the businesses of the Company
and the Acquisition Parties will increase purchasing power and the
ability to negotiate future favorable quantity discounts with
publishers and national brokers.
STRONG CUSTOMER RELATIONSHIPS
The Company and the Acquisition Parties have well established
relationships with their existing customer bases, which include such
major retailers as The Kroger Company, Giant Eagle, Meijer and Big Bear
Stores, a division of The Penn Traffic Company. The Company has entered
into long-term contracts ranging from one to five years, but primarily
three years with the major retailers, to be the exclusive provider of
magazines and, in most cases, related periodical products. Management
believes the proposed acquisition transactions will solidify existing
relationships with the major retailers who previously were split among
the Acquisition Parties and will enable the Combined Company to take
full advantage of the growing trend of larger retailers who are
attempting to consolidate their vendor relationships.
PROPRIETARY TECHNOLOGY
The proposed transaction will enable the Combined Company to
successfully leverage its investment in its SMARTS System, acquired
from the Scherer Affiliates, for more efficient product allocation and
higher per store revenue. Management believes that, as the Combined
Company continues to expand, the SMARTS System, 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. See "The Company and the Combined
Company - `The SMARTS System'."
VALUE ADDED MARKETING
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 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. See "The Company and
the Combined Company - `Marketing and Sales'."
EXPERIENCED MANAGEMENT TEAM
In the opinion of the Company, its existing management team,
many members of which are also part of the Scherer Affiliates, is
highly respected in the wholesale periodical distribution industry and
is recognized as an innovative group with over 300 years of combined
experience. Upon completion of the Acquisitions, the Company plans to
retain several key members of the other Acquisition Parties' management
teams in order to broaden the experience base of the management team
and facilitate further growth through acquisitions.
18
<PAGE> 31
RAPIDLY CONSOLIDATING INDUSTRY; MARGIN TRENDS
The wholesale periodical distribution industry is poised for
additional significant consolidation over the next few years. Efforts
are currently underway by large retailers, many of whom are customers
of the Company, to continue to consolidate vendor relationships with
larger suppliers. These changes in purchasing practices have reduced
gross margins of the regional wholesalers and are expected to drive
many smaller wholesalers out of business, resulting in an industry with
a small number of large wholesalers controlling the bulk of the
periodical distribution business. 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 increase the ability of the enterprises
comprising the Combined Company to compete more effectively. See "The
Wholesale Periodical Distribution Industry - `Industry Trends'."
FUTURE ACQUISITION AND DISPOSITION (CONSOLIDATION) PROSPECTS
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 more
additional consolidation and 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. See "The Wholesale
Periodical Distribution Industry - `Industry Trends'."
FUTURE TRADING OF COMPANY STOCK
The Company is a public company with approximately 2900
shareholders. There is some private trading of the company's stock, and
many of the Company's shareholders have expressed a desire to have the
stock listed and actively traded. At present, however, the Company's
stock is not listed or actively traded on any exchange, and there are
no market makers for the stock. Once the Company completes the
acquisition transactions, management believes that the Combined
Company, with current annual revenues of approximately $300,000,000,
should be of the financial size and strength to support an active
trading market for the Combined Company's shareholders and for future
acquisition opportunities; however, the Company currently does not meet
the requirements for listing the stock on a stock exchange or on the
NASDAQ stock market, and the Company does not have any current plans or
arrangements with market makers to make a market in the Company's
common stock or to obtain a listing on an exchange or stock market.
Accordingly, there can be no assurance that a public market for the
Company's common stock will develop following consummation of the
transactions.
THE EXCHANGE AGREEMENTS
The Exchange Agreements with the Stoll Shareholders, the Michiana
Shareholders, the Klein Shareholder, the OPD Shareholders and the Scherer
Shareholders provide that all of the outstanding stock of Stoll, Michiana,
Klein, OPD and Scherer Companies will be transferred to the Company in exchange
for Common Stock of the Company and Senior and Subordinated Debentures of the
Company. Similarly, the Asset Exchange Agreements with Northern and Wholesalers
provide for such Scherer Affiliates to transfer to the Company all of their
assets and liabilities related to wholesale periodical distribution (including
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.
19
<PAGE> 32
METHOD OF VALUATION
Each of Stoll, Michiana, Klein and the Scherer Affiliates
(except Wholesalers and Scherer Companies) was valued in a similar
manner for purposes of determining the Common Stock of the Company and
Debentures to be issued. At the time of the negotiations, the parties
were in agreement that 60% was the most common percentage used by
willing buyers and sellers in the industry. The parties also agreed
that tangible net worth would be defined as total assets (excluding
intangible assets), less total liabilities. The value was determined by
netting the sum of:
(a) An amount equal to 60% of the net annual
wholesale and retail sales of the particular company for a
defined 12-month period ending in 1995, for Klein the
corresponding period was for the five weeks of March 1996
annualized for 52 weeks. During the first quarter of 1996,
Klein increased its 1995 annual business base of $46,247,000
by approximately $9,000,000 through the acquisitions of Welsh
News of Mansfield, Ohio and City News Agency, Inc. of Canton,
Ohio. Since the use of the 12-month revenue results from 1995,
which do not reflect the two 1996 acquisitions, would have
underestimated the value of the business acquired by the
Company, the Company and Klein mutually agreed that an
annualization based on the 5 week period of March, 1996 would
provide a more accurate valuation of the then current annual
wholesale and retail sales of Klein. The six month revenue for
Klein of $24,428,000 was less than one-half of the business
base from the March annualization because City News Agency,
Inc. was purchased in February of 1996 and because Klein lost
some chain customers in the second calendar quarter. Thus,
Klein did not receive the benefit of all of the March revenue
for the entire six month period. This method of computation
was agreed to by all parties and was included in the signed
agreements; and
(b) The tangible net worth (as defined by agreement
between the Company and the acquisition parties in
consultation with their accountants) of the particular company
as of June 30, 1996 (for Klein, the corresponding date was
August 23, 1996); and
(c) For Scherer Companies, the valuation method used
was based only upon its tangible net worth. Scherer Companies
primarily provides administrative services to the other
Scherer Affiliates. As a result, most of its revenues are
eliminated in the consolidated financial statements of the
Combined Company, and the Company and the Acquisition Parties
agreed to use only tangible net worth in valuing Scherer
Companies. For Wholesalers, the valuation method used was
based only upon the fair value of the assets being acquired.
The assets being purchased are leased to other Scherer
Affiliates and will also be used by the Combined Company in
its operations. As a result, the Company and the Acquisition
Parties agreed to use the fair market value of the assets
being acquired from Wholesalers to determine their value, as
determined by independent appraisers, including two truck
dealers, Beannie's Auto and Truck Sales and Nelson Auto Group,
and by quotes from IBM, a computer company.
The Company has received valuations calculated in accordance with the
Exchange Agreements for each of the Acquisition Parties. Based on these
valuations, the Company has calculated the Debenture amounts and the amounts for
share ownership. See "The Stock and Asset Exchanges - `Debentures'," "The Stock
and Asset Exchanges - Principal Holders of Voting Securities and Ownership of
Shares by Directors and Executive Officers," Shareholder Proposals - Proposals
One through Seven and "Senior and Subordinated Debentures - Description of
Securities."
The consideration being paid by the Company for Stoll is 19,584,662
shares of Common Stock of the Company, $16,800,000 principal amount of Senior
Debentures, and $9,105,267 principal amount of Subordinated Debentures. The
consideration being paid by the Company for Michiana is 5,355,811 shares of
Common Stock of the Company, $3,500,000 principal amount of Senior Debentures,
and $2,334,256 principal amount of Subordinated Debentures. The consideration
being paid by the Company for Klein is 10,878,807 shares of Common Stock of the
Company, $10,180,000 principal amount of Senior Debentures, and $5,498,281
principal amount of Subordinated Debentures. The consideration being paid by the
Company for the Scherer
20
<PAGE> 33
Affiliates is 12,441,777 shares of Common Stock of the Company, $9,197,604
principal amount of Senior Debentures, and $1,527,309 principal amount of
Subordinated Debentures.
Under the Stoll Exchange Agreement, 53.14% of the value is to be
received in Common Stock of the Company and 46.86% is to be received as
Debentures. Under the Michiana Exchange Agreement, 57.93% of the value is to be
received in Common Stock of the Company and 42.07% is to be received as
Debentures. Under the Klein Exchange Agreement, 51.00% of the value is to be
received in Common Stock of the Company and 49.00% is to be received as
Debentures. Under the Exchange Agreements with the Scherer Affiliates, 51.00% of
the value is to be received in Common Stock of the Company and 49.00% is to be
received as Debentures, adjusted for the 5,000,000 shares of the Common Stock of
the Company owned by OPD.
All of the parties to the Exchange Agreements had originally negotiated
to take a minimum of 51% of the consideration to be received in Common Stock of
the Company in order to qualify the transaction as a tax-free reorganization
under Section 368 of the Internal Revenue Code of 1986, as amended. In addition,
Stoll and Michiana agreed to take a percentage greater than 51% in exchange for
assumption by the Company of additional liabilities not originally contemplated.
Subsequently, upon advice of their respective tax counsel, all of the parties to
the Exchange Agreements restructured the transaction to qualify as a tax-free
contribution under Section 351 of the Internal Revenue Code of 1986, as amended.
See "Certain Federal Income Tax Consequences."
For purposes of the Exchange Agreements, the Common Stock of the
Company was valued at a pre-reverse split value of $1.50 per share using a
valuation methodology similar to that used for all of the Acquisition Parties
and agreed to by all of the parties. This valuation was determined by
arms-length negotiations between the parties.
MATERIAL PROVISIONS OF EXCHANGE AGREEMENTS
Each of the Exchange Agreements contemplates that the stock or assets
of the various Acquisition Parties will be contributed to the Company in
exchange for Common Stock of the Company and Senior and Subordinated Debentures
of the Company. The consideration to be paid by the Company for the stock or
assets, as the case may be, of the Acquisition Parties is described under the
previous heading and is titled "The Exchange Agreements -- Method of Valuation."
In the case of Acquisitions for which stock will be contributed to the
Company, at the closing of such transaction, each shareholder of that
Acquisition Party will surrender to the Company the share certificates
evidencing all of the shares of such Acquisition Party owned by such
shareholders. In the case of Acquisitions for which assets will be contributed
to the Company, at the closing of such transaction, the Acquisition Party will
transfer all of its assets relating to the wholesale distribution of periodicals
(except that in the case of Wholesalers only certain specified vehicles and
computer equipment will be transferred).
The Exchange Agreements contain various representations and warranties
of either the Acquisition Party and it shareholders, if applicable, or the
Company as to, among other things:
(a) corporate organization, standing, power and authority to enter into
the Exchange Agreement and consummate the transactions contemplated
thereby; (b) capitalization, security holders and subsidiaries; (c)
ownership of shares; (d) the need for consents and approvals in order
to enter into the Exchange Agreement and consummate the transactions
contemplated thereby; (e) the accuracy of financial statements; (f) the
absence of undisclosed liabilities and adverse and other changes; (g)
the filing of all necessary returns and payment of taxes; (h) the
compliance with law in connection with the operations of the parties'
respective businesses; (i) insurance matters; (j) title to and
condition of properties; (k) legal proceedings; (l) ERISA matters; (m)
certain material contracts and the absence of defaults thereunder; (n)
the Exchange Agreement's non-contravention of any applicable laws,
articles of incorporation, by-laws, material agreements, undertakings,
indentures, orders, decrees, restrictions or legal obligations; (o)
officers,
21
<PAGE> 34
employees and compensation; (p) books of account and records; (q) labor
relations; (r) business matters; and (s) other matters specified in the
Exchange Agreement.
The Exchange Agreements provide that the Acquisition Parties and their
shareholders shall agree that, between the date of the Exchange Agreement and
the closing:
Nothing shall be done that would be contrary to or in breach of any of
the terms or provisions of the Exchange Agreement or which would cause
any of the representations and warranties contained in the Exchange
Agreement to be or become untrue in any material respect; (b) the
Acquisition Party shall conduct its business in the ordinary course
consistent with past practices; and (c) the Acquisition Party shall use
all reasonable efforts to preserve the business organization intact,
keep available to the Acquisition Party and the Company the present
service of the Acquisitions Party's employees, and preserve for the
Acquisition Party and the Company the goodwill of the Acquisition
Party's suppliers, customers, and others with whom business
relationships exist.
The Exchange Agreements provide for indemnification by the Acquisition
Parties and their shareholders for any losses, liabilities or damages incurred
as a result of any material inaccuracy or breach of the representations,
warranties, covenants or agreements made in the Exchange Agreements. The
indemnification obligations may be satisfied with Common Stock of the Company,
to be valued at $1.50 per share for this purpose. The indemnification obligation
is limited to approximately 10% of the original valuation of the Acquisition
Party and the Company is not entitled to indemnity unless the aggregate amount
of damages exceeds approximately 1% of the original valuation of the Acquisition
Party, except that this amount is reduced for certain environmental matters.
The parties maximum indemnification obligations are $1,400,000 for
Michiana, $6,200,000 for Stoll, $2,700,000 for OPD, $310,000 for Northern,
$127,347 for Scherer Companies, $110,000 for Wholesalers and $3,500,000 for
Klein.
Certain of the Exchange Agreements also provide that certain existing
employees of the respective Acquisition Parties will enter into employment
agreements with the Company for a term of three years and upon other customary
terms and conditions. See "The Stock and Asset Exchanges - Conflicts of Interest
and Related Party Transactions" and "Proposal Eight - Executive Compensation."
DEBENTURES
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 and certain Senior Debentures and Subordinated
Debentures (each as described under the heading "Material Provisions of the
Debentures" set forth below) of the Company. 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
Companies Shareholders and Northern and Wholesalers pursuant to which the
Debentures are being issued. The Exchange Agreements provide for Senior
Debentures and Subordinated Debentures to be issued to the Stoll Shareholders,
the Michiana Shareholders, the Klein Shareholder, the OPD Shareholders, the
Scherer Companies Shareholders and to Northern and Wholesalers or their
Shareholders. Based on the valuations of the Acquisition Parties under the
Exchange Agreements, the Debentures will be issued in the aggregate principal
amounts in the table that follows. A $4,500,000 Subordinated Debenture and
$500,000 will be issued in exchange for a $5,000,000 note owed by OPD 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 nominee
for director of the Company. The Company also intends to issue debentures in
connection with the acquisition of the stock of Read-Mor Bookstores, Inc., a
small retail chain with six bookstores managed by Scherer Companies. See "The
Stock and Asset Exchanges - `Conflicts of Interest and Related Party
Transactions'."
22
<PAGE> 35
<TABLE>
<CAPTION>
Principal Amount of Total
Principal Amount of Subordinated Debenture
Senior Debentures Debentures Amount
- ------------------------------ -----------------------------------------------------------------------
<S> <C> <C> <C>
Stoll Shareholders $16,800,000 $9,105,267 $25,905,267
Scherer Affiliate
Shareholders 9,197,604 1,527,309 10,724,913
Michiana
Shareholders 3,500,000 2,334,256 5,834,256
Klein Shareholder 10,180,000 5,498,281 15,678,281
KDR Limited 0 4,500,000 4,500,000
Read-Mor Shareholder 242,211 94,594 336,805
------- ------ -------
Totals $39,919,815 $23,059,707 $62,979,522
=========== =========== ===========
</TABLE>
Interest on the Senior and Subordinated Debentures is being accrued
through the date of the Annual Meeting. Interest accrued through June 30, 1997
is approximately $5,016,000. The Debenture Agreement provides for quarterly
principal payments on the Senior Debentures beginning April 1, 1997; however all
payments are deferred under the Debenture Agreement until the final closings
after the Annual Meeting. At July 1, 1997, two principal payments totaling
$3,329,295 had been deferred. As a result no principal or interest payments have
been made on the Senior and Subordinated Debentures to date. The following is a
description of the Debentures and certain material provisions of the Debenture
Agreement.
MATERIAL PROVISIONS OF THE DEBENTURES
The following is a discussion of material provisions of the Debentures.
A more complete description is contained later in this Proxy Statement following
the discussions of the proposals to be voted upon. See "Senior and Subordinated
Debentures."
The Senior Debentures are designated as "8% Senior Debentures Due
2002", shall mature on January 1, 2002, and shall 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 interest payment date following later of October 1,
1996 or 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, or the date of final closing of a particular
acquisition. The Senior Debentures are to be secured by all of the assets of the
Company and its subsidiaries as described in the Debenture Agreement. The Senior
Debentures and all liens and encumbrances securing same are subordinate to (a)
all existing mortgages, security interests, liens, encumbrances, easements,
restrictions, encroachments and other claims (collectively, "Encumbrances") set
forth on Schedule 1 to the Debenture Agreement and any refinancing, deferrals,
renewals, extensions and refunding of and amendments, modifications or
supplements thereof; (b) any Encumbrances granted in conjunction with
indebtedness incurred to prepay or refinance all or any part of the Senior
Debentures; (c) any Encumbrances granted in conjunction with indebtedness
incurred for working capital purposes in an amount, including the indebtedness
covered under (a) above, not to exceed at any one time eight percent (8%) of the
Company's consolidated net sales; and (d) purchase money Encumbrances granted to
secure indebtedness incurred in connection with the purchase of any asset or
equipment for use in the Company's business (collectively, "Senior
Indebtedness"). In general, payments with respect to the Senior Debentures are
subordinate and subject to the prior payment of all installments of Senior
Indebtedness which are due and payable.
The Subordinated Debentures are designated as "10% Subordinated
Debentures Due 2004," shall mature on January 1, 2004 and shall 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
23
<PAGE> 36
and October 1, commencing on the interest payment date following later of
October 1, 1996 or 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 Subordinated
Debentures are to be secured by all of the assets of the Company and its
subsidiaries as described in the Debenture Agreement. The Subordinated
Debentures are subordinated (a) to all Senior Indebtedness, (b) to Encumbrances
granted to secure indebtedness evidenced by the Senior Debentures, and (c) to
Encumbrances granted to secure the principal of and premium, if any, and
interest on all indebtedness subject to a security interest or mortgage of the
Company and any subsidiary in which the Company holds at least 51% of the voting
stock ("Controlled Subsidiary"), whether presently existing or hereafter
incurred, including without limitation, (i) for money borrowed by the Company or
any Controlled Subsidiary (including lease financing indebtedness), (ii) for
money borrowed by others (including lease financing indebtedness) and
guaranteed, directly or indirectly, by the Company or any Controlled Subsidiary,
or (iii) for purchase money indebtedness, or indebtedness secured by property at
the time of the acquisition of such property by the Company or any Controlled
Subsidiary, for the payment of which the Company or any Controlled Subsidiary is
directly or contingently liable; and to all deferrals, renewals, extensions and
refundings of, and amendments, modifications, and supplements to, any such
indebtedness, provided that by the terms of the instrument creating or
evidencing any such indebtedness referred to above, it is expressly provided
that such indebtedness is superior in right of payment to the Subordinated
Debentures. Payments with respect to the Subordinated Debentures are subordinate
and subject to the prior payment of all installments of Senior Indebtedness and,
in general, to of all other debts senior to the Subordinated Debentures which
are due and payable.
Under the Debenture Agreement, John J. Heiniger has been appointed as a
trustee to represent the interests of the holders of the debentures. Mr.
Heiniger is currently the Chief Financial Officer of Stoll, and is expected to
enter into an employment agreement with the Company following the Acquisition
Transactions. The parties intend to select a new trustee who will not be an
employee of the Company. However, such new trustee must be selected unanimously
by a committee consisting of Ronald E. Scherer, Richard H. Stoll, Sr., Richard
H. Stoll, Jr., Thaddeus S. Majerek and George R. Klein, Jr.
In accordance with the terms of the Debenture Agreement, the occurrence
of certain events including, but not limited to, generally the following are
defaults under the Debentures and under the Debenture Agreement and under the
other agreements and instruments pursuant to which the Company and its
subsidiaries have granted the security interests and mortgage liens which secure
the Debentures and certain other obligations related thereto: (a) failure to pay
any installment of interest on the Debentures within 30 days after written
notice from the trustee; (b) failure to pay the principal of any of the
Debentures within 30 days after written notice from the trustee; (c) failure to
observe or perform any other covenant in the Debenture Agreement which has
continued for a period of 60 days after written notice of such failure from the
trustee; and (d) commencement of various bankruptcy or insolvency proceedings by
or against the Company.
Upon the occurrence of an event of default relating to a bankruptcy or
insolvency proceeding, all principal and interest automatically becomes
immediately due and payable. Upon the occurrence of any other event of default,
the trustee, in addition to being able to pursue any other legal remedies
available to him or her, if applicable, may declare the principal and interest
of the Senior Debentures or of both classes of Debentures to be due and payable
immediately, provided, however, that if the Company cures the default before a
judgment or decree is rendered, the acceleration will be rescinded.
Additionally, under the Debenture Agreement, all of the Stoll Senior
Debentures of $16,800,000, along with all accrued interest thereon, are to be
paid before any other Senior Debentures are paid. After the Stoll Senior
Debentures have been paid, then all other holders of Senior Debentures are to be
paid in proportion to the principal amount of Senior Debentures held by them.
None of the principal on the Subordinated Debentures is to be paid until all of
the Senior Debentures have been paid in full.
Finally, in accordance with the terms of the Debenture Agreement, a
five person executive committee (the "Executive Committee") was formed,
consisting of two members appointed by the Stoll Shareholders, currently Richard
Stoll, Sr. and Richard Stoll, Jr., one person appointed by Ronald E.
24
<PAGE> 37
Scherer, currently Ronald E. Scherer, one person appointed by the Michiana
Shareholders, currently Thaddeus S. Majerek, and one person appointed by the
Klein Shareholder, currently George R. Klein. Until at least $12,000,000 in
principal amount of the Stoll Senior Debentures and all accrued interest thereon
have been paid in full, if the Company proposes to acquire any additional
businesses, it must give notice to the members of the Executive Committee. Upon
the request of any member of the Executive Committee, the proposed acquisition
must be reviewed by the Executive Committee, and the Company is not permitted to
proceed with the proposed acquisition unless at least a majority of the members
of the Executive Committee approve of such acquisition. If no member of the
Executive Committee requests a review of the proposed acquisition within ten
days after the Company gives them notice of the proposal, then the Company is
permitted to proceed with the proposed acquisition.
It is anticipated that in order to obtain operating efficiencies, the
Company will consolidate the operations of the Company, Stoll, Michiana, Klein
and the Scherer Affiliates, and, where appropriate, eliminate duplication of
facilities and personnel. Under the Debenture Agreement, until at least
$12,000,000 in principal amount of the Stoll Senior Debentures and all accrued
interest thereon have been paid in full, if the Company proposes to close a
facility or otherwise consolidate an operation that is material to the
operations of Stoll, Michiana, Klein or the Scherer Affiliates, then it is
required to give notice to the member(s) of the Executive Committee who was
(were) appointed by the shareholders of the Acquisition Party whose former
operations could be adversely affected by such consolidation. Upon request of
one of the adversely affected entity's appointee(s) to the Executive Committee,
the proposed consolidation must be reviewed by the entire Executive Committee,
and the Company is not permitted to proceed with the proposed consolidation
unless at least a majority of the members of the Executive Committee approve of
such consolidation. If none of the adversely affected entity's appointee(s) to
the Executive Committee request a review of the proposed consolidation within
ten days after the Company gives them notice of the proposal, then the Company
is permitted to proceed with the proposed consolidation. See "Senior and
Subordinated Debentures - `Description of Securities'."
APPROVALS AND CONSENTS
The Company and the Acquisition Parties have agreed to use all
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable to consummate and
make effective the transactions contemplated by the Exchange Agreements,
including obtaining all necessary (a) actions or nonactions, waivers, consents
and approvals from governmental entities, and (b) consents, approvals or waivers
from third parties.
Under the Hart-Scott-Rodino Anti-Trust Improvements Act of 1976 (the
"HSR Act"), certain acquisition transactions may not be consummated unless
notice has been given and certain information has been furnished to the
Antitrust Division of the United States Department of Justice (the "Antitrust
Division") and the Federal Trade Commission (the "FTC") and specified waiting
period requirements have been satisfied. The Company has determined that the
only two acquisitions requiring a filing under the HSR Act are the acquisition
of the stock of OPD and the acquisition of the stock of Klein. The Company and
OPD filed with the Antitrust Division and the FTC a Notification and Report Form
with respect to the OPD acquisition on July 25, 1996. On August 9, 1996, the FTC
notified the Company and OPD that the HSR waiting period had been terminated.
The Company filed with the Antitrust Division and the FTC a Notification and
Report Form with respect to the Klein acquisition on September 18, 1996. On
October 2, 1996, the FTC notified the Company that the HSR waiting period had
been terminated. Termination of the waiting periods does not constitute approval
by the FTC of the transactions. Rather, it means that the FTC is not raising an
objection to the parties proceeding with the proposed transactions.
Under the HSR Act, the filing of a pre-merger notification for review
by the Federal Trade Commission and the Department of Justice is required if
both the size of the transaction and the size of the parties tests are met. The
noticed transaction may not be consummated until after either the early
termination or expiration of a thirty day waiting period without an FTC request
for further review. The Company, after consultation with its legal counsel,
determined that certain of the acquisitions, as scheduled in the Stock Transfer
and Exchange Agreements and the Asset Transfer and Exchange Agreements, do not
meet the "size of the parties" test and, therefore, the filing of a pre-merger
notification was not required. Under the size of the parties test, one party to
the transaction must have $100 million or more in assets or annual net sales and
the other party must have $10 million or more in assets or annual net sales. The
proposed Acquisitions are to take place in the following sequence: (1) Michiana
News Service, Inc. (approximately $25.6 million annual net sales); (2) Northern
News Company
25
<PAGE> 38
(approximately $5.1 million in annual net sales); (3) the Stoll Companies
(approximately $84.2 million annual net sales); (4) Ohio Periodical
Distributors, Inc. (approximately $51.2 million annual net sales); and (5) the
Klein Companies (approximately $46.2 million annual net sales). The Company's
acquisitions of Michiana, Northern and Stoll did not require the filing of a
pre-merger notification because the consolidated annual net sales of the Company
will not exceed $100 million until after the acquisition of Stoll. At the point
in the acquisition sequence prior to the acquisition of OPD, the Company's
annual net sales, when combined with the sales of Michiana, Northern and Stoll
will total approximately $173.1 million and the filing of a pre-merger
notification was required to comply with the requirements of the HSR Act.
Similarly, the Company's consolidated annual net sales of approximately $224.3
million (including the sales of Michiana, Northern, Stoll and OPD) prior to the
acquisition of Klein, exceed the "size of the parties" threshold, and a
pre-merger notification was filed for the Klein transaction as well. Each of the
acquisitions of Scherer Companies, Wholesalers Leasing Corp. and Read-mor Book
Stores, Inc. fails the "size of the parties" test because none of those acquired
companies has assets or sales in excess of $10 million, and the Company has,
therefore, determined that no filing is required for these transactions. Should
it later be determined that the filing of a pre-merger notification was required
for these transactions, the Company, its officers and directors could be subject
to substantial fines.
It should be noted that, in filing its pre-merger notifications on both
the OPD and the Klein transactions, the Company included a description of the
acquisitions of Michiana, Northern and Stoll, including financial detail on each
company (and OPD in the Klein filing). The Pre-merger Notification Office of the
Federal Trade Commission granted early termination of the waiting periods on
these transactions thereby permitting consummation of the transactions.
OPINION OF THE FINANCIAL ADVISOR
The Company received a fairness opinion from the Corporate Finance
Department ("Corporate Finance") of BankBoston, N.A., formerly the First
National Bank of Boston, Boston, Massachusetts ("BankBoston"). BankBoston has
consented to the Company's use of this opinion in this Proxy Statement. This
opinion states that, from a financial point of view, the consideration to be
paid by the Company for Michiana, Stoll, Klein, OPD, Northern (including
MacGregor), Wholesalers and Scherer Companies is fair to the shareholders of the
Company.
BankBoston, the financial advisor to the Company's Board of Directors
in connection with the transactions described in Proposals One through Seven,
herein, delivered its written opinion and presentation to the Board on August
14, 1996 that, from a financial point of view, the consideration to be paid by
the Company in connection with the proposed business combinations with Michiana,
Stoll, OPD, Northern (including MacGregor), and Scherer Companies was fair to
the shareholders of the Company. BankBoston subsequently updated its August 14,
1996, opinion by delivery of its written opinion dated as of the date of this
Proxy Statement which reflects the inclusion of Klein as well as other
conditions prevailing at the time. BankBoston has consented to the discussion of
its opinion in this Proxy Statement. The amount, form and allocation of the
consideration to be paid by the Company was determined by the Company following
negotiation with the foregoing Acquisition Parties and was not recommended by
BankBoston. Certain financial analyses used by BankBoston in connection with its
opinion are summarized under the heading "Analyses" beginning on page 30.
The full text of the written opinion of BankBoston, dated the date
hereof, which sets forth the assumptions made, matters considered and
limitations on the review undertaken in connection with the opinion, is attached
hereto as Exhibit B, and is incorporated herein by reference. Holders of shares
of Common Stock of the Company are urged to, and should, read such opinion in
its entirety. The following summary is qualified in its entirety by reference to
the full text of such opinion.
In connection with its review, BankBoston has performed the following
analysis: (i) reviewed the publicly available consolidated financial statements
of the Company for recent years and interim periods year to date and certain
other relevant financial operating data of the Company and the Acquisition
Parties made available to it from published sources and from the internal
records of the Company and the Acquisition Parties; (ii) reviewed certain
internal financial and operating information relating to the Company and the
Acquisition Parties (including financial projections) prepared by Company
management; (iii) reviewed and discussed with the senior management of the
Company the business
26
<PAGE> 39
and prospects of the Company and the Acquisition Parties, the strategic
rationale for the transaction and the benefits of the transaction to the
Company; (iv) reviewed historic trading activity of the Common Stock of the
Company; (v) reviewed the Stock Transfer and Exchange Agreements entered into
between the Company and Michiana, Scherer Companies, Klein, OPD, and Stoll, and
reviewed the Asset Transfer and Exchange Agreements entered into between the
Company and Northern and Wholesalers; (vi) reviewed the public market valuations
for companies engaged in lines of business which were deemed similar to the
Company; (vii) reviewed prices paid in certain prior acquisitions by the Company
and certain of the Acquisition Parties of periodical distribution companies
because there was no relevant publicly available information regarding
transactions of independent companies in similar lines of business; (viii)
evaluated the projected earnings per share and share price impacts of the
transaction relative to the Company's projected performance on a stand-alone
basis; and (ix) reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as BankBoston
deemed necessary or important for purposes of its opinion.
In rendering its opinion, BankBoston did not independently verify or
check any of the foregoing information, and relied on the accuracy, completeness
and fairness of all information supplied or otherwise made available to it by or
on behalf of the Company, or otherwise reviewed by BankBoston. With respect to
the financial projections, BankBoston assumed that they had been reasonably
prepared on the basis reflecting the best currently available estimates and
judgments of the Company's management as to the Company's and Acquisition
Parties' future financial performance. BankBoston relied upon, without
independent verification, estimates by the Company of the revenue enhancements,
cost savings and other synergies that are expected as a result of the
transaction. BankBoston also relied on the representations of the Company in the
Exchange Agreements with respect to legal and other matters.
BankBoston relied upon management representations regarding the terms
of employment contracts, lease agreements, supply contracts and other ancillary
agreements related to the transaction which management believes were entered
into at an arms length basis and reflect terms and conditions customary for
transactions of this type. BankBoston has not made any independent evaluation or
appraisal of the assets or liabilities of the Company or the Acquisition
Parties. BankBoston's opinion is necessarily based upon market, economic,
financial and other conditions as they exist on, and the information made
available to it as of, the date of its opinion. It should be understood that
subsequent developments may affect its opinion, and may alter its opinion
rendered. BankBoston, however, does not have any obligation to update, revise or
reaffirm this opinion.
BankBoston is an internationally recognized financial institution with
a Corporate Finance Department that provides strategic advisory services in the
areas of mergers and acquisitions, sales and divestitures, management buyouts,
recapitalizations, restructurings, valuations and fairness opinions. The Company
selected BankBoston as its financial advisor based on a variety of factors,
including its substantial valuation experience and expertise in transactions
similar to those set forth herein, existing loan relationships between the
Company and an affiliate, Bank of Boston, Connecticut, the Corporate Finance
Department's familiarity with the Company and the pending transactions, its
commitment to completing the engagement in a timely fashion, and the
reasonableness of its compensation.
The Company's relationship with BankBoston commenced when Bank of
Boston Connecticut, BankBoston's Connecticut-based subsidiary, made certain
loans to Service News Company, the Company's Connecticut-based, wholly-owned
subsidiary. The loans include the following: (i) a $1 million revolving credit
facility that expires on December 31, 1998, with principal advances that are
subject to a formula based on accounts receivable, and (ii) a $1 million term
loan, with an outstanding balance at July 25, 1997, of $500,000, that requires
quarterly principal payments of $83,333.33. The next payment is due on October
1, 1997. The interest rate on both credit facilities is at Bank of Boston,
Connecticut's Base Rate plus 1/4%. In addition, there is an annual fee of 1/4%
charged on the unused portion of the revolving credit facility.
Subsequent to (i) and (ii) above, in July of 1996, the Company engaged
BankBoston to act as a financial advisor in connection with developing a
structure for financing the transactions and to act as an agent of the Company
in connection with possible placement of certain subordinated debt and equity
securities of the Company.
27
<PAGE> 40
Subsequently, Bank of Boston, Connecticut, has issued a $500,000 letter
of credit on behalf of the Company to secure a bond in connection with an appeal
of a legal judgment.
With respect to the loans provided by Bank of Boston, Connecticut to
Service News Company, the Company issued to Bank of Boston, Connecticut warrants
to purchase 50,000 shares of Common Stock which may be exercised for no
consideration. 30,000 of such warrants also include a put right in favor of
BankBoston Connecticut (or a subsequent holder of the warrant) obligating the
Company in the event the put right is exercised to purchase all shares issued
under the warrant at a price per share of $1.00. The put right may be exercised
by Bank of Boston Connecticut or other holder at any time during the year 2000
following exercise of the warrant.
With respect to the services provided in connection with the
development of a financing structure for the transactions, including the
financial due diligence on the Company, the introduction of the Company to, and
attendance with the Company at, meetings with financial institutions, and the
related possible future placement of debt and equity securities of the Company,
the Company has agreed to pay BankBoston a transaction fee of 3.33% of the
amount of any new subordinated debt or equity placed by the BankBoston,
excluding the Senior and Subordinated Debentures with the Acquisition Parties.
The Company would incur fees of approximately $1,329,329, if the $39,920,000 of
Senior Debentures were refinanced and fees of approximately $767,888 if the
$23,060,000 of Subordinated Debentures were refinanced, assuming all of the
financing was obtained and all of the financing was placed by BankBoston. Based
upon the Combined Company's debt obligations (other than the Debentures) of
approximately $17,056,000 as of March 29, 1997, the Company would incur a fee of
approximately $567,980 if BankBoston obtained refinancing for all of this debt.
To date, there have been no transactions subject to this fee, no commitments are
pending, and no transactions are expected prior to the Annual Meeting of
Shareholders. There can be no assurance that BankBoston will be able to obtain
any of this financing. The Company has paid BankBoston a non-refundable retainer
fee in the amount of $50,000, which will be credited against any transaction fee
payable to BankBoston. The Company has also agreed to reimburse BankBoston for
its reasonable out-of-pocket expenses, including legal or professional fees, and
to indemnify BankBoston against certain liabilities arising out of or related to
the Company's engagement of BankBoston.
Pursuant to a certain letter agreement dated July 3, 1996 (the
"Engagement Letter"), the Company's Board engaged BankBoston to act as its
financial advisor in connection with the proposed acquisition transactions and
to issue its opinion to the Board regarding the fairness of the consideration to
be paid by the Company in connection with the proposed transactions from a
financial point of view. In accordance with the terms of the Engagement Letter,
the Board has agreed to pay BankBoston a fee in the amount of $300,000 for
issuing its opinion and advising the Board with respect to these transactions.
This fee is not contingent upon the outcome of the transactions with the
Acquisition Parties or the completion of the placement of the debt or equity
securities.
ANALYSES
The following is a summary of the material financial analyses
used by BankBoston in connection with its opinion and does not purport
to be a complete description of the analyses conducted by BankBoston in
arriving at its opinions. In arriving at its opinions, BankBoston did
not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Each of the
analyses set forth below contains a forward-looking statement.
Following the discussion of the various analyses is a paragraph
identifying important factors that could cause the actual results of
the Combined Company to differ materially from those contained in the
forward-looking statements.
Projected EPS and Share Price. BankBoston analyzed the
projected EPS and share price, using projections provided by the
Company for both the Company and the Combined Company, which included
assumptions on revenue growth in major markets, changes in gross
margins and synergies for the consolidation of facilities and
operations which are more fully discussed under "Combination of
Operations Prior to Annual Meeting" and "Reasons for Proposed
Acquisition Transactions." Although the Company provided projections to
BankBoston, the Company does not, as a matter of course, publicly
disclose forecasts or projections of its future operating results;
although it prepares projections in the normal course of business as
part of its internal planning process. The projections it furnished
were not prepared with a view to complying with the published
guidelines of the Securities and Exchange Commission or the American
Institute of Certified Public Accountants regarding forecasts. The
projections provided by the Company are based on a number of
assumptions, all of which are inherently subject to significant
economic and competitive uncertainties and contingencies beyond the
Company's control. There can be no assurance that the assumptions will
prove to be accurate or that projected results are realizable, and
actual results may be substantially different than those projected.
Because BankBoston's analysis was based on the Company's projections,
the same uncertainties as to whether the projections will prove to be
accurate apply to the results of BankBoston's analysis.
BankBoston utilized management's EPS forecast for the years
1998 through 2001 for both the Company and the Combined Company and
applied price earnings multiples for the Company of 8.64x in 1998 and
1999, 9.12x in 2000 and 2001; and 12.48x for the Combined Company. The
multiples used in this analysis were derived from an analysis of public
companies, including Advanced Marketing Services, Inc., Allou Health &
Beauty Care, Inc., AMCON Distributing Company, D&K Wholesale Drug Inc.,
Inc., Handleman Company and Krantor Corporation, Although none of
these companies are in the wholesale periodical distribution business,
they were determined to be in lines of business similar to the Company
and demonstrated financial and other characteristics that would
indicate that they were appropriate guideline companies. The multiples
for the Combined Company were increased by 4% and the multiples for the
Company were reduced by 10% in years 1998 and 1999 and 5% in years 2000
and 2001 to account for the relative difference in size compared to the
average of the guideline companies. The Company multiple was further
reduced by 20% to account for the current lack of liquidity of the
Company's shares. The analysis included a five year net sales compound
growth rate of 19.3% for the stand alone Company versus 11.4% for the
Combined Company, a 19.2% five year gross margin compound growth rate
for the stand alone Company versus 16.1% for the Combined Company and a
four year operating income compound growth rate of 26.5% for the stand
alone Company versus 21.2% for the Combined Company.
The estimated share value based upon management's projections
and the multiples utilized in the analysis, for the Combined Company is
$3.50 in 1998, $4.42 in 1999, $5.58 in 2000 and $6.88 in 2001. The
estimated share value based upon management's projection and the
multiples utilized in the analysis, for the Company is $0.31 in 1998,
$1.10 in 1999, $1.34 in 2000 and $1.51 in 2001. These estimated share
values are forward-looking statements and are subject to a number of
risks which could cause actual share values to vary substantially from
these estimates. Accordingly, shareholders are cautioned not to rely on
these estimates as indications of what the Company's or the Combined
Company's stock prices will be. In addition to the risks described
above in the first paragraph of this section, the risks set forth below
following the descriptions of the other analyses used are also
applicable and may cause these estimates not to be realized.
28
<PAGE> 41
Discounted Future Value Analysis. Using management's
projections, which included assumptions on revenue growth in major
markets, changes in gross margins and synergies from the consolidation
of facilities and operations, BankBoston estimated current share values
for both the Company and Combined Company by first estimating possible
future share prices in the year 2001 and then discounting such future
share values to present value using an appropriate discount rate.
BankBoston estimated possible future share values in the year 2001 by
averaging estimated share values which were determined by applying
multiples of .025x revenues for the company and 0.3x revenues for the
Combined Company, 7.0x earnings before interest, taxes, depreciation
and amortization for both the Company and the Combined Company and
10.0x net after tax earnings of the Company and 12.0x net after tax
earnings of the Combined Company. The multiples used in this analysis
were derived from an analysis of the public companies discussed above,
which were determined to be in lines of business similar to the Company
and demonstrated financial and other characteristics that would
indicate that they were appropriate guideline companies.
The estimated possible future share values were discounted to
present value using a range of discount rates for the Company of 15.3%
to 19.3% and a range of discount rates of 13.5% to 17.5% for the
Combined Company. The estimated possible future share values were
further reduced by 6.0% for the Company and increased by 15.0% for the
Combined Company to account for the differences in size of the Company
and Combined Company relative to the average of the guideline
companies. The estimated possible future share values of the Company
and Combined Company were further reduced by 20.0% and 10.0%
respectively to account for the lack of liquidity of the shares of the
Company and Combined Company. A lower liquidity discount was used for
the Combined Company because management expects the Combined Company's
shares to be more actively traded subsequent to the Transactions. This
analysis resulted in a supportable range of values of between $0.51 and
$0.60 per share for the Company compared to a supportable range of
values of between $2.51 and $2.94 per share for the Combined Company.
Discounted Cash Flow (DCF) Analysis. BankBoston performed a
discounted cash flow analysis using projections provided by management
of the Company which included assumptions on revenue growth in major
markets, change in gross margins and synergies from the consolidation
of facilities and operations. BankBoston calculated a net present value
of free cash flows for the Company and the Combined Company (which is
defined as unlevered net income plus depreciation, plus or minus any
changes in working capital and capital expenditures) for the six months
ending September 27, 1997, and the fiscal years 1998 through 2001 using
discount rates ranging from 12.4% to 16.4% for the Company and 11.0% to
15.0% for the Combined Company. BankBoston then calculated estimated
terminal values for the Company and the Combined Company using (i) exit
multiples of 6.0x, 7.0x and 8.0x and projected EBITDA for calendar year
2001, and (ii) with perpetuity cash flow growth of 3.0%, 4.0% and 5.0%
after calendar year 2001. The rates and multiples used in this analysis
were derived from an analysis of the public companies discussed above,
which were determined to be in lines of business similar to the Company
and demonstrated financial and other characteristics that would
indicate that they were appropriate guideline companies.
Based on the discount rates above and discounted cash flows,
the exit multiple analysis produced estimated net present values per
share of Common Stock for the Company and the Combined Company (after
adjustments for relative size and liquidity), when using the terminal
value exit multiple of 6.0x, that ranged from $.64 to $.75 per share
(Company) and $2.57 to $3.15 per share (Combined Company), when using
the terminal value multiple of 7.0x, that ranged from $.72 to $.85 per
share (Company) and $3.01 per share to $3.65 per share (Combined
Company, and when using the terminal value multiple of 8.0x, that
ranged from $.81 to $.95 per share (Company) and $3.44 to $4.16 per
share (Combined Company).
Based on the discount rates above and the discounted cash
flows, the perpetuity cash flow growth analysis produced estimated net
present values per share of Common Stock for the Company and the
Combined Company (after adjustments for relative liquidity), when using
the perpetuity growth rate of 3.0%, that ranged from $.77 to $1.23 per
share (Company), and $2.24 to $4.08 per share (Combined Company), when
using the perpetuity growth rate of 4.0%, that ranged from $.83 to
$1.38 per share (Company) and $2.47 to $4.70 per share (Combined
Company), when using the perpetuity growth rate of 5.0%, that ranged
from $.90 to $1.56 per share (Company) and $2.75 to $5.52 per share
(Combined Company).
Comparable Transactions Analysis. BankBoston performed an
analysis of certain financial information regarding four prior
acquisitions made by the Company and certain of the Acquisition Parties
(the "Selected Transactions") prior to the proposed transactions. The
comparable acquisitions that were analyzed are as follows: MacGregor
(acquired by Northern), Triangle News (acquired by the Company),
Service News, (acquired by the Company), and Twin City News (acquired
by Michiana). These transactions were used by BankBoston after its
search of publicly available information revealed a lack of publicly
available financial information regarding acquisitions of periodical
distribution companies. No independent comparable transaction analysis
was performed since management and BankBoston determined that there was
no publicily available information about comparable transactions to be
reviewed. The Selected Transactions were identified and selected by the
Company. The information regarding these transactions was provided by
the Company, and management for the Company has represented that such
information reflects unrelated, arms-length transactions.
The analysis indicated that, for the Selected Transactions,
the purchase price paid as a multiple of (i) sales for the Selected
Transactions ranged from .1x to .7x, compared to .5x to .7x for the
purchase price to be paid with respect to the proposed transactions,
(ii) EBITDA for the Selected Transactions ranged from 6.1x to 39.0x,
compared to 6.8x to 9.6x for the proposed
29
<PAGE> 42
transactions, and (iii) EBIT for the Selected Transactions ranged from
10.3x to 73.2x, compared to 7.9x to 15.1x for the proposed
transactions.
The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of
financial analysis and the application of these methods to the
particular circumstances, and, therefore, such an opinion is not
readily susceptible to summary description. Each of the analyses
conducted by BankBoston was carried out in order to provide a different
perspective on the proposed transactions and to add to the total mix of
information available. BankBoston did not form a conclusion as to
whether any individual analysis, considered in isolation, supported or
failed to support an opinion as to fairness. Rather, in reaching its
conclusion, BankBoston considered the results of all analyses taken as
a whole. BankBoston did not place particular reliance or weight on any
individual analysis, including the comparable transaction analysis, but
instead concluded that its analyses, taken as a whole, supported its
determination. Accordingly, notwithstanding the separate factors
summarized above, BankBoston believes that its analyses must be
considered as a whole and that selecting portions of its analyses and
the factors considered by it, without considering all analyses and
factors, may create an incomplete view of the evaluation process
underlying its opinions.
The analyses were prepared solely for purposes of BankBoston
providing its opinion to the Company's Board as to the fairness, from a
financial point of view, of the consideration to be paid by the Company
in connection with the proposed transactions, and do not purport to be
appraisals or necessarily reflect the prices at which businesses or
securities actually may be sold or purchased.
There are a number of factors which could cause the actual
financial results of the Combined Company to differ materially from
those set forth in forward-looking statements contained in the
preceding paragraphs: (1) No company or transaction used in the above
analyses as a comparison is identical to the Company or any of the
Acquisition Parties or the proposed transactions. (2) Analyses based
upon forecasts of future results are not necessarily indicative of
actual future results, which can vary significantly from the results
suggested by such analyses. (3) Projections used in the analyses are
inherently subject to uncertainty, being based upon numerous factors or
events beyond the control of the parties or their respective advisors.
(4) Projections are based upon assumptions of future events, many of
which will not materialize and many of which are not in the control of
management of the Company.
BankBoston's opinion to the Company's Board was one of many
factors considered by the Board in making its determination to enter
into the transactions. The preceding summary does not purport to be a
complete description of the analyses performed by BankBoston and is
qualified by reference to the written opinion of BankBoston set forth
in Exhibit B attached hereto.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
This section includes a summary of Arthur Andersen LLP's opinion on the
Material Federal Income Tax Consequences of the proposed transactions described
in this proxy as Proposals One through Twelve (the "Proposed Transactions"),
including the proposed exchange (the "Exchange") of the Company's Common Stock
and Debentures for stock or assets of Michiana, Stoll, The Klein Companies,
Northern, MacGregor, Wholesalers, and Scherer Companies (together with OPD)(the
"Acquisition Parties"), and the merger of OPD into the Company ("Merger"). The
Company has not obtained a private letter ruling from the Internal Revenue
Service (the "Service") regarding the Proposed Transactions. Accordingly, the
Service is not bound by the Arthur Andersen LLP opinion, and there can be no
assurance that the Internal Revenue Service will not take a position contrary to
the opinion. Due to uncertainties in the law including differing levels of
authority and interpretations thereof, Arthur Andersen LLP cannot definitely
opine that the Exchange and the Merger will be treated as described below, but
instead concludes that such Proposed Transactions should be treated as described
below. Accordingly, the opinion represents Arthur Andersen LLP's conclusions,
based solely on an analysis of the existing authorities, as to the likely
outcome of the litigation if the Service were to take contrary positions.
Potential, materially different consequences if the Service's position were to
be sustained are described at the end of the section entitled "Certain
Consequences to the Company's Current Shareholders and the UNIMAG Group of the
Acquisitions."
The discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), income tax regulations, judicial interpretations of the
foregoing, and other guidance published by the Service, all of which are subject
to change and differing interpretation. The discussion is limited to a summary
of material federal income tax consequences of the Proposed Transactions,
including (i) the exchange of shares of the Company's stock (and the receipt of
cash in lieu of fractional shares) pursuant to the Reverse Stock Split, (ii) the
issuance by the Company of (a) shares of its Common Stock and Debentures
pursuant to the Exchange and the Merger, and (b) shares of its Common Stock to
R. David Thomas ("Thomas") in exchange for cash (collectively, the
"Acquisition"), and (iii) the receipt of cash in exchange for Company shares
solely pursuant to the exercise of dissenters' rights under Ohio law with
respect to the Acquisition. The discussion does not address the tax consequences
of any other transaction.
The discussion below addresses the material federal income tax consequences of
the Proposed Transactions only to the Company and its current subsidiaries
(collectively, the "UNIMAG GROUP") and the Company's current shareholders (i.e.,
shareholders entitled to vote on the Proposed Transactions). The Stock and Asset
Exchange Agreements provide that Acquisition Parties and their shareholders are
responsible for evaluating all tax consequences to them of the Acquisition.
Accordingly, the discussion does not address the tax consequences of the
Proposed Transactions to any transferor of stock, assets or cash to the Company
pursuant to the Acquisition (a "Transferor"), including any current Company
shareholder acting in the capacity as a Transferor. Moreover, the discussion
does not address the tax consequences of the Proposed Transactions to any
Acquisition Party, any shareholder thereof, or any Company shareholder acting in
any non-shareholder capacity such as an employee or officer of the Company, any
Acquisition Party, or any related party, or as a party to any other transaction
involving any of the foregoing. Any Transferor, Acquisition Party, shareholder
of any Acquisition Party, or any
30
<PAGE> 43
Company shareholder acting in any non-shareholder capacity must consult or rely
on the advice of their own counsel, accountant, or other advisor.
The discussion also does not address non-income, state, local, or
foreign tax consequences associated with the proposed transactions. It does not
address all aspects of federal income taxation that may be relevant in the
particular circumstances of each shareholder, or to special status company
shareholders, including, without limitation, insurance companies; tax-exempt
entities; financial institutions or broker-dealers; foreign corporations,
foreign estates and trusts, and persons who are not citizens or residents of
the United States; and persons who acquired stock as a result of the exercise
of a employee stock option, pursuant to an employee stock purchase plan or
otherwise as compensation.
Certain Consequences to the Company Shareholders and the Company of the
Reverse Stock Split. The exchange of current certificates evidencing shares of
the Company common stock ("Old Shares") for new certificates evidencing the
Company stock ("New Shares") on a one-for-ten basis will constitute a
reorganization within the meaning of section 368(a)(1) (E) of the Code.
Accordingly, except as provided below with respect to the receipt of cash in
lieu of fractional share interests, (i) neither the Company nor its shareholders
will recognize any gain or loss on such exchange, (ii) the basis of the New
Shares received by a Company shareholder pursuant to the Reverse Stock Split
(including any fractional share interest to which the holder is entitled) will
be the same as the basis of the Old Shares exchanged therefor, and (iii) the
holding period of the New Shares received by a Company shareholder pursuant to
the Reverse Stock Split (including and fractional share interest to which the
shareholder is entitled) will include the holding period of the Old Shares
exchanged therefor, if such Old Shares were held as a capital asset on the date
of the exchange.
The payment of cash in lieu of fractional share interests in the Company
common stock will be treated for federal income tax purposes as if the
fractional share interests were issued as part of the Reverse Stock Split and
were subsequently redeemed by the Company. Subject to the limitations discussed
in this paragraph, gain or loss will be recognized on such exchange (determined
under section 1001 of the Code and subject to the limitations of section 267 of
the Code) and, if the fractional share interest is a capital asset in the hands
of the exchanging holder, will constitute capital gain or loss to such holder.
However, if a Company shareholder does not experience a sufficient reduction in
proportionate interest in the Company (e.g., because of shares of the Company
stock owned by related parties, shares received in connection with the
Acquisition, or both) that shareholder may recognize dividend income equal to
all or a portion of cash received, instead of recognizing capital gain or loss.
The determination as to whether there has been a sufficient reduction in
proportionate interest must be made by each individual shareholder based on his,
her or its specific factual situation.
Certain consequences to the company's Current Shareholders and the
UNIMAG Group of the Acquisition. The issuance of Company common stock and
Debentures to the Transferors pursuant to the Acquisition should not cause the
Company's current shareholders to recognize gain or loss in their capacity as
Company shareholders. Moreover, under section 1032, the Company should not
recognize any gain or loss on the issuance of its common stock and Debentures
in exchange for the stock and assets of the Acquisition Parties, or in exchange
of cash transferred by Thomas.
Under section 362 of the Code, a corporation issuing stock and
debentures in exchange for property in a transaction to which section 351
applies takes a basis in such property equal to the transferor's basis, plus any
gain recognized by the transferor. Section 351(a) provides that no gain or loss
is recognized by transferors of property (which can include cash or securities)
solely in exchange for stock of a corporation, if immediately after the
exchange, such transferors own at least 80% of the combined voting power of all
classes of stock entitled to vote and at least 80% of the total number of shares
of all other classes of stock of the corporation. If section 351(a) would apply
to an exchange, but for the fact that there is received other property or money,
section 351(b) provides that transferors receiving such other property or money
must recognize gain (if any), but not in excess of the amount of money received,
plus the fair market value of such other property received.
The Company's issuance of Common Stock and Debentures in exchange for
the stock or assets of the Acquisition Parties in the Acquisition should
constitute an exchange to which section 351(a) and
31
<PAGE> 44
(b) of the Code apply (other than with respect to OPD, which should be a
Transferor for such purpose, but which is described further below
All of the Transferors should be members of the 80% control group:
Ronald Scherer, Linda Hayner, Teddy Rysz, Wholesalers, OPD, Northern, Stoll
shareholders, Michiana shareholders, The Klein Companies shareholders, and R.
David Thomas. Qualification under the 80% control test assumes that all
transfers in the Acquisition are consummated, and the failure of one or more of
the Transferors to be included in the control group, including OPD, would cause
the Acquisition to fail to qualify under section 351(a).
Accordingly, the Company's basis in the stock or assets of the
Acquisition Parties (other than OPD) received in the exchange should be equal to
the basis of the stock or assets in the hands of the Transferor thereof,
increased by any gain recognized by such Transferor on such transfer. The amount
of gain should vary according to the particular circumstances of each such
Transferor (e.g. depending upon the Transferor's basis in his, her or its stock
or assets). Interest accruing on the Debentures following the closing of the
Acquisition should not give rise to such gain (see discussion below relating to
preclosing interest). If a Transferor of stock or asset to the Company (other
than OPD) reports gain on the installment method over the term of the
Debentures, the Company's basis in such stock or assets should be increased at
the time that such Transferor recognized such gain (rather than at the time of
such stock or assets are transferred to the Company).
The merger of OPD with and into the Company should constitute a
reorganization within the meaning of section 368(a)(1)(A) of the Code. The
Company's basis in the OPD assets received in the Merger should equal the basis
of such assets in OPD's hands increased by the gain, if any that is recognized
by OPD.
Accordingly, the Company's basis in the acquired stock and assets may
significantly differ from (and, in certain cases, be significantly lower than)
their carrying value for financial accounting purposes.
The Company's recovery of its basis in the stock and assets acquired in
the Acquisitions should be governed by the generally applicable rules of the
Code governing depreciation and amortization, including Sections 167, 168, and
197 of the Code and the income tax regulations thereunder. The Company's basis
in assets acquired from OPD, Northern or Wholesalers generally should be
depreciable or amortizable if such assets are used in the Company's trades or
businesses or held for the production of income; experience exhaustion, wear and
tear, or obsolescence: and have a useful life which can be determined or
estimated with reasonable accuracy. The Company's basis in inventory, stock in
trade or land should not be depreciable or amortizable. The Company's basis in
the stock of the Acquisition Parties should not be depreciable or amortizable.
Intangible assets acquired from OPD, Northern or Wholesaler by the Company
should be amortizable if they qualify as an "amortizable section 197 intangible"
for purposes of section 197. An "amortization section 197 intangible" generally
includes a broad range of assets (e.g. goodwill, going concern value, business
books and records, licenses, and convenants not to compete), However, the Code
generally excludes from that definition intangibles that would not have been
amortizable but for section 197 and that are acquired from a related party that
acquired or used such intangibles prior to the statutory effective dates of
section 197. Under these rules, the Company's basis in any asset acquired from
OPD, Northern, or Wholesalers in the nature of goodwill, going concern value,
and certain other intangible assets generally should not be depreciable or
amortizable. Such tax results should occur even though for financial accounting
purposes corresponding amounts generally will give rise to depreciation or
amortization charges.
In general, Section 382 of the Code impose limitations on the use of
net operating losses and certain built-in losses following an ownership change
(the "Section 382 limitation"). An ownership change generally is deemed to occur
when there is a change of more than 50 percentage points change in share
ownership over a three-year period. The issuance of additional shares of Common
Stock by the Company pursuant to the Acquisitions should result in the UNIMAG
Group's having an ownership change. Accordingly, the amount of any post-change
income of the UNIMAG Group that may be offset by the pre-change net operating
losses (and potentially certain built-in losses, if any) of the UNIMAG Group
should be subject to the Section 382 limitation.
32
<PAGE> 45
The annual section 382 limitation generally should be equal to the aggregate
value of the stock of the Company immediately prior to the ownership multiplied
by the long-term tax-exempt rate published by the Service for the month in which
the Acquisition is closed. If the Acquisition occurs during the middle of a
taxable year (e.g., before September 30, 1997), the annual limitation for that
year should be a pro rated amount based on the number days in the pre-change and
post-change portions of that year. The annual limitation may also be increased
by the excess of "built-in gains" over "built-in losses" of the UNIMAG Group to
the extent such excess is recognized within 5 years of the closing date of the
Acquisition (in general, built-in gain is attributable to the excess of the
value of an asset on the closing date over such asset's basis, and any income
item attributable to the pre-closing period recognized after the closing date.
Unused annual limitation is carried over to one or more succeeding years.
As a result of the application of the Section 382 limitation, a
significant amount of pre-change net operating losses of the UNIMAG Group should
expire unutilized. Accordingly, the application of the Section 382 limitation
may increase the cumulative federal income tax liability of the UNIMAG Group in
comparison to such liability if no limitation applied. In addition, the UNIMAG
Group should be required to pay federal income tax in any year in which its
taxable income exceeds the Section 382 limitation, notwithstanding the existence
of the pre-change net operating losses (and potentially the excess of "built-in
losses" over "built-in gains", if any), of the UNIMAG Group to the extent such
excess is recognized within 5 years of the closing date of the Acquisition (in
general, built-in loss is attributable to the excess of the basis of an asset on
the closing date over such asset's value and any deduction attributable to the
pre-closing period recognized after the closing date.
In addition, under section 384 of the Code, any pre-acquisition net
operating losses (and certain built-in losses, if any) of the UNIMAG Group
generally should not be permitted to offset any post-Acquisition income
attributable to certain built-in gains (as described above), if any, recognized
after the Acquisitions with respect to the Acquisition Parties. Such built-in
gains potentially include the excess of the fair market value of an asset over
its tax basis on the Acquisition date, as well as significant amounts
attributable to expected changes in accounting methods relating to sales return
reserves under section 458 of the Code. The section 384 limitation applies in
addition to the Section 382 limitation. Thus, section 384 may prevent
pre-acqusition losses from offsetting one or more built-in gains of the
Acquisition Parties even though the Section 382 limitation would not prevent
such offsetting. This also could cause the company post-Acquisition consolidated
group to be required to pay federal income tax in any year in which built-in
gains of the Acquisition Parties, if any, are recognized, notwithstanding the
existence of the pre-change net operating losses (and potentially certain
built-in losses, if any).
The UNIMAG Group includes the following companies: United Magazine
Company, Service News Co. dba Yankees News, Triangle News, Team Logos
Sportstuff, Unimag I, Sportstuff Marketing, Imperial News and Service News
Company.
There is substantial authority under Section 163 of the Code to support
the Company's deducting pre-closing interest paid on the Debentures in
accordance with its current accrual method of accounting (subject to section
263A(f), which may require that a material portion of such interest be
capitalized). Pre-closing interest is interest on the Debentures attributable to
the period from the time the obligation to pay such interest was incurred
through the closing date of the Acquisition. However, there can be no assurance
that the Service will not seek to disallow such interest deductions by treating
such interest as nondeductible purchase price may be allocated to assets that
nondepreciable or nonamortizable, and therefore generally does not result in an
current deduction. Accordingly, if the company cannot deduct such pre-closing
interest, there would be a significant increase in the taxable income (or
decrease in the taxable loss) the Company's post-Acquisition consolidated group
for the year with respect to which such interest is disallowed.
In general, the use of pre-Acquisition net operating losses (and
certain build-in losses), if any, of the Acquisition Parties by the Company's
post-Acquisition consolidated group should be subject to limitations. Such
limitations include the application of a section 382 limitation separate from
the section 382 limitation for the UNIMAG Group discussed above (determined by
reference to the value of the Acquisition Party's stock, rather than the value
of the Company's stock). Generally, pre-Acquisition net operating losses (and
certain built-in losses) can only offset post-Acquisition income of the
Acquisition Party which originally generated the net operating loss or built-in
loss. Accordingly, these limitations may affect the taxable income or loss of
such group (which would include the UNIMAG Group,) in post-Acquisition periods.
If upon examination of the Acquisition by the Service, it were
ultimately determined that the transfer of stock and assets of the Acquisition
Parties (other than OPD) to the Company did not qualify under section 351 of the
Code, the federal income tax consequences described above with respect to the
transfer of such stock or assets should be equal to the portion of the Company's
allocable cost, and except that the depreciation or amortization periods for
such assets generally should be restarted. If it were ultimately determined that
the merger did not qualify under section 368(a)(1)(A), and that the transfer of
OPD's assets pursuant to the merger did not qualify under section 351 of the
Code (together with the transfer of stock or assets of the other Acquisition
Parties), the federal income tax consequences addressed above with respect to
the Merger should not be materially changed, except that the company's basis in
OPD's assets should be equal to the amount of the Company's allocable cost), and
except that the depreciation or amortization periods for such assets generally
should be restarted. This could cause the Company's basis in the stock or assets
acquired to increase and this basis may or may not be depreciable or
amortizable.
Certain Consequences of the Exercise of Dissenters' Rights. Subject to
the limitations discussed in this paragraph, gain or loss will be recognized by
a Company shareholder who properly perfects such shareholder's appraisal rights
under Ohio law, measured by the difference between the amount of cash received
and the basis of the shares of the Company stock exchanged therefor. Depending
on the time period involved in resolving the Dissenter's Rights claim, a court
may award interest. Any interest so awarded must be treated as ordinary income
by such shareholders. Any gain or loss will be capital gain or loss provided
that the shares of the Company stock were held as capital assets at the time of
the exchange, and will be long term capital gain or loss if such shares were
held for more than one year at such time. However, if a dissenting the Company
shareholder does not experience a sufficient reduction in proportionate interest
in the Company (e.g., because of shares of the Company stock owned by related
parties, shares received in connection with the Acquisition, or both), such
shareholder may recognize divided income equal to all or a portion of the cash
received (other than any amount constituting interest as described above)
pursuant to the exercise of dissenters' rights, instead of recognizing capital
gain or loss. The determination as to whether there has been a sufficient
reduction in proportionate interest must be made by each individual shareholder
based on his or her specific factual situation.
EACH COMPANY SHAREHOLDER IS URGED TO CONSULT ITS, HIS OR HER OWN TAX ADVISOR AS
TO ITS, HIS OR HER OWN PARTICULAR TAX CONSEQUENCES, IN RESPECT OF THE PROPOSED
TRANSACTION, SPECIFICALLY THE TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT AND
THE EXERCISE OF DISSENTERS' RIGHTS, INCLUDING THE EFFECT AND APPLICABILITY OF
FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
33
<PAGE> 46
RIGHTS, INCLUDING THE EFFECT AND APPLICABILITY OF FEDERAL, STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS.
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. All
of the agreements and transactions described under the heading "Conflicts of
Interest and Related Party Transactions -- Existing Company Related Party
Transactions" will continue in effect after the consummation of the proposed
Acquisitions with no changes or revisions, except for the management agreement
between Scherer Companies and the Company. This management agreement was
terminated effective July 1, 1996. The employment agreements with Ronald E.
Scherer, David B. Thompson, and Eugene J. Alfonsi identified in the last
paragraph of the heading "Conflict of Interest and Related Party Transactions
- -- Existing Company Related Party Transactions" have not yet been entered
into. Unless otherwise disclosed, the terms of all transactions described in
this section are no less favorable than could be obtained from non-affiliated
parties.
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 part of the services
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. The management
services arrangement between the Company and Scherer Companies was
terminated effective July 1, 1996. Additionally, Scherer Companies has
also been providing management services to OPD, Wholesalers, Northern
and MacGregor. These services arrangements, which are eliminated in the
Scherer Affiliates' financial statements, will be terminated at the
time of the final closing of the acquisitions.
PUT AGREEMENTS WITH PRINCIPAL SHAREHOLDERS
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. The anticipated price per share is
$1.50 for 3,672,572 of these shares and $2.11 per share for the
remaining 1,148,826 shares. In the event the put options are exercised
as they become exercisable, the related payments would be $167,916 in
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"). The Company has previously filed Forms 8-K and
8-KA in connection with the Wilmington transaction.
34
<PAGE> 47
LEASE AGREEMENTS
The Company's subsidiary, 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, Yankee,
entered into a consulting agreement with Charles Pastorino, 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. The aggregate amount paid during fiscal 1996 was $51,000.
YANKEE AGREEMENTS WITH MDI, L.P.
On May 24, 1993, MDI, L.P., a limited partnership in which
Yankee and Magazine Distributors, Inc. ("MDI") were partners, was
dissolved. As part of the dissolution, Yankee received the net
operating assets of the Connecticut territory of the business operated
by MDI, L.P. As of May 24, 1993, these net operating assets were valued
at $2,040,000. MDI currently holds more than 5% of the outstanding
shares of Common Stock of the Company. In connection with the
dissolution of MDI, L.P., the Company, Yankee, OPD and Northern
executed 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 and valued at $1.50 per share for
accounting purposes after July 1, 1996. 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
$537,677 in 1996, $468,982 in 1995 and $446,092 in 1994 (one-half paid
in cash and one-half paid in shares). These non-competition agreements
were negotiated by the parties to protect the value of the net
operating assets being acquired by the Company.
As part of the dissolution of MDI, L.P., 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.
Also, in connection with the dissolution of 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. These non-competition agreements were negotiated by the parties
to preserve the value of the operating assets of MDI, L.P. transferred
to MDI in the dissolution agreement.
35
<PAGE> 48
In March, 1991, the Company entered into an agreement to
restructure the Company by disposing of the operating assets and
liabilities of Yankee. Under various agreements, Yankee agreed to
contribute and sell its net operating assets to MDI, L.P. in exchange
for a 48% ownership interest in MDI, L.P. valued at $2,850,000, and a
note payable by MDI, L.P. in the original amount of $3,500,000. In
1993, in connection with the dissolution of MDI, L.P., Yankee received
the net operating assets of the Connecticut territory in exchange for
Yankee's 48% partnership interest. Also, the Consulting Agreements
described above were entered into and MDI purchased 1,000,000 shares of
Common Stock of the Company for a purchase price of $1,000,000.
EMPLOYMENT AGREEMENTS
In connection with the acquisition transactions, the
Company is currently in the process of finalizing employment agreements
with three officers and directors, Ronald E. Scherer, David B. Thompson
and Eugene J. Alfonsi. Each of these employment agreements will be for
a term of three years. The Company has contracted with a national
consulting firm, Hay Group, to confirm an appropriate level 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. From information provided by The Hay Group, the
compensation committee of the Board of Directors has recommended annual
compensation for Mr. Scherer of $491,000, for Mr. Thompson of $224,000
and for Mr. Alfonsi of $195,000. The employment agreements also include
a provision for a discretionary bonus, however there is no set bonus or
incentive compensation under the agreements. The Company is in the
process of finalizing the employment agreement on those terms and
expects them to be completed by the time of the annual shareholders
meeting.
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) even though the Company's management had
evaluated the potential acquisition of the Scherer Affiliates during
the summer of 1995, the Exchange Agreements are on substantially the
same terms as the Exchange 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 and tangible net worth, respectively); (3)
the acquisition agreements provide for an independent audit (or an
independent appraisal in the case of Wholesalers) 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 BankBoston that states, from a
financial point of view, that the consideration to be paid by the
Company for Michiana, Stoll, Klein, OPD, Northern, MacGregor,
Wholesalers 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 B.
Additionally, Mr. Scherer abstained from all voting of the Board of
Directors with respect to the Board approval of the acquisitions of the
Scherer Affiliates.
36
<PAGE> 49
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 warehouse and distribution facility will continue to be
used for the distribution of periodicals in northern 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 $51,000. 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 17,800 square feet of
office space for its principal executive offices at 5131 Post Road,
Dublin, Ohio, from NRS Equities, Inc., an entity owned 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
272 square feet of office and conference facilities in this building to
the Company for $328.67 per month. Management expects that this lease
and the sublease will continue after consummation of the Acquisitions
and will be assigned 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 which provide for aggregate annual compensation of $360,000
with four individuals: Terry A. Massaro, Marketing Director, Kenneth R.
Bentley, M.I.S. Director, Arthur C. Foster, Jr., Vice President
Corporate Operations, and Ronald E. Scherer, Jr., SMARTS Director.
Ronald E. Scherer, Jr., is the son of Ronald E. Scherer. His employment
agreement is for a term of three years, and provides for an annual
salary of $60,000.
INTERCOMPANY ADVANCES
The Company has made a number of non-interest bearing advances
to Scherer Affiliates, totaling $1,036,700 at September 28, 1996 for
purposes of paying slotting fees and making payments to publishers. As
of June 30, 1997 these advances had been repaid and Scherer Affiliates
had advanced to the Company a total of $110,000 for general working
capital purposes. All of these advances will be eliminated at the
closing and have been eliminated from the consolidated financial
statements of the Combined Company.
AMOUNT OWED BY OPD TO PRINCIPAL SHAREHOLDER
OPD owes $5,000,000, as of June 30, 1997, 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
nominee for director of the Company. Interest of $48,958 is being paid
monthly. Since July 1, 1996, the Company paid KDR interest in the
aggregate amount of $589,496, and interest accrued for the month of
July 1997 was $48,958. 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 agreed
to the assumption by the Company of the obligations of OPD under the
note. KDR will exchange the Note for a $4,500,000 10% Subordinated
Debenture due in 2004 upon terms and conditions similar to those of the
Subordinated Debentures to be issued by the Company to the Acquisition
37
<PAGE> 50
Parties at closing. In consideration for KDR's agreement to the new
note, KDR will be paid accrued interest and will receive a partial
payment of $500,000 of the principal of the old note. In connection
with the exchange of the notes, the Company will nominate R.L. Richards
for election to the Company's board of directors. The transactions are
dependent upon the approval of the acquisitions of OPD by the Company
at the Annual Meeting.
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
which provide for aggregate annual compensation of $399,000 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. The other two individuals are John Heiniger, Stoll
Treasurer, and Ron Lankerd, Stoll General Manager. Mr. Heiniger is also
serving as the trustee under the Debenture Agreement.
DEFERRED COMPENSATION AGREEMENT
Stoll has entered into a deferred compensation agreement for
past services with Richard Stoll, Sr., who has been nominated to the
Company's board of directors. Under the agreement, Stoll will pay Mr.
Stoll, Sr. 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. This
agreement will continue after consummation of the Acquisitions, and the
net present value of this agreement has been established as a liability
on the financial statements of Stoll and has been deducted from the
valuation of Stoll at June 30, 1996. In addition to serving as a
director, Richard Stoll, Sr. will serve as an advisor and serve on the
Executive Committee.
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, each for a
three-year term expiring September 30, 1996, providing for monthly
rentals of $1,460, $2,250 and $1,330, respectively. Monthly rent is
being paid while the renewal of these leases is being evaluated by the
Company and by Stoll advisors;
(b) Two are wholesale operations 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
(c) Two are wholesale operations leases located in Galesburg
and Wyoming, Michigan expiring September 1996 providing for monthly
rentals of $6,300 and $20,000, respectively. Galesburg and Wyoming have
been closed as part of the consolidation of operations in Michigan.
Galesburg rent was to be paid through May 31, 1997, and Wyoming was to
be paid through June 30, 1997.
38
<PAGE> 51
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. Mr. Stoll has been
nominated for election to the Company's Board of Directors. 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. Additionally, the remaining balance due on
Stoll Shareholder loans has been eliminated through Shareholder
distributions, effective June 30, 1996 for valuation purposes.
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. Mr. Majerek was deemed independent for this
purpose because he was not an employee of the Company and he had no
ties to Mr. Scherer or the Scherer Affiliates. However, he will benefit
as a result of the Michiana Exchange Agreement, which is conditioned
upon closing of the Scherer Affiliate Acquisitions. Additionally,
members of his family will benefit. These benefits are described in the
following paragraphs.
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 which provide for aggregate annual compensation
of $320,000 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. Each
employment agreement is for a term of three years; 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.
Eight of the nine 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 18% of Michiana's net revenues during
its fiscal year ended June 30, 1996 with sales to HOCAB of
approximately $4,500,000 during that year. During the fiscal year ended
June 30, 1996, Michiana received $84,000 from HOCAB for administrative,
accounting and management services. 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 special prices negotiated in the
agreement. These discounts are comparable to quantity discounts
provided to non-affiliated customers of a similar size. HOCAB is
expected to benefit by an aggregate of approximately $165,000 per year
from the 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
39
<PAGE> 52
payments on the Senior Debentures to be paid to them. Because of the
delay in the Annual Meeting, these payments have been deferred.). 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; Michiana does not receive any consideration for
this guarantee. At December 31, 1996, there was no balance outstanding
on this guaranteed debt. 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
approximately $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. This agreement will commence
after consummation of the Acquisitions and will terminate three years
thereafter.
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. The Company estimates that the purchase price will be
approximately $250,000.
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 all 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 of
approximately $80,000, an amount equal to the value of the assets being
acquired and the assumption of 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.
40
<PAGE> 53
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. To the extent Klein, as a
subsidiary of the Company, pays on this guarantee, Mr. Klein will
receive a benefit.
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, for
$155,526 per year. Central News Company leases a 38,000 square foot
warehouse and distribution facility in Akron, Ohio, for $46,371 per
year. Newspaper Sales, Inc. leases a 10,000 square foot facility
located on Paynes Avenue in Cleveland, Ohio, for $29,821 per year.
All leases expired on December 31, 1996. The Company entered
into a new three year lease with Newspaper Sales, Inc., at $29,281 per
year, and a month-to-month lease with a six month termination clause
(unless sold or leased in that six month period) with The George R.
Klein News Co. at $162,538 per year. The lease with Central News Co. in
Akron, Ohio was terminated on May 1, 1997 as part of the consolidation
plan.
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, this agreement will terminate, and
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 $159,000.
DISSENTERS' RIGHTS
In accordance with Section 1701.85, of the Ohio Revised Code,
shareholders of record of the Company as of May 30, 1997, who vote against, or
abstain from voting with respect to, Proposals One through Seven are entitled to
certain dissenters' rights of appraisal with respect to shares owned by such
shareholder, provided that, not later than ten days after the date on which the
votes on the proposals were taken at the Annual Meeting, the dissenting
shareholder delivers to the Company a written demand for payment of the fair
cash value of the shares as to which he/she ("he") seeks relief, which demand
shall state his address, the number of such shares, and the amount claimed by
him as the fair cash value, as described in the Section 1701.85(C), Ohio Revised
Code, of the shares. Shareholders will not be provided any further notice of the
date on which the votes on Proposals One through Seven are taken, since it is
anticipated that such votes will occur on the date scheduled for the Annual
Meeting.
Thereafter, the Company may send to the dissenting shareholder, at the
address specified in his demand, a request for the certificates representing the
shares as to which such shareholder seeks relief, whereupon, within fifteen days
from the date of the sending of such request, the dissenting shareholder shall
deliver to the Company the certificates requested so that the Company may
endorse on the certificates a legend to the effect that demand for the fair cash
value of such shares has been made. The Company shall promptly return such
endorsed certificates to the dissenting shareholder. A dissenting shareholder's
failure to deliver such certificates terminates his rights as a dissenting
shareholder, at the Company's option, exercised by written notice sent to the
dissenting shareholder
41
<PAGE> 54
within 20 days after the lapse of the 15 day period, unless a court otherwise
directs. A request under this paragraph by the Company is not an admission by
the Company that the shareholder is entitled to relief as aforesaid.
If the Company and the dissenting shareholder fail to agree on the fair
cash value per share of the shares as to which the dissenting shareholder seeks
relief, the dissenting shareholder or the Company, within three months after the
service of the demand by the dissenting shareholder, may file a complaint in the
court of common pleas of the county in which the principal office of the Company
is located. Other dissenting shareholders, within that three-month period, may
join as plaintiffs or may be joined as defendants in any such proceeding, and
any two or more proceedings may be consolidated. The complaint shall contain a
brief statement of the facts, including the vote and the facts entitling the
dissenting shareholder to the relief demanded. No answer to such a complaint is
required. Upon the filing of a complaint, the court, on motion of the
petitioner, shall set a date for a hearing on the complaint and shall require
that a copy of the complaint and a notice of the filing and of the date for
hearing be given to the respondent or defendant in the manner in which summons
is required to be served or substituted service is required to be made in other
cases. On the day of such hearing, the court shall determine from the complaint
and from such evidence as is submitted by either party whether the dissenting
shareholder is entitled to be paid the fair cash value of any shares and, if so,
the number of such shares. Upon a finding in favor of the dissenting
shareholder, the court may appoint one or more appraisers to receive evidence
and recommend a decision to the court as to the fair cash value of the shares.
The court thereupon shall make a finding as to the fair cash value of the shares
and shall render judgment against the Company for the payment of such value,
with interest at such rate and from such date as the court considers equitable.
The costs of the proceeding, including reasonable compensation to the appraisers
to be fixed by the court, shall be assessed or apportioned as the court
considers equitable. The final order entered in any proceeding as described
above may be appealed in accordance with applicable laws and regulations.
Payment of the fair cash value of the shares as determined by the court or upon
the agreement of the Company and the dissenting shareholder shall be made only
upon and simultaneously with the surrender to the Company of the certificates
representing the shares for which the payment is to be made.
Under Ohio law, determination of fair cash value is made as of the date
preceding the day on which the vote of the shareholders is taken, and the
determination excludes any appreciation or depreciation in the value of the
stock resulting from the proposed Acquisitions.
A copy of Section 1701.85 of the Ohio Revised Code is attached to the
proxy statement as Exhibit C, and the foregoing discussion is qualified in its
entirely by reference to the text of such section.
PRO FORMA SELECTED FINANCIAL DATA
The Company is acquiring the businesses of Michiana, Stoll, Scherer
Affiliates and Klein during the Company's fourth fiscal quarter of 1996. These
are being accounted for using the purchase method of accounting.
The Company has reflected the transactions in its financial statements
for the period ended September 28, 1996, and in its related pro forma statements
presented herein for the following reasons: the Company began managing Stoll,
Michiana, Klein and Scherer in the fourth quarter of 1996 for the risk/reward of
the Company's shareholders. The valuation date for the transactions was June 30,
1996 (August 23, 1996 for Klein), and Debentures began to accrue interest from
July 1, 1996 forward (August 24, 1996 for Klein). The effective dates of the
various acquisitions for purposes of inclusion in the consolidated financial
statements of the Company were July 31, 1996 for the Scherer Affiliates, Stoll,
and Michiana and September 14, 1996 for Klein. These were the approximate dates
by which both the definitive agreements were signed and control of the outcome
of the vote was achieved by the execution of the shareholder voting agreement by
Ronald E. Scherer, OPD and R. David Thomas.
The conduct of all of the companies during the fourth quarter of 1996
reinforces that the Company had effective control of the acquired operations. In
addition, the fact that the outcome of the vote at the Annual Meeting of
Shareholders was assured also reinforced the effective control issue.
42
<PAGE> 55
The following Tables 1 through 4 set forth the separate pro forma
financial statements for Michiana, Stoll, the Scherer Affiliates and Klein for
the twelve months ended September 28, 1996 as if the Acquisitions had taken
place for financial, accounting and corporate law purposes on or with respect to
such date. In addition, set forth in Table 5 are the pro forma financial
statements of all of the Acquisition Parties combined. Set forth in Table 6 are
the pro-forma financial statements of the Company as if the proposed
Acquisitions had not occurred. Set forth in Table 7 are the pro-forma financial
statements of the Combined Company (as if the proposed Acquisitions had
occurred).
The only pro forma adjustments provided were for Debenture interest for
the entire year and amortization of goodwill for the entire year. The Company
did not include pro forma adjustments for elimination of owner related expenses,
for non-recurring expenses, for subsequent reductions in full-time personnel,
and for reductions in operating expenses from facility consolidations.
43
<PAGE> 56
TABLE 1
MICHIANA PRO FORMA INCOME STATEMENT
$(000) Omitted
12 Months ended 09/28/96
<TABLE>
<CAPTION>
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
MICHIANA MICHIANA MICHIANA
TWO MTHS. TEN MTHS. 12 MTHS.
ENDED ENDED ENDED PRO FORMA MICHIANA
9/28/96 7/31/96 9/28/96 ADJUSTMENTS PRO FORMA
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C>
NET SALES 3,491 21,200 24,691 0 24,691
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
COST OF SALES 2,885 16,079 18,964 0 18,964
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
Gross Profit 606 5,121 5,727 0 5,727
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (860) (4,697) (5,557) (1) (353) (5,910)
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
INCOME (LOSS) FROM OPERATIONS (254) 424 170 (353) (183)
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
OTHER INCOME (EXPENSES), NET:
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
Interest Expense 0 (514) (514) (2) (425) (939)
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
Interest Income 0 102 102 102
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
Other, Net 0 (23) (23) 0 (23)
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
Total Other Income (Expenses), Net 0 (435) (435) (425) (860)
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (254) (11) (265) (778) (1,043)
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
INCOME TAXES
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
NET INCOME (LOSS) (254) (11) (265) (778) (1,043)
- ------------------------------------------------ ----------- ----------- ----------- -------------- -------------
</TABLE>
44
<PAGE> 57
TABLE 2
STOLL PRO FORMA INCOME STATEMENT
$(000) Omitted
12 Months ended 09/28/96
<TABLE>
<CAPTION>
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
STOLL STOLL STOLL
TWO MTHS. TEN MTHS. 12 MTHS.
ENDED ENDED ENDED PRO FORMA STOLL
9/28/96 7/31/96 9/28/96 ADJUSTMENTS PRO FORMA
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES 11,284 65,924 77,208 0 77,208
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
COST OF SALES 9,122 51,680 60,802 0 60,802
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
Gross Profit 2,162 14,244 16,406 0 16,406
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (3,885) (23,254) (27,139) (1)(1,037) (28,176)
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
INCOME (LOSS) FROM OPERATIONS (1,723) (9,010) (10,733) (1,037) (11,770)
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
OTHER INCOME (EXPENSES), NET
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
Interest Expense 84 (241) (157) (2)(1,864) (2,021)
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
Interest Income (118) 322 204 204
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
Other, Net 98 (60) 38 0 38
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
Total Other Income (Expenses), Net 64 21 85 (1,864) (1,779)
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,659) (8,989) (10,648) (2,901) (13,549)
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
INCOME TAXES
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
NET INCOME (LOSS) (1,659) (8,989) (10,648) (2,901) (13,549)
- ------------------------------------------------------- ------------ ------------- ------------- ----------- ------------
</TABLE>
45
<PAGE> 58
TABLE 3
SCHERER AFFILIATES PRO FORMA INCOME STATEMENT
$(000) Omitted
12 Months ended 09/28/96
<TABLE>
<CAPTION>
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
SCHERER SCHERER SCHERER
TWO MTHS. TEN MTHS. 12 MTHS.
ENDED ENDED ENDED PRO FORMA SCHERER
9/28/96 7/31/96 9/28/96 ADJUSTMENTS PRO FORMA
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
NET SALES 13,164 57,002 70,166 0 70,166
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
COST OF SALES 8,961 38,422 47,383 0 47,383
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
Gross Profit 4,203 18,580 22,783 0 22,783
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (4,199) (17,586) (21,785) (1) (815) (22,600)
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
INCOME (LOSS) FROM OPERATIONS 4 994 998 (815) 183
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
OTHER INCOME (EXPENSES), NET:
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
Interest Expense (210) (799) (1,009) (2) (734) (1,743)
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
Interest Income 0 2 2 2
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
Other, Net 64 44 108 0 108
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
Total Other Income (Expenses), Net (146) (753) (899) (734) (1,633)
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (142) 241 99 (1,549) (1,450)
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
INCOME TAXES
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
NET INCOME (LOSS) (142) 241 99 (1,549) (1,450)
- ------------------------------------------------------- ------------ ------------- -------------- --------------- -------------
</TABLE>
46
<PAGE> 59
TABLE 4
KLEIN PRO FORMA INCOME STATEMENT
$(000) Omitted
12 Months ended 09/28/96
<TABLE>
<CAPTION>
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
KLEIN KLEIN KLEIN
TWO WEEKS 50 WEEKS 12 MTHS.
ENDED ENDED ENDED PRO FORMA KLEIN
9/28/96 9/14/96 9/28/96 ADJUSTMENTS PRO FORMA
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES 1,909 48,219 50,128 0 50,128
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
COST OF SALES 1,421 36,737 38,158 0 38,158
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
Gross Profit 488 11,482 11,970 0 11,970
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (468) (10,879) (11,347) (1) (800) (12,147)
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
INCOME (LOSS) FROM OPERATIONS 20 603 623 (800) (177)
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
OTHER INCOME (EXPENSES), NET:
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
Interest Expense (7) (41) (48) (2) (1,312) (1,360)
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
Interest Income 0 54 54 54
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
Other, Net 4 292 296 0 296
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
Total Other Income (Expenses), Net (3) 305 302 (1,312) (1,010)
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 17 908 925 (2,112) (1,187)
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
INCOME TAXES
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
NET INCOME (LOSS) 17 908 925 (2,112) (1,187)
- ------------------------------------------------------- ------------ ------------ ------------- ----------------- ------------
</TABLE>
47
<PAGE> 60
TABLE 5
ACQUISITION PARTIES COMBINED PRO FORMA INCOME STATEMENT
$(000) Omitted
12 Months ended 09/28/96
<TABLE>
<CAPTION>
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
PARTIES
(a) (b) ENDED (c)
PARTIES PARTIES 12 MTHS. PRO FORMA PARTIES
INCLUDED PRIOR 9/28/96 ADJUSTMENTS PRO FORMA
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
NET SALES 29,848 192,345 222,193 0 222,193
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
COST OF SALES 22,389 142,918 165,307 0 165,307
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
Gross Profit 7,459 49,427 56,886 0 56,886
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (9,412) (56,416) (65,828) (1) (3,005) (68,833)
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
INCOME (LOSS) FROM OPERATIONS (1,953) (6,989) (8,942) (3,005) (11,947)
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
OTHER INCOME (EXPENSES), NET:
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
Interest Expense (133) (1,595) (1,728) (2) (4,335) (6,063)
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
Interest Income (118) 480 362 362
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
Other, Net 166 253 419 0 419
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
Total Other Income (Expenses), Net (85) (862) (947) (4,335) (5,282)
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES (2,038) (7,851) (9,889) (7,340) (17,229)
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
INCOME TAXES
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
NET INCOME (LOSS) (2,038) (7,851) (9,889) (7,340) (17,229)
- ------------------------------------------------------ -------------- ------------- ------------ ----------------- ----------------
<FN>
(a) Parties Included -- This includes the actual results of operations for the
parties acquired in the fourth quarter from the date of acquisition through
the end of the fiscal year.
(b) Parties Prior -- This includes the historical results of the fourth quarter
acquisition parties for the applicable period prior to their acquisition by
UNIMAG.
(c) Items a and b above are then combined with the necessary pro forma
adjustments of amortization of goodwill and the accrual of interest on the
debentures to arrive at the "Parties Pro Forma" amount.
</TABLE>
48
<PAGE> 61
TABLE 6
COMPANY (EXCLUDING ACQUISITION PARTIES) STAND ALONE PRO FORMA INCOME STATEMENT
$(000) Omitted
12 Months ended 09/28/96
<TABLE>
<CAPTION>
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
(a) (b)
UNIMAG UNIMAG UNIMAG UNIMAG UNIMAG
INCLUDED PRIOR TOTAL PRO FORMA(3) PRO FORMA
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES 50,384 0 50,384 8,174 58,558
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
COST OF SALES 37,888 0 37,888 6,340 44,228
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
Gross Profit 12,496 0 12,496 1,834 14,330
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (15,303) 0 (15,303) (1,888) (17,191)
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
INCOME (LOSS) FROM OPERATIONS (2,807) 0 (2,807) (54) (2,861)
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
OTHER INCOME (EXPENSES), NET:
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
Interest Expense (1,648) 0 (1,648) (58) (1,706)
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
Interest Income 300 0 300 0 300
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
Other, Net (195) 0 (195) 168 (27)
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
Total Other Income (Expenses), Net (1,543) 0 (1,543) 110 (1,433)
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES (4,350) 0 (4,350) 56 (4,294)
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
INCOME TAXES
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
NET INCOME (LOSS) (4,350) 0 (4,350) 56 (4,294)
- ------------------------------------------------------ --------------- --------- -------------- ------------- ------------
<FN>
(a) UNIMAG Included -- This includes the actual results of UNIMAG excluding the
fourth quarter acquisitions.
(b) UNIMAG Pro Forma -- includes the historical results of Pittsburgh and
Wilmington from September 30, 1995 through the date of acquisition (January
1996) and the necessary purchase accounting adjustments for goodwill
amortization and interest.
</TABLE>
49
<PAGE> 62
TABLE 7
COMBINED COMPANY PRO FORMA INCOME STATEMENT
$(000) Omitted
12 Months ended 09/28/96
<TABLE>
<CAPTION>
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
(c)
COMB. COMP.
(a) (b) 12 MTHS. (d)
UNIMAG PRIOR ENDED PRO FORMA COMB. COMP.
AS FILED HISTORICAL 9/28/96 ADJUSTMENTS PRO FORMA
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
NET SALES $ 80,232 $ 192,345 $ 272,577 $ 8,174 $ 280,751
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
COST OF SALES 60,277 142,918 203,195 6,340 209,535
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
Gross Profit 19,955 49,427 69,382 1,834 71,216
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (24,715) (56,416) (81,131) (4,893) (86,024)
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
INCOME (LOSS) FROM OPERATIONS (4,760) (6,989) (11,749) (3,059) (14,808)
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
OTHER INCOME (EXPENSES), NET:
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
Interest Expense (1,781) (1,595) (3,376) (4,393) (7,769)
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
Interest Income 182 480 662 0 662
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
Other, Net (29) 253 224 168 392
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
Total Other Income (1,628) (862) (2,490) (4,225) (6,715)
(Expenses), Net
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES (6,388) (7,851) (14,239) (7,284) (21,523)
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
INCOME TAXES 0 0 0 0 (4) 0
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
NET INCOME (LOSS) $ (6,388) $ (7,851) $ (14,239) $ (7,284) $ (21,523)
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
Weighted Average Shares
Outstanding 3,226 6,963
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
Earnings (Loss) Per Share $ (1.98) $ (3.09)
- ----------------------------------------- -------------- ------------ ------------- ------------ -----------
<FN>
(a) UNIMAG as filed -- This column represents UNIMAG consolidated as filed for
fiscal 1997, including the results of operations for all acquisition from
the date of acquisition.
(b) Prior Historical -- This includes the historical results of the fourth
quarter acquisition parties for the applicable period prior to their
acquisition by UNIMAG.
(c) Comb. Corp. -- This column is the sum of the previous two columns.
(d) Pro forma adjustments -- This column is the combination of "pro forma"
columns from the previous two pages.
</TABLE>
50
<PAGE> 63
The pro forma adjustments to the unaudited condensed pro forma
statements of operations reflect the acquisitions as if they had occurred on
October 2, 1995 (the beginning of the Company's 1996 fiscal year). These
condensed pro forma consolidated statements of operations do not give effect to
any other transactions, and do not purport to represent the actual results of
operations of the Company had the acquisition occurred on October 2, 1995.
The acquisitions of Michiana, Stoll, Scherer Affiliates and Klein are
described in greater detail in Proposals One through Seven within this Proxy
Statement.
1. The Company has made a preliminary purchase price
allocation. The acquisitions generate net goodwill on a preliminary
basis for Stoll of $50,173,000, for Michiana of $17,083,000, for
Scherer Affiliates of $39,421,000, and for Klein of $33,290,000. The
Company previously reported nine weeks of goodwill for Michiana, Stoll
and Scherer, and two weeks of goodwill for Klein. The pro forma amounts
in Selling, General and Administrative Expenses record the balance of
amortization of goodwill and the depreciation on the stepup of the
fixed assets for the fiscal year.
2. In connection with the Acquisitions, the Company will issue
approximately $39,920,000 of 8% Senior Debentures due 2002, and
$23,060,000 of 10% Subordinated Debentures due 2004. The Company
previously reported nine weeks of debenture interest for Michiana,
Stoll, and Scherer, and two weeks for Klein. No pro forma entry was
necessary for the conversion of KDR debt to Subordinated Debentures.
The pro forma amounts in Interest Expense record the balance of
debenture interest for the fiscal year.
3. The Company has reported nine months of operations for both
Pittsburgh and Wilmington (acquired in separate transactions in January
of 1996) in the audited financial statements for the fiscal year ended
September 28, 1996. The pro forma amounts represent operations of
Pittsburgh and Wilmington for the first three months of the fiscal
year.
4. No provision has been made for income taxes because of the
pro forma losses sustained and because of the availability of loss
carryforwards for the Company.
The Company has not made any pro forma adjustments for elimination of
owner related expenses, non-recurring expenses, subsequent reductions in
full-time personnel, or for reductions in operating expenses from facility
consolidations. The Company has identified approximately $1,750,000 in owner
related expenses in the Acquisition Companies which will be eliminated in the
Combined Company. The Company also has identified approximately $1,500,000 in
owner severance, $410,000 of curtailment loss related to the termination of the
Stoll pension plan, and $20,000 in owner-affiliated bad debt writeoffs which are
non-recurring. The Company has initiated approximately 175 full-time layoffs
with gross annual payroll savings of approximately $2,725,000 (excluding payroll
taxes, fringe benefits and related costs) in connection with facility
consolidations. The Company has not quantified, to date, any additional savings
from facility consolidations.
PRINCIPAL HOLDERS OF VOTING SECURITIES AND OWNERSHIP OF SHARES BY DIRECTORS AND
EXECUTIVE OFFICERS
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 July 25, 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
51
<PAGE> 64
Meeting of Shareholders. The following tables also reflect the 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 future issuance of 25,096 shares (post
split) of Common Stock to MDI, the proposed issuance of 33,333 shares (post
split) to R. David Thomas, and assume the exercise of warrants held by the Bank
of Boston Connecticut to acquire 5,000 shares (post split) of Common Stock of
the Company. The tables also have been adjusted to reflect adjustments to net
worth based on the balance sheets as of June 30, 1996 for Michiana, Stoll,
Read-Mor and Scherer Affiliates (and August 23, 1996 for Klein). No other
rights, options, and warrants to acquire any of the Company's securities are
presently outstanding.
TABLE FOR MORE THAN 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 (1) Outstanding (2) # of Shares Percentage(2)
- ------------------- ---------------------- --------------- ----------- -------------
- ------------------------------------ -------------------------- ------------------- ----------------------------------
<S> <C> <C> <C> <C>
Ronald E. Scherer 1,045,600 39.00% 1,747,530(3)(5) 24.65%
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(3)(6)(7) 18.65% 0(7) 0%
Distributors, Inc.
5131 Post Road
Dublin, OH 43017
The Roger L. Scherer 500,000(7) 18.65% 1,180,498(7) 16.65%
Trust FBO Ronald E. Scherer
U/A 6/14/79
100 East Broad Street
Columbus, Ohio 43215
The Roger L. Scherer 500,000(7) 18.65% 1,180,498(7) 16.65%
Trust FBO Linda Hayner
Talbott U/A 6/14/79
100 East Broad Street
Columbus, Ohio 43215
Linda Hayner Talbott 510,550(7) 19.04% 1,212,480(7) 17.10%
5131 Post Road
Dublin, Ohio 43017
R. David Thomas 300,000 (6)) 11.19% 333,333 4.70%
One Bay Colony
Ft. Lauderdale, FL 33308
</TABLE>
52
<PAGE> 65
(continued)
<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 (1) Outstanding (2) # of Shares Percentage(2)
- ------------------- ---------------------- --------------- ----------- -------------
- ------------------------------------ -------------------------- ------------------- ----------------------------------
<S> <C> <C> <C> <C>
Richard H. Stoll, Sr. 0(5) 0% 391,693(5)(11) 5.53%
Director Nominee
6477 Mill Ridge Road
Maumee, Oh. 43537
George R. Klein 0(5) 0% 1,087,881(5) 15.35%
Director Nominee
1771 East 30th Street
Cleveland, Ohio 44114
Magazine Distributors, Inc. 153,608(8) 5.73% 178,704 2.52%
100 Cantiague Rock Rd.
Hicksville, NY 11801
Doris Marshal 237,302 (4) 8.85% 237,302 3.35%
P. O. Box 5503
Martinsville, VA 24115
</TABLE>
TABLE FOR EXECUTIVE OFFICERS, DIRECTORS AND DIRECTOR 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 (1) Outstanding (2) # of Shares Percentage(2)
- ------------------- ---------------------- --------------- ----------- -------------
- ------------------------------------ -------------------------- ------------------- ----------------------------------
<S> <C> <C> <C> <C>
Ronald E. Scherer 1,045,600 (3)(5)(6)(7) 39.00% 1,747,530(3)(5)(7)
Chairman of the Board 24.65%
of Directors, President
and Chief Executive Officer
5131 Post Road
Dublin, OH 43107
David B. Thompson 61,164(3) 2.28% 61,164(3) *
Director and Treasurer
5131 Post Road
Dublin, Ohio 43017
Eugene J. Alfonsi 5,000 * 5,000 *
Director
5131 Post Road
Dublin, Ohio 43017
</TABLE>
53
<PAGE> 66
(continued)
<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 (1) Outstanding (2) # of Shares Percentage(2)
- ------------------- ---------------------- --------------- ----------- -------------
- ------------------------------------ -------------------------- ------------------- ----------------------------------
<S> <C> <C> <C> <C>
Thaddeus A. Majerek 0(5)(9) 0% 262,435(5)(9) 3.70%
Director
2232 S. 11th Street
Niles, MI 49120
Robert H. Monnaville, Jr. 39,925 1.49% 39,925 *
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(5)(10) 2.01%
Director Nominee
203 N. Wabash, Suite 1504
Chicago, IL 60601
William D. Parker 0 0 0 0
Director Nominee
5131 Post Road
Dublin, Ohio 43017
Richard H. Stoll, Sr. 0(5) 0 391,693(5)(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
George R. Klein 0(4) 0 1,087,881 15.35%
Director Nominee
1771 E. 30th Street
Cleveland, Ohio 44114
</TABLE>
54
<PAGE> 67
(continued)
<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 (1) Outstanding (2) # of Shares Percentage(2)
- ------------------- ---------------------- --------------- ----------- -------------
- ------------------------------------ -------------------------- ------------------- ----------------------------------
<S> <C> <C> <C> <C>
All Directors and Executive 1,154,839 43.07% 3,741,198 52.78%
Officers as a Group
(6 persons before the Annual
Meeting, 11 persons after the
Annual Meeting)
<FN>
* Less than 1%
</TABLE>
(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, assuming the exercise of warrants held
by the Bank of Boston Connecticut to acquire 5,000 shares, is 2,681,034
shares. None of the executive officers, directors or holders of more
than 5% 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 Acquisitions and the
issuance of shares to MDI, L. P., assuming the exercise of warrants
held by the Bank of Boston Connecticut to acquire 5,000 shares and the
anticipated purchase of 33,333 shares by R. David Thomas, is 7,088,939.
(3) For Ronald E. Scherer, 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 of RAP. Mr. Scherer does not have or share
voting or investment power over the shares held by RAP. The shares of
RAP are reflected as beneficially owned by Mr. Thompson.
After the completion of the Acquisitions, includes 133,542
(1.88%) 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.
(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
55
<PAGE> 68
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. The agreement is limited only to the election of seven
directors until such time as the Debentures have been paid in full.
Parties to the Agreement do not share voting or investment power over
the securities held by the other parties to the Agreement.
(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
Hayner Talbott, the sister of Ronald E. Scherer, and her family. The
trusts are reflected in the foregoing table as beneficially owning the
Company stock owned by OPD because the trusts are stockholders of OPD.
In connection with the merger of OPD into the Company, the shares of
stock of the Company owned by OPD will become treasury stock of the
Company. The two trusts will become direct shareholders in the merger.
Additionally, each of the trusts will become beneficial owners of the
shares of stock of the Company owned by the other trust due to shared
voting arrangements. The two trusts will also become beneficial owners
of shares of stock received by Wholesalers and Northern in the
Acquisitions because the trusts are stockholders of these entities. Mr.
Scherer and Ms. Talbott are reflected in the table as beneficially
owning the shares of stock owned by the trusts.
(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.
(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 (3.85%) shares of Common Stock of the Company to be
owned by another family trust, over which Mr. Majerek disclaims any
beneficial ownership because he will not have or share voting or
investment power over the Company stock.
(10) Does not include 1,816,047 (25.62%) 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 (22.10) 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. Mr.
Stoll does not share voting or investment power over the securities to
be received by other members of the Stoll family
56
<PAGE> 69
THE WHOLESALE PERIODICAL DISTRIBUTION INDUSTRY
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 they 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.
The wholesale periodical distribution process usually begins when the
wholesaler receives books and periodicals in bulk from publishers or national
distributors (also known as national wholesalers or national brokers) and
re-packs them with other products on a weekly or monthly basis for delivery to
the retailers in its region. Historically, one wholesaler has controlled a
geographic territory through exclusive relationships with the retailers in its
region. The economics of the wholesale magazine distribution industry are
similar to those of the US Postal Service which demonstrate that it is not
profitable to have more than one letter carrier deliver separate pieces of mail
to the same house or neighborhood. Similarly, it is difficult for one periodical
wholesaler to profitably duplicate the efforts of another periodical wholesaler
with the same retailers in a given region.
Consequently, the relationship between the retailer and wholesaler has
been sheltered from the traditional competitive forces that exist in other
industries because of the favorable economics inherent in an exclusive delivery
route. In addition, the existing distribution structure has always been the most
profitable way for the publisher to reach the consumer.
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:
- The magazine publisher's ability to continue to
provide newsworthy or entertaining publications to
consumers;
- The publishers' and wholesalers' ability to maintain
a profit structure appealing to the retailers;
- Improving the efficiency and accuracy of product
allocation to capitalize on the impulse nature of the
purchase decision and optimize sales; and
- Maintaining a cost effective delivery system.
PRODUCT MANAGEMENT
Magazine publishers typically contract with large national distributors
to initiate the movement of their publications through the distribution chain.
These national distributors then sell
57
<PAGE> 70
the product to local wholesalers, like the Company, which manage the
distribution chain within various geographic regions across the country.
The local wholesalers are responsible for maintaining relationships
with the retailers that ultimately sell the product to consumers. In addition to
delivering new magazines and books to these retailers, the wholesaler is
responsible for picking up unsold magazines and in some cases, maintaining
magazine displays within each store. The retailers receive credit for the unsold
magazines that are returned to the wholesaler which then receives a
corresponding credit from the publisher or national broker upon proof of return.
The wholesaler is also responsible for destroying the unsold periodicals that
are returned for credit. In most cases, they are shredded and baled on the
wholesaler's premises and sold as scrap paper to recyclers.
Throughout the distribution process, it is the local wholesalers'
responsibility to account for the magazines until they are either sold or
returned and destroyed. In order to meet this responsibility, the wholesalers
must rely upon sophisticated management information and scanning systems that
can record the progress of the publications not only to identify their location
and status, but to charge or credit the appropriate parties for periodicals sold
or returned. Wholesalers are subject to periodic audits by publishers to ensure
the accuracy and integrity of reporting and control systems.
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 WalMart 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 by the retailers' demands for
chain-wide or divisional billing to minimize their
administrative costs and improve profit margins. 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
58
<PAGE> 71
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.
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.
59
<PAGE> 72
THE COMPANY AND THE COMBINED COMPANY
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.
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.
60
<PAGE> 73
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.
Additionally, through the recent pending 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.
COMBINED REVENUE
Following the consummation of the proposed exchange and acquisition
transactions, the Combined Company will have an estimated market share of
greater than fifty percent (50%) in the Ohio, Indiana, Michigan and western
Pennsylvania area. 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 $280 million for all
entities.
62
<PAGE> 74
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 in 1996 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.
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
=== === === ===
</TABLE>
The Combined Company
<TABLE>
<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 04 295 399 65
Drivers 22 160 282 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.
Each of the companies in the Combined Company had separate compensation
plans, some of which were the result of collective bargaining agreements. The
Company plans to continue all compensation plans which are subject to collective
bargaining agreements. All other compensation plans are being analyzed and the
Company intends to establish a uniform set of compensation plans which will meet
the requirements of ERISA.
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.
62
<PAGE> 75
- 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
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 retail prices of the periodicals that the Company distributes are
established by publishers such as Time Warner, Hearst and Hachette. The Company
purchases approximately 75% of its product, representing approximately 70% of
accounts payable, from four national wholesalers - Warner Distribution Services,
ICD/The Hearst Corporation, Murdoch and Curtis Circulation Co. These purchases
are made under long-standing relationships, and there are no formal purchase
agreements. The product is purchased from the wholesaler at a discount to the
suggested retail price (cover price) and then sold to retailers at a smaller
discount off the cover price.
63
<PAGE> 76
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.
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
64
<PAGE> 77
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.
- 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 management believes 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
65
<PAGE> 78
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
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
66
<PAGE> 79
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. The Company protects its proprietary rights in the SMARTS System by use
of trade secret protection combined with no distribution of its software source
code and restrictive license agreements with users of the 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.
During 1996, most of the larger retail chains entered into multi-year
contracts with wholesale distributors. The Company has entered into long-term
contracts ranging from one through five years, but primarily three years with
the major retailers, to be the exclusive providers of magazines and, in most
cases, related periodical products. Some of the retail chains which the Company
has received contracts with include The Kroger Company, Giant Eagle, Meijer, and
Big Bear stores. During 1996, the Company and the Acquisition Parties lost
business they had with K-Mart and WalMart. Although the Company submitted bids
for contracts with K-Mart and WalMart, those bids were not accepted.
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.
- 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;
67
<PAGE> 80
- 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 under the heading "The Company and the Combined
Company -- `The SMARTS System'") becomes integrated and
utilized by the 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 -`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.
FINANCING ARRANGEMENTS
The transactions with the Acquisition Parties initially are being
financed by the issuance of Common Stock of the Company, valued at $1.50 per
share (pre-reverse split), and by Senior and Subordinated Debentures. See "The
Stock and Asset Exchanges" and Proposals One through Seven.
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 will aggregate
$39,920,000. In connection with such refinancing, the Company has engaged
BankBoston as financial advisor to the Company's Board of Directors. (See "The
Stock and Asset Exchanges - `Opinion of the Financial Advisors to the Company's
Board of
68
<PAGE> 81
Directors'.") BankBoston 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 interested in
providing such financing, introduced to the Company by BankBoston. However,
because of delays associated with holding the Annual Meeting and final
consummation of the acquisitions, the Company has not received a financing
commitment nor reached agreement with any of these entities regarding such
financing, nor can there be any assurances that such financing will be secured.
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 BankBoston or through any
other financial adviser in connection with the transactions, nor can there be
any assurances that such financing will be secured.
FACILITIES
At September 28, 1996, the Company owned or leased 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 maintained lease agreements with respect to
approximately 7,500 sq. ft. for one bookstore and four Newsrack retail outlets
in Connecticut.
Company's Corporate Facilities:
The Company is provided approximately 272 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 17,128 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'."
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'."
69
<PAGE> 82
Scherer Affiliates Wholesale Facilities:
- 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
Stoll Wholesale Facilities (continued):
- 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:
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.
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,
70
<PAGE> 83
Richard H. Stoll, Sr., Richard H. Stoll, Jr., and George R. Klein. See "The
Stock and Asset Exchanges - `Debentures'" and "Senior and Subordinated
Debentures -- Description of Securities."
ADDITIONAL INFORMATION REGARDING THE COMPANY
LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in a number of
lawsuits which have arisen during the course of business. Except as
described below, none of the lawsuits in which the Company or its
subsidiaries are engaged involves a claim for damages against the
Company in excess of 10% of the current assets of the Company. At
September 28, 1996, the Company had provided accruals for what it
believed to be adequate accrued loss contingencies for potential future
settlement costs. The ratio of the claims to the current assets of the
Company is less than 10% and, therefore, the Company believes that none
of these actions, except to the extent disclosed hereinbelow, is likely
to have a material adverse effect on the Company's financial position
or results of operations. The Company's most significant lawsuit is
described below:
- Taubman. The Company and its subsidiary, Team Logos
Sportstuff, Inc. ("TLSI"), have been named as
defendants, along with several unrelated parties, in
a suit by Taubman entities in the United States
District Court, Eastern District of Michigan,
Southern Division. The suit claims damages for lost
rent based upon an assertion that the Company and
TLSI assumed certain retail leases associated with
companies which were part of an asset purchase by the
Company in July of 1992. On February 21, 1997,
summary judgments were granted plaintiffs against the
Company and TLSI in the amount of $1,999,830, and in
the amount of $171,101.81. On March 24, 1997, the
Company filed a notice of appeal and intends to
vigorously pursue reversal at the appellate level. It
is the Company's position that its appeal has
substantial merit. The Company has also entered into
settlement discussions with the plaintiffs which, if
successful, would significantly minimize any
potential adverse effect of the judgments on the
Company's financial position. The ultimate outcome of
the case is uncertain, and a provision has been made
in the Company's September 28, 1996 financial
statements for the expected cost of settlement.
- Other Litigation. With respect to directors and
executive officers of the Company, to the knowledge
of management, no director or executive officer of
the Company is a party adverse to the Company or has
a material interest adverse to the Company in any
material pending legal proceeding.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Shares of the Company. The common shares
of the Company 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 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. 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
71
<PAGE> 84
taken as an indication of the value of the shares or the price at which
the Company's shares may be purchased or sold at other times and for
other purposes should a trading market develop or should a holder
desire to sell shares through other means.
Shareholders. As of May 30, 1997, the Company had 2,886
shareholders of record.
Dividends. There were no dividends declared or paid by the
Company during fiscal years 1996 or 1995. The Board of Directors of 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.
FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's financial statements for the years ended
September 28, 1996 and September 30, 1995, and for the six months ended
March 28, 1997, and March 30, 1996, and the related management's
discussion and analysis of financial condition and results of
operations are included in this Proxy Statement under the heading
"Additional Information About the Company."
73
<PAGE> 85
SHAREHOLDER PROPOSALS
PROPOSAL ONE: TO APPROVE THE STOCK TRANSFER AND EXCHANGE AGREEMENT
AMONG THE COMPANY, MICHIANA AND ALL OF ITS
SHAREHOLDERS AND THE TRANSFER BY THE MICHIANA
SHAREHOLDERS OF ALL OF THE STOCK OF MICHIANA TO THE
COMPANY IN EXCHANGE FOR SHARES OF COMMON STOCK OF THE
COMPANY AND SENIOR AND SUBORDINATED DEBENTURES ISSUED
BY THE COMPANY IN ACCORDANCE WITH THE TERMS OF SUCH
STOCK TRANSFER AND EXCHANGE AGREEMENT.
GENERAL
Effective July 30, 1996, the Company entered into a Stock Transfer and
Exchange Agreement with Michiana and the Michiana shareholders (the "Michiana
Exchange Agreement"), pursuant to which the Michiana Shareholders will
contribute their shares of stock of Michiana to the Company in exchange for
5,355,811 shares (pre-reverse split) of Common Stock of the Company and for
$3,500,000 of principal amount of 8% Senior Debentures due 2002 and for
$2,334,256 principal amount of 10% Subordinated Debentures due 2004 of the
Company (the "Michiana Transaction"). The Michiana Transaction has been closed
into escrow pending a favorable vote of the shareholders of the Company.
At the Annual Meeting, if shareholders who are entitled to vote more
than a majority of the outstanding shares of Common Stock of the Company vote to
approve the Michiana Exchange Agreement and also vote in favor of Proposals Two
through Seven and Proposal Ten, escrow will terminate, and the Michiana
Transaction will be finalized. Ronald E. Scherer, OPD and R. David Thomas, who
together have the right to vote more than a majority of the outstanding shares
of Common Stock of the Company, have each agreed to vote in favor of the
Michiana Exchange Agreement and such proposals.
MICHIANA NEWS SERVICE, INC.
BUSINESS
The following description of Michiana's business relates to
its operations prior to July, 1996. In July of 1996, the Company began
managing Michiana's business, including such areas as conducting joint
marketing and distribution operations, terminating excess employees
using Workers Adjustment and Retraining Notification Act ("WARN")
notices on Company letterhead, joint decision making in operational and
accounting areas, customer communication using UNIMAG letterhead and
business cards as well as answering phones in the UNIMAG name, and
future business planning in an integrated mode. The business of
Michiana, under the Company's management, continues to operate
similarly to the way it did prior to July, 1996; however, the Company
has begun to implement strategies to reduce redundant overhead and
facilities in coordination with its activities with the other
Acquisition Parties.
The following are the significant steps taken to integrate the
operations of Michiana to date. All steps to integrate the businesses
of each of the Acquisition Parties are described under "Combination of
Operations Prior to Annual Meeting." In November of 1996, Michiana
transferred its warehouse and office functions to Jackson, Michigan.
Additionally, Michiana reduced the scope of its Ft. Wayne operations by
integrating its business and delivery routes with customers being
serviced by the distribution facility located in Indianapolis, Indiana,
being operated by Stoll. To date, the dollar amount expended to
integrate the operations of Michiana has been immaterial. Since
September 28, 1996, Michiana has eliminated approximately 45 full-time
positions at an annual gross
74
<PAGE> 86
payroll savings, excluding payroll taxes and fringe benefits, of
approximately $650,000. These and other related savings have resulted
in a net reduction of operating expenses.
Michiana, incorporated in August, 1971, was headquartered in
Niles, Michigan and was a regional wholesaler of periodicals, including
magazines, books, sports collectibles and allied products. Michiana
distributed over 3,000 periodicals to over 2,000 retail outlets in
southwestern Michigan, Northern Indiana and Chicago, Illinois. The
retail outlets included supermarkets, discount variety stores,
convenience stores, drug stores and newsstands that offer mass market
reading materials to consumers. The periodicals distributed by Michiana
were similar to the periodicals distributed by the Company; however,
Michiana did not distribute any newspapers. During the fiscal year
ended June 30, 1996, Michiana generated total revenues of approximately
$25,000,000. Of this amount, approximately $19,300,000, or 76% came
from the sale of magazines, $4,800,000 or 19% came from the sale of
books, and the balance came from the sale of sundry products. See "The
Company and the Combined Company."
Michiana's supply and distribution system was similar to the
supply and distribution system of the Company. See "The Company and the
Combined Company - `Suppliers and Pricing and Distribution System'" for
a more complete description of the supply and distribution system.
Michiana's suppliers of product were the same as the Company's. The
prices of the products were established by the publishers. Michiana
then purchased most of the periodicals from national distributors at a
discount from the suggested retail price and sold the products to
retailers at a lesser discount. The national distributors generally
arranged for shipments of periodicals to Michiana.
Michiana maintained a 46,800 square foot office, warehouse and
distribution facility in Niles, Michigan, and a 14,200 square foot
depot facility in Fort Wayne, Indiana. See "The Company and the
Combined Company - `Facilities'." Michiana's Niles facility received
periodicals in bulk form. The product was then sorted, stacked, bundled
and packaged and then loaded into trucks and vans for delivery to
retailers. Some of the product was trucked to Michiana's depot facility
in Fort Wayne where it was bundled for appropriate delivery routes and
loaded onto trucks and vans for delivery to retailers in the Fort Wayne
area.
The periodicals were shipped from the Niles facility to the
Fort Wayne depot by a semi-tractor truck leased from a small trucking
company affiliated with Michiana, Toman Distribution Services, Inc.
("Toman"). Certain of the assets of Toman are being acquired by the
Company as part of the acquisition of Michiana. See "The Stock and
Asset Exchanges - `Conflicts of Interest and Related Party
Transactions'."
In a typical distribution arrangement, Michiana's service
representatives would deliver the periodicals to the retailers and
would go into the retail establishment, remove out of date periodicals
and restock the shelves and bins with the new periodicals. In more
remote rural areas, this arrangement was impractical and, rather than
delivering the periodicals directly to retailers and actually
restocking the retailers' shelves, Michiana arranged for direct
shipment, through the mail or through other carriers, directly to the
retailers who then stocked their own shelves. Michiana referred to this
as its "reship" operations.
At September 28, 1996, Michiana employed approximately 175
people, including 85 full-time personnel. The part-time personnel
included approximately 50 people engaged in in-store service and 35
part-time warehouse personnel. The full-time personnel included 15
managers and supervisors, 22 administrative persons, 6 marketing
personnel, 14 drivers and 28 warehouse personnel. None of the employees
were members of a union. In the opinion of management of Michiana,
relations with employees have been satisfactory.
76
<PAGE> 87
In connection with its marketing efforts, Michiana had 6
full-time sales personnel and 50 part-time in-store service ("ISS")
personnel. Michiana faced competition from the same sources as the
Company. See "The Company and the Combined Company - `Competition'."
Competition came from other wholesalers, from alternative channels of
distribution, and from substitute products. In general, Michiana had
experienced more intense competition from other wholesalers than had,
for example, OPD. In Michigan and Indiana it competed with Stoll, The
Anderson Group, Northern and MacGregor; in Chicago it competed with
Charles Levy Company. As a result of the Acquisitions, Stoll, Northern,
and MacGregor all are part of the Combined Company and are working
together in the distribution of periodicals.
The mailing address of Michiana's principal executive offices
is 2232 South 11th Street, Niles, Michigan 49120, and its telephone
number is (616) 684-3013.
MARKET FOR COMMON EQUITY AND SHAREHOLDER MATTERS
Michiana's total authorized shares of capital stock consist of
1,000 shares of common stock, $100.00 par value (the "Michiana Stock").
All of the Michiana Stock is issued and outstanding and held of record
by three trustees for the benefit of members of the Majerek family. No
public market for the Michiana Stock exists, and transfers of the
Michiana Stock are subject to significant restrictions by virtue of
various stock restriction, stock redemption and pledge agreements among
Michiana, the Michiana Shareholders and certain of Michiana's
creditors, and pursuant to federal and state securities laws and
regulations. The stock restriction and stock redemption agreements will
be terminated at the time of the closing. There were no dividends
declared or paid to any holder of the Michiana Stock in fiscal year
1995 or fiscal year 1996. There are restrictions in existing bank
agreements that limit the ability of Michiana to pay dividends on its
common equity.
THE EXCHANGE TRANSACTION; CERTAIN PROVISIONS OF THE MICHIANA EXCHANGE
AGREEMENT
The Michiana Exchange Agreement has been filed with the
Securities and Exchange Commission as Exhibit 2B to a Form 8-KA filed
September 30, 1996. Shareholders may inspect and copy the Michiana
Exchange Agreement at the Commission's public reference facility at
Room 1024, 450 Fifth Street, NW, Washington, DC 20549, and at the
Commission's regional offices at Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661, and at 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of the
Michiana Exchange Agreement can be obtained by mail from the
Commission's Public Reference Section at 450 Fifth Street, NW,
Washington, DC 20549 at prescribed rates. Additionally, a copy of the
Michiana Exchange Agreement can be obtained over the Internet from the
website of the Securities and Exchange Commission at WWW.SEC.GOV.
In accordance with the terms and conditions set forth in the
Michiana Exchange Agreement, when the Michiana Transaction is approved
by the shareholders of the Company, the Michiana Shareholders will
contribute all of their shares of stock of Michiana to the Company, and
Michiana will thereby become a wholly-owned subsidiary of the Company.
In exchange for each share of Michiana Stock (a "Michiana
Share") which is contributed to the Company, the Michiana Shareholders
will receive, (a) shares of the Common Stock of the Company, and (b)
Senior and Subordinated Debentures of the Company (the "Debentures").
The Debentures will be issued pursuant to the terms of the Debenture
Agreement which will be entered into in connection with the acquisition
transactions. An aggregate of $3,500,000 principal amount of the
Debentures will be Senior Debentures, and the balance of the
76
<PAGE> 88
Debentures will be Subordinated Debentures. See "Senior and
Subordinated Debentures" for a description of the terms of the Senior
and Subordinated Debentures to be issued.
The number of shares of Common Stock of the Company and the
principal amount of Senior and Subordinated Debentures to be received
upon exchange of the Michiana Shares was based upon a total valuation
of Michiana, determined as described below, with 57.93% of this value
being exchanged for shares of Common Stock of the Company at an agreed
upon price of $1.50 per share, and 42.07% of this value being exchanged
for Senior and Subordinated Debentures. All of the Acquisition Parties
originally agreed to take a minimum of 51% of the total consideration
in the form of the Company's Common Stock and 49% as Debentures. The
Michiana Shareholders agreed to take a percentage greater than 51% in
exchange for the Company's assumption of certain liabilities not
originally contemplated. At the time of the negotiations, the parties
were in agreement that 60% was the most common percentage used by
willing buyers and sellers in the industry. The parties also agreed
that tangible net worth would be defined as total assets (excluding
intangible assets), less total liabilities. The value of Michiana was
determined by netting the sum of:
(a) An amount equal to 60% of the net annual wholesale sales
of Michiana for the 12-month period ended December 31, 1995
("1995 Michiana Sales"); and
(b) The tangible net worth (as defined by agreement between
the parties in consultation with their accountants) of Michiana as of
June 30, 1996 (the "Michiana Tangible Net Worth").
At the time the Michiana Exchange Agreement was entered into,
60% of 1995 Michiana Sales was estimated to be $16,857,976, and
Michiana Tangible Net Worth was estimated to be a deficit of
$2,102,548, for a total estimated valuation of $14,755,398.
Pursuant to the Michiana Exchange Agreement, the Michiana
Shareholders have prepared and delivered to the Company the balance
sheet of Michiana as of June 30, 1996 (the "Michiana Closing Date
Balance Sheet"), and the 1995 sales report of Michiana for the year
ended December 31, 1995 ( the "1995 Michiana Sales Report"). The
Michiana Closing Date Balance Sheet and the 1995 Michiana Sales Report
have been (1) prepared from and in accordance with the books and
records of Michiana; (2) except as otherwise provided in the Michiana
Exchange Agreement, prepared in conformity with generally accepted
accounting principles applied on a consistent basis (with certain
exceptions primarily relating to the exclusion of intangible assets and
the impact of changes in the Section 458 reserve on sales); and (3) as
to the Michiana Closing Date Balance Sheet, fairly present in all
material respects the financial condition of Michiana as of such date
in accordance with such practices. The Michiana Shareholders were also
required to deliver to the Company the workpapers used in connection
with the preparation of the Closing Date Balance Sheet and the 1995
Sales Report.
As contemplated by the Michiana Exchange Agreement, in order
to determine the actual Michiana Tangible Net Worth as of June 30,
1996, Arthur Andersen LLP has conducted an audit of the Michiana
Closing Date Balance Sheet and has conducted a review of the 1995
Michiana Sales Report to confirm the accuracy of the recorded amount of
1995 Sales. The Michiana Exchange Agreement provides that, in
determining the Michiana Tangible Net Worth, the calculation will
exclude goodwill, customer lists, order and regulation records,
noncompete agreements, consulting agreements, and other intangible
assets.
77
<PAGE> 89
Based upon the Michiana Closing Date Balance Sheet, which was
prepared by Michiana's management and audited by Arthur Anderson LLP,
the Michiana Tangible Net Worth was a deficit of $3,214,978, and, based
upon the 1995 Michiana Sales Report, 60% of the 1995 Michiana Sales was
$17,082,950, for a total valuation of $13,867,972. Based upon this
valuation, the Michiana Shareholders will receive (a) an aggregate of
5,355,811 shares (pre-reverse split) of the Common Stock of the
Company, (b) Senior Debentures in the aggregate principal amount of
$3,500,000, and (c) Subordinated Debentures in the aggregate principal
amount of $2,334,256. The Debenture table and the tables for share
ownership have been calculated on a pro forma basis to reflect these
amounts.
At the closing of the Michiana transaction ("Michiana
Effective Time"), each Michiana Shareholder will surrender to the
Company the Michiana share certificates evidencing all of the Michiana
Shares then owned by such Michiana Shareholder. Upon surrender of the
Michiana share certificates evidencing all of the Michiana Shares owned
by each Michiana Shareholder, the Company will issue to each Michiana
Shareholder that number of shares of Common Stock of the Company and
the Senior and Subordinated Debentures which such Michiana Shareholder
is entitled to receive following the exchange.
If, between the date of the execution of the Michiana Exchange
Agreement and the Michiana Effective Time, the number of outstanding
shares of the Common Stock of the Company has been reduced by virtue of
a reverse stock split or other similar means, then the $1.50 price of a
share of Common Stock of the Company for purposes of determining the
ratio of exchange of Michiana Shares for shares of Common Stock of the
Company shall be proportionately adjusted to reflect such reduction. In
lieu of fractional shares resulting from the exchange, the Company will
pay to each holder who would otherwise be entitled to receive
fractional shares an amount equal to such fractional interest
multiplied by $1.50, also adjusted to reflect any such reduction.
The Michiana Exchange Agreement contains various
representations and warranties of one or both of the parties thereto as
to, among other things, (a) its corporate organization, standing, power
and authority to enter into the Michiana Exchange Agreement and
consummate the transactions contemplated thereby; (b) its
capitalization, security holders and subsidiaries; (c) ownership of
shares; (d) the need for consents and approvals in order to enter into
the Michiana Exchange Agreement and consummate the transactions
contemplated thereby; (e) the accuracy of financial statements; (f) the
absence of undisclosed liabilities and adverse and other changes; (g)
the filing of all necessary returns and payment of taxes; (h) the
compliance with law in connection with the operations of the parties'
respective businesses; (i) insurance matters; (j) title to and
condition of properties; (k) legal proceedings; (l) ERISA matters; (m)
certain material contracts of Michiana and the absence of defaults
thereunder; (n) the Michiana Exchange Agreement's non-contravention of
any applicable laws, articles of incorporation, by-laws, material
agreements, undertakings, indentures, orders, decrees, restrictions or
legal obligations; (o) officers, employees and compensation; (p) books
of account and records; (q) labor relations; (r) business matters; and
(s) other matters specified in the Michiana Exchange Agreement.
78
<PAGE> 90
The Michiana Exchange Agreement provides that Michiana and the
Michiana Shareholders shall agree that, between the date of the
Michiana Exchange Agreement and the Michiana Effective Time, (a)
neither Michiana nor any Michiana Shareholder shall take or permit to
be taken any action or do or permit to be done anything in the conduct
of the business of Michiana, or otherwise, that would be contrary to or
in breach of any of the terms or provisions of the Michiana Exchange
Agreement or which would cause any of their representations and
warranties contained in the Agreement to be or become untrue in any
material respect; (b) Michiana shall conduct its business in the
ordinary course consistent with past practices; and (c) Michiana and
the Michiana Shareholders shall use all reasonable efforts to preserve
the business organization intact, keep available to Michiana and the
Company the present service of Michiana's employees, and preserve for
Michiana and the Company the goodwill of Michiana's suppliers,
customers, and others with whom business relationships exist.
The Michiana Exchange Agreement provides for indemnification
by the selling or transferring shareholders for any losses, liabilities
or damages incurred as a result of any material inaccuracy or breach of
the representations, warranties, covenants or agreements made. The
indemnification obligations of the transferring shareholders may be
satisfied by returning to the Company Common Stock of the Company, to
be valued at $1.50 per share for this purpose. The indemnification
obligation of the transferring shareholders is limited. The maximum
indemnification to be provided by the transferring shareholders is
$1,400,000 (10% of the original estimated value of Michiana), and no
single Michiana Shareholder will be liable for an amount in excess of
the consideration received for his or her shares. However, the Company
is not entitled to indemnity unless the aggregate of all damages
exceeds $140,000, and then only to amounts in excess of $140,000,
except that this amount is reduced to $25,000 for environmental
matters.
Pursuant to the terms of the Michiana Exchange Agreement, Mike
Gilbert, Michiana Vice-President, Dave Majerek, Michiana Vice-President
and Thaddeus A. Majerek, Michiana President, will enter into employment
agreements with Michiana or the Company for a term of three years from
the Effective Time, subject to other customary terms and conditions.
See "The Stock and Asset Exchanges - `Conflicts of Interest and Related
Party Transactions'" and Proposal Eight - `Executive Compensation'.
PURPOSES AND EFFECT OF THE EXCHANGE
The purposes and the effect of the exchange have been
described in the summary of this proxy statement. See "Introduction and
Summary - `The Stock and Asset Exchanges'."
ACCOUNTING TREATMENT
The acquisition of Michiana was initiated in February, 1996.
On March 1, 1996, the Company and Michiana entered into a Joint
Operating Agreement in which the Company and Michiana agreed to conduct
certain of their operations jointly. Effective July 30, 1996, Michiana
executed the definitive agreement to contribute its shares to the
Company in exchange for Common Stock of the Company and Debentures. The
acquisition will be accounted for under the purchase method of
accounting. For ease of accounting, the Company has elected to use July
28, 1996 as the effective date of the transaction. The Company will
adjust purchase accounting for the impact of recognizing income before
consideration is transferred. The Company has recognized the results of
operations starting July 28, 1996.
78
<PAGE> 91
RIGHTS OF DISSENTING SHAREHOLDERS OF THE COMPANY
Shareholders of the Company who do not vote in favor of
Proposal One, and who otherwise perfect their rights as dissenting
shareholders, have certain rights as dissenting shareholders. See "The
Stock and Asset Exchanges - `Dissenters' Rights'," and Exhibit C.
INTERESTS OF CERTAIN PERSONS
There are a number of transactions and arrangements between
the Company and the Michiana shareholders. See "The Stock and Asset
Exchanges - `Conflicts of Interest and Related Party Transactions'."
EFFECTIVENESS
All documents necessary to consummate the Michiana Transaction
have been deposited into escrow, with Baker & Hostetler LLP as the
escrow agent. Termination of the escrow is conditioned upon approval of
Proposals One through Seven and Proposal Ten by the affirmative vote of
the holders of a majority or more of the outstanding shares of Common
Stock of the Company. Ronald E. Scherer, OPD, and R. David Thomas, who
together have the right to vote more than 50% of the outstanding shares
of Common Stock of the Company, have agreed to vote in favor of the
above proposals.
It has been the intention of both the Company and Michiana to
treat the valuation of the exchange as having been effective since July
1, 1996. Accordingly, the Michiana Closing Balance Sheet is as of June
30, 1996, and the Debentures began to accrue interest from July 1,
1996. The exchange will legally become effective promptly following the
vote of the shareholders of the Company approving the exchange, at
which time escrow will be terminated, and all documents that have been
deposited in escrow will be released and delivered to the appropriate
parties. As stated above, the effective date for accounting was
approximately July 28, 1996.
VOTING
Assuming the presence of a quorum, the affirmative vote of the
holders of a majority of the voting power of the outstanding shares of
Common Stock of the Company is necessary for approval of the Michiana
Exchange Agreement among the Company, Michiana and the Michiana
Shareholders and for the contribution of all of the stock of Michiana
to the Company. Abstentions and non-votes by brokers holding Common
Stock in street name will have the same effect as shares of Common
Stock cast against the proposal.
MICHIANA FINANCIAL INFORMATION
Michiana is a C Corporation with a fiscal year end of June 30. The
financial information for Michiana is provided below in this Proposal One and
begins with "Management Discussion and Analysis." It includes a two year balance
sheet, three year statements of operations and retained earnings and cash flows,
and a management discussion and analysis of financial condition and results of
operations. No interim financial information is required due to Michiana's June
30 fiscal year end. Shareholders should note that the report of the independent
auditors issued in connection with the Michiana financial statement contains a
going concern qualification.
Set forth below is a Management's Discussion and Analysis of Financial
Condition and Results of Operations for Michiana, along with a two year audited
balance sheet and a two year audited and one year unaudited statement of
operations and cash flows. Michiana accounts for approximately 10% of the
Combined Company revenues.
79
<PAGE> 92
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS OF MICHIANA FOR THE YEARS ENDED JUNE 30, 1996,
1995 AND 1994
For 1996 versus 1995, revenue decreased by $1,264,000, or
4.7%. The decline was attributable to the loss of revenue from chain
customers such as WalMart, K-Mart, The Kroger Company and Meijer (The
Kroger Company and Meijer business was lost to other members of the
Combined Company) and due to increased discounting for retained
customers. This was offset partially by the acquisition of
approximately $2,000,000 of annual new business in the Lafayette,
Indiana market place in March of 1996. For fiscal 1995 versus fiscal
1994, revenue increased by $1,491,000, or 5.9%, of which approximately
$400,000 was due to the purchase of Mr. Paperback in October of 1993.
The gross profit margin remained relatively constant for 1995
and 1994, but declined by 1.2% in 1996 due to increased discounting;
however, it is anticipated that Michiana will be subject to lower gross
margins in future periods as a result of industry-wide competitive
pressures.
The decline in revenue and the increased discounting in 1996
versus 1995 caused a decline in gross margin of $629,000, following a
$387,000 increase in 1995 versus 1994.
Selling, general and administrative expenses decreased by
$197,000, or 3.3% in 1996 versus 1995, and by $142,000, or 2.5% in 1995
versus 1994. As a percentage of revenue, the selling, general and
administrative expenses were 22.4% in 1996, versus 22.1% in 1995 and
22.8% in 1994.
The Company has accrued approximately $1,000,000 for past due
taxes and interest relating to an IRS review of tax issues relating to
past Section 458 reserve deductions; however, that liability relates
primarily to 1993 and prior.
LIQUIDITY, CAPITAL RESOURCES, AND FACTORS AFFECTING FUTURE PERFORMANCE
Michiana's working capital deficit for the last two years is
as follows:
1996 $(4,782,000)
1995 $(1,632,000)
During 1996, the Company reclassified approximately $2,938,000
of current related party advances and receivables to long-term
receivables. The Company also paid $300,000 in cash for an acquisition.
The Combined Company is engaged in negotiations with financial
institutions to refinance existing debt, including the Michiana term
bank and third party debt and the tax accrual.
Michiana's plan for the balance of calendar 1996 and for 1997
is to consolidate operations with other facilities of the Combined
Company to reduce selling, general and administrative expenses to
offset the expected decline in gross margin. This should generate
adequate cash flow to meet Michiana's working capital obligations.
INFLATION
The impact of inflation on wholesale operations is difficult
to measure. Michiana cannot easily pass on periodical costs to
customers unless the publishers increase cover prices. Michiana and the
Combined Company are engaged in activities to control operating costs.
As a result, Michiana believes that the effect of inflation, if any, on
the results of
81
<PAGE> 93
operations and financial conditions has been minor and is expected to
remain so in the future.
SEASONALITY
The sale of magazines and books is subject to minimal seasonality.
81
<PAGE> 94
MICHIANA NEWS SERVICE, INC.
FINANCIAL STATEMENTS
AS OF JUNE 30, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
82
<PAGE> 95
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Michiana News Service, Inc:
We have audited the accompanying balance sheets of MICHIANA NEWS
SERVICE, INC. (a Michigan corporation), as of June 30, 1996 and 1995, and the
related statements of income, stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 financial statements referred to above present
fairly, in all material respects, the financial position of Michiana News
Service, Inc. as of June 30, 1996 and 1995, and the results of its operations
and its 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 negative net worth, is currently in
default under certain of its debt agreements, has unpaid taxes due the Internal
Revenue Service and has a net working capital deficiency. These matters raise
substantial doubt about its ability to continue as a going concern. Management's
discussion of 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,
October 25, 1996
83
<PAGE> 96
MICHIANA NEWS SERVICE, INC.
Balance Sheets
As of June 30, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------ -------------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 28,567 $ 1,571
Accounts receivable, net of allowance for doubtful accounts
of $25,000 in 1996 and 1995 732,278 1,133,411
Inventories 2,888,914 3,541,140
Prepaids and other 67,327 36,265
Deferred tax asset - 237,247
Current portion and demand notes receivable from related
parties 1,461,930 180,757
Advances to and receivables from related parties 759,078 5,257,213
------------ ------------
Total current assets 5,938,094 10,387,604
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment 1,161,168 1,106,461
Vehicles 557,043 737,369
Leasehold improvements 568,826 551,676
------------ ------------
2,287,037 2,395,506
Less- Accumulated depreciation and amortization (1,211,581) (1,075,693)
------------ ------------
Property and equipment, net 1,075,456 1,319,813
------------ ------------
OTHER ASSETS:
Long-term notes receivable from related parties 2,938,297 -
Costs in excess of net assets acquired, less accumulated
amortization of $217,297 in 1996 and $184,064 in 1995 1,141,332 786,306
Order and Regulation Records, less accumulated amortization of
$1,056,757 in 1996 and $923,450 in 1995
196,601 329,908
Non-competition agreements, less accumulated amortization of
$1,873,625 in 1996 and $1,636,417 in 1995
881,259 1,118,466
Other 629,174 628,461
------------ ------------
Total other assets 5,786,663 2,863,141
------------ ------------
Total assets $ 12,800,213 $ 14,570,558
============ ============
</TABLE>
(Continued on next page)
84
<PAGE> 97
MICHIANA NEWS SERVICE, INC.
Balance Sheets
As of June 30, 1996 and 1995
(continued)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT 1996 1995
------------------------------------- -------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings:
Bank $ 750,000 $ 750,000
Related parties 1,215,125 1,294,309
Current maturities of long-term debt obligations 1,150,471 879,376
Accounts payable 5,624,184 6,910,470
Accrued expenses 697,573 433,653
Reserve for gross profit on sales returns 722,294 838,966
Deferred income taxes - 829,576
Income taxes payable 560,090 82,766
------------ ------------
Total current liabilities 10,719,737 12,019,116
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt net of current maturities 2,814,046 3,217,093
Other liabilities 896 23,562
------------ ------------
Total long-term liabilities 2,814,942 3,240,655
------------ ------------
Total liabilities 13,534,679 15,259,771
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $100 par value; 1,000 shares authorized, issued and
outstanding 100,000 100,000
Retained deficit (834,466) (789,213)
------------ ------------
Total stockholders' deficit (734,466) (689,213)
------------ ------------
Total liabilities and stockholders' deficit $ 12,800,213 $ 14,570,558
============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of
these balance sheets.
85
<PAGE> 98
MICHIANA NEWS SERVICE, INC.
Statements of Income
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ----------------
(Unaudited)
<S> <C> <C> <C>
Net sales $ 25,624,750 $ 26,888,784 $ 25,397,691
Cost of goods sold 19,513,810 20,149,242 19,044,943
------------ ------------ ------------
Gross profit 6,110,940 6,739,542 6,352,748
Other operating income 313,144 281,888 253,153
Selling, general and administrative expenses (5,736,270) (5,933,043) (5,790,552)
------------ ------------ ------------
Income from operations 687,814 1,088,387 815,349
Interest income 93,468 232,291 190,388
Interest expense (633,829) (634,210) (576,757)
Other expense, net (24,784) (42,358) (10,862)
------------ ------------ ------------
Income before provision for taxes 122,669 644,110 418,118
Provision for income taxes (107,802) (313,793) (226,522)
------------ ------------ ------------
Net income $ 14,867 $ 330,317 $ 191,596
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
86
<PAGE> 99
MICHIANA NEWS SERVICE, INC.
Statements of Stockholders' Deficit
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Stock
---------------------------------
Number of
Shares Stock Retained
Outstanding Amount Deficit Total
------------ ---------------------------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1993
(unaudited) 1,000 $100,000 $(1,311,126) $(1,211,126)
Net income (unaudited) - - 191,596 191,596
------- ---------------------------- -----------
Balance at June 30, 1994 1,000 100,000 (1,119,530) (1,019,530)
Net income - - 330,317 330,317
------- ---------------------------- -----------
Balance at June 30, 1995 1,000 100,000 (789,213) (689,213)
Net income - - 14,867 14,867
Forgiveness of related party
note receivable - - (60,120) (60,120)
------- ---------------------------- -----------
Balance at June 30, 1996 1,000 $ 100,000 $ (834,466) $ (734,466)
======= ============================ ===========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
87
<PAGE> 100
MICHIANA NEWS SERVICE, INC.
Statements of Cash Flows
For the Years Ended June 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,867 $ 330,317 $ 191,596
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 723,471 844,623 938,841
Bad debt provision 19,183 59,735 45,000
Deferred income taxes, net (592,329) 311,372 (29,027)
Loss on sale of fixed assets 35,134 1,693 30,150
Changes in certain assets and liabilities, net of
the effect of acquisitions:
(Increase) decrease in certain assets:
Accounts receivable 501,133 (148,559) (273,614)
Accounts receivable-related parties 249,125 (748,567) (538,714)
Inventories 808,624 (497,246) (31,542)
Prepaid and other (31,062) 11,174 (87,309)
Increase (decrease) in certain liabilities:
Accounts payable and other (1,308,952) (41,072) 402,157
Accrued expenses 263,920 119,644 38,614
Reserve for gross profit on sales returns (116,672) 85,663 3,303
Income taxes payable 477,324 (277,615) 360,381
----------- ----------- -----------
Total adjustments 1,028,899 (279,155) 858,240
----------- ----------- -----------
Net cash provided by operations 1,043,766 51,162 1,049,836
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (43,257) (84,499) (163,921)
Proceeds from sale of equipment 33,454 24,500 20,000
Cash paid in the acquisition of Twin City News
(300,000) - -
Cash paid in the acquisition of Mr. Paperback
- - (50,000)
----------- ----------- -----------
Net cash used in investing activities
(309,803) (59,999) (193,921)
</TABLE>
(Continued on next page)
88
<PAGE> 101
MICHIANA NEWS SERVICE, INC.
Statements of Cash Flows
For the Years Ended June 30, 1996, 1995 and 1994
(continued)
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net additions on revolving loan $ - $ 750,000 $ -
Net payments on notes payable (657,204) (683,192) (839,597)
Net (increase) decrease in advances to related
parties (49,763) (57,687) (16,545)
--------- --------- ---------
Net cash provided by (used in)
financing activities (706,967) 9,121 (856,142)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH 26,996 284 (227)
CASH, beginning of year 1,571 1,287 1,514
--------- --------- ---------
CASH, end of year $ 28,567 $ 1,571 $ 1,287
========= ========= =========
Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest $ 504,000 $ 572,000 $ 519,000
Cash Paid for Income Taxes $ 181,000 $ 66,400 $ 20,000
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
91
<PAGE> 102
MICHIANA NEWS SERVICE, INC.
Notes to Financial Statements
June 30, 1996 and 1995
(1) BUSINESS
--------
Michiana News Service, Inc. (Michiana or the Company) was incorporated in the
State of Michigan on July 1, 1971, and was wholly-owned by Mr. Ted Majerek and
family. Beginning in 1958, Michiana conducted business as Niles News Agency.
Since that time Michiana purchased several adjacent news agencies and now
operates as a wholesale distributor of magazines and books in southwestern
Michigan and northern Indiana. Michiana operates out of Niles, Michigan and Ft.
Wayne, Indiana distributing approximately 3,000 titles to approximately 2,000
retail outlets.
(2) GOING CONCERN MATTERS
---------------------
Certain recent developments have had an adverse impact on the Company. As of
June 30, 1996, the Company has a working capital deficiency due primarily to an
Internal Revenue Service assessment relating to settlements of prior year taxes
and the timing of repayment of affiliated company accounts receivable. The
Company also currently has negative net worth and is in default under certain of
its debt agreements. In July, 1996, the Company entered into a definitive
agreement to be acquired by United Magazine Company (UNIMAG) in exchange for
UNIMAG stock and debentures. Effective the end of July 1996, UNIMAG assumed
effective control of Michiana. UNIMAG made several acquisitions in July and
August 1996 as part of an industry roll-up of magazine wholesale distributors,
including Michiana. However, the actual closing of these transactions and the
exchange of stock and debentures will not occur until after the annual
shareholders meeting of UNIMAG, which is expected to take place near the end of
March, 1997. UNIMAG also currently has a working capital deficiency. UNIMAG is
in the process of pursuing several alternative forms of financing to meet
working capital requirements, consolidate bank borrowings and obtain alternative
financing for their acquisition transactions. However, such financing and
refinancing is not expected to occur until sometime after the UNIMAG annual
shareholders meeting. UNIMAG believes that it will ultimately be able to secure
financing and refinancing necessary and to affect changes in the new
consolidated group to provide necessary cash flow to meet obligations and carry
out its business plan. However, 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) Estimates
---------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions 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.
(b) Inventories
-----------
Inventories are valued at the lower of cost (first-in,
first-out) or market.
90
<PAGE> 103
(c) Property and Equipment
----------------------
Property and equipment are stated at cost or fair value for
assets acquired. Depreciation is provided on the straight-line method
over the estimated useful lives of the related assets as follows:
<TABLE>
<CAPTION>
Years
--------
<S> <C>
Furniture and equipment 5-10
Vehicles 3-5
</TABLE>
Leasehold improvements are being amortized on a straight-line
basis over the estimated useful lives of the improvement.
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.
(d) Costs in Excess of Net Assets Acquired
--------------------------------------
The excess of the cost over fair value of the net assets or
purchased businesses is recorded as goodwill and amortized on a
straight-line basis over 40 years. 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 June 30, 1996.
(e) Non-competition Agreements
--------------------------
The Company capitalized costs associated with covenants not to
compete agreements entered into with former owners of various wholesale
distributors acquired by the Company. These costs are being amortized
over the lives of the covenant agreements, (5 - 10 years) on a
straight-line basis.
(f) 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, Michiana 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.
(g) Income Taxes
------------
Michiana follows Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." Accordingly, deferred
taxes are recorded for transactions that are reported in different
years for financial reporting versus tax purposes. Under this liability
method, the amount of deferred taxes on the balance sheet is adjusted
for changes in tax rates or other provisions of the income tax law.
91
<PAGE> 104
(h) 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 southern Michigan and
northern Indiana areas discussed in Note 1. The Company's sales to the
related parties described in Note 4 represent approximately 20% of
revenue for the years ended June 30, 1996, 1995 and 1994. No other one
chain represents a significant portion of the Company's revenue.
(4) NOTES RECEIVABLE AND ADVANCES TO AND RECEIVABLES FROM RELATED PARTIES
---------------------------------------------------------------------
The Company has demand notes from certain stockholders and stockholder family
members. The notes are due on demand and accrue interest at rates ranging from
6% to 8%. At June 30, 1996 and 1995, the outstanding balances were $109,283 and
$180,757 respectively.
In addition, the Company's majority stockholder is the controlling stockholder
of another corporation, Hall of Cards & Books, Inc. (of Michigan) and certain
majority stockholder family members are the stockholders in a corporation, Hall
of Cards & Books, Inc. (of Indiana) (collectively HOCAB), whose primary business
is the retail sales of magazines and books. Sales to HOCAB for the years ending
June 30, 1996, 1995 and 1994 were approximately $4,500,000, $4,700,000 and
$4,300,000, respectively, at normal trade terms. The Company also received
$84,000, $144,000 and $144,000 from HOCAB during these same periods for
administrative, accounting and management services. Advances to and receivables
from related parties is substantially comprised of the amounts due to the
Company from HOCAB in 1995 and other shareholder related businesses in 1996.
In connection with the sale of Michiana to UNIMAG as discussed in Note 1, the
Company entered into a note receivable with HOCAB in the amount of $3,589,389 of
which $1,352,647 is due within one year. As a result of this transaction, the
amount of the note receivable not due within fiscal year 1997 has been
classified as long-term note receivable from related parties.
(5) DEBT OBLIGATIONS
----------------
The components of the Company's debt obligations at June 30, 1996 and 1995 are
as follows:
Short Term Borrowings
The Company's short term debt as of June 30, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
(a) Line of Credit with bank $ 750,000 $ 750,000
---------- ----------
(b) Related parties 1,005,605 1,107,876
(c) Shareholders 209,520 186,433
---------- ----------
Short-term debt from related parties
and shareholders 1,215,125 1,294,309
---------- ----------
Total short-term borrowings $1,965,125 $2,044,309
========== ==========
</TABLE>
(a) The Company has a revolving line of credit with a bank with
interest payable monthly at the bank's prime rate plus 3/4% (9% at June
30, 1996). Borrowings under the line of credit are payable August 31,
1996 and are subject to the terms and conditions of a general loan
agreement with the bank. The maturity date was subsequently extended to
March 1, 1997. The line of credit is collateralized by inventories,
fixtures and equipment,
92
<PAGE> 105
accounts receivable, assignment of life insurance and a personal
guarantee of the Company's majority stockholder. The total amount
available and outstanding on the line of credit at June 30, 1996 is
$750,000.
(b) The related party notes are with employees and shareholder family
members. These notes accrue interest at a rate of 8% and are due on
demand.
(c) The shareholder notes bear interest at rates ranging from 8% to 10%
and are due on demand.
Long term Debt Obligations
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
(a) Term Loans with financial institutions $ 888,514 $1,043,223
(b) Seller Financing 3,076,003 3,053,246
------------- -------------
3,964,517 4,096,469
Less: current portion (1,150,471) (879,376)
------------- -------------
Long-term portion of debt obligations $2,814,046 $3,217,093
============= =============
</TABLE>
(a) The Company has various term loans with financial institutions.
These loans accrue interest at rates ranging from 6.75% to 9.5%.
Principal and interest payments are made on a monthly basis. These
loans expire at various times during 1997 through January 2000.
These 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 not in compliance with its debt
covenants at June 30, 1996 triggering an event of default. Debt in
default has been included in current portion of debt in the
accompanying financial statements.
(b) Seller financing represents the portion of the consideration
associated with an acquisition that was funded by the seller. These
obligations relate primarily to acquisitions made by the Company. These
loans bear interest at rates ranging from 7% to 10%. Principal payments
are made primarily on a monthly basis. These loans expire at various
times during 1997 through August 2007.
The Company has guaranteed the debt of one of its affiliated
companies. The outstanding balance of this guaranteed debt was
approximately $541,000 at June 30, 1996. The bank has agreed to
terminate this guarantee upon the closing of the acquisition
transactions described in Note 1 and the repayment by UNIMAG of certain
outstanding Michiana debt totaling approximately $1.6 million. The $1.6
million of debt is personally guaranteed by the majority stockholder of
Michiana.
93
<PAGE> 106
Maturities debt obligations at June 30, 1996, are as follows:
<TABLE>
<CAPTION>
Fiscal Year
---------------
<S> <C>
1997 $1,150,471
1998 469,599
1999 330,208
2000 405,905
2001 296,576
Thereafter 1,311,758
-------------
Total $3,964,517
=============
</TABLE>
(6) OPERATING LEASES
----------------
The Company leases certain warehouse facilities from shareholders of the
Company. The Company also leases a warehouse facility and certain vehicles from
unrelated parties. The total expense related to the leases with related parties
for the years ended June 30, 1996, 1995 and 1994 was approximately $260,000,
$324,000 and $288,000, respectively. Lease expense with non-related parties for
the year ended June 30, 1996 was approximately $53,000 and $0 for the years
ended June 30, 1995 and 1994.
As of June 30, 1996, the future minimum annual rental commitments of lease
agreements are as follows:
<TABLE>
<CAPTION>
Fiscal Year
---------------
<S> <C>
1997 $ 247,000
1998 47,000
1999 45,000
2000 41,000
=============
Total $ 380,000
=============
</TABLE>
(7) PROFIT SHARING PLAN
-------------------
Michiana maintains a profit sharing plan, with a 401(k) option, covering
substantially all employees. All Company contributions are discretionary as
determined by the Board of Directors. Profit sharing plan expense was $3,039,
$5,014 and $30,000 for the years ended June 30, 1996, 1995 and 1994.
(8) INCOME TAXES
------------
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
CURRENT TAX EXPENSE:
FEDERAL $688,102 $153,295 $116,118
STATE 37,586 58,271 41,700
DEFERRED TAX EXPENSE:
FEDERAL (617,886) 102,227 68,704
TOTAL TAX PROVISION $107,802 $313,793 $226,522
</TABLE>
The following is a reconciliation of the provision for income taxes computed at
the federal statutory rate (34%) to the reported provision:
96
<PAGE> 107
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -------------
(Unaudited)
<S> <C> <C> <C>
Computed tax at statutory rate $ 39,289 $218,346 $142,160
Nondeductible amortization of intangibles 32,702 48,962 52,504
State taxes net of federal benefit 24,807 38,459 27,522
Other 11,004 8,026 4,336
---------- ---------- -----------
$107,802 $313,793 $226,522
========== ========== ===========
</TABLE>
At June 30, 1996, the Company had net deferred tax assets of $319,615 which have
been fully reserved with a valuation allowance due to uncertainty of future
realization. The net deferred tax liabilities at June 30, 1995 were $829,576.
Deferred tax assets were $237,247 net of a valuation reserve of $319,615. The
significant sources of temporary differences that give rise to deferred federal
income taxes are magazine return reserves, bad debt reserves and amortization of
intangibles. During the year ended June 30, 1996, the Company reached a
settlement with the Internal Revenue Service relating to prior year taxes. The
total amount of the assessments including interest was approximately $1.2
million. The assessment involves primarily a disallowance of the timing of the
deductibility of the Company's magazine returns for income tax purposes.
(9) ACQUISITIONS
------------
Effective March 1, 1996, Michiana acquired certain assets and operations of Twin
City News Agency, Inc., a wholesale distributor of books and periodicals located
in Lafayette, Indiana, for $788,560. The purchase price consisted of $300,000
paid in cash at closing and issuance of notes payable for the remaining balance.
The transaction was accounted for as a purchase and the assets acquired,
including non-competition agreements, were recorded at their fair value at the
date of the acquisition. The purchase price exceeded the fair value of the net
assets acquired by $388,260, which was recorded as goodwill. The purchase of
Twin City News Agency, Inc. was not significant for financial reporting
purposes. The results of operations of Twin City News Agency, Inc. has been
included in results of operations of Michiana beginning March 1, 1996.
(10) SUBSEQUENT EVENT
----------------
In July 1996, the Company entered into a definitive agreement to be acquired by
United Magazine Company in exchange for UNIMAG stock and debentures. UNIMAG
assumed effective control of the Company at the end of July 1996. However, the
actual closing of these transactions and the exchange of stock and debentures
will not occur until after the annual shareholders meeting of United Magazine
Company which is expected to take place near the end of March 1997.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF
THE MICHIANA EXCHANGE AGREEMENT AMONG THE COMPANY, MICHIANA AND ALL OF ITS
SHAREHOLDERS AND THE TRANSFER BY THE MICHIANA SHAREHOLDERS OF ALL OF THE STOCK
OF MICHIANA TO THE COMPANY IN EXCHANGE FOR SHARES OF COMMON STOCK OF THE COMPANY
AND SENIOR AND SUBORDINATED DEBENTURES ISSUED BY THE COMPANY IN ACCORDANCE WITH
THE TERMS OF SUCH MICHIANA EXCHANGE AGREEMENT.
95
<PAGE> 108
PROPOSAL TWO: TO APPROVE THE STOCK TRANSFER AND EXCHANGE AGREEMENT
AMONG THE COMPANY, STOLL AND ALL OF ITS SHAREHOLDERS
AND THE TRANSFER BY THE STOLL SHAREHOLDERS OF ALL OF
THE STOCK OF STOLL TO THE COMPANY IN EXCHANGE FOR
SHARES OF COMMON STOCK OF THE COMPANY AND SENIOR AND
SUBORDINATED DEBENTURES ISSUED BY THE COMPANY IN
ACCORDANCE WITH THE TERMS OF SUCH STOCK TRANSFER AND
EXCHANGE AGREEMENT.
GENERAL
Effective July 31, 1996, the Company entered into a Stock Transfer and
Exchange Agreement with the Stoll Shareholders (the "Stoll Exchange Agreement").
Under the terms of the Stoll Exchange Agreement, the Stoll Shareholders will
contribute all of the outstanding shares of stock of Stoll to the Company in
exchange for 19,584,662 shares (pre-reverse split) of Common Stock of the
Company and for $16,800,000 principal amount of 8% Senior Debentures due 2002
and $9,105,267 principal amount of 10% Subordinated Debentures due 2004 of the
Company (the "Stoll Transaction"). The exchange has been closed into escrow
pending a favorable vote of the shareholders of the Company.
At the Annual Meeting, if shareholders who are entitled to vote more
than a majority of the outstanding shares of Common Stock of the Company vote to
approve the Stoll Exchange Agreement and also vote in favor of Proposals One,
Three through Seven, and Proposal Ten, escrow will terminate, and the Stock
Transfer and Exchange will be finalized. Ronald E. Scherer, OPD and R. David
Thomas, who together have the right to vote more than a majority of the
outstanding shares of Common Stock of the Company, have each agreed to vote in
favor of the Stoll Exchange Agreement and such proposals.
THE STOLL COMPANIES
BUSINESS
The following description of Stoll's business relates to its
operations prior to July, 1996. In July of 1996, the Company began
managing Stoll's business, including such areas as conducting joint
marketing and distribution operations, terminating excess employees
using Workers Adjustment and Retraining Notification Act ("WARN")
notices on Company letterhead, joint decision making in operational and
accounting areas, customer communication using UNIMAG letterhead and
business cards as well as answering phones in the UNIMAG name, and
future business planning in an integrated mode. The business of Stoll,
under the Company's management, continues to operate similarly to the
way it did prior to July, 1996; however, the Company has begun to
implement strategies to reduce redundant overhead and facilities in
coordination with the other Acquisition Parties.
The following are the significant steps taken to integrate the
operations of Stoll to date. All steps to integrate the businesses of
each of the Acquisition Parties are described under "Combination of
Operations Prior to Annual Meeting." In the first fiscal quarter of
1997, Stoll absorbed the warehouse and office functions of Michiana
(Niles, Michigan), Northern (Petoskey, Michigan) and MacGregor (Mt.
Pleasant, Michigan) into its Jackson warehouse and office facility.
Stoll previously had converted its Toledo and Grand Rapids operations
to depots. Stoll also incorporated some additional customer business
from Michiana and the Scherer Affiliates in Indiana and Michigan and
closed its Galesburg, Michigan location.
97
<PAGE> 109
To date, the dollar amount expanded to integrate the
operations of Michiana and the Scherer Affiliates into Stoll has been
immaterial and has provided, on a consolidated basis, a net reduction
in operating expenses.
Stoll, incorporated in September, 1938, was headquartered in
Toledo, Ohio and was a regional wholesaler of periodicals, including
magazines, books, sports collectibles and allied products. Stoll
distributed over 3,000 periodicals to over 3,750 retail outlets in
Michigan, Indiana and Ohio. The retail outlets included supermarkets,
discount variety stores, convenience stores, drug stores, and
newsstands that offer mass market reading materials to consumers. In
addition, Stoll operated 13 retail bookstores, totaling approximately
58,000 square feet, through which it sold magazines, books, newspapers
and related products. The products distributed by Stoll were similar to
the products distributed by the Company, including magazines, books and
sundries; Stoll did not distribute any newspapers. See "The Company and
the Combined Company - `Products'."
During the fiscal year ended September 30, 1995, Stoll
generated total revenues of approximately $83,620,000. Of this amount,
approximately $65,000,000, or 78%, came from the sale of magazines;
$9,000,000, or 11%, came from the sale of books; $9,000,000, or 11%,
came from the sale of retail products; and the remaining $4,000,000
came from the sale of sundry products. Sales by Stoll wholesale of
$4,000,000, or 5%, to Stoll retail were eliminated in the total revenue
calculation.
Stoll operated four separate wholesale divisions under the
names "Buckeye News", which was based in Toledo, Ohio, "Indiana
Periodicals Distributor", which was based in Indianapolis, Indiana,
"Southern Michigan News", which was based in Jackson, Michigan, and
"Western Michigan News", which was based in Grand Rapids, Michigan.
Each of those names and divisions roughly corresponded to different
periodical wholesale distributors that Stoll had acquired over a number
of years.
Stoll's wholesale supply and distribution system was similar
to the supply and distribution system of the Company. See "The Company
and the Combined Company - `Suppliers and Pricing', and `Distribution
System'" for a more complete description of the supply and distribution
system. Stoll's suppliers of product were the same as the Company's.
The prices of the product were established by the publishers. Stoll
then purchased a majority of the product from national distributors at
a discount from the suggested retail price and then sold the product to
retailers at a smaller discount. The national distributors also
arranged for shipment of the product to Stoll.
Stoll maintained a 84,000 square foot office, warehouse and
distribution facility in Jackson, Michigan and a 78,000 square foot
office, warehouse and distribution facility in Indianapolis, Indiana.
Stoll also maintained depots of 53,000 square feet in Grand Rapids,
Michigan, 30,000 square feet in Toledo, Ohio, 20,000 square feet in
Galesburg, Michigan, and a small combination depot/retail outlet in
Ludington, Michigan. Stoll also maintained a 45,000 square foot
facility in Jackson, Michigan for the distribution of books. See "The
Company and the Combined Company - `Facilities'."
Stoll's two main facilities in Jackson, Michigan and in
Indianapolis, Indiana received periodicals in bulk form. The product
was then sorted, stacked, bundled and packaged for loading into trucks
and vans for delivery to retailers. A portion of the periodicals were
trucked from these main distribution facilities to Stoll's depot
facilities, where they were combined with other periodicals for
appropriate delivery routes and loaded onto trucks or vans for delivery
to retailers in the surrounding areas.
At September 28, 1996, Stoll employed approximately 597
people, including 338 full-time personnel. The part-time personnel
included approximately 156 people engaged in in-store-service and 98
part time retail personnel. The full-time personnel included 71
99
<PAGE> 110
drivers, 91 warehouse personnel, 52 managers and supervisors, 36
administrative and office personnel, 56 marketing personnel, and 30
people in retail and other. A total of 21 drivers and 6 warehouse
employees were members of two separate unions, each affiliated with the
Teamsters. Both union contracts expire in 1997. In the opinion of Stoll
management, relations with both union and non-union employees have been
satisfactory.
In connection with its marketing efforts, Stoll had 25
full-time sales personnel, 31 full-time in store service personnel and
156 part-time in store service personnel. Stoll faced competition from
the same sources as the Company. See "The Company and the Combined
Company - `Competition'." Competition came from other wholesalers,
alternative channels of distribution, and from substitute products.
Stoll had experienced more intense competition from other wholesalers
than had, for example, OPD. In Michigan, northwest Ohio, and Indiana,
it competed with Michiana, OPD, Northern, MacGregor, The Andersen
Group, and the Ludington group. As a result of the acquisitions,
Michiana, OPD, Northern and MacGregor are all part of the Combined
Company and are working together in the distribution of periodicals.
Stoll also operated 13 retail stores that sold magazines,
books and sundry items under a separate Stoll corporate division known
as "Community Newscenters". These stores are located in regional malls
and strip shopping centers in Michigan, Indiana and Ohio. The stores
are operated under various names such as Community Newscenter,
Webster's Books, Andersen Newscenter, Readers World, Read-Mor Book
Store, Jay's Community Newscenter and Morey's Newsstand. All of the
stores are in leased space. The size of the stores ranges from 1,800 to
10,800 square feet in size. Total annual volume for these stores was
approximately $9,000,000, and the majority of their purchases were made
from Stoll wholesale divisions.
The mailing address of Stoll's principal executive offices is
2021 Adams Street, Toledo, Ohio 43624, and its telephone number is
(419) 243-2161.
MARKET FOR COMMON EQUITY AND SHAREHOLDER MATTERS
Stoll's total authorized shares of capital stock consist of
10,000 shares of Class A common stock, no par value, and 40,000 shares
of Class B common stock, no par value (the "Stoll Stock"). All of the
Stoll Stock is issued and outstanding and held of record by 12 persons.
No public market for the Stoll Stock exists, and transfers of the Stoll
Stock are subject to significant restrictions by virtue of various
stock restriction agreements among Stoll and the Stoll Shareholders,
which restrictions will be terminated upon completion of the Stoll
Transaction, and by federal and state securities laws and regulations.
There were dividends of $540,000 declared and paid to Stoll
Shareholders in fiscal year 1995, and dividends of $200,000 declared
and paid to Stoll Shareholders in fiscal year 1996. In addition, there
were distributions of net non-operating assets of $3,343,305 from
previously taxed but undistributed retained earnings made in 1996.
There are no restrictions that limit the ability of Stoll to pay
dividends on its common equity.
THE EXCHANGE TRANSACTION; CERTAIN PROVISIONS OF THE STOLL EXCHANGE
AGREEMENT
The Stoll Exchange Agreement has been filed with the
Securities and Exchange Commission as Exhibit 2C to a Form 8-KA filed
September 30, 1996. Shareholders may inspect and copy the Stoll
Exchange Agreement at the Commission's public reference facility at
Room 1024, 450 Fifth Street, NW, Washington, DC 20549, and at the
Commission's regional offices at Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661, and at 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of the
Stoll Exchange Agreement can be obtained by mail from the Commission's
Public Reference Section at 450 Fifth Street, NW, Washington, DC 20549
at prescribed rates. Additionally, a copy of the Stoll Exchange
Agreement can be obtained over
99
<PAGE> 111
the Internet from the website of the Securities and Exchange Commission
at WWW.SEC.GOV.
In accordance with the terms and conditions set forth in the
Stoll Exchange Agreement, when the Stoll Transaction is approved by the
shareholders of the Company, the Stoll Shareholders will contribute all
of their shares of stock of Stoll to the Company, and Stoll will
thereby become a wholly-owned subsidiary of the Company.
In exchange for each share of Stoll Stock (a "Stoll Share")
which is contributed to the Company, the contributing shareholder will
receive, (a) shares of the Common Stock of the Company, and (b) Senior
and Subordinated Debentures of the Company. The Debentures will be
issued pursuant to the terms of the Debenture Agreement, which will be
entered into in connection with the Acquisition transactions. An
aggregate of $16,800,000 principal amount of the Debentures will be
Senior Debentures and the balance of the Debentures will be
Subordinated Debentures. See "Senior and Subordinated Debentures --
`Description of Securities'" for a description of the terms of the
Senior and Subordinated Debentures to be issued.
The number of shares of Common Stock of the Company and the
principal amount of Senior and Subordinated Debentures to be received
upon exchange of the Stoll Shares is based upon a total valuation of
Stoll, determined as described below, with 53.14% of this value being
exchanged for shares of Common Stock of the Company at an agreed upon
price of $1.50 per share, and 46.86% of this value being exchanged for
Debentures. All of the Acquisition Parties originally agreed to take a
minimum of 51% of the total consideration in the form of the Company's
Common Stock and 49% as Debentures. The Stoll Shareholders agreed to
take a percentage greater than 51% in exchange for the Company's
assumption of certain liabilities not originally contemplated. At the
time of the negotiations, the parties were in agreement that 60% was
the most common percentage used by willing buyers and sellers in the
industry. The parties also agreed that tangible net worth would be
defined as total assets (excluding intangible assets), less total
liabilities. The value of Stoll was determined by adding the sum of:
(a) An amount, equal to 60% of the net annual wholesale and
retail sales of Stoll for the 12-month period ended September 30, 1995
("1995 Stoll Sales"); and
(b) The tangible net worth (as defined by agreement between
the parties in consultation with their accountants) of Stoll as of June
30, 1996 (the "Stoll Tangible Net Worth").
At the time the Stoll Exchange Agreement was entered into, 60%
of 1995 Stoll Sales was estimated to be $49,721,990, and Stoll Tangible
Net Worth was estimated to be $13,260,702, for a total estimated
valuation of $62,982,692.
Pursuant to the Stoll Exchange Agreement, the Stoll
Shareholders have prepared and delivered to the Company the balance
sheet of Stoll as of June 30, 1996 (the "Stoll Closing Date Balance
Sheet"), and the 1995 sales report of Stoll for the 12 month period
ended September 30, 1995 (the "1995 Stoll Sales Report"). The Stoll
Closing Date Balance Sheet and the 1995 Stoll Sales Report have been
(1) prepared from and in accordance with the books and records of
Stoll; (2) except as otherwise provided in the Stoll Exchange
Agreement, prepared in conformity with generally accepted accounting
principles applied on a consistent basis (with certain exceptions
primarily relating to the exclusion of intangible assets and the impact
of changes in the Section 458 reserve on sales); and (3) as to the
Stoll Closing Balance Sheet, fairly present in all material respects
the financial condition of Stoll as of such
100
<PAGE> 112
date in accordance with such practices. The Stoll Shareholders were
also required to deliver to the Company the workpapers used in
connection with the preparation of the Stoll Closing Date Balance Sheet
and the Stoll 1995 Sales Report.
As contemplated by the Stoll Exchange Agreement, in order to
determine the actual Stoll Tangible Net Worth as of June 30, 1996,
Arthur Andersen LLP has conducted an audit of the Stoll Closing Date
Balance Sheet, and has conducted a review of the 1995 Stoll Sales
Report to confirm the accuracy of the recorded amount of 1995 Stoll
Sales. The Stoll Exchange Agreement provides that, in determining the
Stoll Tangible Net Worth, the calculation will exclude goodwill,
customer lists, order and regulation records, noncompete agreements,
consulting agreements, and other intangible assets.
Based upon the Stoll Closing Date Balance Sheet, which was
prepared by Stoll Management and audited by Arthur Andersen LLP, the
Stoll Tangible Net Worth was $5,109,486. The reduction in Stoll's
Tangible Net Worth is based, in part, upon certain distributions made
to the Stoll shareholders, including cash dividends totaling $740,000
prior to June 30, 1996 and non-operating assets with a total book value
of $3,343,305 made after June 30, 1996, but reflected in the June 30
valuation. Based upon the 1995 Stoll Sales Report, 60% of the 1995
Stoll Sales was $50,172,773. As a result, the total valuation is
$55,282,259. Based upon this valuation, the Stoll Shareholders will
receive (a) 19,584,662 shares (pre-reverse split) of the Common Stock
of the Company, (b) Senior Debentures in the principal amount of
$16,800,000 , and (c) Subordinated Debentures in the principal amount
of $9,105,267. The Debenture table and the tables for share ownership
have been calculated on a pro forma basis to reflect these amounts.
Additionally, under the Debenture Agreement, all of the Stoll
Senior Debentures of $16,800,000, along with all accrued interest
thereon, are to be paid before any other Senior Debentures are paid.
After the Stoll Senior Debentures have been paid, then all other
holders of Senior Debentures are to be paid in proportion to the
principal amount of Senior Debentures held by them. None of the
principal on the Subordinated Debentures is to be paid until all of
the Senior Debentures have been paid in full. At July 1, 1997, two
principal payments totaling $3,329,295, which are to be paid to Stoll,
had been deferred.
At the closing of the Stoll Exchange Agreement ("Stoll
Effective Time"), each Stoll Shareholder will surrender to the Company
the Stoll share certificates evidencing all of the Stoll Shares then
owned by such Stoll Shareholder. Upon surrender of the Stoll share
certificates evidencing all of the Stoll Shares owned by each Stoll
Shareholder, the Company will issue to each Stoll Shareholder that
number of shares of Common Stock of the Company and the Senior and
Subordinated Debentures which such Stoll Shareholder is entitled to
receive following the exchange.
101
<PAGE> 113
If, between the date of the execution of the Stoll Exchange
Agreement and the Stoll Effective Time, the number of outstanding
shares of the Common Stock of the Company has been reduced by virtue of
a reverse stock split or other similar means, then the $1.50 price of a
share of Common Stock of the Company for purposes of exchanging Stoll
Shares into shares of Common Stock of the Company shall be
proportionately adjusted to reflect such reduction. In lieu of
fractional shares resulting from the exchange, the Company will pay to
each holder who would otherwise be entitled to receive fractional
shares an amount equal to such fractional interest multiplied by $1.50
also adjusted to reflect any such reduction.
The Stoll Exchange Agreement contains various representations
and warranties of one or both of the parties thereto as to, among other
things, (a) its corporate organization, standing, power and authority
to enter into the Stoll Exchange Agreement to consummate the
transactions contemplated thereby; (b) its capitalization, security
holders and subsidiaries; (c) ownership of shares; (d) the need for
consents and approvals in order to enter into the Stoll Exchange
Agreement to consummate the transactions contemplated thereby; (e) the
accuracy of financial statements; (f) the absence of undisclosed
liabilities and adverse and other changes; (g) the filing of all
necessary returns and payment of taxes; (h) the compliance with law in
connection with the operations of the parties' respective businesses;
(i) insurance matters; (j) title to and condition of properties; (k)
legal proceedings; (l) ERISA matters; (m) certain material contracts of
Stoll and the absence of defaults thereunder; (n) the Stoll Exchange
Agreement's non-contravention of any applicable laws, articles of
incorporation, by-laws, material agreements, undertakings, indentures,
orders, decrees, restrictions or legal obligations; (o) officers,
employees and compensation; (p) books of account and records; (q) labor
relations; (r) business matters; and (s) other matters specified in the
Stoll Exchange Agreement.
The Stoll Exchange Agreement provides that Stoll and the Stoll
Shareholders shall agree that between the date of the Stoll Exchange
Agreement and the Stoll Effective Time, (a) neither Stoll nor any Stoll
Shareholder shall take or permit to be taken any action or do or permit
to be done anything in the conduct of the business of Stoll, or
otherwise, that would be contrary to or in breach of any of the terms
or provisions of this Agreement or which would cause any of their
representations and warranties contained in the Stoll Exchange
Agreement to be or become untrue in any material respect; (b) Stoll
shall conduct its business in the ordinary course consistent with past
practices; and (c) Stoll and the Stoll Shareholders shall use all
reasonable efforts to preserve the business organization intact, keep
available to Stoll and the Company the present service of Stoll's
employees, and preserve for Stoll and the Company the goodwill of
Stoll's suppliers, customers, and others with whom business
relationships exist.
The Stoll Exchange Agreement provides for indemnification by
the selling or transferring shareholders for any losses, liabilities or
damages incurred as a result of any material inaccuracy or breach of
the representations, warranties, covenants or agreements made. The
indemnification obligations of the transferring shareholders may be
satisfied by returning to the Company Common Stock of the Company, to
be valued at $1.50 per share for this purpose. The indemnification
obligation of the transferring shareholders is $6,200,000 (10% of the
original estimated value of Stoll), and no single Stoll Shareholder
will be liable for an amount in excess of the consideration received
for his or her shares. However, the Company is not entitled to
indemnity unless the aggregate of all damages exceeds $620,000, and
then only to amounts in excess of $620,000, except that this amount is
reduced to $100,000 for environmental matters. Additionally, $400,000
of funds otherwise payable to Stoll from the expected sale of an
airplane will be reserved to cover expenses incurred in the
investigation and remediation of certain environmental contingencies
identified to the Company by Stoll, with the balance, if any, being
paid to Stoll.
Pursuant to the terms of the Stoll Exchange Agreement, Richard
H. Stoll, Jr., Stoll President, John Heiniger, Stoll Treasurer, and Ron
Lankerd, Stoll General Manager, will
101
<PAGE> 114
enter into employment agreements with the Company for a term of three
years from the closing date and subject to other customary terms and
conditions. Additionally, Stoll has entered into a twelve (12) year
deferred compensation agreement with Richard H. Stoll, Sr. pursuant to
which Richard H. Stoll Sr. will receive $250,000 per year for a period
of five (5) years and $100,000 per year for seven (7) years. See "The
Stock and Asset Exchanges - `Conflicts of Interest and Related Party
Transactions'" and Proposal Eight - `Executive Compensation'.
PURPOSES AND EFFECT OF THE EXCHANGE
The purposes and effect of the exchange have been described in
the Introduction and Summary section of the Proxy Statement. See
"Introduction and Summary" and "The Stock and Asset Exchanges."
ACCOUNTING TREATMENT
The acquisition of Stoll was initiated in February of 1996. On
July 3, 1996, the Company and Stoll entered into a Joint Operating
Agreement in which the Company and Stoll agreed to conduct certain of
their operations jointly. Effective July 31, 1996, Stoll executed the
definitive agreement to contribute its shares to the Company in
exchange for Common Stock of the Company and Debentures. The
acquisition will be accounted for under the purchase method of
accounting. For ease of accounting, the Company has elected to use July
28, 1996 as the effective date of the transaction. The Company will
adjust purchase accounting for the impact of recognizing income before
consideration is transferred. The Company has recognized the results of
operations starting July 28, 1996.
RIGHTS OF DISSENTING SHAREHOLDERS OF THE COMPANY
Shareholders of the Company who do not vote in favor of
Proposal Two, and who otherwise perfect their rights as dissenting
shareholders, have certain rights as dissenting shareholders. See "The
Stock and Asset Exchanges - `Dissenters' Rights'" and Exhibit C.
INTERESTS OF CERTAIN PERSONS
There are a number of transactions and arrangements between
the Company and the Stoll Shareholders. See "The Stock and Asset
Exchanges - `Conflicts of Interest and Related Party Transactions'."
EFFECTIVENESS
All documents necessary to consummate the Stoll Transaction
have been deposited into escrow with Baker & Hostetler LLP as the
escrow agent. Termination of the escrow is conditioned upon approval of
Proposals One through Seven and Proposal Ten by the affirmative vote of
holders of a majority or more of the outstanding shares of Common Stock
of the Company. Ronald E. Scherer, OPD, and R. David Thomas, who
together have the right to vote more than 50% of the outstanding shares
of Common Stock of the Company, have agreed to vote in favor of the
above proposals.
It has been the intention of both the Company and Stoll to
treat the valuation of the exchange as having been effective since July
1, 1996. Accordingly, the Stoll Closing Balance Sheet is as of June 30,
1996, and the Debentures began to accrue interest from July 1, 1996.
The exchange will legally become effective promptly following the vote
of the shareholders of the Company approving the exchange, at which
time escrow will be terminated and all documents that have been
deposited in escrow will be released and delivered to the appropriate
parties. As stated above, the Effective Date for Accounting was
approximately July 28, 1996.
102
<PAGE> 115
VOTING
Assuming the presence of a quorum, the affirmative vote of the
holders of a majority or more of the voting power of the outstanding
shares of Common Stock of the Company is necessary for approval of the
Stoll Exchange Agreement among the Company, Stoll and the Stoll
Shareholders and consummation of the transactions contemplated thereby.
Abstentions and non-votes by brokers holding Common Stock in street
name will have the same effect as shares of Common Stock cast against
the proposal. As stated above, the Effective Date for Accounting was
approximately July 31, 1996.
STOLL FINANCIAL INFORMATION
Stoll is an S Corporation with a fiscal year end of September 30. The
financial information for Stoll is provided below in this Proposal Two beginning
with "Management Discussion and Analysis" and includes a two year balance sheet,
three year statements of operations and retained earnings and cash flows, and a
management discussion and analysis. The interim financial statements for Stoll
for the three and nine months ended June 28, 1996 are also included.
Set forth below is a Management Discussion and Analysis of Financial
Condition and Results of Operations for Stoll, along with a two year audited
balance sheet and a one year audited and two year unaudited statement of
operations. Stoll accounts for approximately 30% of the Combined Company
revenues.
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS OF STOLL FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994
AND 1993
For 1995 versus 1994, revenue increased by $1,483,000, or
1.8%, versus an increase of $3,961,000, or 5.1%, from 1994 versus 1993.
The gross profit margin reduced slightly to 26.2% in 1995 from
26.6% in 1994 and 26.6% in 1993. While the increases in cost of goods
sold that occurred in 1996 from price competition for chain business
did not have a major impact prior to fiscal 1996, it is anticipated
that Stoll will be subject to lower gross margins in future periods.
The decline in gross margin percentage in 1995 versus 1994 on
increased revenue caused a small increase in gross margin of $38,000,
following a $1,079,000 increase in 1994 versus 1993.
Other operating income increased in 1995 versus 1994 primarily
due to higher prices on scrap paper sales.
Selling, general and administrative expenses and other
operating costs increased by $438,000, or 2.2%, in 1995 versus 1994,
after an increase of $1,214,000, or 6.4%, in 1994 versus 1993. As a
percentage of revenue, the selling, general and administrative expenses
were 24.6% in 1995 versus 24.5% in 1994, and 24.2% in 1993.
Interest expense increased from $91,000 in 1994 to $974,000 in
1995 because Stoll decided to provide an accrual of $1,498,000 for
federal, state and local income taxes and $841,000 for related interest
for a tax settlement related to the 458 reserve attributable to years
when Stoll was not an S Corporation.
The 1995 income before taxes of $1,379,000 was a $902,000
decrease from the 1994 income before taxes of $2,281,000, which, in
turn, was slightly lower than the
103
<PAGE> 116
comparable 1993 income before taxes of $2,678,000. The 1995 decrease
from 1994 was attributable primarily to the increased interest expense.
LIQUIDITY, CAPITAL RESOURCES, AND FACTORS AFFECTING FUTURE PERFORMANCE
Stoll's working capital is as follows:
September 30, 1995 $6,778,000
September 30, 1994 $8,505,000
Working capital decreased by $1,727,000 in 1995, due, in part,
to the distribution of dividends to shareholders based on the
profitability of Stoll and to the accrual for the income taxes and
accrued interest.
Cash flow from operations was relatively consistent and in
excess of $3,000,000 for both fiscal years. Investing activities for
purchases of property , plant and equipment also were relatively
consistent and in excess of $880,000 during those two years. In 1994,
Stoll used $1,472,513 for purchase of an airplane which was sold in
1996. Distributions to shareholders were $1,301,000 in 1995, and
$1,324,000 in 1994. In 1994, Stoll borrowed $1,400,000. These
activities caused cash to increase from $2,660,000 in the beginning of
1994, to $4,587,000 at the end of 1995.
The Combined Company is engaged in negotiations with financial
institutions to refinance existing debt, including the Stoll debt.
Stoll's plan for the balance of 1996 and for 1997 is to
consolidate operations with other facilities of the Combined Company to
reduce selling, general and administrative expenses to offset the
expected decline in gross margin. This should generate adequate cash
flow to meet Stoll's working capital obligations.
INFLATION
The impact of inflation on wholesale operations is difficult to
measure. Stoll cannot easily pass on periodical costs to customers unless the
publishers increase cover prices. Stoll and the Combined Company are engaged in
activities to control operating costs. As a result, Stoll believes that the
effect of inflation, if any, on the results of operations and financial
conditions has been minor and is expected to remain so in the future.
SEASONALITY
The sale of magazines and books is subject to minimal seasonality
106
<PAGE> 117
THE STOLL COMPANIES
FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
WITH REPORT OF INDEPENDENT AUDITORS
105
<PAGE> 118
THE STOLL COMPANIES
Financial Statements
Years ended September 30, 1995, 1994 and 1993
Contents
Report of Independent Auditors ........................................100
Audited Financial Statements
Balance Sheets ........................................................101
Statements of Operations and Retained Earnings ........................103
Statements of Cash Flows...............................................104
Notes to Financial Statements .........................................105
106
<PAGE> 119
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Stoll Companies:
We have audited the accompanying balance sheet of The Stoll Companies
as of September 30, 1995, and the related statements of operations and retained
earnings and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present
fairly, in all material respects, the financial position of The Stoll Companies
at September 30, 1995, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
The 1994 and 1993 financial statements were reviewed by us and our
reports thereon, dated October 25, 1994 and October 22, 1993, respectively,
stated we were not aware of any material modifications that should be made to
those statements for them to be in conformity with generally accepted accounting
principles. However, a review is substantially less in scope than an audit and
does not provide a basis for the expression of an opinion on the financial
statements taken as a whole.
ERNST & YOUNG LLP
Toledo, Ohio
September 23, 1996
107
<PAGE> 120
THE STOLL COMPANIES
Balance Sheets
<TABLE>
<CAPTION>
September 30
1995 1994
-----------------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,586,593 $ 3,748,376
Trade accounts receivable, less allowance of $172,000
($175,000 in 1994) 8,402,664 8,660,917
Notes receivable from and advances to
related parties 102,018 483,862
Inventories 10,887,063 11,457,980
Prepaid expenses and other 94,388 64,823
-----------------------------------------
Total current assets 24,072,726 24,415,958
Other assets:
Notes receivable from officers 931,006 544,005
Notes receivable from and advances to
related parties 2,407,949 1,095,000
Cash value of life insurance 671,401 633,561
Prepaid pension (Note 3) 371,546 207,716
Goodwill, less amortization of $1,056,540 ($956,206 in
1994) 812,726 913,060
Agreements not to compete, less amortization of $432,087
($280,487 in 1994) 305,913 457,513
Customer lists, less amortization of $298,611 ($206,944 in
1995) 251,389 343,056
Deposits and investments 260,231 123,666
Other assets - net 964,511 928,846
-----------------------------------------
6,976,672 5,246,423
Property, plant and equipment:
Land 97,662 97,662
Buildings and building equipment 842,859 842,859
Automotive equipment 3,074,116 2,897,981
Furniture and fixtures 4,921,555 4,736,170
Leasehold improvements 706,960 701,411
Airplane 1,155,684 1,155,684
-----------------------------------------
10,798,836 10,431,767
Less allowances for depreciation and amortization 6,677,430 6,004,977
-----------------------------------------
4,121,406 4,426,790
Land and airplane (in 1994) not used in operations 874,234 2,346,747
-----------------------------------------
4,995,640 6,773,537
=========================================
$36,045,038 $36,435,918
=========================================
</TABLE>
108
<PAGE> 121
<TABLE>
<CAPTION>
September 30
1995 1994
-----------------------------------------
(Unaudited)
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Note payable (Note 2) $ 1,400,000 $ 1,400,000
Accounts payable 9,119,944 10,446,675
Income taxes payable (Note 6) 1,498,101 -
Accrued interest (Note 6) 841,211 -
Compensation and payroll taxes withheld 281,709 255,777
Reserve for returns 3,436,000 3,287,000
Other accrued expenses 528,168 339,626
Liability under non-compete agreement 190,262 182,267
-----------------------------------------
Total current liabilities 17,295,395 15,911,345
Liability under non-compete agreement due after
one year - 190,262
Redeemable Common Stock (Note 4):
Class B Common Stock, nonvoting, without par value;
$243 redemption value; 40,000 shares authorized,
issued and outstanding 9,720,000 9,720,000
Shareholders' equity (Note 4):
Class A Common Stock, voting, without par value;
10,000 shares authorized, issued and outstanding 1,000,000 1,000,000
Retained earnings 8,029,643 9,614,311
-----------------------------------------
9,029,643 10,614,311
-----------------------------------------
$36,045,038 $36,435,918
=========================================
</TABLE>
See accompanying notes.
109
<PAGE> 122
THE STOLL COMPANIES
Statements of Operations and Retained Earnings
<TABLE>
<CAPTION>
Year Ended September 30
1995 1994 1993
------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Net sales $83,621,289 $82,138,153 $78,177,417
Cost of sales 61,720,106 60,275,440 57,393,843
------------------------------------------------------------
Gross profit 21,901,183 21,862,713 20,783,574
Other operating income 613,927 394,816 350,554
Other operating costs, selling, general
and administrative expenses:
Payroll and related expenses 12,102,187 11,939,228 11,267,792
Selling, delivery and warehouse expenses 3,306,218 3,553,393 3,289,945
General and administrative expenses 3,375,864 2,782,542 2,823,482
Depreciation and amortization 1,795,804 1,866,389 1,546,068
------------------------------------------------------------
20,580,073 20,141,552 18,927,287
------------------------------------------------------------
Operating income 1,935,037 2,115,977 2,206,841
Other income (expense):
Gain (loss) on disposals of equipment (161,079) (92,122) 11,327
Interest income 388,080 212,861 219,740
Interest expense (Note 6) (973,815) (90,523) (1,000)
Sundry 191,210 134,935 241,262
------------------------------------------------------------
(555,604) 165,151 471,329
------------------------------------------------------------
Income before income taxes 1,379,433 2,281,128 2,678,170
Provision for income taxes (Note 6) 1,663,101 215,000 150,000
------------------------------------------------------------
Net income (loss) (283,668) 2,066,128 2,528,170
Retained earnings at beginning of year
(Note 8) 9,614,311 8,872,183 7,156,513
Cash distributions ($26.02, $26.48 and
$16.25 per share):
Class A (260,200) (264,800) (162,500)
Class B (1,040,800) (1,059,200) (650,000)
============================================================
(1,301,000) (1,324,000) (812,500)
============================================================
Retained earnings at end of year $ 8,029,643 $ 9,614,311 $ 8,872,183
============================================================
</TABLE>
See accompanying notes.
110
<PAGE> 123
THE STOLL COMPANIES
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended September 30
1995 1994 1993
----------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (283,668) $2,066,128 $2,528,170
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Provision for depreciation and amortization 1,429,680 1,526,623 1,252,558
Loss (gain) on disposals of equipment 161,079 92,122 (11,327)
Changes in operating assets and liabilities:
Accounts receivable 258,253 (923,347) (356,671)
Inventories 570,917 656,955 104,968
Notes receivable, prepaid expenses and
other assets (429,080) (433,810) 163,330
Accounts payable (1,326,731) 393,481 (410,224)
Reserve for returns 149,000 51,000 95,000
Other accrued liabilities and expenses 2,553,783 227,701 (227,564)
----------------------------------------------------------
Net cash provided by operating activities 3,083,233 3,656,853 3,138,240
Investing activities
Purchases of property, plant and equipment (887,951) (1,109,836) (684,394)
Proceeds from sales of property and equipment 126,202 111,946 76,800
Purchase of airplane held for resale - (1,472,513) -
Cost of business acquired (Note 1) - - (500,000)
----------------------------------------------------------
Net cash used in investing activities (761,749) (2,470,403) (1,107,594)
Financing activities
Cash distributions (1,301,000) (1,324,000) (812,500)
Payments on non-compete agreement (182,267) (174,271) (99,600)
Proceeds from short-term note payable - 1,400,000 -
----------------------------------------------------------
Net cash used in financing activities (1,483,267) (98,271) (912,100)
----------------------------------------------------------
Net increase in cash and cash equivalents 838,217 1,088,179 1,118,546
Cash and cash equivalents at beginning of year 3,748,376 2,660,197 1,541,651
----------------------------------------------------------
Cash and cash equivalents at end of year $ 4,586,593 $ 3,748,376 $ 2,660,197
==========================================================
Supplemental disclosure--cash paid for interest $ 132,604 $ 90,523 $ -
==========================================================
</TABLE>
See accompanying notes.
111
<PAGE> 124
THE STOLL COMPANIES
Notes to Financial Statements
September 30, 1995
1. ACCOUNTING POLICIES
-------------------
Business
The Stoll Companies (the Company) operate in the wholesale periodical business
in northwest Ohio, central Indiana and southern Michigan. On July 31, 1996, the
Company and its shareholders entered into a Stock Transfer and Exchange
Agreement with United Magazine Company (Unimag) to exchange the Company's Class
A and B Common Stock for Unimag common stock and debentures (the merger
agreement).
In July 1993, the Company acquired the business and certain assets of Cuson News
Agency (Cuson) for $500,000 in cash. The acquisition was accounted for as a
purchase. Assets recorded at their estimated fair values at the dates of
acquisition are as follows:
<TABLE>
<S> <C>
Customer lists $150,000
Goodwill 75,000
Property, plant and equipment 275,000
=================
$500,000
=================
</TABLE>
Operations of Cuson have been included in the Company's statements of operations
from the date of acquisition.
Cash Equivalents
The Company considers all short-term investments with a maturity of less than 90
days when purchased to be cash equivalents.
Inventories
Inventories are stated at cost, not in excess of market. Cost has been
determined by the first-in, first-out (FIFO) method.
Goodwill
Goodwill represents the excess of the purchase price over the book value at the
dates of acquisition of companies purchased. The carrying value of goodwill is
reviewed if the facts and circumstances suggest that it may be impaired.
Goodwill is being amortized over 10 to 20 years.
Agreements Not to Compete
The Company entered into non-compete agreements with former owners of acquired
businesses. Intangible assets were recorded for the present value of these
agreements and are amortized over the 5 year lives of the agreements not to
compete.
Customer Lists
Customer lists are stated at cost and are amortized over their estimated useful
life of six years.
112
<PAGE> 125
Property, Plant and Equipment
Properties are recorded at cost. Depreciation is provided at rates which are
sufficient to amortize the carrying amounts of assets over their estimated
useful lives utilizing the straight-line method.
Reserve for Returns
Magazines and books delivered to customers and not sold are returned to the
Company for full credit. The reserve for magazine and books returns represents
the approximate gross margin on magazines and books delivered to customers and
expected to be returned after the balance-sheet date.
Financial Instruments
The carrying value of financial instruments approximates fair values thereof.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions 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 those estimates.
2. NOTE PAYABLE
------------
The Company has an unsecured note payable with a bank under a $2,000,000
revolving credit agreement. Interest is payable monthly at the bank's prime rate
(8.75% at September 30, 1995) with the principal due March 1996. Outstanding
borrowings at September 30, 1995 and 1994 were $1,400,000.
3. PENSION PLANS
-------------
Employees of two divisions of the Company, included in a collective bargaining
unit, are covered by a noncontributory multi-employer defined benefit pension
plan. Expense for this plan for the years ended September 30, 1995, 1994 and
1993 was $104,635, $105,043 and $99,596, respectively.
Other eligible employees are covered by a noncontributory defined benefit
pension plan (the plan). The benefits are based on years of service and the
employee's compensation. The Company's funding policy is to contribute annually
the maximum amount that can be deducted for federal income tax purposes. The
plan's funded status is determined annually as of July 1. In connection with the
merger (see Note 1), the plan was terminated effective June 30, 1996. The
following table sets forth the plan's funded status as of July 1, 1995 and 1994:
113
<PAGE> 126
<TABLE>
<CAPTION>
1995 1994
-----------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$2,073,201 and $2,019,479, respectively $ 2,248,934 $ 2,185,453
=========================================
Projected benefit obligation for service rendered to date $(2,915,715) $(2,857,222)
Plan assets at fair value, including common stock and fixed
income investments and common trust funds 2,571,315 2,314,306
-----------------------------------------
Projected benefit obligation in excess of plan assets (344,400) (542,916)
Unrecognized net loss from past experience different from that
assumed and effects of changes in assumptions 435,747 443,086
Unrecognized prior service cost, including effects of change in
maximum normal retirement benefit 257,117 281,073
Unrecognized net obligation at transition 23,082 26,473
-----------------------------------------
Prepaid pension asset $ 371,546 $ 207,716
=========================================
</TABLE>
Net periodic pension cost for the plan includes the following components:
<TABLE>
<CAPTION>
Year ended September 30
1995 1994 1993
-----------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $ 168,239 $ 159,372 $ 148,650
Interest cost on projected benefit obligation 207,136 197,343 178,716
(Gain) loss from return on plan assets (286,718) 26,623 (203,758)
Net amortization and deferral 66,103 (231,223) 27,216
-----------------------------------------------------
Net periodic pension cost $ 154,760 $ 152,115 $ 150,824
=====================================================
</TABLE>
Actuarial assumptions for the plan are as follows:
<TABLE>
<CAPTION>
July 1,
1995 1994 1993
-----------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 7.5% 8.0%
Rate of increase in future compensation 4.5% 4.5% 6.0%
Long-term rate of return 8.0% 8.0% 8.0%
</TABLE>
The Company has a 401(k) defined contribution plan for all eligible employees.
Employees' contributions are made by salary reduction in increments of 1% of
compensation, not to exceed an amount defined annually by the Internal Revenue
Service. Employees may also make additional contributions on a voluntary basis.
The Company makes profit sharing and matching contributions to the plan as
determined annually by the Board of Directors. The Company's defined
contribution plan expense for the year ended September 30, 1995, 1994 and 1993
under the 401(k) plan was $180,317, $170,167 and $147,330, respectively.
114
<PAGE> 127
4. SHAREHOLDER AGREEMENT AND DIVIDENDS
-----------------------------------
The Company's Class A and B Common Stock are subject to a transfer restriction
agreement dated May 5, 1991. Under the agreement, if a number of Class A shares
constituting voting control are transferred to a third party, all Class B shares
must be transferred as part of the same transaction at the same per share price
paid for the Class A shares. Class B shares cannot be otherwise transferred,
except to the Company, and the Company has the obligation to purchase the
shares.
The agreement provides that the price at which Class B shares may be transferred
to the Company is to be determined annually by the shareholders. The
shareholders have determined the price to be $243 per share as of September 30,
1995. In connection with the merger (see Note 1), the shareholder agreement has
been terminated.
On July 31, 1996 the Company declared a total dividend in the amount of
$4,343,305 on its Class A and Class B shares, distributable in certain property
of the Company effective August 31, 1996. Distributed in the dividend were the
Company's life insurance policies with a cash value of $671,401 at September 30,
1995 ($709,252 at August 31, 1996), land not used in operations with a carrying
value as of September 30, 1995 of $874,234 (agreed-upon fair value at August 31,
1996 of $1,200,000) and notes and advances from related parties with carrying
values of $1,821,268 at September 30, 1995 ($2,434,053 at August 31, 1996).
5. LEASES AND RELATED PARTY TRANSACTIONS
-------------------------------------
The Company leases warehouses in Jackson, Galesburg, and Grand Rapids, Michigan
and Indianapolis, Indiana, and retail book stores in Sturgis, Manistee, and
Ludington, Michigan from shareholders of the Company and certain officers. The
Company also leases retail book stores in Michigan, Indiana and Ohio from
unrelated parties.
The total rent expense for the year ended September 30, 1995, 1994 and 1993
amounted to $1,588,935, $1,907,698 and $1,599,110 ($1,043,580, $926,480 and
$835,515 to related parties), respectively. Future minimum rental commitments
are as follows:
<TABLE>
<CAPTION>
Fiscal Year Related
Ending September 30 Parties Other Total
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996 $347,000 $ 604,000 $ 951,000
1997 300,000 480,000 780,000
1998 150,000 475,000 625,000
1999 - 456,000 456,000
2000 - 413,000 413,000
Thereafter - 413,000 413,000
----------------------------------------------------------
Total $797,000 $2,841,000 $3,638,000
==========================================================
</TABLE>
In 1995, the Company sold an airplane not used in operations for its approximate
net book value of $1,290,000 in exchange for a note receivable from a related
party.
Interest received from related parties totaled $119,385, $128,635 and $148,125
for the year ended September 30, 1995, 1994 and 1993, respectively. Consultant
fees paid to a related party amounted to $54,000, $56,100 and $37,400 for the
years ended September 30, 1995, 1994 and 1993, respectively.
115
<PAGE> 128
6. INCOME TAXES
------------
The Company elected to be treated as an S Corporation for income tax purposes
effective April 1, 1991. As a result, the shareholders of the Company include
the taxable income or loss of the Company in their respective personal income
tax returns, and no provision for federal or state income taxes is recorded by
the Company on S Corporation income.
Net deferred tax assets of approximately $389,000 ($40,000 liability at
September 30, 1994) represent income taxes on temporary differences and have not
been recorded in these financial statements because of the Company's S
Corporation status. In connection with the merger (see Note 1), the Company's S
Corporation status will be terminated, and such net deferred tax liabilities
will be recorded by the Company on the effective date of the merger.
Historically, for tax return purposes, the Company has recorded a reserve for
periodical returns based upon its selling price of periodicals in accordance
with its interpretation of Internal Revenue Code (IRC) Section 458. The Internal
Revenue Service (IRS) has assessed adjustments with respect to the Company's IRC
Section 458 reserve for periodical returns. During September and October 1995,
the United States Tax Court rendered decisions favorable to the IRS's position
regarding such reserves. While not conceding its IRC 458 issue with the IRS, at
September 30, 1995 management of the Company decided to provide $1,498,101 for
federal, state and local income taxes and $841,211 for related interest expense
attributable to years when the Company was not an S Corporation.
In addition, Company shareholders will be personally liable for income taxes on
adjustments to taxable income subsequent to adoption of S Corporation status
with respect to the Company's IRC Section 458 reserve. Such estimated federal,
state and local tax liabilities, including the interest thereon, amount to
approximately $1,000,000.
The Company provided $165,000, $215,000 and $150,000 for local income taxes for
the years ended September 30, 1995, 1994 and 1993, respectively.
7. CONTINGENCY
-----------
The Company has certain exposure with respect to the potential clean-up of
alleged contaminated properties. The Company evaluated its potential exposure
for the clean-up of these sites and accrued $400,000 in fiscal 1995 as its best
estimate of current exposure based on costs that can be reasonably estimated.
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS OF STOLL FOR THE NINE MONTHS AND THREE MONTHS
ENDED JUNE 30, 1996 AND 1995
For the three months ended June 30, 1996, revenue declined $2,310,000
from the corresponding three month period ended June 30, 1995. For the nine
months ended June 30, 1996, revenue declined $6,507,000 from the corresponding
nine month period ended June 30, 1995. The decline of 10.6% for the comparable
three month periods and 9.8% for the comparable nine month periods was
attributable primarily to the loss of revenue from chain customers such as The
Kroger Company, WalMart and K-Mart (The Kroger Company business was lost to
other members of the Combined Company).
Gross margins as a percentage of revenue were 21.3% in 1996 versus
25.5% in 1995 for the comparable three month periods, reflecting the
industry-wide decline in gross margin. This decline in
117
<PAGE> 129
the third quarter of 1996 caused the nine month gross margin percentage to
decline to 22.9% from 25.6% for 1996 versus 1995 and increased the decline in
1996 gross margin versus 1995.
Despite the decline in comparative revenue, selling, general and
administrative expenses increased by $5,536,000, or 108.8%, for the three months
ended June 30, 1996 versus 1995, and by $6,057,000, or 39.4%, for the nine
months ended June 30, 1996 versus 1995. As a percent of revenue, the selling,
general and administrative expenses for the three month period were 54.3% in
1996 versus 23.2% in 1995 and for the nine month period were 36.0% in 1996
versus 23.2% in 1995. The primary increases in 1996 versus 1995 were in deferred
compensation, severance costs and in costs to close facilities.
The loss before taxes of $6,417,000 for the three months ended June 30,
1996 was a decline of $6,963,000 from the income of $546,000 for the
corresponding three month period ended June 30, 1995. The decline was caused, in
part, by the $1,411,000 reduction in comparable gross margin, which was caused
by declining revenue and increasing cost of goods sold, by $1,373,000 in
severance packages for Richard Stoll, Sr., by $410,000 in curtailment loss
related to the termination of the Stoll Company pension plan, and by costs
relating to closing facilities.
The loss before taxes of $7,791,000 for the nine months ended June 30,
1996 was a decline of $9,471,000 from the income of $1,680,000 for the
corresponding nine month period ended June 30, 1995. The decline was caused by
the $3,246,000 reduction in comparable gross margin, which was caused by
declining revenue and increasing cost of goods sold, by $1,373,000 in severance
packages for Richard Stoll, Sr. and costs relating to closing facilities.
LIQUIDITY, CAPITAL RESOURCES, AND FACTORS AFFECTING FUTURE PERFORMANCE
Stoll's working capital for the periods listed is as follows:
June 30,1996 $ 362,000
September 30, 1995 $6,778,000
September 30, 1994 $8,505,000
Working capital decreased by $1,727,000 in 1995, due, in part, to the
distribution of dividends to shareholders based on the profitability of Stoll.
The decline of working capital from September 30, 1995 to June 30, 1996 was
$6,416,000. Reasons for the decline include a nine month loss of $7,791,000
reduced by depreciation and amortization of $1,107,000. Stoll also distributed
$740,000 in cash.
During the nine months ended June 28, 1996 Stoll made purchases of
property plant and equipment of $1,201,000 and made cash distributions of
$740,000. These were offset, in part, by an increase in borrowings of $3,271,000
and a reduction in available cash of $4,458,000 for operating cash flow.
The Combined Company is engaged in negotiations with financial
institutions to refinance existing debt, including the Stoll debt.
Stoll's plan for the balance of 1996 is to consolidate operations with
other facilities of the Combined Company to reduce selling, general and
administrative expenses to offset the expected decline in gross margin. This
should generate adequate cash flow to meet Stoll's working capital obligations.
INFLATION
- ---------
The impact of inflation on wholesale operations is difficult to
measure. Stoll cannot easily pass on periodical costs to customers unless the
publishers increase cover prices. Stoll and the Combined Company are engaged in
activities to control operating costs. As a result, Stoll believes
117
<PAGE> 130
that the effect of inflation, if any, on the results of operations and financial
conditions has been minor and is expected to remain so in the future.
SEASONALITY
The sale of magazines and books is subject to minimal seasonality.
118
<PAGE> 131
THE STOLL COMPANIES
BALANCE SHEETS
As of June 28, 1996 and September 30, 1995
$(000) omitted
<TABLE>
<CAPTION>
June 28, 1996 Sept. 30, 1995
Assets (Unaudited) (Audited)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets $ $
- --------------
Cash 1,537 4,587
Accounts Receivable, Net 9,663 8,403
Inventories 12,511 10,887
Advances to Affiliates 2,505 102
Prepaids and Other 918 94
--------------------- ------------------------
Total Current Assets 27,134 24,073
--------------------- ------------------------
Property and Equipment, at Cost
- -------------------------------
Land 968 98
Buildings and Leasehold Improvements 1,502 1,550
Furniture and Equipment 5,838 6,077
Vehicles 4,504 3,074
--------------------- ------------------------
12,812 10,799
Less-Accumulated Depreciation
and Amortization (7,380) (6,678)
--------------------- ------------------------
Total Property and Equipment, Net 5,432 4,121
--------------------- ------------------------
Other Assets
- ------------
Costs in Excess of Net Assets Acquired, Net 917 1,064
Advances to Affiliates, Non-Current 0 3,339
Prepaid Contracts and Other 3,809 3,448
--------------------- ------------------------
Total Other Assets 4,726 7,851
--------------------- ------------------------
Total Assets $ $
37,292 36,045
===================== ========================
Liabilities and Shareholders' Equity
- --------------------------------------------------------------
Current Liabilities $ $
- -------------------
Short Term Debt 4,671 1,400
Accounts Payable 13,934 9,120
Accrued Expenses 4,664 3,339
Reserve for Gross Profit on Sales Returns 3,103 3,436
Advances from Affiliates 400 0
--------------------- ------------------------
Total Current Liabilities 26,772 17,295
--------------------- ------------------------
Long-Term Debt Obligations
- --------------------------
Other 301 0
--------------------- ------------------------
Total Liabilities 27,073 17,295
--------------------- ------------------------
Shareholders' Equity
- --------------------
Common Stock, No Par Value 10,720 10,720
Retained Earnings (Deficit) (501) 8,030
--------------------- ------------------------
Total Shareholders' Equity 10,219 18,750
--------------------- ------------------------
Total Liabilities and Shareholders' Equity $ 37,292 $ 36,045
===================== ========================
</TABLE>
119
<PAGE> 132
THE STOLL COMPANIES
STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended June 28, 1996 and July 1, 1995
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended 1996 Ended 1995 Ended 1996 Ended 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 19,575 $ 21,885 $ 59,565 $ 66,072
Cost of Goods Sold 15,397 16,296 45,927 49,188
-----------------------------------------------------
Gross Profit 4,178 5,589 13,638 16,884
Selling, General and Administrative (10,623) (5,087) (21,417) (15,360)
Expenses
-----------------------------------------------------
Income (Loss) from Operations (6,445) 502 (7,779) 1,524
Interest Income (Expense), Net 28 44 98 156
Other Income (Expense) 0 0 (110) 0
-----------------------------------------------------
Income (Loss) Before Provision for Income (6,417) 546 (7,791) 1,680
Taxes
Provision for Income Taxes 0 0 0 0
-----------------------------------------------------
Net Income (Loss) $ (6,417) $ 546 $ (7,791) $ 1,680
=====================================================
</TABLE>
120
<PAGE> 133
THE STOLL COMPANIES
STATEMENTS OF CASH FLOW
For the Nine Months Ended June 28, 1996 and July 1, 1995
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
June 28, 1996 July 1, 1995
(Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Net Cash (Used In) Operating Activities: $(4,458) $(1,255)
------- -------
Cash Flows from Investing Activities:
Purchases of Property and Equipment (1,201) (521)
Other 78 575
------- -------
Net Cash Provided By (Used In) Investing
Activities (1,123) 54
------- -------
Cash Flows From Financing Activities:
Proceeds From Debt Issuance 3,271 0
Dividends and Distributions (740) (1,004)
------- -------
Net Cash Provided By (Used In) Financing
Activities 2,531 (1,004)
------- -------
Net Increase (Decrease) In Cash and Equivalents (3,050) 305
Cash, Beginning of Period 4,587 3,746
------- -------
Cash, End of Period 1,537 4,053
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest $ 207 $ 92
======= =======
</TABLE>
121
<PAGE> 134
THE STOLL COMPANIES
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED JUNE 28, 1996 AND JULY 1, 1995
(UNAUDITED)
1. GENERAL
-------
In the opinion of management, the accompanying unaudited condensed interim
financial statements contain all adjustments necessary to present fairly the
financial position of The Stoll Companies ("Stoll") as of June 28, 1996 and
September 30, 1995, and the results of its operations and cash flows for the
three months and nine months ended June 28, 1996 and July 1, 1995. All such
adjustments were of a normal recurring nature. The results of operations in any
interim period are not necessarily indicative of results for the full year.
2. THE BUSINESS
------------
The Stoll Companies, an Ohio corporation, is an independent magazine, book, and
newspaper ("periodical") distributor operating in northwest Ohio, central
Indiana and southern Michigan.
3. PENDING SHAREHOLDER ACTIONS
---------------------------
Effective August 23, 1996, United Magazine Company ("UNIMAG") entered into a
Stock Transfer and Exchange Agreement with Stoll and the shareholders of Stoll
(the "Stoll Shareholders"), pursuant to which the Stoll Shareholders agreed to
contribute their shares of stock of Stoll to UNIMAG in exchange for Common Stock
of UNIMAG and Senior and Subordinated Debentures of UNIMAG. The transaction will
be closed into escrow pending a favorable vote of the shareholders of UNIMAG on
the transaction. Upon the UNIMAG shareholders voting in favor of the acquisition
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 UNIMAG, OPD, which is controlled by Ronald E. Scherer, and R. David
Thomas, another significant shareholder of UNIMAG, have each agreed to vote
their shares in favor of the transactions with Stoll. Together these
shareholders are entitled to vote more than 50% of the stock of UNIMAG. Since
approval of the transactions is assured and UNIMAG had effective control over
the operations of the company, Stoll has been included in the consolidated
financial statements of UNIMAG subsequent to mid-September of 1996.
4. PROVISION FOR INCOME TAXES
--------------------------
There is no provision made for income taxes for The Stoll Companies because the
shareholders of those companies have elected to be taxed under provisions of the
Internal Revenue Code related to S Corporations.
5. PENSION PLAN TERMINATION
------------------------
In connection with the Stock Transfer and Exchange Agreement with UNIMAG, Stoll
terminated its pension plan effective June 30, 1996 and recorded a curtailment
loss of $410,000 during that period in connection with the termination.
6. DEFERRED COMPENSATION PLAN
--------------------------
During the quarter ended June 30, 1996, Stoll entered into a deferred
compensation agreement for past services with Richard Stoll, Sr. Under the
agreement, Stoll will pay Mr. Stoll, Sr. 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. The net present value of this agreement of $1,373,000 has been
expensed during the quarter ended June 30, 1996.
122
<PAGE> 135
7. DIVIDENDS
---------
Between September 30, 1995 and June 30, 1996 Stoll distributed cash dividends of
$740,000 to Stoll shareholders.
8. NOTE PAYABLE
------------
Between September 30, 1995 and June 30, 1996 Stoll increased short term
borrowings under a $5,000,000 revolving credit agreement by $3,271,000.
123
<PAGE> 136
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF
THE STOCK TRANSFER AND EXCHANGE AGREEMENT AMONG THE COMPANY, STOLL, AND ALL OF
ITS SHAREHOLDERS AND THE TRANSFER BY THE STOLL SHAREHOLDERS OF ALL OF THE STOCK
OF STOLL TO THE COMPANY IN EXCHANGE FOR SHARES OF COMMON STOCK OF THE COMPANY
AND SENIOR AND SUBORDINATED DEBENTURES ISSUED BY THE COMPANY IN ACCORDANCE WITH
THE TERMS OF SUCH STOLL STOCK TRANSFER AND EXCHANGE AGREEMENT.
126
<PAGE> 137
PROPOSAL THREE: TO CONSIDER AND ACT UPON A PROPOSAL TO APPROVE THE
STOCK TRANSFER AND EXCHANGE AGREEMENT AMONG THE
COMPANY, OHIO PERIODICAL DISTRIBUTORS, INC. ("OPD")
AND ALL OF ITS SHAREHOLDERS AND PURSUANT TO SUCH
AGREEMENT, TO ADOPT A MERGER AGREEMENT BETWEEN THE
COMPANY AND OPD PURSUANT TO WHICH OPD WILL BE MERGED
WITH AND INTO THE COMPANY, AND THE SHAREHOLDERS OF
OPD WILL RECEIVE SHARES OF COMMON STOCK OF THE
COMPANY AND SENIOR AND SUBORDINATED DEBENTURES ISSUED
BY THE COMPANY IN THE MERGER IN ACCORDANCE WITH THE
TERMS OF SUCH STOCK TRANSFER AND EXCHANGE AGREEMENT.
GENERAL
The Company has entered into Asset Transfer and Exchange Agreements and
Stock Transfer and Exchange Agreements with the Scherer Affiliates (except for
MacGregor News Agency, Inc. which will be acquired in connection with the
acquisition of the assets of Northern News Company, its parent). Even though
each of the Scherer Affiliates is a separate corporate entity, they are all
owned directly or indirectly by the Scherer family. Additionally, each
acquisition is conditioned upon completion of the other Acquisitions related to
all of the Scherer Affiliates.
The Company entered into an Asset Transfer and Exchange Agreement with
OPD, effective August 1, 1996, subsequently amended to a Stock Transfer and
Exchange Agreement (the "OPD Exchange Agreement"). The OPD Exchange Agreement
has been further amended to provide for consummation of the transaction in the
form of a merger pursuant to a merger agreement (the "OPD Merger Agreement").
Pursuant to the Merger Agreement, OPD will merge with and into the Company with
the Company being the surviving entity in the merger (the "Merger"). At the
Effective Time of the Merger, the shares of stock of OPD will be converted into
the right to receive 10,190,773 Shares (pre-reverse split) of Common Stock of
the Company and $7,404,807 principal amount of 8% Senior Debentures due 2002 and
$76,013 principal amount of 10% Subordinated Debentures due 2004 of the Company
(the "OPD Transaction"). OPD operates two divisions: one distributes periodicals
in the greater Columbus, Ohio area, and the other distributes periodicals in the
greater Cincinnati, Ohio area. This transaction has been closed into escrow
pending a favorable vote of the shareholders of the Company.
At the Annual Meeting, if shareholders who are entitled to vote more
than a majority of the outstanding shares of Common Stock of the Company vote in
favor of the OPD Transaction and Proposals One, Two, Four through Seven and
Proposal Ten, escrow will terminate, and the OPD Transaction will be finalized.
Ronald E. Scherer, OPD and R. David Thomas, who together have the right to vote
more than a majority of the outstanding shares of Common Stock of the Company,
have each agreed to vote in favor of the OPD Transaction, and such proposals.
OPD
BUSINESS
The following description of the business operations of OPD
relates to its operations prior to July 1996. In July of 1996, the
Company began managing the business of OPD related to the wholesale
distribution of periodicals, including such areas as conducting joint
marketing and distribution operations, terminating excess employees
using Workers Adjustment and Retraining Notification Act ("WARN")
notices on Company letterhead, joint decision making in operational and
accounting areas, customer communication using UNIMAG letterhead and
business cards as well as answering phones in the UNIMAG name,
126
<PAGE> 138
and future business planning in an integrated mode This business of
OPD, under the Company's management, continues to operate similarly to
the way it did prior to July, 1996; however, the Company has begun to
implement strategies to reduce redundant overhead and facilities in
coordination with the other Acquisition Parties. In March of 1997, the
warehouse and office functions of OPD's Columbus operations were
transferred to Cincinnati. To date, the dollar amount expended to
integrate the operation of OPD has been insignificant. Since September
28, 1996, OPD has eliminated approximately 35 full-time positions at an
annual gross payroll saving, excluding payroll taxes and fringe
benefits, of approximately $583,000. These and other related savings
have resulted in a net reduction of operating expenses. All steps to
integrate the businesses of each of the Acquisition Parties are
described under "Combination of Operations Prior to Annual Meeting."
OPD is located in the State of Ohio and is a regional
wholesaler of periodicals. It distributed over 3,000 periodicals to
over 2,300 retail locations in Ohio, Michigan, Indiana and Kentucky.
The retail outlets included supermarkets, discount variety stores,
convenience stores, drug stores, and newsstands that offer mass market
reading materials to consumers.
OPD has certain transactions with other companies that are
part of the Scherer Affiliates. Wholesalers, an equipment leasing
company based in Dublin, Ohio, owns and operates a fleet of
approximately 65 vehicles leased to OPD and the other Scherer
Affiliates for use in the wholesale distribution of magazines and
periodicals. These vehicles are being transferred to the Company as
part of the acquisition of certain assets of Wholesalers. Scherer
Companies provided general management services including management
information, accounting, marketing, personnel, facility management,
vehicle management and planning to all of the other Scherer Affiliates,
including OPD, and to the Company.
Because both the Company and all of the Scherer Affiliates
were under similar management of Scherer Companies, the wholesale
supply and distribution system for OPD was the same as the system to be
used by the Company. See "The Company and the Combined Company -
`Suppliers and Pricing', and `Distribution System'" for a more complete
description of the supply and distribution system. OPD's suppliers of
product were the same as the Company's. The prices of the product were
established by the publishers. OPD then purchased the periodicals from
the national distributors at a discount from the suggested retail price
and then sold them to retailers at a smaller discount off retail. The
national distributors arranged for shipment of periodicals to OPD.
OPD maintained a 65,000 square foot office, warehouse and
distribution facility in Columbus, Ohio, and owned a 35,000 square foot
office, warehouse and distribution facility in Cincinnati, Ohio. See
"The Company and the Combined Company - `Facilities'." The two main
facilities of OPD were maintained in Columbus, Ohio and Cincinnati,
Ohio, and received periodicals in bulk form. The product was then
sorted, stacked, bundled and packaged and then loaded into trucks and
vans for delivery to retailers.
During the fiscal year ended December 31, 1995, OPD generated
total net sales of approximately $52,065,000. Of this amount,
approximately $45,778,000, or 87.9% came from the sale of magazines,
$5,457,000, or 10.5% came from the sale of books, and the balance came
from the sale of sundry products.
At September 28, 1996, OPD employed approximately 303 people
including 175 full-time personnel. The part-time personnel include
approximately 123 people engaged in in-store service. The full-time
personnel included 39 drivers, 65 warehouse personnel, 35 managers and
supervisors, 11 marketing personnel, and 18 administrative and office
personnel. None of the employees are members of a union. In the opinion
of OPD management, relations with employees have been satisfactory.
127
<PAGE> 139
Because the Company, OPD and the other Scherer Affiliates are
under similar management, the marketing employed by OPD is the same as
the marketing employed for the Company. See "The Company and the
Combined Company - `Marketing and Sales'." OPD faced competition from
the same sources as the Company. See "The Company and the Combined
Company - `Competition'." Competition came from other wholesalers, from
alternative channels of distribution, and from substitute products. OPD
had experienced somewhat less intense competition from other
wholesalers than had, for example, Michiana or Stoll. In Ohio, OPD
competed with Michiana, Stoll, Klein, The Andersen Group, and the
Ludington group. As a result of the acquisitions, Michiana, Stoll and
Klein are all a part of the Combined Company and will be working
together in the distribution of periodicals.
The mailing address of the principal executive offices of OPD
is 5131 Post Road, Dublin Ohio 43017, and the telephone number is (614)
792-0777.
MARKET FOR COMMON EQUITY AND SHAREHOLDER MATTERS
The total authorized shares of capital stock of OPD consists
of 500 shares of common stock, no par value, all of which shares are
issued and outstanding, and 99% of such shares are held of record
primarily by trusts created for the benefit of Ronald E. Scherer and
Linda Hayner Talbott, and members of their families (collectively, the
Scherer Trusts). No public market for OPD Stock exists, and transfers
of OPD Stock are subject to significant restrictions by virtue of
various stock restriction, stock redemption and pledge agreements among
OPD, the OPD Shareholders and certain of OPD's creditors, and pursuant
to federal and state securities laws and regulations. There were no
dividends declared or paid to any holder of OPD Stock in fiscal year
1995 or fiscal year 1996. There are no restrictions that limit the
ability of OPD to pay dividends on its common equity.
THE MERGER TRANSACTION; CERTAIN PROVISIONS OF THE OPD MERGER AGREEMENT
The OPD Asset Transfer and Exchange Agreement has been filed
with the Securities and Exchange Commission as an exhibit to a Form
8-KA, filed on September 30, 1996. The OPD Exchange Agreement is filed
as Exhibit 2A to a Form 8-KA, filed on June 16, 1997 and the OPD Merger
Agreement is filed as Exhibit 2(y) to a Form 8-KA filed on August 4,
1997. Shareholders may inspect and copy the OPD Asset Transfer and
Exchange Agreement as well as the OPD Merger Agreement at the
Commission's public reference facility at Room 1024, 450 Fifth Street,
N. W., Washington, DC 20549, and at the Commission's regional offices
at Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661, and at 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of the OPD Exchange Agreement and the OPD
Merger Agreement can be obtained by mail from the Commission's Public
Reference Section at 450 Fifth Street, N. W., Washington, DC 20549 at
prescribed rates. Additionally, a copy of the OPD Merger Agreement can
be obtained over the Internet from the website of the Securities and
Exchange Commission at WWW.SEC.GOV.
In accordance with the terms and conditions set forth in the
OPD Merger Agreement, at the time that the Merger is effective, the
shares of OPD common stock will automatically be converted into the
right to receive, (a) shares of the Common Stock of the Company,
and (b) Senior and Subordinated Debentures of the Company. The
Debentures will be issued pursuant to the terms of the Debenture
Agreement which will be entered into in connection with the acquisition
transactions. An aggregate of $7,404,807 principal amount of the
Debentures will be Senior Debentures, and the balance of the Debentures
will be Subordinated Debentures. See "Senior and Subordinated
Debentures" for a description of the terms of the Senior and
Subordinated Debentures to be issued.
128
<PAGE> 140
The number of shares of Common Stock of the Company and the
principal amount of Senior and Subordinated Debentures to be received
in the Merger was based upon a total valuation of OPD, determined as
described below, with 51.0% of this value, net of an adjustment for
5,000,000 (pre-split) shares of Common Stock of the Company owned by
OPD, being exchanged for shares of Common Stock of the Company at an
agreed upon price of $1.50 per share, and 49.0% of this value, net of
an adjustment for 5,000,000 (pre-split) shares of Common Stock of the
Company owned by OPD, being exchanged for Senior and Subordinated
Debentures. All of the Acquisition Parties originally agreed to take a
minimum of 51% of the total consideration in the form of the Company's
Common Stock and 49% as Debentures. At the time of the negotiations,
the parties were in agreement that 60% was the most common percentage
used by willing buyers and sellers in the industry. The parties also
agreed that tangible net worth would be defined as total assets
(excluding intangible assets), less total liabilities. The value of OPD
was determined by netting the sum of:
(a) An amount equal to 60% of the net annual wholesale sales
of OPD for the 12-month period ended December 31, 1995 ("1995 OPD
Sales"); and
(b) The tangible net worth (as defined by agreement between
the parties in consultation with their accountants) of OPD as of June
30, 1996 (the "OPD Tangible Net Worth").
At the time the OPD Asset and Exchange Agreement was
originally entered into, 60% of 1995 OPD Sales was estimated to be
$30,723,244, and OPD's Tangible Net Worth was estimated to be a deficit
of $3,436,528, for a total estimated valuation of $27,286,716.
Pursuant to the OPD Exchange Agreement, the OPD Shareholders
have prepared and delivered to the Company the balance sheet of OPD as
of June 30, 1996 (the "OPD Closing Date Balance Sheet"), and the 1995
sales report of OPD for the year ended December 31, 1995 (the "1995 OPD
Sales Report"). The OPD Closing Date Balance Sheet and the 1995 OPD
Sales Report have been (1) prepared from and in accordance with the
books and records of OPD; (2) except as otherwise provided in the OPD
Exchange Agreement, prepared in conformity with generally accepted
accounting principles applied on a consistent basis (with certain
exceptions primarily relating to the exclusion of intangible assets and
the impact of changes in the Section 458 reserve on sales); and (3) as
to the OPD Closing Date Balance Sheet, fairly present in all material
respects the financial condition of OPD as of such date in accordance
with such practices. The OPD Shareholders were also required to deliver
to the Company the workpapers used in connection with the preparation
of the Closing Date Balance Sheet and the 1995 Sales Report.
As contemplated by the OPD Exchange Agreement, in order to
determine the actual OPD Tangible Net Worth as of June 30, 1996, Arthur
Andersen LLP has conducted an audit of the OPD Closing Date Balance
Sheet and has conducted a review of the 1995 OPD Sales Report to
confirm the accuracy of the recorded amount of 1995 Sales. The OPD
Exchange Agreement provides that, in determining the OPD Tangible Net
Worth, the calculation will exclude goodwill, customer lists, order and
regulation records, noncompete agreements, consulting agreements, and
other intangible assets.
Based upon the OPD Closing Date Balance Sheet, which was
prepared by management of OPD and audited by Arthur Andersen LLP, the
OPD Tangible Net Worth was a deficit of $8,471,836, and, based upon the
1995 OPD Sales Report, 60% of the 1995 OPD Sales was $31,238,816, for a
total
129
<PAGE> 141
valuation of $22,766,980. Based upon this estimated valuation, the OPD
Shareholders will receive (a) an aggregate of 10,190,773 shares
(pre-reverse split) of the Common Stock of the Company; (b) Senior
Debentures in the aggregate principal amount of $7,480,807; and (c)
Subordinated Debentures in the aggregate principal amount of $76,013.
The Debenture table and the tables for share ownership have been
calculated on a pro forma basis to reflect these amounts.
At the closing of the Merger with OPD, each OPD Shareholder
will surrender to the Company the OPD share certificates evidencing all
of the OPD Shares then owned by such OPD Shareholder. Immediately after
the Effective Time, upon surrender of the OPD share certificates
evidencing all of the OPD Shares owned by each OPD Shareholder, the
Company will issue to each OPD Shareholder that number of shares of
Common Stock of the Company and the Senior and Subordinated Debentures
which such OPD Shareholder is entitled to receive as a result of the
Merger.
If, between the date of the execution of the OPD Exchange
Agreement and the Effective Time, the number of outstanding shares of
the Common Stock of the Company has been reduced by virtue of a reverse
stock split or other similar means, then the $1.50 price of a share of
Common Stock of the Company, for purposes of exchanging OPD Shares into
shares of Common Stock of the Company, shall be proportionately
adjusted to reflect such reduction. In lieu of fractional shares
resulting from the conversion of stock in the Merger, the Company will
pay to each holder who would otherwise be entitled to receive
fractional shares an amount equal to such fractional interest
multiplied by $1.50.
As discussed, the Stock Exchange Agreement remains effective.
The Merger Agreement is contained in a separate amendment providing
only for the basic terms of the Merger itself. The OPD Exchange
Agreement contains various representations and warranties of one or
both of the parties thereto as to, among other things, (a) its
corporate organization, standing, power and authority to enter into the
OPD Exchange Agreement and consummate the transactions contemplated
thereby; (b) its capitalization, security holders and subsidiaries; (c)
ownership of shares; (d) the need for consents and approvals in order
to enter into the OPD Exchange Agreement and consummate the
transactions contemplated thereby; (e) the accuracy of financial
statements; (f) the absence of undisclosed liabilities and adverse and
other changes; (g) the filing of all necessary returns and payment of
taxes; (h) the compliance with law in connection with the operations of
the parties' respective businesses; (i) insurance matters; (j) title to
and condition of properties; (k) legal proceedings; (l) ERISA matters;
(m) certain material contracts of OPD and the absence of defaults
thereunder; (n) the OPD Exchange Agreement's non-contravention of any
applicable laws, articles of incorporation, by-laws, material
agreements, undertakings, indentures, orders, decrees, restrictions or
legal obligations; (o) officers, employees and compensation; (p) books
of account and records; (q) labor relations; (r) business matters; and
(s) other matters specified in the OPD Exchange Agreement.
The OPD Exchange Agreement provides that OPD will agree that
between the date of the Agreement and the Effective Time, (a) neither
OPD nor any OPD Shareholder shall take or permit to be taken any action
or do or permit to be done anything in the conduct of
130
<PAGE> 142
the business of OPD, or otherwise, relating to the wholesale
distribution of periodicals that would be contrary to or in breach of
any of the terms or provisions of the Agreement or which would cause
any of their representations and warranties contained in the Agreement
to be or become untrue in any material respect; (b) OPD shall conduct
its business in the ordinary course consistent with past practices; and
(c) OPD and the OPD Shareholders shall use all reasonable efforts to
preserve the business organization intact, keep available to OPD and
the Company the present service of OPD's employees, and preserve for
OPD and the Company the goodwill of OPD's suppliers, customers, and
others with whom business relationships exist.
The OPD Exchange Agreement provides for indemnification by the
selling or transferring shareholders for any losses, liabilities or
damages incurred as a result of any material inaccuracy or breach of
the representations, warranties, covenants or agreements made. The
indemnification obligations of the transferring shareholders may be
made by returning to the Company Common Stock of the Company, to be
valued at $1.50 per share for this purpose. The indemnification
obligation of the transferring shareholder is limited. The maximum
indemnification to be provided by the shareholders of OPD is $2,700,000
(10% of the original estimated value of OPD), provided that no single
shareholder will be liable for an amount in excess of the consideration
received for his or her shares. However, the Company is not entitled to
indemnity from OPD unless the aggregate of all damages exceeds
$210,000, and then only to amounts in excess of $210,000, except that
this amount is reduced to $45,000 for environmental matters. The
indemnification obligations of the OPD Shareholders terminate two years
after the date the OPD Transaction is closed into escrow.
PURPOSES AND EFFECT OF THE MERGER
The purposes and effects of the OPD transaction have been
described in the Introduction and Summary section of this Proxy
Statement. See "Introduction and Summary" and "The Stock and Asset
Exchanges."
ACCOUNTING TREATMENT
OPD, Northern, Scherer Companies, and Wholesalers are being
acquired from a common ownership group. This common ownership group is
primarily (directly or through Trusts) Ronald E. Scherer and Linda
Hayner Talbott. Ronald E. Scherer is the Chairman of Scherer Affiliate
companies and also the principal shareholder and Chairman of the
Company, and he has significant influence directly over policy making
for both Scherer Affiliates and the Company. However, for purposes of
determining the appropriate accounting treatment, Ronald E. Scherer is
not considered to constitute a controlling shareholder group, and,
therefore, the acquisition of Scherer Affiliates is being accounted for
under the purchase accounting method. For ease of accounting, the
Company has elected to use July 28, 1996 as the effective date of the
transaction. The Company will adjust purchase accounting for the impact
of recognizing income before consideration is transferred. The Company
will recognize the results of operations starting July 28, 1996.
RIGHTS OF DISSENTING SHAREHOLDERS OF THE COMPANY
Shareholders of the Company who do not vote in favor of
Proposal Three, and who otherwise perfect their rights as dissenting
shareholders, have certain rights as dissenting shareholders. See "The
Stock and Asset Exchanges -- `Dissenter's Rights" and Exhibit C.
130
<PAGE> 143
INTERESTS OF CERTAIN PERSONS
There are a number of transactions and arrangements between
the Company and the principals of OPD. See "The Stock and Asset
Exchanges - `Conflicts of Interest and Related Party Transactions'."
EFFECTIVENESS
All documents necessary to consummate the OPD Merger have been
deposited into escrow, with Baker & Hostetler LLP as the escrow agent.
Termination of the escrow is conditioned upon approval of Proposals One
through Seven and Proposal Ten by the affirmative vote of a majority or
more of the outstanding shares of Common Stock of the Company. Ronald
E. Scherer, OPD, and R. David Thomas, who together have the right to
vote more than 50% of the outstanding shares of Common Stock of the
Company, have agreed to vote in favor of the above proposals.
The OPD Closing Balance Sheet is as of June 30, 1996 and the
Debentures began to accrue interest from July 1, 1996. The OPD Merger
will legally become effective promptly following the vote of the
shareholders of the Company approving the OPD Transaction, at which
time escrow will be terminated and all documents that have been
deposited in escrow will be released and delivered to the appropriate
parties and a Certificate of Merger will be filed with the Ohio
Secretary of State. As stated above, the Effective Date for Accounting
was approximately July 28, 1996.
VOTING
Assuming the presence of a quorum, the affirmative vote of the
holders of a majority or more of the voting power of the outstanding
shares of Common Stock is necessary for adoption of the OPD Merger
Agreement and consummation of the Merger contemplated therein.
Abstentions and non-votes by brokers holding Common Stock in street
name will have the same effect as shares of Common Stock cast against
the proposal.
SCHERER AFFILIATES FINANCIAL INFORMATION
The financial information for the Scherer Affiliates, which
includes OPD, is provided below in this Proposal Three beginning with
"Management Discussion and Analysis" and includes a combined two year
statement of net assets to be acquired, three year combined results of
operations and cash flows related to net assets to be acquired, and a
management discussion and analysis. The interim financial statements
for the Scherer Affiliates for the six months ended June 28, 1996 are
also included. The Scherer Affiliates account for approximately 25% of
the Combined Company's revenues.
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS OF THE SCHERER AFFILIATES FOR THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
The financial information for the Scherer Affiliates is on a
"carved out" basis and relates only to combined statements of net
assets to be acquired and combined results of operations and cash flows
relating to net assets to be acquired.
For 1995 versus 1994, revenue increased by $1,842,000, or
3.1%, versus an increase of $1,146,000, or 2.0%, from 1994 versus 1993.
The gross profit margin increased to 29.5% in 1995 from 27.7%
in 1994, and 27.7% in 1993. The increase was primarily due to an
overall increase in mainline title sales which
131
<PAGE> 144
have a higher gross profit than checkout titles, and also to increases
in sales of waste paper and to impact marketing income sharing. The
increases in cost of goods sold that occurred in 1996 from price
competition for chain business did not have a major impact prior to
fiscal 1996; however, it is anticipated that the Scherer Affiliates
will be subject to lower gross margins in future periods.
The increase in gross margin percentage in 1995 versus 1994
caused an increase in gross margin of $1,648,000, following a $297,000
increase in 1994 versus 1993.
Selling, general and administrative expenses increased by
$1,026,000, or 7.3%, in 1995 versus 1994, after an increase of
$933,000, or 7.1%, in 1994 versus 1993. As a percent of revenue, the
selling, general and administrative expenses were 24.5% in 1995 versus
23.6% in 1994 and 22.4% in 1993. The primary increases in 1995 versus
1994 were in display fixture expense and in research and development in
new distribution programming; the primary decreases in 1995 versus 1994
were in rent and in facility maintenance. The primary increases in 1994
versus 1993 were in service personnel costs and in marketing personnel
costs; the primary decreases in 1994 versus 1993 were in travel
expenses and insurance.
The 1995 income from operations of $3,081,000 was a $622,000
increase from the 1994 income from operations of $2,459,000, which, in
turn, was lower than the comparable 1993 income from operations of
$3,095,000. The 1995 increase over 1994 was attributable primarily to
the increase in gross profit and the increase in other operating
income, offset by higher selling, general and administrative expenses.
The 1994 decrease from 1993 was attributable primarily to the increase
in selling, general and administrative expenses.
LIQUIDITY, CAPITAL RESOURCES AND FACTORS AFFECTING FUTURE PERFORMANCE
The Scherer Affiliates' operations relating to net assets
being acquired have generated income from operations in excess of
$2,400,000 in each of the three years ended December 31, 1995, 1994 and
1993. It is anticipated that the Scherer Affiliates' operations will
continue to contribute net income and cash flow from operations as part
of the Combined Company.
The Scherer Affiliates anticipate contributing total assets of
approximately $29,822,000, and total liabilities of $37,855,000 to the
Combined Company. Included in the liabilities is a $5,000,000 note
payable to KDR which is expected to be converted to Subordinated
Debentures issued by the Company
The Combined Company is engaged in negotiations with financial
institutions to refinance existing debt, including the Scherer
Affiliates' debt.
The Scherer Affiliates' plans for the balance of 1996 and for
1997 are to consolidate operations with other facilities of the
Combined Company to reduce selling, general and administrative expenses
to offset the expected decline in gross margin. This should generate
adequate cash flow to meet the Scherer Affiliates' working capital
obligations.
INFLATION
The impact of inflation on wholesale operations is difficult to
measure. OPD cannot easily pass on periodical costs to customers unless the
publishers increase cover prices. OPD and the Combined Company are engaged in
activities to control operating costs. As a result, OPD believes that the effect
of inflation, if any, on the results of operations and financial conditions has
been minor and is expected to remain so in the future.
132
<PAGE> 145
SEASONALITY
The sale of magazines and books is subject to minimal seasonality.
133
<PAGE> 146
NORTHERN NEWS COMPANY
OHIO PERIODICAL DISTRIBUTORS, INC.
SCHERER COMPANIES, INC.
WHOLESALERS LEASING CORP.
COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995, 1994, AND 1993
TOGETHER WITH AUDITORS' REPORT
136
<PAGE> 147
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of:
Northern News Company
Ohio Periodical Distributors, Inc.
Scherer Companies, Inc.
Wholesalers Leasing Corp:
We have audited the accompanying combined statement of net liabilities
to be acquired of Northern News Company, Ohio Periodical Distributors, Inc.,
Scherer Companies, Inc., and Wholesalers Leasing Corp. (collectively the
Companies) as of December 31, 1995 and 1994, and the related combined results of
operations and cash flows relating to net assets to be acquired for the years
then ended. These combined financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
combined 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.
The accompanying combined financial statements were prepared to present
the net liabilities and the related results of operations and cash flows of the
Companies, which were to be acquired by United Magazine Company as described in
Note 1. The accompanying combined financial statements were prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the proxy of United Magazine Company and
are not intended to be a complete presentation of the Companies.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the net liabilities to be acquired of
the Companies as of December 31, 1995 and 1994, and the related results of its
operations and cash flows for the years then ended in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Columbus, Ohio,
October 23, 1996
136
<PAGE> 148
NORTHERN NEWS COMPANY
OHIO PERIODICAL DISTRIBUTORS, INC.
SCHERER COMPANIES, INC.
WHOLESALERS LEASING CORP.
Combined Statements of Net Liabilities to be Acquired
As of December 31, 1995 and 1994
<TABLE>
<CAPTION>
ASSETS 1995 1994
------ -----------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 193,412 $ 181,452
Accounts receivable, net of allowance for doubtful
accounts of $130,000 in 1995 and $103,000 in 1994 5,132,147 5,883,533
Accounts receivable, related parties 1,376,031 2,149,453
Inventories 5,874,476 5,280,783
Prepaids and other receivables 68,260 113,501
-----------------------------------------------
Total current assets 12,644,326 13,608,722
-----------------------------------------------
PROPERTY AND EQUIPMENT, at cost:
Land 44,000 44,000
Buildings and lease improvements 1,245,942 1,245,942
Furniture, equipment and vehicles 6,628,171 6,102,367
-----------------------------------------------
7,918,113 7,392,309
Less- Accumulated depreciation (6,378,158) (6,044,599)
-----------------------------------------------
Property and equipment, net 1,539,955 1,347,710
-----------------------------------------------
OTHER ASSETS:
Prepaid rent 508,980 624,410
Investment in UNIMAG 3,771,162 3,757,684
Other 985,723 754,098
-----------------------------------------------
Total other assets 5,265,865 5,136,192
-----------------------------------------------
Total assets $19,450,146 $20,092,624
===============================================
</TABLE>
(Continued on next page)
137
<PAGE> 149
NORTHERN NEWS COMPANY
OHIO PERIODICAL DISTRIBUTORS, INC.
SCHERER COMPANIES, INC.
WHOLESALERS LEASING CORP.
Combined Statements of Net Assets to be Acquired
As of December 31, 1995 and 1994
(continued)
<TABLE>
<CAPTION>
LIABILITIES 1995 1994
----------- -------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Demand note $ 5,000,000 $ 5,000,000
Current portion of long-term debt 280,000
Accounts payable 20,306,921 18,938,057
Accrued expenses 1,156,730 1,180,116
Gross profit reserve on sales returns 2,274,385 2,332,691
-------------------------------------------------------
Total current liabilities 29,018,036 27,450,864
LONG-TERM DEBT 1,320,000 1,000,000
-------------------------------------------------------
Total liabilities 30,338,036 28,450,864
Net assets (liabilities) to be (10,887,890) (8,358,240)
acquired
-------------------------------------------------------
Total liabilities and net
liabilities to be acquired $ 19,450,146 $20,092,624
=======================================================
</TABLE>
The accompanying notes to combined financial statements are an integral
part of these combined statements.
138
<PAGE> 150
NORTHERN NEWS COMPANY
OHIO PERIODICAL DISTRIBUTORS, INC.
SCHERER COMPANIES, INC.
WHOLESALERS LEASING CORP.
Combined Results of Operations Related to Net Liabilities to be Acquired
For the Years Ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
1995 1994 1993
-----------------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
Net sales $ 61,413,481 $ 59,571,722 $ 58,425,533
Cost of goods sold (43,271,495) (43,077,940) (42,228,937)
-----------------------------------------------------------
Gross profit 18,141,986 16,493,782 16,196,596
Selling, general and administrative
expenses (15,060,503) (14,034,800) (13,101,867)
-----------------------------------------------------------
Income from operations 3,081,483 2,458,982 3,094,729
-----------------------------------------------------------
Other income and (expenses):
Income or (loss) from investment
in UNIMAG 13,478 356,939 (1,355,043)
Interest income 1,335 40,240 33,211
Interest expense (695,964) (719,798) (728,774)
Other, net (120,440) 649,566 (85,860)
-----------------------------------------------------------
Total other income (expense), net (801,591) 326,947 (2,136,466)
-----------------------------------------------------------
Net income from net liabilities
to be acquired $ 2,279,892 $ 2,785,929 $ 958,263
===========================================================
</TABLE>
The accompanying notes to combined financial statements are an integral
part of these combined statements.
139
<PAGE> 151
NORTHERN NEWS COMPANY
OHIO PERIODICAL DISTRIBUTORS, INC.
----------------------------------
SCHERER COMPANIES, INC.
-----------------------
WHOLESALERS LEASING CORP.
-------------------------
COMBINED STATEMENTS OF CASH FLOWS
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
INCREASE (DECREASE) IN CASH
---------------------------
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $2,279,892 $2,785,929 $958,263
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization 321,539 371,674 352,387
(Income) loss from investment in UNIMAG (13,478) (356,939) 1,355,043
Changes in certain assets and liabilities, net of the
effect of acquisitions and investments-
(Increase) decrease in certain assets:
Accounts receivable 751,386 (186,773) 251,132
Inventories (593,693) (459,410) 189,649
Prepaids and other current assets 45,241 29,788 30,747
Other assets (231,625) (126,037) (157,313)
Prepaid rent 115,430 (504,657) -
Increase (decrease) in certain liabilities:
Accounts payable 1,368,864 2,650,716 (952,924)
Accrued expenses (23,386) 245,837 144,332
Reserve for gross profit on sales returns (58,306) 248,851 197,643
---------------------------------------------------------
Net cash provided by operating activities 3,961,864 4,698,979 2,368,959
---------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (513,784) (433,971) (307,832)
Increase (decrease) in notes receivable from related
parties 773,422 (697,429) 497,122
---------------------------------------------------------
Net cash provided by (used in) investing
activities 259,638 (1,131,400) 189,290
---------------------------------------------------------
</TABLE>
(Continued on next page)
140
<PAGE> 152
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------------------------------------------------
INCREASE (DECREASE) IN CASH
---------------------------
(Continued)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt obligations $ 600,000 $ - $ 60,000
Payments on debt obligations - (60,000) -
Distributions (4,160,625) (2,833,367) (1,734,289)
Cash used by operations not acquired (648,917) (795,711) (593,244)
----------- ----------- -----------
Net cash used in financing activities (4,209,542) (3,689,078) (2,267,533)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 11,960 (121,499) 290,716
CASH, beginning of year 181,452 302,951 12,235
----------- ----------- -----------
CASH, end of year $ 193,412 $ 181,452 $ 302,951
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
- ------------------------------------------------
Cash paid during the year for interest $ 702,000 $ 697,000 $ 684,000
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
142
<PAGE> 153
NORTHERN NEWS COMPANY
OHIO PERIODICAL DISTRIBUTORS, INC.
SCHERER COMPANIES, INC.
WHOLESALERS LEASING CORP.
Notes to Combined Financial Statements
Of Net Liabilities to be Acquired
December 31, 1995 and 1994
(1) BUSINESS
--------
Description of Combined Entities
Effective July 31, 1996 United Magazine Company (UNIMAG) acquired certain assets
and assumed certain liabilities of Northern News Company and Wholesalers Leasing
Corp. Also on July 31, 1996 UNIMAG acquired the outstanding stock of Ohio
Periodical Distributors, Inc. and Scherer Companies, Inc., (collectively the
Companies). The combined financial statements have been presented as the
Companies are all directly or indirectly commonly owned.
The financial statements of the acquired companies include only those assets,
liabilities, revenues and expenses directly related to the magazine operations.
In addition to excluding assets, liabilities, revenues and expenses unrelated to
the magazine operations, certain assets and liabilities and revenues and
expenses between related parties that are not being acquired have been excluded.
The operations excluded are totally unrelated to the magazine business being
acquired and include the following:
- -- Health and racquet club operations
- -- Mini warehouse storage rental units operations
- -- Non-related real estate operations (such as condominimums and related
rental income)
- -- Residential real estate development operations
- -- Loans to the owner and related parties and related interest income
A description of each of the entities operations acquired is identified below.
Northern News Company
Northern News Company (Northern) operates book and magazine distribution
facilities in northern Michigan.
Ohio Periodical Distributors, Inc.
Ohio Periodical Distributors, Inc. (OPD) operates book and magazine distribution
facilities in Central and Southern Ohio.
Wholesalers Leasing Corp.
Wholesalers Leasing Corp. leases primarily vehicles and computer equipment to
the above-mentioned companies as well as other entities.
Scherer Companies, Inc.
Scherer Companies, Inc. (Scherer) is a management company. It provides various
levels of management services primarily for the affiliated companies mentioned
above.
142
<PAGE> 154
Change in Net Liabilities Acquired
As discussed above, the financial statements include only those assets,
liabilities, revenues and expenses directly related to the magazine operations.
The components of the change in net liabilities acquired are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- --------------- --------------
<S> <C> <C> <C>
Beginning Balance $(8,358,240) $(7,515,091) $(6,145,821)
Net income 2,279,892 2,785,929 958,263
Net Distributions (4,160,625) (2,833,367) (1,734,289)
Cash used to finance
operations not acquired (648,917) (745,711) (593,244)
------------ ----------- -------------
$(10,887,890) $(8,358,240) $(7,515,091)
============ =========== ===========
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(a) Method of Accounting
--------------------
All material balances and transactions among the combined
entities have been eliminated.
(b) Estimates
---------
The preparation of combined 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.
(c) Inventories
-----------
Inventories are valued at the lower of cost (first-in,
first-out) or market.
(d) Property and Equipment
----------------------
Property and equipment are stated at cost. Depreciation is
provided on the straight-line method over the estimated useful lives of
the related assets as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Building 31.5
Furniture and equipment 5-7
Vehicles 3-5
Leasehold improvements Shorter of life of lease including
renewals or life of asset
</TABLE>
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.
(e) Investment in UNIMAG
--------------------
The Companies own 5,000,000 shares of common stock of United
Magazine Company (UNIMAG). During 1993 and 1994, this represents an
investment of approximately 25% of United Magazine Company and
therefore is accounted for under the equity method of
143
<PAGE> 155
accounting. In April 1995 the Companies interest fell below 20% and is
no longer on the equity method. The related impact on operations has
been included in the caption "Income (loss) from investment in UNIMAG"
in the accompanying statement of operations related to net liabilities
to be acquired.
(f) 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 Companies record 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 which the Company will
receive full credit from the publisher.
(g) Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Companies
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.
(h) Income Taxes
------------
The shareholders of the Companies elected to be taxed under
provisions of the INTERNAL REVENUE CODE related to S Corporations. The
election was approved by the Internal Revenue Service. Under those
provisions, the results of operations of the Companies are treated as
taxable income or loss to the individual shareholders rather than the
Companies. Therefore, no provision or liability for Federal and state
income taxes has been included in the accompanying financial
statements.
(3) SHORT-TERM BORROWINGS
---------------------
OPD has a $5,000,000 demand note that accrues interest at 11.75%. The note is
collateralized by the 5 million shares of UNIMAG stock held by OPD (see Note
2.e.). This lender directly or indirectly holds 3,000,000 shares of UNIMAG
stock.
(4) DEBT OBLIGATIONS
----------------
The debt obligations for the companies are as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
a. Acquisition note $1,000,000 $1,000,000
b. Note payable to vendor 600,000 -
============= =============
$1,600,000 $1,000,000
============= =============
</TABLE>
a. As part of an acquisition made by OPD in 1989, part of the
consideration was in the form of a note to seller. This note accrues
interest at 11% and is due in annual payments of $100,000 commencing on
May 31, 1996 with final payment of $600,000 due on May 31, 2000. The note
is secured by certain real estate of OPD.
b. In December 1995 OPD entered into an agreement with a major vendor.
This note accrues interest at 10%. Principal and interest payments of
$19,360 are due monthly commencing on January 15, 1996 through December
15, 1998. The note is collateralized by the accounts receivables of OPD
and is personally guaranteed by the owner.
144
<PAGE> 156
Maturities of debt obligations at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Fiscal Years
------------
<S> <C>
1996 $ 280,000
1997 300,000
1998 320,000
1999 100,000
2000 600,000
-------
Total $1,600,000
==========
</TABLE>
(5) RELATED PARTY TRANSACTIONS
--------------------------
The accounts receivable from related parties primarily is from a retail book
store company. The Companies sell products and provides management and computer
assistance to this company.
Scherer leases office space from a related party. Under the lease agreement,
Scherer is obligated to pay the related party for the space used. During 1995
and 1994 Scherer paid the related party approximately $426,000 and $375,000
under this agreement. As of December 31, 1995 Scherer had prepaid rent of
$500,000.
(6) SIGNIFICANT VENDORS
-------------------
The Companies purchased approximately 73% and 64%, respectively, of their
product from three vendors. As of December 31, 1995 and, 1994, the respective
accounts payable from these vendors represented approximately 34% and 37% of the
accounts payable, respectively.
(7) RETIREMENT SAVINGS PLAN
-----------------------
Effective April 1994, the Companies adopted a defined contribution retirement
savings plan for substantially all non-bargaining 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 Companies. Employees are fully vested in the Company's
contributions after 3 years. The Companies has not made any significant
contributions to the Plan.
(8) ACCOUNTING PRONOUNCEMENTS NOT YET EFFECTIVE
-------------------------------------------
In March 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121).
Adoption of SFAS 121 is required for financial statements for fiscal years
beginning after December 15, 1995, with earlier adoption permitted.
SFAS 121 requires that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company does not expect that the adoption of SFAS 121 will
have a material adverse impact on the Company's financial position and results
of operation.
(9) SUBSEQUENT EVENT
----------------
In January 1996 Northern News Company acquired the MacGregor News Company for
approximately $2 million. MacGregor had annual sales of approximately $5,000,000
for the year ended December 31, 1995. The acquisition was accounted for as a
purchase, effective January 1, 1996.
144
<PAGE> 157
In July 1996 the Companies entered into a definitive agreement to be acquired by
United Magazine Company in exchange for United Magazine Company common stock and
debentures. The accompanying financial statements present the net assets and
results of operations of the magazine operations of the Companies which will be
acquired by United Magazine.
145
<PAGE> 158
(10) SUMMARIZED COMBINING FINANCIAL INFORMATION
------------------------------------------
<TABLE>
<CAPTION>
Northern
News OPD Scherer Wholesalers Eliminations Total
----------- ------------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1995
CURRENT ASSETS $ 1,393,653 $11,206,599 $ 44,074 $ - $ - $ 12,644,326
PROPERTY AND EQUIPMENT, NET 90,665 488,174 706,909 254,207 - 1,539,955
OTHER ASSETS 68,006 4,689,359 508,500 - - 5,265,865
----------- ----------- ---------- --------- --------- ------------
Total assets 1,552,324 16,384,132 1,259,483 254,207 - 19,450,146
CURRENT LIABILITIES 3,045,468 24,849,121 1,123,447 - - 29,018,036
LONG-TERM DEBT - 1,320,000 - - - 1,320,000
----------- ----------- ---------- --------- --------- ------------
Total liabilities 3,045,468 26,169,121 1,123,447 - - 30,338,036
----------- ----------- ---------- --------- --------- ------------
Net assets (liabilities) to be acquired $(1,493,144) $(9,784,989) $ 136,036 $ 254,207 $ - $(10,887,890)
=========== =========== ========== ========= ========= ============
NET SALES $ 8,804,353 $52,609,128 $ - $ 327,125 $(327,125) $ 61,413,481
GROSS PROFIT 2,604,662 15,537,324 - 327,125 (327,125) 18,141,986
NET INCOME FROM NET ASSETS (LIABILITIES)
TO BE ACQUIRED $ 929,643 $ 502,613 $ 788,827 $ 58,809 $ - $ 2,279,892
=========== =========== ========== ========= ========= ============
AS OF DECEMBER 31, 1994
CURRENT ASSETS $ 1,623,678 $11,865,188 $ 119,856 $ - $ - $ 13,608,722
PROPERTY AND EQUIPMENT, NET 49,293 532,751 544,513 221,153 - 1,347,710
OTHER ASSETS 64,091 4,449,925 622,176 - - 5,136,192
----------- ----------- ---------- --------- --------- ------------
Total assets 1,737,062 16,847,864 1,286,545 221,153 - 20,092,624
CURRENT LIABILITIES 3,149,673 23,142,819 1,158,372 - - 27,450,864
LONG-TERM DEBT - 1,000,000 - - - 1,000,000
----------- ----------- ---------- --------- --------- ------------
Total liabilities 3,149,673 24,142,819 1,158,372 - - 28,450,864
----------- ----------- ---------- --------- --------- ------------
Net assets (liabilities) to be acquired $(1,412,611) $(7,294,955) $ 128,173 $ 221,153 $ - $ (8,358,240)
=========== =========== ========== ========= ========= ============
NET SALES $ 8,317,862 $51,253,860 $ - $ 638,729 $(638,729) $ 59,571,722
GROSS PROFIT 2,267,414 14,226,368 - 638,729 (638,729) 16,493,782
NET INCOME FROM NET ASSETS (LIABILITIES)
TO BE ACQUIRED $ 604,318 $ 1,625,085 $ 274,769 $ 281,757 $ - $ 2,785,929
=========== =========== ========== ========= ========= ============
AS OF DECEMBER 31, 1993
NET SALES $ 8,198,067 $50,227,466 $ - $ 722,893 $(722,893) $ 58,425,533
GROSS PROFIT 2,401,053 13,795,543 - 722,893 (722,893) 16,196,596
NET INCOME FROM NET ASSETS (LIABILITIES)
TO BE ACQUIRED $ 931,109 $ (441,440) $ 207,696 $ 260,898 $ - $ 958,263
=========== =========== ========== ========= ========= ============
</TABLE>
147
<PAGE> 159
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS OF SCHERER AFFILIATES FOR THE SIX MONTHS AND
------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
-----------------------------------------
For the three months ended June 30, 1996, revenue declined
$1,118,000 from the corresponding three month period ended June 30,
1995. For the six months ended June 30, 1996, revenue increased
$1,035,000 from the corresponding six month period ended June 30, 1995.
The decline of 7.3% for the comparable three month periods was
attributable to the loss of revenue from chain customers such as
WalMart. The 3.4% increase for the comparable six month periods
included increased business from MacGregor.
Gross margins as a percentage of revenue were 23.0% in 1996
versus 29.5% in 1995 for the comparable three month period and 27.2% in
1996 versus 29.5% in 1995 for the comparable six month periods. The
declines in margins are due to the industry-wide decline in gross
margin.
Selling, general and administrative expenses decreased by
$366,000, or 7.0%, for the three months ended June 30, 1996 versus
1995, and increased by $1,053,000 for the six months ended June 30,
1996 versus 1995. As a percentage of revenue, the selling, general and
administrative expenses for the three month period were 24.8% in 1996
versus 24.7% in 1995 and for the six month period were 27.3% in 1996
versus 24.8% in 1995. The primary increases in 1996 versus 1995 were in
legal and accounting charges; the primary decreases in 1996 versus 1995
were in administrative payments and in employee benefits.
The loss from operations of $260,000 for the three months
ended June 30, 1996 was a decline of $996,000 from the income of
$736,000 for the corresponding three month period ended June 30, 1995.
The declines were caused by the decline in margins and increase in
selling, general and administrative expenses.
The loss from operations of $52,000 for the six months ended
June 30, 1996 was a decrease of $1,506,000 from the income of
$1,454,000 for the corresponding six month period ended June 30, 1995.
The decrease was caused by the decline in gross margin, and an increase
in selling, general and administrative expenses.
LIQUIDITY, CAPITAL RESOURCES, AND FACTORS AFFECTING FUTURE PERFORMANCE
Scherer Affiliates anticipates contributing total assets of
approximately $29,822,000 and total liabilities of $37,855,000 to the
Combined Company. Included in the liabilities is a $5,000,000 note
payable to KDR which will be converted to Company Subordinated
Debentures.
The Combined Company is engaged in negotiations with financial
institutions to refinance existing debt, including the Scherer
Affiliates debt.
Scherer Affiliate's plan for the balance of 1996 is to
consolidate operations with other facilities of the Combined Company to
reduce selling, general and administrative expenses to offset the
expected decline in gross margin. This should generate adequate cash
flow to meet Scherer Affiliate's working capital obligations.
INFLATION
The impact of inflation on wholesale operations is difficult to
measure. Scherer cannot easily pass on periodical costs to customers unless the
publishers increase cover prices. Scherer and the Combined Company are engaged
in activities to control operating costs. As a result, Scherer
147
<PAGE> 160
believes that the effect of inflation, if any, on the results of operations and
financial conditions has been minor and is expected to remain so in the future.
SEASONALITY
The sale of magazines and books is subject to minimal seasonality.
INTERIM FINANCIAL STATEMENTS
See following pages.
148
<PAGE> 161
THE SCHERER AFFILIATES
Balance Sheets
As of June 28, 1996 and December 31, 1995
$(000) omitted
<TABLE>
<CAPTION>
June 28, 1996 December 31, 1995
Assets (Unaudited) (Audited)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash $ 0 $ 194
Accounts Receivable, Net 5,930 5,132
Inventories 7,568 5,874
Advances to Affiliates 1,448 1,376
Prepaids and Other 648 68
------------------------- --------------------------------
Total Current Assets 15,594 12,644
------------------------- --------------------------------
Property and Equipment, at Cost
Land 44 44
Buildings and Leasehold Improvements 1,236 1,246
Furniture, Equipment and Vehicles 7,302 6,628
------------------------- --------------------------------
8,582 7,918
Less-Accumulated Depreciation
and Amortization (6,500) (6,378)
------------------------- --------------------------------
Total Property and Equipment, Net 2,082 1,540
------------------------- --------------------------------
Other Assets
Investments 7,507 3,777
Costs in Excess of Net Assets Acquired, Net 2,439 106
Prepaid Contracts and Other 2,200 1,389
------------------------- --------------------------------
Total Other Assets 12,146 5,266
------------------------- --------------------------------
Total Assets $29,822 $19,450
========================= ================================
Liabilities
- ---------------------------------------------------------
Current Liabilities
Affiliate Debt $ 5,000 $ 5,000
Other Debt 1,076 280
Accounts Payable 23,202 20,307
Accrued Expenses 2,370 1,157
Reserve for Gross Profit on Sales Returns 2,409 2,274
------------------------- --------------------------------
Total Current Liabilities 35,057 29,018
------------------------- --------------------------------
Long-Term Debt Obligations
Other 2,798 1,320
------------------------- --------------------------------
Total Liabilities 37,855 30,338
------------------------- --------------------------------
Net (Liabilities) to be Acquired $(8,033) $(10,888)
========================= ================================
</TABLE>
150
<PAGE> 162
THE SCHERER AFFILIATES
Statements Of Operations
For the Three Months and Six Months Ended June 28, 1996 and July 1, 1995
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended 1996 Ended 1995 Ended 1996 Ended 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 14,236 $ 15,354 $ 31,742 $ 30,707
Cost of Goods Sold 10,962 10,818 23,124 21,636
-------- -------- -------- --------
Gross Profit 3,274 4,536 8,618 9,071
Income
Selling, General and Administrative Expenses (3,534) (3,800) (8,670) (7,617)
-------- -------- -------- --------
Income (Loss) from Operations (260) 736 (52) 1,454
Interest Income (Expense), Net (302) (199) (581) (344)
Other Income (Expense) 92 0 183 (60)
-------- -------- -------- --------
Income (Loss) Before Provision for Income Taxes (470) 537 (450) 1,050
Provision for Income Taxes 0 0 0 0
======== ======== ======== ========
Net Income (Loss) $ (470) $ 537 $ (450) $ 1,050
======== ======== ======== ========
</TABLE>
150
<PAGE> 163
NORTHERN NEWS COMPANY
---------------------
OHIO PERIODICAL DISTRIBUTORS, INC.
----------------------------------
SCHERER COMPANIES, INC.
-----------------------
WHOLESALERS LEASING CORP.
-------------------------
CONDENSED COMBINED STATEMENTS OF CASH FLOW
------------------------------------------
FOR THE SIX MONTHS ENDED
------------------------
JUNE 28, 1996 AND JULY 1, 1995
------------------------------
(000's omitted)
---------------
<TABLE>
<CAPTION>
6 Months 6 Months
Ended June Ended July
28, 1996 1, 1995
---------- ----------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES $(1,803) $ 65
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (665) (246)
------- -------
Net cash provided by (used in) investing
activities (665) (246)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt obligations (395) -
Borrowings under debt obligation 2,669 -
------- -------
Net cash provided by (used in) financing
activities 2,274 -
------- -------
NET DECREASE IN CASH AND EQUIVALENTS (194) (181)
CASH, beginning of period 194 181
------- -------
CASH, end of period $ - $ -
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 342 $ 351
</TABLE>
151
<PAGE> 164
THE SCHERER AFFILIATES
NOTES TO CONDENSED COMBINED INTERIM FINANCIAL STATEMENTS
OF NET ASSETS TO BE ACQUIRED
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 28, 1996 AND JULY 1, 1995
(UNAUDITED)
1. GENERAL
-------
In the opinion of management, the accompanying unaudited condensed combined
interim financial statements contain all adjustments necessary to present fairly
the combined statement of net assets to be acquired of The Scherer Affiliates as
of June 28, 1996 and December 31, 1995, and the results of its operations
related to net assets to be acquired for the three months and six months ended
June 28, 1996 and July 1, 1995. All such adjustments were of a normal recurring
nature. The results of operations in any interim period are not necessarily
indicative of results for the full year.
The financial statements of the companies include only those assets,
liabilities, revenues and expenses that directly relate to periodical
distribution operations. In addition to excluding assets, liabilities, revenues
and expenses unrelated to the periodical distribution operations, certain assets
and liabilities and revenues and expenses between related parties that are not
being acquired have been excluded.
2. THE BUSINESS
------------
The Scherer Affiliates (the "The Scherer Affiliates") consist of a number of
companies engaged in wholesale periodical distribution in central and southern
Ohio and northern Michigan and all affiliated with Ronald E. Scherer ("Ronald E.
Scherer"): Ohio Periodical Distributors, Inc., an Ohio corporation ("OPD"),
Northern News Company, a Michigan corporation ("Northern") which includes stock
in MacGregor News Agency, Inc. ("MacGregor"), Wholesalers Leasing, Corp., a
Delaware corporation ("Wholesalers"), Scherer Companies, a Delaware corporation
("Scherer Companies"). The combined financial statements have been presented as
the companies are all directly or indirectly commonly owned.
3. PENDING SHAREHOLDER ACTIONS
---------------------------
Effective July 29, 1996, United Magazine Company ("UNIMAG") entered into an
Asset Transfer and Exchange Agreement with Northern, pursuant to which UNIMAG
acquired such of the assets of that company as are related to the wholesale
distribution of periodicals (and, pursuant to the agreement with Northern, to
acquire all of the stock of MacGregor held by Northern) in exchange for Common
Stock of the Company and Senior and Subordinated Debentures of UNIMAG. Effective
August 1, 1996, UNIMAG entered into an Asset Transfer and Exchange Agreement
with OPD, subsequently amended to a Stock Transfer and Exchange Agreement and
further amended to provide for consummation of the transaction in the form of a
merger, pursuant to which OPD will merge with and into UNIMAG with UNIMAG being
the surviving entity in the merger, in exchange for Common Stock of UNIMAG and
Senior and Subordinated Debentures of UNIMAG. Effective August 2, 1996, UNIMAG
entered into an Asset Transfer and Exchange Agreement with Wholesalers, pursuant
to which UNIMAG agreed to acquire substantially all of the assets and assume
substantially all of the liabilities of that company as are related to the
wholesale distribution of periodicals in exchange for Common Stock of UNIMAG and
Senior and Subordinated Debentures of UNIMAG. Effective August 2, 1996, UNIMAG
entered into a Stock Transfer and Exchange Agreement with Scherer Companies and
the shareholders of Scherer Companies (the "Scherer Shareholders"), pursuant to
which the Scherer Shareholders agreed to contribute their shares of stock of
Scherer Companies to UNIMAG in exchange for Common Stock of UNIMAG and Senior
and Subordinated Debentures of UNIMAG.
Each of these transactions has been or is expected to be closed into escrow
pending a favorable vote of the shareholders of UNIMAG on each of these
transactions. Upon the shareholders voting in favor of the acquisitions at the
Annual Meeting of Shareholders, then closing documents will be
152
<PAGE> 165
released from escrow and the transactions will be consummated. Ronald E.
Scherer, chairman of UNIMAG, OPD, which is controlled by Ronald E. Scherer, and
R. David Thomas, another significant shareholder of UNIMAG, have each agreed to
vote their shares in favor of the transactions with The Scherer Affiliates.
Together these shareholders are entitled to vote more than 50% of the stock of
UNIMAG. Since approval of the transactions is assured and UNIMAG had effective
control over the operations of the companies, The Scherer Affiliates have been
included in the consolidated financial statements of UNIMAG subsequent to July
of 1996.
4. PROVISION FOR INCOME TAXES
--------------------------
There is no provision made for income taxes because the shareholders of
companies included in The Scherer Affiliates have elected to be taxed under
provisions of the Internal Revenue Code related to S Corporations.
5. ACQUISITION OF MACGREGOR
------------------------
In January 1996 Northern News Company acquired the MacGregor News Company for
approximately $2 million. MacGregor had annual sales of approximately $5 million
for the year ended December 31, 1995. The acquisition was accounted for as a
purchase, effective January 1, 1996.
153
<PAGE> 166
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ADOPTION OF A
MERGER AGREEMENT AMONG THE COMPANY, OHIO PERIODICAL DISTRIBUTORS, INC. ("OPD")
AND ALL OF ITS SHAREHOLDERS OF OPD, AND TO APPROVE THE MERGER OF OPD INTO THE
COMPANY IN ACCORDANCE WITH A MERGER AGREEMENT BETWEEN THE COMPANY AND OPD
PURSUANT TO WHICH OPD WILL BE MERGED WITH AND INTO THE COMPANY, AND THE
SHAREHOLDERS OF OPD WILL RECEIVE SHARES OF COMMON STOCK OF THE COMPANY AND
SENIOR AND SUBORDINATED DEBENTURES ISSUED BY THE COMPANY IN THE MERGER IN
ACCORDANCE WITH THE TERMS OF SUCH STOCK TRANSFER AND EXCHANGE AGREEMENT.
154
<PAGE> 167
PROPOSAL FOUR: TO CONSIDER AND ACT UPON A PROPOSAL TO APPROVE THE
ASSET TRANSFER AND EXCHANGE AGREEMENT BETWEEN THE
COMPANY AND NORTHERN NEWS COMPANY ("NORTHERN"), AND
THE ACQUISITION BY THE COMPANY OF SUCH OF THE ASSETS
AND THE ASSUMPTION OF SUCH OF THE LIABILITIES OF
NORTHERN AS THEY RELATE TO THE WHOLESALE DISTRIBUTION
OF MAGAZINES AND PERIODICALS INCLUDING THE CAPITAL
STOCK OF MACGREGOR NEWS AGENCY, INC. ("MACGREGOR")
OWNED BY NORTHERN IN EXCHANGE FOR SHARES OF COMMON
STOCK OF THE COMPANY AND SENIOR AND SUBORDINATED
DEBENTURES ISSUED BY THE COMPANY IN ACCORDANCE WITH
THE TERMS OF SUCH ASSET TRANSFER AND EXCHANGE
AGREEMENT.
GENERAL
The Company has entered into Asset Transfer and Exchange Agreements and
Stock Transfer and Exchange Agreements with the Scherer Affiliates (except for
MacGregor News Agency, Inc. which will be acquired in connection with the
acquisition of the assets of Northern, its parent). Even though each of the
Scherer Affiliates is a separate corporate entity, they are all owned directly
or indirectly by the Scherer family. Additionally, each acquisition is
conditioned upon completion of the other acquisitions related to all of the
Scherer Affiliates.
The Company entered into an Asset Transfer and Exchange Agreement with
Northern effective July 29, 1996 (the "Northern Exchange Agreement"), pursuant
to which Northern will contribute all of its assets and liabilities related to
the wholesale distribution of periodicals to the Company in exchange for
1,335,425 Shares (pre-reverse split) of Common Stock of the Company and for
$1,423,384 principal amount of 8% Senior Debentures due 2002 and $501,199
principal amount of 10% Subordinated Debentures due 2004 of the Company (the
"Northern Transaction"). Northern distributed periodicals in a geographic area
that encompasses northern Michigan. One of the assets to be transferred to the
Company by Northern is 79% of the outstanding common stock of MacGregor.
MacGregor distributed periodicals in a geographic area that encompasses central
and southern Michigan. The Company has also entered into an agreement with
Arthur C. Foster Sr., the owner of the other 21% of the stock of MacGregor,
pursuant to which Mr. Foster will sell the remaining 21% of the outstanding
stock of MacGregor to the Company in exchange for the Company's assumption of
all amounts remaining due to the former owners of MacGregor News Agency, Inc.
from Mr. Foster, which amount is approximately $513,152. This transaction has
been closed into escrow pending a favorable vote of the shareholders of the
Company.
At the Annual Meeting, if shareholders who are entitled to vote more
than a majority of the outstanding shares of Common Stock of the Company vote in
favor of the Northern Transaction and Proposals One, Two, Three, Five through
Seven and Proposal Ten, escrow will terminate, and the Northern Transaction will
be finalized. Ronald E. Scherer, OPD and R. David Thomas, who together have the
right to vote more than a majority of the outstanding shares of Common Stock of
the Company, have each agreed to vote in favor of the Northern Transaction and
such proposals.
NORTHERN
BUSINESS
The following description of the business operations of
Northern relates to its operations prior to July 1996. In July of 1996,
the Company began managing the business of Northern related to the
wholesale distribution of periodicals, including such areas as
156
<PAGE> 168
conducting joint marketing and distribution operations, terminating
excess employees using Workers Adjustment and Retraining Notification
Act ("WARN") notices on Company letterhead, joint decision making in
operational and accounting areas, customer communication using UNIMAG
letterhead and business cards as well as answering phones in the UNIMAG
name, and future business planning in an integrated mode. This business
of Northern, under the Company's management, continues to operate
similarly to the way it did prior to July, 1996; however, the Company
has begun to implement strategies to reduce redundant overhead and
facilities in coordination with the other Acquisition Parties. In
November of 1996, Northern transferred its warehouse and office
operations in Michigan to Stoll's warehouse facility in Jackson,
Michigan. To date, the dollar amount expended to integrate the
operation of Northern and MacGregor has been insignificant. Since
September 28, 1994, Northern and MacGregor have eliminated
approximately 32 full-time positions at an annual gross payroll
savings, excluding payroll taxes and fringe benefits, of approximately
$401,000. These, and other related savings, have resulted in a net
reduction of operating expenses. All steps to integrate the businesses
of each of the Acquisition Parties are described under "Combination of
Operations Prior to Annual Meeting."
Northern and MacGregor are located in the State of Michigan
and are regional wholesalers of periodicals. They distributed over
3,000 periodicals to over 950 retail locations in Michigan. The retail
outlets included supermarkets, discount variety stores, convenience
stores, drug stores, and newsstands that offer mass market reading
materials to consumers. In addition, MacGregor also operates 2 retail
bookstores, totaling approximately 7,300 square feet, through which it
sells magazines, books, newspapers and related products.
Northern and MacGregor have certain transactions with other
companies that are part of the Scherer Affiliates. Wholesalers, an
equipment leasing company based in Dublin, Ohio, owns and operates a
fleet of approximately 65 vehicles which it leases to Northern,
MacGregor and other Scherer Affiliates for use in the wholesale
distribution of magazines and periodicals by all of the Scherer
Affiliates. These vehicles will be transferred to the Company as part
of the acquisition of certain assets of Wholesalers. Scherer Companies
provided general management services including management information,
accounting, marketing, personnel, facility management, vehicle
management and planning to all of the other Scherer Affiliates and to
the Company.
Because both the Company and all of the Scherer Affiliates
were under similar management of Scherer Companies, the wholesale
supply and distribution system for Northern was the same as the system
to be used by the Company. See "The Company and the Combined Company -
`Suppliers and Pricing', and `Distribution System'" for a more complete
description of the supply and distribution system. Northern's suppliers
of product were the same as the Company's. The prices of the product
were established by the publishers. Northern then purchased the
periodicals from the national distributors at a discount from the
suggested retail price and then sold them to retailers at a smaller
discount off retail. The national distributors arranged for shipment of
periodicals to Northern.
Northern maintains a 17,000 square foot facility in Petoskey,
Michigan, at an annual rental of $51,000; the facility is owned by
Northern which is owned by a Scherer family trust. MacGregor maintains
a 17,000 square foot facility in Mt. Pleasant, Michigan. See "The
Company and the Combined Company - `Facilities'." Previously Northern
and MacGregor had separate office, warehouse and distribution
facilities which have been converted to depots. As a result,
periodicals are being shipped from the Jackson, Michigan facility to
Northern and MacGregor for delivery to customers.
During the fiscal year ended December 31, 1995, Northern
generated total net sales of approximately $8,713,000. Of this amount,
approximately $7,708,000, or 88.5% came from the sale of magazines,
$880,000, or 10.1% came from the sale of books, and the balance came
from the sale of sundry products. During the fiscal year ended December
31, 1995, MacGregor generated total net sales of approximately
$5,274,000.
157
<PAGE> 169
At September 28, 1996, Northern and MacGregor employed
approximately 160 people including 80 full-time personnel. The
part-time personnel included approximately 65 people engaged in
in-store service and 13 part-time retail personnel. The full-time
personnel included 22 drivers, 30 warehouse personnel, 8 managers and
supervisors, 4 marketing personnel, and 12 administrative and office
personnel. None of the employees were members of a union. In the
opinion of Northern management, relations with employees have been
satisfactory.
Because the Company and Northern are under similar management,
the marketing employed by the Company is the same as the marketing
employed for Northern. See "The Company and the Combined Company -
`Marketing and Sales'." Northern faced competition from the same
sources as the Company. See "The Company and the Combined Company -
`Competition'." Competition came from other wholesalers, from
alternative channels of distribution, and from substitute products. In
Michigan, Northern and MacGregor competed primarily with Michiana,
Stoll, The Anderson Group, and the Ludington Group. As a result of the
acquisitions, Michiana, Northern and Stoll will become a part of the
Combined Company and are working together in the distribution of
periodicals.
The mailing address of the principal executive offices of
Northern is 5131 Post Road, Dublin Ohio 43017, and the telephone number
is (614) 792-0777.
MARKET FOR COMMON EQUITY AND SHAREHOLDER MATTERS
The total authorized shares of capital stock of Northern
consists of 1,000 shares of common stock, no par value, of which 500
shares are issued and outstanding and held of record by a trust created
for the benefit of Ronald E. Scherer and members of his family, which
is one of the same trusts which own 49% of the stock of OPD. The
Northern Transaction consists of a transfer of assets of Northern.
The total authorized shares of capital stock of MacGregor
consist of 50,000 shares of common stock, 1.00 par value. 10,000 shares
of the common stock of MacGregor are issued and outstanding. 79% of the
outstanding shares of stock of MacGregor are owned by Northern and will
be acquired by the Company as part of the assets of Northern. The other
21% of MacGregor's capital stock are owned by Arthur C. Foster, Sr.,
and the Company has entered into an agreement with Mr. Foster Sr. to
acquire these shares in exchange for assumption by the Company of
approximately $513,512 of debt owed by Mr. Foster, Sr. to the former
owners of MacGregor News Agency, Inc.
THE ASSET TRANSFER AND EXCHANGE TRANSACTIONS; CERTAIN PROVISIONS OF THE
ASSET TRANSFER AND EXCHANGE AGREEMENT
The Northern Exchange Agreement is filed as Exhibit 2A to a
Form 8-KA, filed on September 30, 1996. Shareholders may inspect and
copy the Northern Exchange Agreement at the Commission's public
reference facility at Room 1024, 450 Fifth Street, NW, Washington, DC
20549, and at the Commission's regional offices at Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661, and at 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of the Northern Exchange Agreement can be obtained by
mail from the Commission's Public Reference Section at 450 Fifth
Street, NW, Washington, DC 20549 at prescribed rates. Additionally, a
copy of the Northern Exchange Agreement can be obtained over the
Internet from the website of the Securities and Exchange Commission at
WWW.SEC.GOV.
In accordance with the terms and conditions set forth in the
Northern Exchange Agreement, the Company will acquire such assets and
assume such liabilities of Northern as are related to the wholesale
distribution of magazines and periodicals, including, with respect to
Northern, all of the stock of MacGregor held by Northern. Following the
acquisition of the
158
<PAGE> 170
assets by the Company, Northern will remain in existence and will
continue to conduct business operations, but will not engage in the
business of the wholesale distribution of periodicals. Pursuant to
non-competition covenants contained in the Northern Exchange Agreement,
the aforementioned Northern has agreed not to compete with the Company
in the wholesale distribution of periodicals for a period of five
years. The Northern Exchange Agreement requires the selling company
thereunder to cause appropriate filings to be made with the Ohio
Secretary of State and any other jurisdiction in which Northern is
qualified to do business in order to change its names, effective as of
the Closing Dates as defined in the agreements, to names which do not
include the words "news," "periodical" or "distributors."
Except as set forth in the Northern Exchange Agreement and in
documents, instruments and agreements related thereto, and as otherwise
described in this Proxy Statement, there are no past, present or
proposed material contracts, arrangements, understandings,
relationships, negotiations or transactions which have occurred or been
contemplated during the periods for which financial statements are
presented between Northern or their affiliates and the Company.
On the Northern Closing Date, in consideration of the transfer
and conveyance of the Northern Acquired Assets, as defined in the
Northern Exchange Agreement, by Northern to the Company and in full
payment therefor, the Company will assume the Northern Assumed
Liabilities (as defined in the Northern Asset Exchange Agreement)
which liabilities are all liabilities relating to the wholesale
distribution of periodicals and the remaining unpaid purchase money
obligation of Northern and Art Foster, Sr. with respect to their
purchase of the MacGregor stock.
In exchange for Northern's net assets which are contributed to
the Company pursuant to the Northern Exchange Agreement, Northern will
receive, subject to certain provisions and adjustments as set forth in
the Northern Exchange Agreement, and described in more detail below,
(a) Common Stock of the Company, and (b) Senior and Subordinated
Debentures of the Company. The Debentures will be issued pursuant to
the terms of the Debenture Agreement which will be entered into in
connection with the Acquisitions. An aggregate of $1,423,384 principal
amount of the Debentures will be Senior Debentures, and the balance of
the Debentures will be Subordinated Debentures. See "Senior and
Subordinated Debentures" for a description of the terms of the Senior
and Subordinated Debentures to be issued.
The number of shares of Common Stock of the Company and the
principal amount of Senior and Subordinated Debentures to be issued to
Northern is based upon a total valuation of the net assets and stock to
be transferred by Northern or other shareholders determined as
described in the following paragraphs, with 51.0% of the sum being
exchanged for shares of Common Stock of the Company at an agreed upon
price of $1.50 per share, and 49.0% of the sum being exchanged for
Senior and Subordinated Debentures of the Company. All of the
Acquisition Parties originally agreed to take a minimum of 51% of the
total consideration in the form of the Company's Common Stock and 49%
as Debentures. At the time of the negotiations, the parties were in
agreement that 60% was the most common percentage used by willing
buyers and sellers in the industry. The parties also agreed that
tangible net worth would be defined as total assets (excluding
intangible assets), less total liabilities. The value of Northern was
determined by adding the sum of:
(a) An amount, equal to 60% of the net annual wholesale sales
of Northern (including MacGregor) for the 12-month period ended
December 31, 1995 ("1995 Northern Sales"); and
(b) The tangible net worth (as defined by agreement between
the parties in consultation with their accountants), of Northern
(including MacGregor) as of June 30, 1996 (the "Northern Tangible Net
Worth").
159
<PAGE> 171
At the time the Northern Exchange Agreement was entered into,
60% of 1995 Northern Sales was estimated to be $5,125,501, and Northern
Tangible Net Worth was estimated to be $11,309, for a total estimated
valuation of $5,136,810.
Pursuant to the Northern Exchange Agreement, Northern has
prepared and delivered to the Company the balance sheet of Northern
(relating only to the assets, liabilities and business operations being
transferred) as of June 30, 1996 (the "Northern Closing Date Balance
Sheets"), and the sales reports of Northern and MacGregor (relating
only to the business operations being transferred) for the year ended
December 31, 1995 (the "1995 Northern Sales Reports"). The Northern
Closing Date Balance Sheets and the 1995 Northern Sales Reports shall:
(1) be prepared from and in accordance with the books and records of
Northern; (2) except as otherwise provided in the Northern Exchange
Agreement, be prepared in conformity with generally accepted accounting
principles applied on a consistent basis (with certain exceptions
primarily relating to the exclusion of intangible assets and the impact
of changes in the Section 458 reserve on sales); and (3) as to the
Northern Closing Date Balance Sheets, fairly present in all material
respects the financial condition of Northern as of such date in
accordance with such practices. Northern was also required to deliver
to the Company the workpapers used in connection with the preparation
of the Northern Closing Date Balance Sheets and the 1995 Northern Sales
Reports.
As contemplated by the Northern Exchange Agreement, in order
to determine the actual Northern Tangible Net Worth as of June 30,
1996, Arthur Andersen LLP has conducted an audit of the Northern
Closing Date Balance Sheet and has conducted a review of the 1995
Northern Sales Report to confirm the accuracy of the recorded amount of
1995 Northern Sales. The Northern Exchange Agreement provides that, in
determining the Northern Tangible Net Worth, the calculation will
exclude goodwill, customer lists, order and regulation records,
noncompete agreements, consulting agreements, and other intangible
assets.
Based upon the Northern Closing Date Balance Sheet which was
prepared by management of Northern and audited by Arthur Andersen LLP,
the Northern Tangible Net Worth was a deficit of $4,464,208, and, based
upon the 1995 Northern Sales Report, 60% of 1995 Northern Sales was
$8,391,928, for a total valuation of $3,927,720. Based upon this
valuation, Northern will receive (a) an aggregate of 1,335,425 shares
(pre-reverse split) of the Common Stock of the Company, (b) Senior
Debentures in the aggregate principal amount of $1,423,384, and (c)
Subordinated Debentures in the principal amount of $501,199. The
Debenture table and the tables for share ownership have been calculated
on a pro forma basis to reflect these amounts.
At the closing of the Northern Transaction, Northern will
transfer all of its assets relating to the wholesale distribution of
periodicals (including the stock of MacGregor), and the Company will
assume all of the related liabilities of Northern. The Company will
then
160
<PAGE> 172
issue to Northern that number of shares of Common Stock of the Company
and the Senior and Subordinated Debentures which Northern is entitled
to receive as described above.
If, between the date of the execution of the Northern Exchange
Agreement and the Effective Time, the number of outstanding shares of
the Common Stock of the Company has been reduced by virtue of a reverse
stock split or other similar means, then the $1.50 price of a share of
Common Stock of the Company, for purposes of exchanging Northern assets
into shares of Common Stock of the Company, shall be proportionately
adjusted to reflect such reduction. In lieu of fractional shares
resulting from the exchange, the Company will pay to each holder who
would otherwise be entitled to receive fractional shares an amount
equal to such fractional interest multiplied by $1.50.
The Northern Exchange Agreement contains various
representations and warranties of one or both of the parties thereto as
to, among other things, (a) its corporate organization, standing, power
and authority to enter into the Northern Exchange Agreement and
consummate the transactions contemplated thereby; (b) its
capitalization, security holders and subsidiaries; (c) ownership of
shares; (d) the need for consents and approvals in order to enter into
the Northern Exchange Agreement and consummate the transactions
contemplated thereby; (e) the accuracy of financial statements; (f) the
absence of undisclosed liabilities and adverse and other changes; (g)
the filing of all necessary returns and payment of taxes; (h) the
compliance with law in connection with the operations of the parties'
respective businesses; (i) insurance matters; (j) title to and
condition of properties; (k) legal proceedings; (l) ERISA matters; (m)
certain material contracts of Northern and the absence of defaults
thereunder; (n) the Northern Exchange Agreement's non-contravention of
any applicable laws, articles of incorporation, by-laws, material
agreements, undertakings, indentures, orders, decrees, restrictions or
legal obligations; (o) officers, employees and compensation; (p) books
of account and records; (q) labor relations; (r) business matters; and
(s) other matters specified in the Agreement.
The Northern Exchange Agreement provides that Northern will
agree that between the date of the Agreement and the Effective Time,
(a) neither Northern nor the Northern Shareholders shall take or permit
to be taken any action or do or permit to be done anything in the
conduct of the business of Northern, or otherwise, relating to the
wholesale distribution of periodicals that would be contrary to or in
breach of any of the terms or provisions of the Agreement or which
would cause any of their representations and warranties contained in
the Agreement to be or become untrue in any material respect; (b)
Northern shall conduct its business in the ordinary course consistent
with past practices; and (c) Northern and the Northern Shareholders are
required to use all reasonable efforts to preserve the business
organization intact, keep available to Northern and the Company the
present service of Northern's employees, and preserve for Northern and
the Company the goodwill of Northern's suppliers, customers, and others
with whom business relationships exist.
The Northern Exchange Agreement provides for indemnification
by the selling company or transferring shareholders for any losses,
liabilities or damages incurred as a result of any material inaccuracy
or breach of the representations, warranties, covenants or agreements
made. The indemnification obligations of the transferring entities or
shareholders may be made by returning to the Company Common Stock of
the Company, to be valued at $1.50 per share for this purpose. The
indemnification obligation of each party is limited. The maximum
indemnification to be provided by Northern is $510,000 (10% of the
original estimated value of Northern). However, the Company is not
entitled to indemnity unless the aggregate of all damages exceeds
$51,000, and then only to amounts in excess of $51,000, except that
this amount is reduced to $10,000 for environmental matters. The
indemnification obligations of Northern and the Northern Shareholders
terminates two years after the date the Northern Transaction is closed
into escrow.
160
<PAGE> 173
PURPOSES AND EFFECT OF THE EXCHANGE TRANSACTION
The purposes and effects of the Northern Transaction have been
described in the Introduction and Summary section of this Proxy
Statement. See "Introduction and Summary" and "The Stock and Asset
Exchanges."
ACCOUNTING TREATMENT
OPD, Northern, Scherer Companies, and Wholesalers are being
acquired from a common ownership group. This common ownership group is
primarily (directly or through Trusts) Ronald E. Scherer and Linda
Hayner Talbott. Ronald E. Scherer is the Chairman of these Scherer
Affiliate companies and also the principal shareholder and Chairman of
the Company, and he has significant influence directly over policy
making for both Scherer Affiliates and the Company. However, for
purposes of determining the appropriate accounting treatment, Ronald E.
Scherer is not considered to constitute a controlling shareholder
group, and, therefore, the acquisition of Scherer Affiliates is being
accounted for under the purchase accounting method. For ease of
accounting, the Company has elected to use July 28, 1996 as the
effective date of the Northern Transaction. The Company will adjust
purchase accounting for the impact of recognizing income before
consideration is transferred. The Company will recognize the results of
operations starting July 28, 1996.
RIGHTS OF DISSENTING SHAREHOLDERS OF THE COMPANY
Shareholders of the Company who do not vote in favor of
Proposal Four, and who otherwise perfect their rights as dissenting
shareholders, have certain rights as dissenting shareholders. See "The
Stock and Asset Exchanges - `Dissenters' Rights'" and Exhibit C.
INTERESTS OF CERTAIN PERSONS
There are a number of transactions and arrangements between
the Company and the principals of Northern. See "The Stock and Asset
Exchanges - `Conflicts of Interest and Related Party Transactions'."
EFFECTIVENESS
All documents necessary to consummate the Northern Transaction
have been deposited into escrow, with Baker & Hostetler LLP as the
escrow agent. Termination of the escrow is conditioned upon approval of
Proposals One through Seven and Proposal Ten by the affirmative vote of
a majority or more of the outstanding shares of Common Stock of the
Company. Ronald E. Scherer, OPD, and R. David Thomas, who together have
the right to vote more than 50% of the outstanding shares of Common
Stock of the Company, have agreed to vote in favor of the above
proposals.
Accordingly, the Northern Closing Balance Sheet is as of June
30, 1996, and the Debentures began to accrue interest from July 1,
1996. The Northern Transaction will legally become effective promptly
following the vote of the shareholders of the Company approving the
Northern Transaction, at which time escrow will be terminated and all
documents that have been deposited in escrow will be released and
delivered to the appropriate parties. As stated above, the Effective
Date for Accounting was approximately July 28, 1996.
162
<PAGE> 174
VOTING
Assuming the presence of a quorum, the affirmative vote of the
holders of a majority or more of the voting power of the outstanding
shares of Common Stock is necessary for approval of the Northern
Exchange Agreement and the acquisition by the Company of such of the
assets and liabilities of Northern as are related to the wholesale
distribution of magazines and periodicals in accordance with the terms
of the Northern Exchange Agreement. Abstentions and non-votes by
brokers holding Common Stock in street name will have the same effect
as shares of Common Stock cast against the proposal.
FINANCIAL INFORMATION
The financial information for the Scherer Affiliates, which
includes Northern, is provided under the heading Proposal Three and
includes a combined two year statement of net assets to be acquired,
three year combined results of operations and cash flows related to net
assets to be acquired, and a management discussion and analysis. The
interim financial statements for the Scherer Affiliates for the six
months ended June 28, 1996, are also included under the heading
Proposal Three.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE APPROVAL
OF THE ASSET TRANSFER AND EXCHANGE AGREEMENT BETWEEN THE COMPANY AND NORTHERN
NEWS COMPANY ("NORTHERN"), AND THE ACQUISITION BY THE COMPANY OF SUCH OF THE
ASSETS AND THE ASSUMPTION OF SUCH OF THE LIABILITIES OF NORTHERN AS THEY RELATE
TO THE WHOLESALE DISTRIBUTION OF MAGAZINES AND PERIODICALS [INCLUDING THE
CAPITAL STOCK OF MACGREGOR NEWS AGENCY, INC. ("MACGREGOR") OWNED BY NORTHERN] IN
EXCHANGE FOR SHARES OF COMMON STOCK OF THE COMPANY AND SENIOR AND SUBORDINATED
DEBENTURES ISSUED BY THE COMPANY IN ACCORDANCE WITH THE TERMS OF SUCH ASSET
TRANSFER AND EXCHANGE AGREEMENT.
163
<PAGE> 175
PROPOSAL FIVE: TO APPROVE THE STOCK TRANSFER AND EXCHANGE AGREEMENT
AMONG THE COMPANY, SCHERER COMPANIES AND ALL OF ITS
SHAREHOLDERS OF SCHERER COMPANIES AND THE TRANSFER BY
THE SCHERER COMPANIES SHAREHOLDERS OF ALL OF THE
STOCK OF SCHERER COMPANIES TO THE COMPANY IN EXCHANGE
FOR SHARES OF COMMON STOCK OF THE COMPANY AND SENIOR
AND SUBORDINATED DEBENTURES ISSUED BY THE COMPANY IN
ACCORDANCE WITH THE TERMS OF SUCH STOCK TRANSFER AND
EXCHANGE AGREEMENT.
GENERAL
The Company has entered into Asset Transfer and Exchange Agreements and
Stock Transfer and Exchange Agreements with the Scherer Affiliates (except for
MacGregor News Agency, Inc. which will be acquired in connection with the
acquisition of Northern News Company, its parent). Even though each of the
Scherer Affiliates is a separate corporate entity, they are all owned directly
or indirectly by the same family. Additionally, each acquisition is conditioned
upon completion of the other acquisitions related to all of the Scherer
Affiliates.
Effective August 2, 1996, the Company entered into a Stock Transfer and
Exchange Agreement (the "Scherer Companies Exchange Agreement") with Scherer
Companies and its shareholders (the "Scherer Shareholders"). Under the terms of
the Scherer Companies Exchange Agreement, Scherer Shareholders are to contribute
all of the outstanding shares of stock of Scherer Companies to the Company in
exchange for 432,980 shares of Common Stock (pre-reverse split) of the Company
and for $62,614 principal amount of 8% Senior Debentures due 2002 and $561,386
principal amount of 10% Subordinated Debentures due 2004 of the Company (the
"Scherer Companies Transaction"). This transaction has been closed into escrow
prior to the Annual Meeting pending a favorable vote of the shareholders of the
Company.
At the Annual Meeting, if shareholders who are entitled to vote more
than a majority of the outstanding shares of Common Stock of the Company vote in
favor of the Scherer Companies Transaction and Proposals One through Four, Six
and Seven and Proposal Ten, escrow will terminate, and the Scherer Companies
transactions will be finalized. Ronald E. Scherer, OPD and R. David Thomas, who
together have the right to vote more than a majority of the outstanding shares
of Common Stock of the Company, have each agreed to vote in favor of the Scherer
Companies Transaction and such proposals.
SCHERER COMPANIES
BUSINESS
The following description of the business operations of
Scherer Companies relates to its operations prior to July, 1996,
including such areas as conducting joint marketing and distribution
operations, terminating excess employees using Workers Adjustment and
Retraining Notification Act ("WARN") notices on Company letterhead,
joint decision making in operational and accounting areas, customer
communication using UNIMAG letterhead and business cards as well as
answering phones in the UNIMAG name, and future business planning in an
integrated mode. In July of 1996, the Company began managing the
business of Scherer Companies. Such management was pursuant to
provisions in the Scherer Companies Exchange Agreement; no separate
joint operating agreement was entered into with Scherer Companies. The
business of Scherer Companies, under the Company's management,
continues to operate similarly to the way it did prior to July, 1996;
however, the Company has begun to implement strategies to reduce
redundant overhead and facilities in coordination with the other
Acquisition Parties. To date, the dollar amount expended by
164
<PAGE> 176
Scherer Companies to integrate the operations of the Combined Company
has been insignificant. All steps to integrate the businesses of each
of the Acquisition Parties are described under "Combination of
Operations Prior to Annual Meeting."
Prior to July, 1996, Scherer Companies served as a management
entity for the other Scherer Affiliates. It also provided general
management services for the Company including management information,
accounting, marketing, personnel, facility management, vehicle
management and planning. Examples of some of these services include
software development and maintenance, hardware purchasing, general
ledger maintenance, invoice reporting, tax preparation, employee
benefit plan development and fleet purchasing. Scherer Companies leased
an IBM AS 400 and related computer hardware and software from
Wholesalers; this computer hardware and software is being transferred
to the Company by Wholesalers in connection with the Acquisitions. In
return for its management services, Scherer Companies received
management fees.
Because both the Company and all of the Scherer Affiliates
were under similar management of Scherer Companies, the wholesale
supply and distribution system for the Scherer Affiliates was the same
as the system used by the Company. See "The Company and the Combined
Company - `Suppliers and Pricing', and `Distribution System'" for a
more complete description of the supply and distribution system. The
Scherer Companies did not directly distribute periodicals, rather, it
managed the Scherer Affiliates and the Company, including the
management services described in the previous paragraph. The Scherer
Affiliates and the Company conducted the actual distribution of
periodicals. The Scherer Affiliates' suppliers of product were the same
as the Company's. The prices of the product were established by the
publishers. The Scherer Affiliates then purchased the periodicals from
the national distributors at a discount from the suggested retail price
and then sold them to retailers at a smaller discount off retail. The
national distributors arranged for shipment of periodicals to OPD,
Northern and MacGregor.
At September 28, 1996, Scherer Companies employed
approximately 46 full-time personnel, including 16 managers and
supervisors, 11 marketing personnel, and 19 administrative and office
personnel. None of the employees were members of a union. In the
opinion of Scherer Companies' management, relations with employees have
been satisfactory.
Because it is only a management entity, the Scherer Companies
did not conduct its own marketing to the public except in connection
with the marketing employed on behalf of the Scherer Affiliates which
conduct the direct distribution of periodicals. See "The Company and
the Combined Company - `Marketing and Sales'."
In connection with its management activities, Scherer
Companies also manages a chain of 6 retail locations, totaling
approximately 12,000 square feet of leased space, owned by Read-Mor
Bookstores, Inc. These retail locations were provided product by OPD
out of both the Columbus and Cincinnati warehouses. These six retail
locations, with total annual revenue of approximately $1.4 million and
with 31 employees, are being acquired separately by the Company from a
shareholder, Ted Rysz, who owns an insignificant number of shares of
Common Stock of the Company for a total purchase price of approximately
$687,358, which includes 233,702 shares (pre-reverse split) of Common
Stock of the Company, and $242,211 principal amount of 8% Senior
Debentures due 2002 and $94,594 principal amount of 10% Subordinated
Debentures due 2004. These locations, when combined with the retail
locations of Stoll, MacGregor and Klein, will give the Combined Company
a midwest chain of 26 retail locations, all serviced by the Combined
Company's wholesalers, with annual revenues of approximately $12
million.
The mailing address of the principal executive offices of
Scherer Companies is 5131 Post Road, Dublin Ohio 43017, and the
telephone number is (614) 792-0777
165
<PAGE> 177
MARKET FOR COMMON EQUITY AND SHAREHOLDER MATTERS
Scherer Companies' total authorized shares of capital stock
consist of 1,000 shares of common stock, no par value (the "Scherer
Companies Stock"), of which, 500 shares are issued and outstanding. Two
hundred forty-seven and one-half (247.5) of the Scherer Companies
authorized shares are held by Ronald E. Scherer, Two hundred
forty-seven and one-half (247.5) shares are held by Linda Hayner
Talbott, and five (5) shares are held by Ted Rysz. No public market for
Scherer Companies Stock exists, and transfers of Scherer Companies
Stock are subject to significant restrictions by virtue of various
stock restriction, stock redemption and pledge agreements among Scherer
Companies, the Scherer Shareholders and certain of Scherer Companies'
creditors, and pursuant to federal and state securities laws and
regulations. There were no dividends declared or paid to any holder of
Scherer Company Stock in fiscal year 1995 or fiscal year 1996. There
are no restrictions that limit the ability of Scherer Company to pay
dividends on its common equity.
THE STOCK TRANSFER AND EXCHANGE TRANSACTION; CERTAIN PROVISIONS OF THE
STOCK TRANSFER AND EXCHANGE AGREEMENT
The Scherer Companies Exchange Agreement is filed as Exhibit
2F to a Form 8-KA, filed September 30, 1996. Shareholders may inspect
and copy the Scherer Companies Exchange Agreement at the Commission's
public reference facility at Room 1024, 450 Fifth Street, N. W.,
Washington, DC 20549 and at the Commission's regional offices at Suite
1400, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661 and at 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of the Scherer Companies Exchange Agreement can be
obtained by mail from the Commission's Public Reference Section at 450
Fifth Street, N. W., Washington, DC 20549 at prescribed rates.
Additionally, a copy of the Scherer Companies Exchange Agreement can be
obtained over the Internet from the website of the Securities and
Exchange Commission at WWW.SEC.GOV.
In accordance with the terms and conditions set forth in the
Scherer Companies Exchange Agreement, at the time that the exchange is
consummated, each of the Scherer Shareholders will contribute and
transfer all of the shares of stock of Scherer Companies to the
Company. As a result, Scherer Companies will thereby become a
wholly-owned subsidiary of the Company.
In exchange for stock of Scherer Companies, the contributing
shareholders of Scherer Companies shall receive (a) Common Stock of the
Company; and (b) Senior and Subordinated Debentures of the Company. The
Debentures will be issued pursuant to the terms of the Debenture
Agreement which will be entered into in connection with the proposed
Acquisition. An aggregate of $62,614 principal amount of the Debentures
will be Senior Debentures, and the balance of the Debentures will be
Subordinated Debentures. See "The Stock and Asset Exchanges -
`Debentures'" for a description of the terms of the Senior and
Subordinated Debentures to be issued.
The number of shares of Common Stock of the Company and the
principal amount of Senior and Subordinated Debentures to be issued to
Scherer Shareholders is based upon a total valuation of Scherer
Companies, determined as described below, with 51% of the sum being
exchanged for shares of Common Stock of the Company at an agreed upon
price of $1.50 per share, and 49% of the sum, being exchanged for
Senior and Subordinated Debentures of the Company. All of the
Acquisition Parties originally agreed to take a minimum of 51% of the
total consideration in the form of the Company's Common Stock and 49%
as Debentures. Because Scherer Companies is only a management entity,
the
166
<PAGE> 178
valuation formulas used for Stoll, Michiana, Klein and other Scherer
Affiliates, all of whom directly engage in periodical distribution,
could not be applied. Instead, the value of Scherer Companies is based
upon the tangible net worth (as defined by agreement between the
parties in consultation with their accountants) of Scherer Companies as
of June 30, 1996 (the "Scherer Companies Tangible Net Worth"). The
parties agreed that tangible net worth would be defined as total assets
(excluding intangible assets), less total liabilities.
At the time the Scherer Companies Exchange Agreement was
entered into, Scherer Companies Tangible Net Worth was estimated to be
$224,300.
Pursuant to the Scherer Companies Exchange Agreement, the
Scherer Shareholders have prepared and delivered to the Company the
balance sheet of Scherer Companies as of June 30, 1996 (the "Scherer
Companies Closing Date Balance Sheet"). The Scherer Companies Closing
Date Balance Sheet has been (1) prepared from and in accordance with
the books and records of Scherer Companies; (2) except as otherwise
provided in the Scherer Companies Exchange Agreement, prepared in
conformity with generally accepted accounting principles applied on a
consistent basis (with certain exceptions primarily relating to the
exclusion of intangible assets); and (3) fairly presents in all
material respects the financial condition of Scherer Companies as of
such date in accordance with such practices. The Scherer Shareholders
were also required to deliver to the Company the workpapers used in
connection with the preparation of the Scherer Companies Closing Date
Balance Sheet.
As contemplated by the Scherer Companies Exchange Agreement,
in order to determine the actual Scherer Companies Tangible Net Worth
as of June 30, 1996, Arthur Andersen LLP has conducted an audit of the
Scherer Companies Closing Date Balance Sheet. The Scherer Companies
Exchange Agreement provides that, in determining the Scherer Companies
Tangible Net Worth, the calculation will exclude goodwill, customer
lists, order and regulation records, noncompete agreements, consulting
agreements, and other intangible assets.
Based upon the Scherer Companies Closing Date Balance Sheet,
which was prepared by management of Scherer Companies and audited by
Arthur Andersen LLP, the Scherer Companies Tangible Net Worth was
$1,273,470. Based upon this valuation, the Scherer Shareholders will
receive (a) an aggregate of 432,980 shares (pre-reverse split) of the
Common Stock of the Company, (b) Senior Debentures in the aggregate
principal amount of $62,614, and (c) Subordinated Debentures in the
aggregate principal amount of $561,386. The Debenture table and the
tables for share ownership have been calculated on a pro forma basis to
reflect these amounts.
At the closing of the Scherer Companies Transaction, each
Scherer Shareholder will surrender to the Company the Scherer Companies
share certificates evidencing all of the Scherer Companies Shares then
owned by such Scherer Shareholders. Upon surrender of
167
<PAGE> 179
the Scherer Companies share certificates evidencing all of the Scherer
Companies Shares owned by each Scherer Companies Shareholder, the
Company will issue to each Scherer Companies Shareholder that number of
shares of Common Stock of the Company and the Senior and Subordinated
Debentures which each such Scherer Companies Shareholder is entitled to
receive following the exchange.
If, between the date of the execution of the Scherer Companies
Exchange Agreements and the Effective Time, the number of outstanding
shares of the Common Stock of the Company has been reduced by virtue of
a reverse stock split or other similar means, then the $1.50 price of a
share of Common Stock of the Company, for purposes of exchanging the
Scherer Companies Shares into shares of Common Stock of the Company,
shall be proportionately adjusted to reflect such reduction. In lieu of
fractional shares resulting from the exchange, the Company will pay to
each holder who would otherwise be entitled to receive fractional
shares an amount equal to such fractional interest multiplied by $1.50.
The Scherer Companies Exchange Agreement contains various
representations and warranties of one or both of the parties thereto as
to, among other things, (a) its corporate organization, standing, power
and authority to enter into the Scherer Companies Exchange Agreement
and consummate the transactions contemplated thereby; (b) its
capitalization, security holders and subsidiaries; (c) ownership of
shares; (d) the need for consents and approvals in order to enter into
the Agreements and consummate the transactions contemplated thereby;
(e) the accuracy of financial statements; (f) the absence of
undisclosed liabilities and adverse and other changes; (g) the filing
of all necessary returns and payment of taxes; (h) the compliance with
law in connection with the operations of the parties' respective
businesses; (i) insurance matters; (j) title to and condition of
properties; (k) legal proceedings; (l) ERISA matters; (m) certain
material contracts of the Scherer Companies and the absence of defaults
thereunder; (n) the Scherer Companies Exchange Agreements'
non-contravention of any applicable laws, articles of incorporation,
by-laws, material agreements, undertakings, indentures, orders,
decrees, restrictions or legal obligations; (o) officers, employees and
compensation; (p) books of account and records; (q) labor relations;
(r) business matters; and (s) other matters specified in the
Agreements.
The Scherer Companies Exchange Agreement provides that the
Scherer Companies will agree that between the date of the Agreement and
the Effective Time, (a) neither Scherer Companies nor any Scherer
Companies Shareholders shall take or permit to be taken any action or
do or permit to be done anything in the conduct of the business of the
Scherer Companies, or otherwise, relating to the wholesale distribution
of periodicals that would be contrary to or in breach of any of the
terms or provisions of the Agreements or which would cause any of their
representations and warranties contained in the Agreements to be or
become untrue in any material respect; (b) Scherer Companies will
conduct their businesses in the ordinary course consistent with past
practices; and (c) Scherer Companies and the Scherer Companies
Shareholders are required to use all reasonable efforts to preserve the
business organization intact, keep available to Scherer Companies and
the Company the present service of Scherer Companies' employees, and
preserve for Scherer Companies and the Company the goodwill of Scherer
Companies' suppliers, customers, and others with whom business
relationships exist.
The Scherer Companies Exchange Agreement provides for
indemnification by the selling company or transferring shareholders for
any losses, liabilities or damages incurred as a result of any material
inaccuracy or breach of the representations, warranties, covenants or
agreements made. The indemnification obligations of the transferring
entities or shareholders may be made by returning to the Company Common
Stock of the Company, to be valued at $1.50 per share for this purpose.
The indemnification obligation of each party is limited. The maximum
indemnification to be provided by the shareholders of Scherer Companies
is $127,347 (10% of the original estimated value of Scherer
167
<PAGE> 180
Companies), provided that no single shareholder will be liable for an
amount in excess of the consideration received for his or her shares.
However, the Company is not entitled to indemnity from any of the
shareholders of Scherer Companies unless the aggregate of all damages
exceeds $4,945, and then only to amounts in excess of $4,945, except
that this amount is reduced to $1,000 with respect to environmental
claims. The indemnification obligations of Scherer Companies
Shareholders terminate two years after the date of the Scherer
Companies Transaction is closed into escrow.
Pursuant to the terms of the Scherer Companies Exchange
Agreement, as a condition to closing, either the Company or Scherer
Companies is required to enter into employment agreements with Terry A.
Massaro, Marketing Director, Kenneth R. Bentley, M.I.S. Director,
Ronald E. Scherer, Jr., SMARTS Director, and Arthur C. Foster, Jr.,
Vice President Corporate Operations, for a term of three years from the
closing date and subject to other customary terms and conditions. See
"The Stock and Asset Exchanges - `Conflicts of Interest and Related
Party Transactions'."
PURPOSES AND EFFECT OF THE EXCHANGE
The purposes and effects of the exchange transactions have
been described in the Introduction and Summary section of this Proxy
Statement. See "Introduction and Summary" and "The Stock and Asset
Exchanges."
ACCOUNTING TREATMENT
OPD, Northern, Scherer Companies, and Wholesalers are being
acquired from a common ownership group. This common ownership group is
primarily (directly or through Trusts) Ronald E. Scherer and Linda
Hayner Talbott. Ronald E. Scherer is the Chairman of these Scherer
Affiliate companies and also the principal shareholder and Chairman of
the Company, and he has significant influence directly over policy
making for both Scherer Affiliates and the Company. However, for
purposes of determining the appropriate accounting treatment, Ronald E.
Scherer is not considered to constitute a controlling shareholder
group, and, therefore, the acquisition of Scherer Affiliates is being
accounted for under the purchase accounting method. For ease of
accounting, the Company has elected to use July 28, 1996 as the
effective date of the transaction. The Company will adjust purchase
accounting for the impact of recognizing income before consideration is
transferred. The effective date for inclusion in the consolidated
financial statements of the Company was July 28.
RIGHTS OF DISSENTING SHAREHOLDERS OF THE COMPANY
Shareholders of the Company who do not vote in favor of
Proposal Five, and who otherwise perfect their rights as dissenting
shareholders, have certain rights as dissenting shareholders. See "The
Stock and Asset Exchanges - `Dissenters' Rights'" and Exhibit C.
INTERESTS OF CERTAIN PERSONS
There are a number of transactions and arrangements between
the Company and the principals of Scherer Companies. See "The Stock and
Asset Exchanges - `Conflicts of Interest and Related Party
Transactions'."
168
<PAGE> 181
EFFECTIVENESS
All documents necessary to consummate the Scherer Companies
Transaction have been deposited into escrow, with Baker & Hostetler LLP
as the escrow agent. Termination of the escrow is conditioned upon
approval of Proposals One through Seven and Proposal Ten by the
affirmative vote of a majority or more of the outstanding shares of
Common Stock of the Company. Ronald E. Scherer, OPD, and R. David
Thomas, who together have the right to vote more than 50% of the
outstanding shares of Common Stock of the Company, have agreed to vote
in favor of the above proposals.
Accordingly, the Scherer Companies Closing Balance Sheet of
Scherer Companies is as of June 30, 1996 and the Debentures to be
issued to the Shareholders of Scherer Companies began to accrue
interest from July 1, 1996. The exchanges will legally become effective
promptly following the vote of the shareholders of the Company
approving Scherer Companies Transaction, at which time escrow will be
terminated and all documents that have been deposited in escrow will be
released and delivered to the appropriate parties. As stated above, the
Effective Date for Accounting purposes was approximately July 28, 1996.
VOTING
Assuming the presence of a quorum, the affirmative vote of the
holders of a majority or more of the voting power of the outstanding
shares of Common Stock is necessary for approval of the Scherer
Exchange Agreement with Scherer Companies and the Scherer Shareholders
and consummation of the exchange contemplated therein. Abstentions and
non-votes by brokers holding Common Stock in street name will have the
same effect as shares of Common Stock cast against the proposal.
FINANCIAL INFORMATION
The financial information for the Scherer Affiliates, which
includes Scherer Companies, is provided under the heading Proposal
Three and includes a combined two year statement of net assets to be
acquired, three year combined results of operations and cash flows
related to net assets to be acquired, and a management discussion and
analysis. The interim financial statements for the Scherer Affiliates
for the six months ending June 28, 1996, are also included in Proposal
Three.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF
THE STOCK TRANSFER AND EXCHANGE AGREEMENT AMONG THE COMPANY, SCHERER COMPANIES
AND ALL OF ITS SHAREHOLDERS AND THE TRANSFER BY THE SCHERER COMPANIES
SHAREHOLDERS OF ALL OF THE STOCK OF SCHERER COMPANIES TO THE COMPANY IN EXCHANGE
FOR SHARES OF COMMON STOCK OF THE COMPANY AND SENIOR AND SUBORDINATED DEBENTURES
ISSUED BY THE COMPANY IN ACCORDANCE WITH THE TERMS OF SUCH SCHERER COMPANIES
STOCK TRANSFER AND EXCHANGE AGREEMENT.
170
<PAGE> 182
PROPOSAL SIX: TO CONSIDER AND ACT UPON A PROPOSAL TO APPROVE THE
ASSET TRANSFER AND EXCHANGE AGREEMENT AND RELATED
DOCUMENTS BETWEEN THE COMPANY AND WHOLESALERS LEASING
CORP. ("WHOLESALERS"), AND THE ACQUISITION BY THE
COMPANY OF SUCH OF THE ASSETS AND THE ASSUMPTION OF
SUCH OF THE LIABILITIES OF WHOLESALERS AS RELATE TO
THE WHOLESALE DISTRIBUTION OF MAGAZINES AND
PERIODICALS IN EXCHANGE FOR SHARES OF COMMON STOCK OF
THE COMPANY AND SENIOR AND SUBORDINATED DEBENTURES
ISSUED BY THE COMPANY IN ACCORDANCE WITH THE TERMS OF
SUCH ASSET TRANSFER AND EXCHANGE AGREEMENT.
GENERAL
The Company has entered into Asset Transfer and Exchange Agreements and
Stock Transfer and Exchange Agreements with the Scherer Affiliates (except for
MacGregor News Agency, Inc. which will be acquired in connection with the
acquisition of Northern News Company, its parent). Even though each of the
Scherer Affiliates is a separate corporate entity, they are all owned directly
or indirectly by the same family. Additionally, each acquisition is conditioned
upon completion of the other acquisitions related to all of the Scherer
Affiliates.
Effective August 2, 1996, the Company entered into an Asset Transfer
and Exchange Agreement with Wholesalers (the "Wholesalers Exchange Agreement")
pursuant to which Wholesalers will contribute certain of its assets and
liabilities related to the wholesale distribution of periodicals to the Company
in exchange for 482,599 shares (pre-reverse split) of Common Stock of the
Company and for $306,799 principal amount of 8% Senior Debentures due 2002 and
$388,711 principal amount of 10% Subordinated Debentures due 2004 of the Company
(the "Wholesalers Transaction"). Wholesalers owns and operates the fleet of
trucks which is used in the wholesale distribution of magazines and periodicals
by all of the Scherer Affiliates. Since this fleet of trucks is already provided
to the Scherer Affiliates under lease arrangements, no significant actions to
integrate the operations of Wholesalers with the Company and the other
Acquisition Parties were necessary. This transaction will be closed into escrow
prior to the Annual Meeting pending a favorable vote of the shareholders of the
Company.
At the Annual Meeting, if shareholders who are entitled to vote more
than a majority of the outstanding shares of Common Stock of the Company vote in
favor of the Wholesaler Transaction and Proposals One through Five, Seven and
Proposal Ten, escrow will terminate, and the Wholesalers transaction will be
finalized. Ronald E. Scherer, OPD and R. David Thomas, who together have the
right to vote more than a majority of the outstanding shares of Common Stock of
the Company, have each agreed to vote in favor of the Wholesaler Transaction and
such proposals.
WHOLESALERS
BUSINESS
The following description of the business operations of
Wholesalers relates to its operations prior to July, 1996. In July of
1996, the Company began managing the business of Wholesalers related to
the wholesale distribution of periodicals. Such management was pursuant
to provisions in the Wholesalers Exchange Agreement; no separate joint
operating agreement was entered into with Scherer Companies. This
business of Wholesalers, under the Company's management, continues to
operate similarly to the way it did prior to July, 1996; however, the
Company has begun to implement strategies to reduce redundant overhead
and facilities in coordination with the other Affiliated Parties. To
date, the dollar amount expended by Wholesalers to integrate the
operations of Wholesalers into the Combined Company has been
insignificant.
Wholesalers is an equipment leasing company based in Dublin,
Ohio. It owns and leases to other Scherer Affiliates a fleet of
approximately 65 vehicles which are used in the
171
<PAGE> 183
wholesale distribution of magazines and periodicals by all of the
Scherer Affiliates; these vehicles are transferred to the Company as
part of the Wholesalers Transaction. In addition, Wholesalers also owns
an IBM AS 400 and related computer hardware and software which it
leases to the Scherer Companies and which is used by the Scherer
Companies in connection with the management services it provides to the
Scherer Affiliates and the Company. This computer hardware and software
will be transferred to the Company in connection with the Wholesalers
Transaction. Wholesalers has no employees. Any required management
service, which is minimal, is provided by Scherer Companies.
The mailing address of the principal executive offices of
Wholesalers is 5131 Post Road, Dublin Ohio 43017, and the telephone
number is (614) 792-0777.
MARKET FOR COMMON EQUITY AND SHAREHOLDER MATTERS
The total authorized shares of capital stock of Wholesalers
consists of 1,000 shares of common stock, no par value, of which 500
shares are outstanding and held of record by the Scherer Trusts.
THE ASSET TRANSFER AND EXCHANGE TRANSACTION; CERTAIN PROVISIONS OF THE
ASSET TRANSFER AND EXCHANGE AGREEMENT
The Wholesalers Exchange Agreement has been filed with the
Securities and Exchange Commission as Exhibit 2E to a Form 8-KA filed
September 30, 1996. Shareholders may inspect and copy the Wholesalers
Exchange Agreement at the Commission's public reference facility at
Room 1024, 450 Fifth Street, N. W., Washington, DC 20549 and at the
Commission's regional offices at Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661 and at 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of the
Wholesalers Exchange Agreement can be obtained by mail from the
Commission's Public Reference Section at 450 Fifth Street, N. W.,
Washington, DC 20549 at prescribed rates. Additionally, a copy of the
Wholesalers Exchange Agreement can be obtained over the Internet from
the website of the Securities and Exchange Commission at WWW.SEC.GOV.
In accordance with the terms and conditions set forth in the
Wholesalers Exchange Agreement, the Company will acquire such assets
and assume such liabilities of the aforementioned Wholesalers as are
related to the wholesale distribution of magazines and periodicals. As
discussed earlier, this includes the fleet of trucks used by the
Scherer Affiliates in the distribution of periodicals, subject to any
outstanding debt thereon, and the computer systems used for the
management information systems by the Scherer Affiliates. Following the
acquisition of the assets by the Company, Wholesalers will remain in
existence separate from the Company.
Except as set forth in the Wholesalers Exchange Agreement and
in documents, instruments and agreements related thereto, and as
otherwise described in this Proxy Statement, there are no past, present
or proposed material contracts, arrangements, understandings,
relationships, negotiations or transactions which have occurred or been
contemplated during the periods for which financial statements are
presented or incorporated by reference between Wholesalers or their
affiliates and the Company.
In exchange for Wholesalers' net assets which are contributed
to the Company pursuant to the Wholesalers Exchange Agreement,
Wholesalers will receive (a) Common Stock of the Company; and (b)
Senior and Subordinated Debentures of the Company. The Debentures will
be issued pursuant to the terms of the Debenture Agreement which will
be entered into in connection with the Acquisition transactions. An
aggregate of $306,799 principal amount of the Debentures will
172
<PAGE> 184
be Senior Debentures, and the balance of the Debentures will be
Subordinated Debentures. See "The Stock and Asset Exchanges -
`Debentures'" for a description of the terms of the Senior and
Subordinated Debentures to be issued.
The number of shares of Common Stock of the Company and the
principal amount of Senior and Subordinated Debentures to be issued to
Wholesalers is based upon a total valuation of the net assets to be
transferred by Wholesalers, determined as described in the following
paragraphs, with 51% of the sum being exchanged for shares of Common
Stock of the Company at an agreed upon price of $1.50 per share, and
49% of the sum being exchanged for Senior and Subordinated Debentures
of the Company. All of the Acquisition Parties originally agreed to
take a minimum of 51% of the total consideration in the form of the
Company's Common Stock and 49% as Debentures. Wholesalers was valued at
an amount equal to the fair market value of its net assets. Because
Wholesalers does not directly engage in the distribution of
periodicals, the valuation formula used for Stoll, Michiana and other
Scherer Affiliates could not be directly applied. Since tangible assets
are being acquired by Wholesalers, the parties agreed to value those
assets through an independent fair market appraisal.
At the time the Wholesalers Exchange Agreement was entered
into, the estimated value of the assets to be contributed to the
Company was $1,100,000. The Wholesaler's Exchange Agreement
contemplates that an appraisal will be performed to determine the fair
value of the assets of Wholesalers to be contributed to the Company. In
connection therewith, the Company obtained valuations on the vehicles
owned by Wholesalers from two independent truck dealers, Beannie's Auto
and Truck Sales and Nelson Auto Group. With respect to the computer
system owned by Wholesalers, the Company obtained quotes from IBM for
the cost of a new system and for the cost of upgrading Wholesalers'
current system, and valued the computer system at the cost of a new
system less the cost of the upgrade. These valuations resulted in a
value for the assets of Wholesalers of $1,419,408.
Based upon this valuation, Wholesalers will receive (a) an
aggregate of 482,599 shares of the Common Stock of the Company, (b)
Senior Debentures in the aggregate principal amount of $306,799, and
(c) Subordinated Debentures in the aggregate principal amount of
$388,711. The Debenture table and the tables for share ownership have
been calculated on a pro forma basis to reflect these amounts.
At the closing of the Wholesalers Transaction, Wholesalers
will transfer vehicles and computer hardware and software to the
Company, and the Company will assume related liabilities. The Company
will then issue to Wholesalers that number of shares of Common Stock of
the Company and the Senior and Subordinated Debentures which
Wholesalers is entitled to receive as described above.
If, between the date of the execution of Wholesalers Exchange
Agreement and the Effective Time, the number of outstanding shares of
the Common Stock of the Company has been reduced by virtue of a reverse
stock split or other similar means, then the $1.50 price of a share of
Common Stock of the Company, for purposes of exchanging Wholesalers
assets into shares of Common Stock of the Company, shall be
proportionately adjusted to reflect such reduction. In lieu of
fractional shares resulting from the exchange, the Company will pay to
each holder who would otherwise be entitled to receive fractional
shares an amount equal to such fractional interest multiplied by $1.50.
Wholesalers Exchange Agreement contains various
representations and warranties of one or both of the parties thereto as
to, among other things, (a) its corporate organization, standing, power
and authority to enter into Wholesalers Exchange Agreement and
consummate the transactions contemplated thereby; (b) its
capitalization, security holders and subsidiaries; (c) ownership of
shares; (d) the need for consents and approvals in order to enter into
the Wholesalers Exchange Agreement and consummate the transactions
173
<PAGE> 185
contemplated thereby; (e) the accuracy of financial statements; (f) the
absence of undisclosed liabilities and adverse and other changes; (g)
the filing of all necessary returns and payment of taxes; (h) the
compliance with law in connection with the operations of the parties'
respective businesses; (i) insurance matters; (j) title to and
condition of properties; (k) legal proceedings; (l) ERISA matters; (m)
certain material contracts of Wholesalers and the absence of defaults
thereunder; (n) Wholesalers Exchange Agreement's non-contravention of
any applicable laws, articles of incorporation, by-laws, material
agreements, undertakings, indentures, orders, decrees, restrictions or
legal obligations; (o) officers, employees and compensation; (p) books
of account and records; (q) labor relations; (r) business matters; and
(s) other matters specified in the Agreements.
The Wholesalers Exchange Agreement provides that Wholesalers
will agree that between the date of the Agreement and the Effective
Time, (a) neither Wholesalers nor Wholesalers Shareholders shall take
or permit to be taken any action or do or permit to be done anything in
the conduct of the business of Wholesalers, or otherwise, relating to
the wholesale distribution of periodicals that would be contrary to or
in breach of any of the terms or provisions of the Agreement or which
would cause any of their representations and warranties contained in
the Agreement to be or become untrue in any material respect; (b)
Wholesalers is required to conduct its business in the ordinary course
consistent with past practices; and (c) Wholesalers and Wholesalers
Shareholders are required to use all reasonable efforts to preserve the
business organization intact, keep available to Wholesalers and the
Company the present service of Wholesalers' employees, and preserve for
Wholesalers and the Company the goodwill of Wholesalers' suppliers,
customers, and others with whom business relationships exist.
The Wholesalers Exchange Agreement provides for
indemnification by Wholesalers for any losses, liabilities or damages
incurred as a result of any material inaccuracy or breach of the
representations, warranties, covenants or agreements made. The
indemnification obligations of Wholesalers may be made by returning to
the Company Common Stock of the Company, to be valued at $1.50 per
share for this purpose. The indemnification obligation of each party is
limited. The maximum indemnification to be provided by Wholesalers is
$110,000 (10% of the original estimated value of Wholesalers). However,
the Company is not entitled to indemnity from Wholesalers unless the
aggregate of all damages exceeds $11,000, and then only to amounts in
excess of $11,000, except that this amount is reduced to $2,000 for
environmental matters. The indemnification obligations of Wholesalers
terminates two years after the date the Wholesalers Transaction is
closed into escrow.
PURPOSES AND EFFECT OF THE EXCHANGE TRANSACTIONS
The purposes and effects of the exchange transactions have
been described in the Introduction and Summary section of this Proxy
Statement. See "Introduction and Summary" and "The Stock and Asset
Exchanges."
175
<PAGE> 186
ACCOUNTING TREATMENT
OPD, Northern, Scherer Companies, and Wholesalers are being
acquired from a common ownership group. This common ownership group is
primarily (directly or through Trusts) Ronald E. Scherer and Linda
Hayner Talbott. Ronald E. Scherer is the Chairman of these Scherer
Affiliate companies and also the principal shareholder and Chairman of
the Company, and he has significant influence directly over policy
making for both Scherer Affiliates and the Company. However, for
purposes of determining the appropriate accounting treatment, Ronald E.
Scherer is not considered to constitute a controlling shareholder
group, and, therefore, the acquisition of Scherer Affiliates is being
accounted for under the purchase accounting method. For ease of
accounting, the Company has elected to use July 28, 1996 as the
effective date of the transaction. The Company will adjust purchase
accounting for the impact of recognizing income before consideration is
transferred. The effective date for inclusion in the consolidated
financial statements of the Company was July 28, 1996.
RIGHTS OF DISSENTING SHAREHOLDERS OF THE COMPANY
Shareholders of the Company who do not vote in favor of
Proposal Six, and who otherwise perfect their rights as dissenting
shareholders, have certain rights as dissenting shareholders. See "The
Stock and Asset Exchanges - `Dissenters' Rights'" and Exhibit C.
INTERESTS OF CERTAIN PERSONS
There are a number of transactions and arrangements between
the Company and the principals of Wholesalers. See "The Stock and Asset
Exchanges - `Conflicts of Interest and Related Party Transactions'."
EFFECTIVENESS
All documents necessary to consummate the Wholesalers
Transaction have been deposited into escrow with Baker & Hostetler LLP
as the escrow agent. Termination of the escrow is conditioned upon
approval of Proposals One through Seven and Proposal Ten by the
affirmative vote of a majority or more of the outstanding shares of
Common Stock of the Company. Ronald E. Scherer, OPD, and R. David
Thomas, who together have the right to vote more than 50% of the
outstanding shares of Common Stock of the Company, have agreed to vote
in favor of the above proposals.
Accordingly, Wholesalers Closing Balance Sheet is as of June
30, 1996 and the Debentures to be issued to Wholesalers began to accrue
interest from July 1, 1996. The exchanges will legally become effective
promptly following the vote of the shareholders of the Company
approving the Wholesalers Transaction, at which time escrow will be
terminated and all documents that have been deposited in escrow will be
released and delivered to the appropriate parties. As stated above, the
Effective Date for Accounting purposes was approximately July 28, 1996.
VOTING
Assuming the presence of a quorum, the affirmative vote of the
holders of a majority or more of the voting power of the outstanding
shares of Common Stock is necessary for approval of the Asset Exchange
Agreement between the Company and Wholesalers and the acquisition by
the Company of such of the assets and liabilities of Wholesalers as are
related to the wholesale distribution of magazines and periodicals in
accordance with the terms of such Asset Transfer and Exchange
Agreement. Abstentions and non-votes by brokers holding Common Stock in
street name will have the same effect as shares of Common Stock cast
against the proposal.
176
<PAGE> 187
FINANCIAL INFORMATION
Wholesalers is part of a business combination of two asset
purchases (Northern and Wholesalers) and two stock purchases (OPD and
Scherer Companies), with each entity having a fiscal year end of
December 31. The financial information for the Scherer Affiliates,
which includes Wholesalers, is provided in Proposal Three and includes
a combined two year statement of net assets to be acquired, three year
combined results of operations and cash flows related to net assets to
be acquired, and a management discussion and analysis. The interim
financial statement for the Scherer Affiliates for the six months ended
June 28, 1996 are also included in Proposal Three.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF
THE ASSET TRANSFER AND EXCHANGE AGREEMENT BETWEEN THE COMPANY, AND WHOLESALERS
LEASING CORP. ("WHOLESALERS") AND THE ACQUISITION BY THE COMPANY OF SUCH OF THE
ASSETS AND THE ASSUMPTION OF SUCH OF THE LIABILITIES OF WHOLESALERS AS RELATES
TO THE WHOLESALE DISTRIBUTION OF MAGAZINES AND PERIODICALS IN EXCHANGE FOR
SHARES OF COMMON STOCK OF THE COMPANY AND SENIOR AND SUBORDINATED DEBENTURES
ISSUED BY THE COMPANY IN ACCORDANCE WITH THE TERMS OF WHOLESALERS ASSET EXCHANGE
AND TRANSFER AGREEMENT.
176
<PAGE> 188
PROPOSAL SEVEN: TO APPROVE THE STOCK TRANSFER AND EXCHANGE AGREEMENT
AMONG THE COMPANY, KLEIN AND THEIR SHAREHOLDER AND
THE TRANSFER BY THE KLEIN SHAREHOLDER OF ALL OF THE
STOCK OF KLEIN TO THE COMPANY IN EXCHANGE FOR SHARES
OF COMMON STOCK OF THE COMPANY AND SENIOR AND
SUBORDINATED DEBENTURES ISSUED BY THE COMPANY IN
ACCORDANCE WITH THE TERMS OF SUCH STOCK TRANSFER AND
EXCHANGE AGREEMENT.
GENERAL
Effective September 14, 1996, the Company entered into a Stock Transfer
and Exchange Agreement with Klein and the Klein Shareholder (the "Klein Exchange
Agreement"). Under the terms of the Klein Exchange Agreement, the Klein
Shareholder will contribute his shares of stock of Klein in exchange for
10,878,807 shares (pre-reverse split) of Common Stock of the Company and for
$10,180,000 principal amount of 8% Senior Debentures due 2002 and $5,498,281
principal amount of 10% Subordinated Debentures due 2004 of the Company (the
"Klein Transaction"). This exchange will be closed into escrow pending a
favorable vote of the shareholders of the Company.
At the Annual Meeting, if shareholders who are entitled to vote more
than a majority of the outstanding shares of Common Stock of the Company vote to
approve the Klein Transaction and in favor of Proposals One through Seven and
Proposal Ten, then the escrow will terminate and the stock exchange and transfer
will be finalized. Ronald E. Scherer, OPD and R. David Thomas, who together have
the right to vote more than a majority of the outstanding shares of Common Stock
of the Company, have each agreed to vote in favor of the Klein Transaction and
such proposals.
KLEIN
BUSINESS
The following description of Klein's business relates to its
operations prior to August, 1996. In August of 1996, the Company began
managing Klein's business. Such management was pursuant to provisions
in the Klein Exchange Agreement; no separate joint operating agreement
was entered into with Klein. The management included such areas as
conducting joint marketing and distribution operations, terminating
excess employees using Workers Adjustment and Retraining Notification
Act ("WARN") notices on Company letterhead, joint decision making in
operational and accounting areas, customer communication using UNIMAG
letterhead and business cards as well as answering phones in the UNIMAG
name, and future business planning in an integrated mode. The business
of Klein, under the Company's management, continues to operate similar
to the way it did prior to August, 1996; however, the Company has begun
to implement strategies to reduce redundant overhead and facilities in
coordination with the other Affiliated Parties. In February of 1997,
Klein transferred its Akron warehouse and office operations to
Cleveland. In addition, Klein has serviced some customers from
Pittsburgh. All steps to integrate the businesses of each of the
Acquisition Parties are described under "Combination of Operations
Prior to Annual Meeting."
Klein includes three companies. George R. Klein News Co.,
incorporated in 1958, was headquartered in Cleveland, Ohio. Central
News Co., incorporated in 1959, was headquartered in Akron, Ohio.
Newspaper Sales, Inc., incorporated in 1981, was headquartered in
Cleveland, Ohio. Klein was a regional wholesaler of periodicals,
including magazines, books, newspapers, sports collectibles and allied
products. Klein distributed over 3,000 periodicals to over 3,000 retail
outlets in northern and northeastern Ohio. The retail outlets included
supermarkets, discount variety stores, convenience stores, drug stores,
and newsstands that offered mass market reading materials to consumers.
The products distributed by Klein were similar to products distributed
by the Company, including
177
<PAGE> 189
magazines, books, newspapers and sundries. See "The Company and the
Combined Company - `Products'."
During the fiscal year ended December 31, 1995, Klein
generated total net sales of approximately $46,000,000. Of this amount,
approximately $38,000,000, or 83%, came from the sale of magazines,
$4,000,000, or 8.5%, came from the sale of books, and $4,000,000, or
8.5% came from the sale of newspapers.
Klein's wholesale supply and distribution system was similar
to the supply and distribution system of the Company. See "The Company
and the Combined Company - `Suppliers and Pricing', and `Distribution
System'" for a more complete description of the supply and distribution
system. Klein's suppliers of product were the same as the Company's.
The prices of the product were established by the publishers. Klein
then purchased a majority of the product from national distributors at
a discount from the suggested retail price and then sold the product to
retailers at a smaller discount. The national distributors also
arranged for shipment of the product to Klein.
Klein maintained a 98,000 square foot office, warehouse and
distribution facility in Cleveland, Ohio, a 38,000 square foot office,
warehouse and distribution facility in Akron, Ohio and a 10,000 square
foot newspaper distribution facility in Cleveland, Ohio. See "The
Company and the Combined Company - `Facilities."
Klein's three facilities received periodicals, including
newspapers, in bulk form. The product was then sorted, stacked, bundled
and packaged for loading into trucks and vans for delivery to
retailers.
At September 28, 1996, Klein employed approximately 314
people, including 163 full-time personnel. The part-time personnel
included approximately 134 people engaged in in-store service and 11
part-time retail personnel. The full-time personnel included 45
drivers, 53 warehouse personnel, 18 managers and supervisors, 9
marketing personnel and 26 administrative and office personnel. There
were 37 drivers and 50 warehouse personnel who were members of three
unions. In the opinion of management of Klein, relations with both
union and non-union employees had been satisfactory.
In connection with its marketing efforts, Klein had 6
full-time sales personnel, 3 full-time in store service personnel and
134 part-time in store service personnel. Klein faced competition from
the same sources as the Company. See "The Company and the Combined
Company - `Competition'." Competition came from other wholesalers, from
alternative channels of distribution, and from substitute products. In
Ohio, it competed primarily with Stoll, OPD, and Triangle. As a result
of the acquisitions, Stoll, OPD and Triangle are all a part of the
Combined Company and are working together in the distribution of
periodicals.
The wholesale periodical distribution business of Klein was
comparable to those of the other members of the Combined Company. See
"The Company and the Combined Company."
Klein also operated five (5) retail bookstores, totaling
approximately 12,000 square feet, through which it sold magazines,
books, newspapers and related products. One of these stores was located
in a regional shopping mall in Cleveland, and the other four stores
were located in strip shopping centers in the Cleveland and Akron
areas. These stores were operated under the following various names:
Booklein, Rosie's and Chagrin Falls News & Gifts. All of these stores
are in leased space. The sizes of the stores ranges from 1,000 to 5,600
square feet. Total annual volume for these stores is approximately
$1,218,000, and the majority of their purchases are made from Klein
wholesale divisions.
178
<PAGE> 190
The mailing address of Klein's principal executive offices is
1771 East 30th Street, Cleveland, Ohio 44114, and its telephone number
is (216) 623-0370.
MARKET FOR COMMON EQUITY AND SHAREHOLDER MATTERS
The George R. Klein News Company's total authorized shares of
capital stock consist of two hundred fifty (250) shares of common
stock, without par value, of which five (5) shares are issued and
outstanding, and five thousand (5,000) shares of preferred stock, par
value $200, none of which are issued and outstanding. Central News
Co.'s total authorized shares of capital stock consist of two hundred
fifty (250) shares of common stock, without par value, eighty (80) of
which are issued and outstanding. Newspaper Sales, Inc.'s total
authorized shares of capital stock consist of seven hundred fifty (750)
shares of common stock, without par value, five hundred (500) of which
are issued and outstanding. All of these issued and outstanding shares
are, collectively, the "Klein Stock". All of the Klein Stock is held of
record by one person, George R. Klein. No public market for the Klein
Stock exists, and transfers of the Klein Stock are not subject to
significant restrictions except pursuant to federal and state
securities laws and regulations. There were $5,000 of dividends and
$190,000 of Sub S distributions declared and paid to the Klein
Shareholder in fiscal year 1995, and no dividends and $250,000 of Sub S
distributions declared and paid to the Klein Shareholder in fiscal year
1996. There are no restrictions that limit the ability of Klein to pay
dividends on its common equity.
THE EXCHANGE AGREEMENT
The Klein Exchange Agreement has been filed with the
Securities and Exchange Commission as Exhibit 2 to a Form 8-K filed
September 27, 1996. Shareholders may inspect and copy the Klein
Exchange Agreement at the Commission's public reference facility at
Room 1024, 450 Fifth Street, NW, Washington, DC 20549, and at the
Commission's regional offices at Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661, and at 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of the
Klein Exchange Agreement can be obtained by mail from the Commission's
Public Reference Section at 450 Fifth Street, NW, Washington, DC 20549
at prescribed rates. Additionally, a copy of the Klein Exchange
Agreement can be obtained over the Internet from the website of the
Securities and Exchange Commission at WWW.SEC.GOV.
In accordance with the terms and conditions set forth in the
Klein Exchange Agreement, when the transaction is approved by the
shareholders of the Company, the Klein Shareholder will contribute all
of his Klein Stock to the Company, and Klein will thereby become a
wholly-owned subsidiary of the Company.
In exchange for each share of Klein Stock (a "Klein Share")
which is contributed to the Company, the Klein Shareholder shall
receive as described in more detail in the following paragraphs, (a)
Common Stock of the Company, and (b) Senior and Subordinated Debentures
of the Company. The Debentures will be issued pursuant to the terms of
the Debenture Agreement which will be entered into in connection with
the acquisition transactions. An aggregate of $10,180,000 principal
amount of the Debentures will be Senior Debentures, and the balance of
the Debentures will be Subordinated Debentures. See "Senior and
Subordinated Debentures" for a description of the terms of the Senior
and Subordinated Debentures to be issued.
The number of shares of Common Stock of the Company and the
principal amount of Senior and Subordinated Debentures to be received
upon exchange of the Klein Stock is based upon a total valuation of
Klein, determined as described below, with 51% of this value being
exchanged for shares of Common Stock of the Company at an agreed upon
price of
179
<PAGE> 191
$1.50 per share, and 49% of this value being exchanged for Debentures
of the Company. All of the Acquisition Parties originally agreed to
take a minimum of 51% of the total consideration in the form of the
Company's common stock and 49% as debentures. Klein was valued in a
manner similar to the other Acquisition Parties (except that the sales
component was based on annualizing average weekly sales during March of
1996 to provide a more accurate representation of the value of Klein).
During the first quarter of 1996, Klein increased its 1995 annual
business base of $46,247,000 by approximately $9,000,000 through two
acquisitions. Since the use of the 12-month revenue results from 1995,
which do not reflect the two 1996 acquisitions, would have
underestimated the value of the business acquired by the Company, the
Company and Klein mutually agreed that an annualization based on the 5
week period of March, 1996 would provide a more accurate valuation of
the then current annual wholesale and retail sales of Klein. At the
time of the negotiations, the parties were in agreement that 60% was
the most common percentage used by willing buyers and sellers in the
industry. The parties also agreed that tangible net worth would be
defined as total assets (excluding intangible assets), less total
liabilities. The value of Klein was determined by adding the sum of:
(a) An amount equal to 60% of the net annual wholesale and
retail sales of Klein based on the average weekly sales during the
five weeks of March 1996 multiplied by 52 weeks ("1996 Klein
Annualized Sales"); and
(b) The tangible net worth (as defined by agreement between
the parties in consultation with their accountants) of Klein as of
August 30, 1996 (the "Klein Tangible Net Worth").
At the time the Klein Exchange Agreement was entered into, 60%
of 1996 Klein Sales was estimated to be $33,261,103, and Klein Tangible
Net Worth was estimated to be $3,238,897, for a total estimated
valuation of $36,500,000.
Pursuant to the Klein Exchange Agreement, the Klein
Shareholder prepared and delivered to the Company the balance sheet of
Klein as of August 30, 1996 (the "Klein Closing Date Balance Sheet")
and the 1996 sales report of Klein for the five weeks of March, 1996 (
the "1996 Klein Sales Report"). The Klein Closing Date Balance Sheet
and the 1996 Klein Sales Report have been (1) prepared from and in
accordance with the books and records of Klein; (2) except as otherwise
provided in the Klein Exchange Agreement, prepared in conformity with
generally accepted accounting principles applied on a consistent basis
(with certain exceptions primarily relating to the exclusion of
intangible assets and the impact of changes in the Section 458 reserve
on sales); and (3) as to the Klein Closing Date Balance Sheet, fairly
present in all material respects the financial condition of Klein as of
such date in accordance with such practices. The Klein Shareholder was
also required to deliver to the Company the workpapers used in
connection with the preparation of the Klein Closing Date Balance Sheet
and the 1996 Klein Sales Report.
In order to determine the actual Klein Tangible Net Worth as
of August 30, 1996, the Company has caused Arthur Andersen LLP to
conduct an audit of the Klein Closing Date Balance Sheet and to conduct
a review of the 1996 Klein Sales Report to confirm the accuracy of the
recorded amount of 1996 Klein Annualized Sales. The Klein Exchange
Agreement provides that in determining the Klein Tangible Net Worth,
the calculation will exclude goodwill, customer lists, order and
regulation records, noncompete agreements, consulting agreements, and
other intangible assets.
Based upon the Klein Closing Date Balance Sheet, which was
prepared by management of Klein and audited by Arthur Andersen LLP,
180
<PAGE> 192
the Klein Tangible Net Worth was a deficit of $1,293,907, and, based
upon the 1996 Klein Sales Report, 60% of the 1996 Klein Annualized
Sales was $33,290,398, for a total valuation of $31,996,491. Based upon
this valuation, the Klein Shareholder will receive (a) an aggregate of
10,878,807 shares of the Common Stock of the Company, (b) Senior
Debentures in the aggregate principal amount of $10,180,000, and (c)
Subordinated Debentures in the aggregate principal amount of
$5,498,281. The Debenture table and the tables for share ownership have
been calculated on a pro forma basis to reflect these amounts.
At the closing of the Klein Transaction ("Klein Effective
Time"), the Klein Shareholder will surrender to the Company the Klein
share certificates evidencing all of the Klein Shares then owned by the
Klein Shareholder. Upon surrender of the Klein share certificates
evidencing all of the Klein Shares owned by the Klein Shareholder, the
Company will issue to the Klein Shareholder that number of shares of
Common Stock and the Debentures which the Klein Shareholder is entitled
to receive in the exchange.
If, between the date of the execution of the Klein Exchange
Agreement and the Klein Effective Time, the number of outstanding
shares of the Common Stock of the Company has been reduced by virtue of
a reverse stock split or other similar means, then the $1.50 price of a
share of Common Stock of the Company for purposes of determining the
ratio of exchange of Klein Shares for shares of Common Stock of the
Company shall be proportionately adjusted to reflect such reduction. In
lieu of fractional shares resulting from the exchange, the Company will
pay to each holder who would otherwise be entitled to receive a
fractional share an amount equal to such fractional interest multiplied
by $1.50, also adjusted to reflect any such reduction.
The Klein Exchange Agreement contains various representations
and warranties of one or both of the parties thereto as to, among other
things, (a) its corporate organization, standing, power and authority
to enter into the Klein Exchange Agreement and consummate the
transactions contemplated thereby; (b) its capitalization, security
holders and subsidiaries; (c) ownership of shares; (d) the need for
consents and approvals in order to enter into the Klein Exchange
Agreement and consummate the transactions contemplated thereby; (e) the
accuracy of financial statements; (f) the absence of undisclosed
liabilities and adverse and other changes; (g) the filing of all
necessary returns and payment of taxes; (h) the compliance with law in
connection with the operations of the parties' respective businesses;
(i) insurance matters; (j) title to and condition of properties; (k)
legal proceedings; (l) ERISA matters; (m) certain material contracts of
Klein and the absence of defaults thereunder; (n) the Klein Exchange
Agreement's non-contravention of any applicable laws, articles of
incorporation, by-laws, material agreements, undertakings, indentures,
orders, decrees, restrictions or legal obligations; (o) officers,
employees and compensation; (p) books of account and records; (q) labor
relations; (r) business matters; and (s) other matters specified in the
Klein Exchange Agreement.
The Klein Exchange Agreement provides that Klein and the Klein
Shareholder shall agree that, between the date of the Klein Exchange
Agreement and the Klein Effective Time, (a) neither Klein nor the Klein
Shareholder shall take or permit to be taken any action or do
181
<PAGE> 193
or permit to be done anything in the conduct of the business of Klein,
or otherwise, that would be contrary to or in breach of any of the
terms or provisions of the Agreement or which would cause any of their
representations and warranties contained in the Agreement to be or
become untrue in any material respect; (b) Klein will conduct its
business in the ordinary course consistent with past practices; and (c)
Klein and the Klein Shareholder will use all reasonable efforts to
preserve the business organization intact, keep available to Klein and
the Company the present service of Klein's employees, and preserve for
Klein and the Company the goodwill of Klein's suppliers, customers, and
others with whom business relationships exist.
The Klein Exchange Agreement provides for indemnification by
the selling or transferring shareholder for any losses, liabilities or
damages incurred as a result of any material inaccuracy or breach of
the representations, warranties, covenants or agreements made. The
indemnification obligations of the transferring shareholder may be
satisfied by returning to the Company Common Stock of the Company, to
be valued at $1.50 per share for this purpose. The indemnification
obligation of the transferring shareholder is limited. The maximum
indemnification to be provided by the transferring shareholder is
$3,500,000 (10% of the original estimated value of Klein). However, the
Company is not entitled to indemnity unless the aggregate of all
damages exceeds $350,000, and then only to amounts in excess of
$350,000, except that this amount is reduced to $35,000 for
environmental matters.
Pursuant to the terms of the Klein Exchange Agreement, Ron
Clark, President of The George R. Klein News Co., and Fred Havlice,
President of Central News Co., will enter into employment agreements
with the Company for a term of three years from the closing date,
subject to other customary terms and conditions. In addition, the
Company will enter into a separate management agreement with Klein
Management Company for the services of George R. Klein. See "The Stock
and Asset Exchanges - `Conflicts of Interest and Related Party
Transactions'" and Proposal Eight - `Executive Compensation'.
PURPOSES AND EFFECT OF THE EXCHANGE
The purposes and effect of the exchange have been described in
the summary of this proxy statement. See "Introduction and Summary -
`The Exchanges and Acquisitions'."
ACCOUNTING TREATMENT
The acquisition of Klein was initiated in August, 1996.
Effective September 14, 1996, Klein executed the definitive agreement
to contribute its shares to the Company in exchange for Common Stock of
the Company and Debentures. The acquisition will be accounted for under
the purchase method of accounting. For ease of accounting, the Company
has elected to use September 14, 1996 as the effective date of the
transaction. The Company will adjust purchase accounting for the impact
of recognizing income before consideration is transferred. The
effective date for inclusion in consolidated financial statements of
the Company was September 14, 1996.
RIGHTS OF DISSENTING SHAREHOLDERS OF THE COMPANY
Shareholders of the Company who do not vote in favor of
Proposal Seven, and who otherwise perfect their rights as dissenting
shareholders, have certain rights as dissenting shareholders. See "The
Stock and Asset Exchanges - `Dissenters' Rights'" and Exhibit C.
181
<PAGE> 194
INTERESTS OF CERTAIN PERSONS
There are a number of transactions and arrangements between
the Company and the Klein Shareholder. See "The Stock and Asset
Exchanges - `Conflicts of Interest and Related Party Transactions'."
EFFECTIVENESS
All documents necessary to consummate the Exchange have been
deposited into escrow with Baker & Hostetler LLP as the escrow agent.
Termination of the escrow is conditioned upon approval of Proposals One
through Seven and Proposal Ten by the affirmative vote of holders of a
majority or more of the outstanding shares of Common Stock of the
Company. Ronald E. Scherer, OPD, and R. David Thomas, who together have
the right to vote more than 50% of the outstanding shares of Common
Stock of the Company, have agreed to vote in favor of the above
proposals.
Accordingly, the Closing Balance Sheet of Klein is as of
August 23, 1996, and the Debentures began to accrue interest from
August 23, 1996. The exchange will legally become effective promptly
following the vote of the shareholders of the Company approving the
Exchange, at which time escrow will be terminated and all documents
that have been deposited in escrow will be released and delivered to
the appropriate parties. As stated above, the Effective Date for
Accounting was approximately September 14, 1996.
VOTING
Assuming the presence of a quorum, the affirmative vote of the
holders of a majority or more of the voting power of the outstanding
shares of Common Stock is necessary for approval of the Klein Exchange
Agreement among the Company, Klein and the Klein Shareholder and the
contribution of all of the stock of Klein to the Company. Abstentions
and non-votes by brokers holding Common Stock in street name will have
the same effect as shares of Common Stock cast against the proposal.
KLEIN FINANCIAL INFORMATION
Klein is a business combination consisting of the purchase of
the stock of three corporate entities with each entity having a fiscal
year end of December 31. The financial information for Klein is
provided below in this Proposal Seven beginning with "Management
Discussion and Analysis" and it includes a two year combined balance
sheet, three year combined statements of operations and retained
earnings and cash flows, and a management discussion and analysis. The
interim financial statements of Klein for the six months ended June 28,
1996 are also included in this Proposal Seven.
Klein has not been audited in the past. The financial
information below includes a two year audited balance sheet and a two
year audited and one year unaudited statement of operations. Klein
accounts for approximately 17% of the Combined Company revenues.
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS OF KLEIN FOR THE YEARS ENDED DECEMBER 31, 1995,
1994 AND 1993
For 1995 versus 1994, net sales increased by $1,470,000, or
3.3%, versus an increase of $1,279,000, or 2.9%, from 1994 versus 1993.
The increases reflect the relative stability of the Klein market during
that period.
The gross profit margin of 25.6% in 1995 was comparable to the
26.1% in 1993. The decline to 24.2% in 1994 was due to adjustments to
inventory valuations. The increases
183
<PAGE> 195
in cost of goods sold that occurred in 1996 from price competition for
chain business did not have a major impact prior to fiscal 1996;
however, it is anticipated that Klein will be subject to lower gross
margins in future periods.
The increase in gross margin percent in 1995 versus 1994
caused an increase in gross margin of $1,026,000, following a $554,000
decrease in 1994 versus 1993.
Selling, general and administrative expenses decreased by
$283,000, or 2.5%, in 1995 versus 1994 after a decrease of $265,000, or
2.3%, in 1994 versus 1993. As a percent of revenue, the selling,
general and administrative expenses were 23.7% in 1995 versus 25.1% in
1994 and 26.4% n 1993. The primary increase in 1995 versus 1994 was in
advertising which was more than offset by decreases in labor and rack
placement. The primary increases in 1994 versus 1993 were in jobber
commissions and professional fees which were more than offset by
decreases in bad debts, advertising and general insurance.
The 1995 income before taxes of $1,659,000 was a $1,974,000
increase from the 1994 loss before taxes of $315,000, which, in turn,
was slightly lower than the comparable 1993 loss before taxes of
$405,000. The 1995 increase over 1994 was attributable primarily to the
$1,026,000 increase in gross margin and the $283,000 reduction in
selling, general and administrative expenses.
LIQUIDITY, CAPITAL RESOURCES AND FACTORS AFFECTING FUTURE PERFORMANCE
Klein's working capital is as follows:
December 31, 1995 $951,000
December 31, 1994 $(608,000)
Working capital increased from December 31, 1994 to December
31, 1995 by $1,559,000. Reasons for the increase include net income of
$1,292,000, plus depreciation and amortization of $704,000 less
dividends of $195,000. Klein also increased gross fixed assets by
$596,000.
Cash flow from operations fluctuated from $(492,000) in 1993
to $1,811,000 in 1994 to $355,000 in 1995 with fluctuations in accounts
payable trade and in net income after tax being the largest sources of
the changes. Investing activities for purchases of property, plant and
equipment were relatively consistent and in the range of $596,000 to
$787,000 during those three years. Klein decreased notes and accounts
receivable from affiliated parties by $884,000 in 1995, $196,000 in
1994 and $424,000 in 1993. Distributions to shareholders and reductions
of notes payable to shareholders were $195,000 in 1995, $205,000 in
1994 and $476,000 in 1993.
The Combined Company is engaged in negotiations with financial
institutions to refinance existing debt, including the Klein debt.
Klein's plan for the balance of 1996 and for 1997 is to
consolidate operations with other facilities of the Combined Company to
reduce selling, general and administrative expenses to offset the
expected decline in gross margin. This should generate adequate cash
flow to meet Klein's liability obligations.
INFLATION
The impact of inflation on wholesale operations is difficult to
measure. Klein cannot easily pass on periodical costs to customers unless the
publishers increase cover prices. Klein and the Combined Company are engaged in
activities to control operating costs. As a result, Klein believes that the
effect of inflation, if any, on the results of operations and financial
conditions has been minor and is expected to remain so in the future.
183
<PAGE> 196
SEASONALITY
The sale of magazines and books is subject to minimal seasonality.
184
<PAGE> 197
GEO. R. KLEIN NEWS GROUP
REPORT ON AUDITS OF COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
185
<PAGE> 198
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Geo. R. Klein News Group:
We have audited the accompanying combined balance sheets of the Geo. R.
Klein News Group as of December 31, 1995 and 1994 and the related combined
statements of operations and retained earnings and cash flows for the years then
ended. These financial statements are the responsibility of the management of
Geo. R. Klein News Group. Our responsibility is to express an opinion on these
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 combined financial statements referred to above present fairly, in
all material respects, the combined financial position of the Geo. R. Klein News
Group as of December 31, 1995 and 1994, and the combined results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
We have reviewed the combined statements of operations and retained
earnings and cash flows of the Geo. R. Klein News Group for the year ended
December 31, 1993, in accordance with Statements on Standards for Accounting and
Review Services issued by the American Institute of Certified Public
Accountants. All information included in these financial statements is the
representation of management of the Geo. R. Klein News Group. Based on our
review, we are not aware of any material modifications that should be made to
the 1993 combined statements of operations and retained earnings and cash flows
referred to above in order for them to be in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
September 18, 1996
187
<PAGE> 199
GEO. R. KLEIN NEWS GROUP
Combined Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------- ---------------------- -----------------------
ASSETS 1995 1994
------ ---- ----
- ----------------------------------------------------------------------------- ---------------------- -----------------------
CURRENT ASSETS:
- ----------------------------------------------------------------------------- ---------------------- -----------------------
<S> <C> <C>
Cash and Cash Equivalents $ 2,016,317 $ 1,566,940
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Accounts Receivable, Trade, Less Allowance for
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Doubtful Accounts of $177,673 in 1995 and $302,622 in 1994 4,999,099 4,926,645
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Notes and Accounts Receivable, Affiliated Entities 431,618 1,116,846
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Merchandise Inventories 3,836,649 3,761,655
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Refundable Federal Income Tax 83,357 366,303
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Prepaid Expenses 80,653 81,934
------ ------
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Total Current Assets 11,447,693 11,820,323
- ----------------------------------------------------------------------------- ---------------------- -----------------------
- ----------------------------------------------------------------------------- ---------------------- -----------------------
INVESTMENTS:
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Investments Accounted for on Equity Basis 0 211,247
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Others, at Cost 373,084 373,084
------- -------
- ----------------------------------------------------------------------------- ---------------------- -----------------------
373,084 584,331
------- -------
- ----------------------------------------------------------------------------- ---------------------- -----------------------
- ----------------------------------------------------------------------------- ---------------------- -----------------------
OTHER ASSETS:
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Notes Receivable, Affiliated Entities 397,779 596,774
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Deposits 29,911 12,676
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Deferred Federal Income Taxes 0 11,255
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Racks 631,184 615,917
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Other 83,116 6,361
------ -----
- ----------------------------------------------------------------------------- ---------------------- -----------------------
1,141,990 1,242,983
--------- ---------
- ----------------------------------------------------------------------------- ---------------------- -----------------------
- ----------------------------------------------------------------------------- ---------------------- -----------------------
PROPERTY, PLANT AND EQUIPMENT:
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Buildings 72,429 72,429
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Machinery, Equipment and Delivery Vehicles 4,354,236 4,252,828
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Office Furniture and Equipment 599,578 574,988
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Leasehold Improvements 887,048 853,715
------- -------
- ----------------------------------------------------------------------------- ---------------------- -----------------------
5,913,291 5,753,960
- ----------------------------------------------------------------------------- ---------------------- -----------------------
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Less Accumulated Depreciation and Amortization 4,665,965 4,356,092
--------- ---------
- ----------------------------------------------------------------------------- ---------------------- -----------------------
1,247,326 1,397,868
---------
- ----------------------------------------------------------------------------- ---------------------- -----------------------
- ----------------------------------------------------------------------------- ---------------------- -----------------------
Total Assets $ 14,210,093 $ 15,045,505
================== ==================
- ----------------------------------------------------------------------------- ---------------------- -----------------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
187
<PAGE> 200
GEO. R. KLEIN NEWS GROUP
Combined Balance Sheets
December 31, 1995 and 1994
(continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------- ------------------------ ---------------------
LIABILITIES 1995 1994
----------- ---- ----
- ----------------------------------------------------------------------------- ------------------------ ---------------------
<S> <C> <C>
CURRENT LIABILITIES:
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Accounts Payable, Trade $ 7,842,695 $ 9,650,530
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Notes Payable, Shareholder 130,960 130,960
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Accrued Wages and Other Expenses 715,651 567,753
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Accrued Other Taxes 105,378 91,911
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Accrued Product Returns 1,627,317 1,987,464
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Deferred Federal Income Taxes 75,030 0
------ -
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Total Current Liabilities 10,497,031 12,428,618
---------- ----------
- ----------------------------------------------------------------------------- ------------------------ ---------------------
- ----------------------------------------------------------------------------- ------------------------ ---------------------
SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------- ------------------------ ---------------------
CAPITAL STOCK:
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Preferred Stock:
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Authorized 5,000 Shares; $200 Par Value Per Share; 6%
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Cumulative Non-Participating; 2,500 Shares Issued, of which
- ----------------------------------------------------------------------------- ------------------------ ---------------------
All are Being Held in Treasury in 1995 and 1994 500,000 500,000
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Common Stock:
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Authorized 250 Shares; No Par Value; 5 Shares Issued
- ----------------------------------------------------------------------------- ------------------------ ---------------------
and Outstanding 14,000 14,000
- ----------------------------------------------------------------------------- ------------------------ ---------------------
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Retained Earnings 3,699,062 2,602,887
--------- ---------
- ----------------------------------------------------------------------------- ------------------------ ---------------------
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Total Shareholders' Equity 4,213,062 3,116,887
- ----------------------------------------------------------------------------- ------------------------ ---------------------
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Less: Treasury Stock, at Cost 500,000 500,000
------- -------
- ----------------------------------------------------------------------------- ------------------------ ---------------------
- ----------------------------------------------------------------------------- ------------------------ ---------------------
3,713,062 2,616,887
--------- ---------
- ----------------------------------------------------------------------------- ------------------------ ---------------------
- ----------------------------------------------------------------------------- ------------------------ ---------------------
Total Liabilities and Shareholders' Equity $ 14,210,093 $ 15,045,505
================== ==================
- ----------------------------------------------------------------------------- ------------------------ ---------------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
188
<PAGE> 201
GEO. R. KLEIN NEWS GROUP
Combined Statements of Operations and Retained Earnings
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
1993
1995 1994 (unaudited)
---- ---- -----------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Gross Sales $ 115,413,095 $ 109,023,077 $ 102,136,815
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Less Returns and Allowances 69,170,793 64,251,220 58,643,529
---------- ---------- ----------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Net Sales 46,242,302 44,771,857 43,493,286
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Cost of Goods Sold 34,395,081 33,950,303 32,127,756
---------- ---------- ----------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Gross Profit 11,847,221 10,821,554 11,365,530
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Operating Expenses 10,938,457 11,221,461 11,486,144
---------- ---------- ----------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Operating Income (Loss) 908,764 (399,907) (120,614)
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Other Income (Expense), Net 961,044 422,755 (199,446)
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Net Loss of Equity Investees (211,247) (337,810) (84,458)
--------- --------- --------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Net Income (Loss) Before Income Taxes 1,658,561 (314,962) (404,518)
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Income Taxes:
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Federal Currently Payable (Benefit) 197,101 61,230 (222,851)
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Federal Deferred (Benefit) 86,285 46,647 (34,571)
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
State and Local 84,000 14,208 16,224
------ ------ ------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
367,386 122,085 (241,198)
------- ------- ---------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Net Income (Loss) 1,291,175 (437,047) (163,320)
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Retained Earnings, Beginning of Year 2,602,887 3,194,934 3,408,254
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Less Dividends Paid on Common Stock 195,000 155,000 50,000
------- ------- ------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
Retained Earnings, End of Year $ 3,699,062 $ 2,602,887 $ 3,194,934
=================== =================== ===================
- ------------------------------------------------------- ---------------------- ---------------------- ---------------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
189
<PAGE> 202
GEO. R. KLEIN NEWS GROUP
Combined Statements of Cash Flows
For the Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
1993
1995 1994 (unaudited)
---- ---- -----------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Income (Loss) $ 1,291,175 $ (437,047) $ (163,320)
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Adjustments to Reconcile Net Income (Loss) to Cash Provi-
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
ded by Operating Activities:
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Depreciation and Amortization 704,309 735,933 617,530
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Loss on Sale of Property, Plant and Equipment 25,778 32,783 2,445
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Deferred Federal Income Taxes 86,285 46,647 (34,571)
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Loss of Equity Investees 211,247 337,810 84,458
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
(Increase) Decrease in Accounts Receivable, Trade (72,454) 189,922 205,630
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
(Increase) Decrease in Merchandise Inventories (74,994) 86,836 (138,062)
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Decrease (Increase) in Refundable Federal Income Taxes 282,946 (172,857) (167,457)
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Decrease (Increase) in Prepaid Expenses 1,281 (1,182) 23,388
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
(Increase) Decrease in Deposits (17,235) 20,897 (1,850)
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
(Increase) Decrease in Other Assets (76,755) 7,822 46,146
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
(Decrease) Increase in Accounts Payable, Trade (1,807,835) 612,003 (1,033,499)
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Increase (Decrease) in Accrued Wages and Other Expenses 147,898 43,913 (16,567)
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
(Increase) Decrease in Accrued Other Taxes 13,467 (15,533) (35,583)
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
(Decrease) Increase in Accrued Product Returns (360,147) 322,742 119,460
--------- ------- -------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Total Adjustments (936,209) 2,247,736 (328,532)
--------- --------- ---------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Cash Provided by (Used in) Operating Activities 354,966 1,810,689 (491,852)
------- --------- ---------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Cash Flows From Investing Activities:
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Decrease in Notes and Accounts Receivable, Affiliated Entities 884,223 196,071 424,490
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Purchase of Property, Plant and Equipment (595,612) (786,636) (733,314)
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Proceeds from Sale of Property, Plant and Equipment 800 18,000 0
--- ------ -
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Cash Provided by (Used in) Investing Activities 289,411 (572,565) (308,824)
------- --------- ---------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Cash Flows From Financing Activities:
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Cash Dividends (195,000) (155,000) (50,000)
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Decrease in Notes Payable, Shareholder 0 (50,000) (426,092)
- -------- ---------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Cash Used in Financing Activities (195,000) (205,000) (476,092)
--------- --------- ---------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Net Increase (Decrease) in Cash and Cash Equivalents 449,377 1,033,124 (1,276,768)
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Cash and Cash Equivalents at Beginning of Year 1,566,940 533,816 1,810,584
--------- ------- ---------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Cash and Cash Equivalents at End of Year $ 2,016,317 $ 1,566,940 $ 533,816
============== ============== ===============
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Supplemental Disclosure of Cash Flow Information:
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Income Taxes Paid $ 175,000 $ 193,651 $ 24,607
=============== =============== ================
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Supplemental Disclosure of Non-Cash Information:
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
On February 23, 1995, the Company sold its investment in
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Picture Me Books. This Transaction Resulted in a Note
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
Receivable of $90,000, With a Related Gain of $756.
- --------------------------------------------------------------------------- ----------------- ----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
190
<PAGE> 203
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of significant accounting policies followed in the
preparation of these financial statements. The policies conform to generally
accepted accounting principles.
PRINCIPLES OF COMBINATION AND OPERATIONS: These combined financial statements of
the Geo. R. Klein News Group include the financial statements of Geo. R. Klein
News Company and its Booklein division, Central News Company and Newspapers
Sales, Inc. (collectively referred to as the "Klein Group"). These entities have
been combined as they are under common control. Image Path, Inc., a subsidiary
of Geo. R. Klein News Company, has been excluded from the combination herein as
it will not be purchased by Unimag (see Note 9). All significant intercompany
balances and transactions have been eliminated in combination.
Geo. R. Klein News Company is engaged in the business of wholesale distribution
of magazines, paperback books and other printed material. Booklein operates four
retail stores which sell greeting cards, paperback books and other specialty
items. The operations of both of these entities are contained within the State
of Ohio.
Central News company is an S Corporation. The Company is engaged in the business
of the wholesale distribution of magazines, paperback books and other printed
materials. Operations are contained within the State of Ohio.
Newspaper Sales, Inc. is also an S corporation. The Company is in the business
of sales and delivery of out-of-town newspapers, news magazines, greeting cards,
and other printed material. In 1994, business associated with distribution of
the "Tradin' Times" was transferred to the Company from a related party. These
operations are conducted primarily in the state of Ohio.
CASH AND CASH EQUIVALENTS: For purposes of the Combined Statements of Cash
Flows, the Klein Group treats all cash, money market deposits and certificates
of deposit with an initial maturity of 90 days or less as cash and cash
equivalents. Cash and cash equivalents are stated at cost which approximates
fair market value.
INVENTORY VALUATION: Merchandise inventories are valued at the lower of cost or
market. The cost of books and magazines of Geo. R. Klein News Company is
determined by use of the last-in, first-out (LIFO) method. The cost of all other
inventories is determined by use of the first-in, first-out (FIFO) method.
INVESTMENTS: The Klein Group accounts for certain investments using the equity
method, including Family Movie Centers (FMC), a fifty percent owned partnership,
primarily engaged in renting and selling video tapes; and Picture Me Books, a
thirty-four percent owned subsidiary, a publisher of children's books. All other
investments are carried at their original cost.
The market and demand for video cassette tapes distributed through grocery and
convenience stores has declined significantly in recent years. Operations of FMC
in both 1995 and 1994 were adversely impacted by the loss of key customers as a
result of changing market conditions.
Subsequent to December 31, 1995, FMC discontinued its operations. The closure of
FMC will not materially impact the results of operations or adversely affect the
financial position of the Klein Group.
The ownership interest in Picture Me Books was sold on February 23, 1995 to its
original owner. This transaction resulted in a note receivable for $90,000, and
a gain of approximately $760. Geo.
191
<PAGE> 204
R. Klein News Company entered into a Consulting Agreement with Picture Me Books.
Under the terms of the agreement, $150,000 will be received over the four year
period of the agreement.
FIXED ASSETS: The Klein Group capitalizes expenditures for property and
equipment and leasehold improvements. The Klein Group currently leases certain
building facilities. Adjustments of the assets and the related accumulated
depreciation accounts are made for property retirements and disposals with the
resulting gain or loss included in income.
Maintenance and repairs are charged to income as incurred. Renewals and
replacements of a routine nature are charged to income, while those which
improve or extend the lives of existing properties are capitalized.
DEPRECIATION: The Klein Group provides for depreciation on fixed assets using
the straight-line method and the double declining balance method over the
estimated useful lives of the assets. Amortization of leasehold improvements is
computed using the straight-line and certain accelerated methods over the terms
of the leases.
ACCRUED PRODUCT RETURNS: The Klein Group estimates the reserve for the gross
profit affect for potential returns to be received in the future based on actual
returns extrapolated out to established periods.
OTHER INCOME, NET: The components of other income, net as presented on the
combined statements of operations and retained earnings includes certain income
and expense items not directly related to the operations of the entities. These
income and expense items include, but not are limited to, interest income, waste
disposal income, finance charges and free publication services.
INCOME TAXES: Effective January 1, 1993, Geo. R. Klein News Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." SFAS 109 utilizes the liability method and
deferred taxes are determined based on the estimated future tax effects of
differences between the financial and tax bases of assets and liabilities given
the provisions of enacted tax laws. Prior to the implementation of SFAS 109, the
Company accounted for income taxes using Accounting Principles Board (APB)
Opinion 11. Because Central News Company and Newspaper Sales, Inc. are S
Corporation's, items of income and loss are passed through to the shareholder
and no federal or state income taxes are computed for those companies.
USE OF SIGNIFICANT ACCOUNTING ESTIMATES: The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
2. MERCHANDISE INVENTORY:
At December 31, inventories are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Books and Magazines $ 3,477,098 $ 3,454,104
Other 359,551 307,551
------- -------
$ 3,836,649 $ 3,761,655
=================== ===============
</TABLE>
If the first-in, first-out (FIFO) method of inventory accounting had been used
by the Klein Group for all inventories, the reported inventories would have been
$278,409 and $238,157 higher than reported at December 31, 1995 and 1994,
respectively.
192
<PAGE> 205
Effective January 1, 1994, Geo. R. Klein News Company changed its basis of
valuing its kids stickers, trading cards and other miscellaneous merchandise
inventories from the last-in, first-out (LIFO) method to the first-in, first-out
(FIFO) method. The Company believes that the FIFO cost method of inventory
valuation provides a more meaningful presentation of the financial position of
the Company as it relates to these inventories since it reflects more recent
costs in the balance sheet. The remaining merchandise inventory, which is
comprised primarily of books and magazines, continue to be valued on the LIFO
method.
This change has been applied to prior years by retroactively restating the
financial statements as required by generally accepted accounting principles.
The effect of this restatement was to increase retained earnings as of January
1, 1994 by $65,956. The effect of this change was not significant to the results
of operations for the year ended December 31, 1994.
In addition to the above mentioned change, Geo. R. Klein News Company changed
its method of estimating inflation for LIFO inventories. Prior to January 1,
1994, the Company used the double-extension method to calculate its yearly
index. Effective January 1, 1994, the Company has utilized the Inventory Price
Index ("IPI"). The IPI method is based on indexes published by the Bureau of
Labor Statistics. The effect of this change was not significant to the results
of operations for the year ended December 31, 1994.
3. PENSION AND PROFIT SHARING PLANS:
The Klein Group makes contributions to a union-sponsored pension plans covering
most hourly employees. The payments to this plan are based on actual weeks
worked by union employees. Pension expense in 1995, 1994 and 1993 was $245,564,
$264,303 and $265,767, respectively.
The Klein Group also makes contributions to a discretionary profit-sharing plan
covering all salaried and some hourly employees. Contributions to the plan are
determined by the Board of Directors. Company contributions charged to
operations were $159,992 in 1995, $146,782 in 1994 and $124,108 in 1993.
4. POSTRETIREMENT BENEFIT PLANS:
During 1995, the Geo. R. Klein News Company established a supplemental heath
care plan for certain retirees. The total estimated benefit cost at the
inception of the plan was $194,574, of which $97,287 was deposited into a
wasting trust in 1995 and the remainder to be deposited in 1996. These funds
will be expended by the trust to cover any health care costs not covered by
Medicare or other forms of insurance for its participants. These benefits will
be provided until all assets of the trust have been expended. The Company has no
future obligation to provide any additional funding and any excess funding will
revert to charity.
On April 1, 1995, the Geo. R. Klein News Company established a retiree medical
and life insurance plan for certain management employees not covered by the
above mentioned trust. Under the terms of the plan, the Company will provide
medical benefits to its retired associates and their dependents. Substantially
all of the Company's employees become eligible for these benefits if they retire
at age 55 or older with more than 10 years of service. The plan requires certain
minimum contributions from retired associates and is of limited duration. The
Company funds its portion of the retiree medical benefits as claims are
incurred. The funded status of the postretirement benefit plan at December 31,
1995 is as follows:
193
<PAGE> 206
<TABLE>
<S> <C>
Accumulated Postretirement Benefit Obligation (APBO):
Actives Not Yet Eligible to Receive Benefits $ 149,008
Actives Eligible to Receive Benefits 59,367
------
Total APBO 208,375
Plan Assets as of December 31, 1995 0
-
APBO in Excess of Plan Assets 208,375
Unrecognized Prior Service Cost 150,995
Unrecognized Net Loss 29,963
------
Accrued Benefit Cost as of December 31, 1995 $ 27,417
================
</TABLE>
The components of the net postretirement benefits expense for the year ended
December 31, 1995, is as follows:
Health care costs were assumed to increase during 1995 by 11%. The ultimate
trend rate is assumed to be 5.5% and is expected to be achieved in 10 years. The
APBO is based on a discount rate of 8.25% as of April 1, 1995 and 7.00% as of
December 31, 1995. If the assumed health care cost trend rate increases by 1%,
the increases in the APBO as of December 31, 1995, and the aggregate of the
service and interest cost components of the net periodic postretirement cost for
the year then ended would be immaterial.
5. LEASES:
The Klein Group leases its buildings at various locations from a company which
is owned by shareholders. The Company paid net rents on these facilities of
$265,733 in 1995, $264,298 in 1994 and $285,000 in 1993. The Geo. R. Klein News
Company lease expires on December 31, 1996 and is anticipated on being renewed
at fair market rates at that time. The Central News Company and Newspaper Sales,
Inc. leases are on a month-to-month basis.
Geo. R. Klein News Company also leases other equipment and facilities from
outside parties under renewable and nonrenewable agreements expiring at various
dates. Rent expense on these properties amounted to $161,226 in 1995, $178,950
in 1994 and $211,636 in 1993.
Newspaper Sales, Inc. leases its delivery trucks from an affiliated company
controlled by the sole shareholder under cancelable leasing arrangements. Rental
expense under these leases amounted to $76,650 in 1995, $65,719 in 1994 and
$58,456 in 1993.
Total rental payments due under all current noncancelable leases for the four
years ended December 31, 1996 through 1999 will be approximately $309,977,
$84,330, $30,301, and $19,980, respectively.
6. OTHER RELATED PARTY TRANSACTIONS:
Net notes and other accounts receivable due from affiliated companies amounted
to $829,397 in 1995 and $1,713,620 in 1994. The note payable, shareholder of
$130,960 at December 31, 1995 is non-interest bearing and payable on demand.
Geo. R. Klein Company paid management fees of $445,000 in 1995 and 1994 and
$385,000 in 1993 to an affiliated company controlled by a shareholder for
general management, tax and legal services.
Central News Company paid management fees of $475,000 for the years ended
December 31, 1995, 1994 and 1993, respectively, to an affiliated company
controlled by the shareholder for general management, tax and legal services.
194
<PAGE> 207
Newspaper Sales, Inc. paid management fees of $70,000 in 1995 and 1994 and
$67,314 in 1993 to an affiliated company controlled by the sole shareholder, for
general management, tax and legal services.
7. INCOME TAXES:
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and the tax basis of assets and liabilities. At December 31, 1995 and
1994, the components of this net deferred tax liability and asset, respectively,
were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Assets:
Accrued Vacation $ 44,172 $ 44,360
Basis Difference in Fixed Assets 153,678 161,095
Inventory Basis Difference 16,296 54,351
Reserve for Bad Debts 24,820 16,660
Other 0 9,840
Deferred Tax Liabilities:
Basis Difference in Fixed Assets (36,748) (20,520)
Basis Difference in Racks (96,052) (66,668)
Reserve for Returns (181,196) (181,196)
Other 0 (6,667)
- -------
Net Deferred Tax (Liability) Asset $ (75,030) $ 11,255
================== ================
</TABLE>
The differences between income taxes at the statutory federal rate of 34% and
those reported in the combined statements of operations and retained earnings
are as follows:
<TABLE>
<CAPTION>
- --------------------------------- ------------------------- ---------------------------- ----------------------------
1995 1994 1993
---- ---- ----
- --------------------------------- ------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at Statutory Rate of 34% $ 563,911 34.0% $(107,087) (34.0)% $(137,536) (34.0)%
- --------------------------------- ------------------------- ---------------------------- ----------------------------
Pass Through of S
Corporation Income to the
Shareholder (128,143) (7.7) (65,584) (20.8) (54,301) (13.4)
- --------------------------------- ------------------------- ---------------------------- ----------------------------
State and Local Taxes 84,000 5.1 14,208 4.5 16,224 4.0
- --------------------------------- ------------------------- ---------------------------- ----------------------------
Income From Equity
Investments 95,879 5.8 56,405 17.9 11,486 2.8
- --------------------------------- ------------------------- ---------------------------- ----------------------------
Non-Deductible Expense, Net (154,709) (9.3) 221,873 70.4 (65,585) (16.2)
- --------------------------------- ------------------------- ---------------------------- ----------------------------
Other, Net (93,552) (5.5) 2,270 0.8 (11,486) (2.8)
--------- ---- --------- ---- --------- ----
- --------------------------------- ------------------------- ---------------------------- ----------------------------
- --------------------------------- ------------------------- ---------------------------- ----------------------------
$ 367,386 22.2% $ 122,085 38.8% $(241,198) (59.6)%
========= ==== ========= ==== ========= ====
- --------------------------------- ------------------------- ---------------------------- ----------------------------
</TABLE>
8. PLEDGED ASSETS:
Central News Company has pledged its fixed assets as collateral for a $500,000
line of credit with National City Bank of Akron. There were no borrowings
outstanding under this line of credit at December 31, 1995 and 1994.
9. SUBSEQUENT EVENTS:
On January 1, 1996, the Geo. R. Klein Company entered into an agreement to
purchase the assets of Welsh News for an aggregate purchase price of
approximately $1,900,000, subject to agreed upon purchase price adjustments.
Welsh News is engaged in the business of the wholesale distribution of
magazines, newspapers and paperback books in Mansfield, Ohio. It is anticipated
that this acquisition of Welsh News will increase the net sales of Geo. R. Klein
News Company and Subsidiaries by approximately $3 million on an annual basis.
195
<PAGE> 208
On February 2, 1996, Central News Company entered into an agreement to purchase
the assets of City News Agency, Inc. ("City") for an aggregate purchase price of
$2,200,000, subject to agreed upon purchase price adjustments. City News is
engaged in the business of the wholesale distribution of magazines and paperback
books in Canton, Ohio. It is anticipated that the acquisition of City News will
increase the net sales of Central News Company by approximately $6 million on an
annual basis.
On September 14, 1996, the Klein Group entered into an agreement to sell
substantially all business assets and transfer substantially all liabilities to
the United Magazine Company ("Unimag"). The estimated purchase price for the
Klein Group is $36.5 million and will be satisfied through the issuance of
Unimag common stock and senior and junior debentures. The final purchase price
will be calculated as 60% of annualized March 1996 net sales plus adjusted net
worth on the date of closing.
195
<PAGE> 209
MANAGEMENT DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS OF KLEIN FOR THE SIX MONTHS AND THREE MONTHS
ENDED JUNE 30,1996 AND 1995
For the three months ended June 30, 1996, revenue increased by
$1,042,000, or 7.1%, from the corresponding three month period ended
June 30, 1995. For the six months ended June 30, 1996, revenue increased
$1,288,000, or 5.6%, from the corresponding six month period ended June
30, 1995. The increases were caused by the acquisition of approximately
$6,100,000 in annual revenue in Akron from the purchase of assets from
City News Agency on February 6, 1996 and the acquisition of
approximately $3,000,000 in annual revenue in Mansfield from Welsh News
Agency on January 1, 1996. These additions offset the loss of business
resulting from the loss of revenue from chain customers such as WalMart,
K-Mart, Borders, B. Dalton and The Kroger Company (The Kroger Company
business was lost to other members of the Combined Company).
Gross margins as a per cent of revenue were 21.1% in 1996
versus 26.8% in 1995 for the comparable three month periods, reflecting
the industry-wide decline in gross margin. This decline in the second
calendar quarter of 1996 caused the six month gross margin per cent to
decline to 21.4% from 26.1% for 1996 versus 1995.
The acquisition of the increased revenue from the two agencies
resulted in an increase in selling, general and administrative expenses
of $1,650,000, or 66.8%, for the three months ended June 30, 1996 versus
1995, and by $1,871,000, or 37.4%, for the six months ended June 30,
1996 versus 1995. As a percent of revenue, the selling, general and
administrative expenses for the three month period were 32.1% in 1996
versus 20.9% in 1995 and for the six month period were 28.2% in 1996
versus 21.6% in 1995.
The loss before taxes of $1,355,000 for the three months ended
June 30, 1996 was a decline of $2,188,000 from the income of $833,000
for the corresponding three month period ended June 30, 1995. The
decline was caused, in part, by the $464,000 reduction in comparable
gross margin. The increase in selling, general and administrative
expenses of $1,650,000 was the other large component of the change.
The loss before taxes of $1,163,000 for the six months ended
June 30, 1996 was a decline of $2,477,000 from the income of $1,314,000
for the corresponding six month period ended June 30, 1995. The decline
was caused, in part, by the $821,000 reduction in comparable gross
margin. The increase in selling, general and administrative expenses of
$1,871,000 were the other large components of the change.
LIQUIDITY, CAPITAL RESOURCES, AND FACTORS AFFECTING FUTURE PERFORMANCE
Klein's working capital for the periods listed is as follows:
June 30,1996 $(3,124,000)
December 31, 1995 $ 951,000
The decline in working capital from December 31, 1995 to June
30, 1996 was $4,075,000. Reasons for the decline include the purchase
of the assets of two agencies for $3,415,000, financed by seller debt
of $2,260,000, the purchase of fixed assets, and advance payments to
customers under long-term contracts.
The Combined Company is engaged in negotiations with financial
institutions to refinance existing debt, including the Klein debt.
197
<PAGE> 210
Klein's plan for the balance of 1996 is to consolidate
operations with other facilities of the Combined Company to reduce
selling, general and administrative expenses to offset the expected
decline in gross margin. This should generate adequate cash flow to
meet Klein's liability obligations.
INFLATION
The impact of inflation on wholesale operations is difficult to
measure. Klein cannot easily pass on periodical costs to customers unless the
publishers increase cover prices. Klein and the Combined Company are engaged in
activities to control operating costs. As a result, Klein believes that the
effect of inflation, if any, on the results of operations and financial
conditions has been minor and is expected to remain so in the future.
SEASONALITY
The sale of magazines and books is subject to minimal seasonality.
198
<PAGE> 211
THE KLEIN COMPANIES
Balance Sheets
As of June 28, 1996 and December 31, 1995
$(000) omitted
<TABLE>
<CAPTION>
June 28, 1996 December 31, 1995
Assets (Unaudited) (Audited)
<S> <C> <C>
Current Assets
Cash $ 2,365 $ 2,016
Accounts Receivable, Net 4,864 4,999
Inventories 5,735 3,837
Advances to Affiliates 0 432
Prepaids and Other 371 164
-------- --------
Total Current Assets 13,335 11,448
-------- --------
Property and Equipment, at Cost
Buildings and Leasehold Improvements 959 959
Furniture, Equipment and Vehicles 5,490 4,954
-------- --------
6,449 5,913
Less-Accumulated Depreciation
and Amortization (4,841) (4,666)
-------- --------
Total Property and Equipment, Net 1,608 1,247
-------- --------
Other Assets
Costs in Excess of Net Assets Acquired, Net 2,242 0
Prepaid Contracts and Other 2,806 1,515
-------- --------
Total Other Assets 5,048 1,515
-------- --------
Total Assets $ 19,991 $ 14,210
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Current Portion of Debt Obligations-Shareholders
$ 481 $ 131
Notes Payable Other 1,452 0
Accounts Payable 10,836 7,843
Accrued Expenses 1,037 896
Reserve for Gross Profit on Sales Returns 2,015 1,627
Distributions Payable 638 0
-------- --------
Total Current Liabilities 16,459 10,497
-------- --------
Long Term Debt Obligations
Other 1,555 0
-------- --------
Total Liabilities 18,014 10,497
-------- --------
Shareholders' Equity
Common Stock, No Par Value 14 14
Preferred Stock 500 500
Treasury Stock, At Cost (500) (500)
Retained Earnings 1,963 3,699
-------- --------
Total Shareholders' Equity 1,977 3,713
-------- --------
Total Liabilities and Shareholders' Equity $ 19,991 $ 14,210
======== ========
</TABLE>
199
<PAGE> 212
THE KLEIN COMPANIES
Statements Of Operations
For the Three Months and Six Months Ended June 28, 1996 and July 1, 1995
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $ 12,840 $ 11,798 $ 24,428 $ 23,140
Cost of Goods Sold 10,137 8,631 19,198 17,089
----------------------------------------------------------------
Gross Profit 2,703 3,167 5,230 6,051
Selling, General and Administrative Expenses (4,120) (2,470) (6,878) (5,007)
----------------------------------------------------------------
Income (Loss) from Operations (1,417) 697 (1,648) 1,044
Interest Income (Expense), Net 25 35 (9) 73
Other Income (Expense) 37 101 494 197
----------------------------------------------------------------
Income (Loss) Before Provision for Income Taxes (1,355) 833 (1,163) 1,314
Provision for Income Taxes 228 0 228 0
----------------------------------------------------------------
Net Income (Loss) $ (1,127) $ 833 $ (935) $ 1,314
================================================================
</TABLE>
200
<PAGE> 213
THE KLEIN COMPANIES
Statements Of Cash Flow
For the Three Months and Six Months Ended June 28, 1996 and July 1, 1995
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 28, 1996 July 1, 1995
(Unaudited) (Unaudited)
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net Cash (Used In) Operating Activities: $ 67 $ (1,116)
-------- --------
Cash Flows from Investing Activities:
Purchases of Property and Equipment (536) (245)
Other (432) 0
-------- --------
Net Cash Provided By (Used In) Investing
Activities (968) (245)
-------- --------
Cash Flows From Financing Activities:
Proceeds From Debt or Stock Issuance 1,250 0
Dividends and Distributions 0 (195)
-------- --------
Net Cash Provided By (Used In) Financing
Activities 1,250 (195)
-------- --------
Net Increase (Decrease) In Cash and Equivalents 349 (1,556)
Cash, Beginning of Period 2,016 1,556
-------- --------
Cash, End of Period 2,365 0
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period for Interest $ 48,597 $ 0
======== ========
</TABLE>
201
<PAGE> 214
THE KLEIN COMPANIES
NOTES TO CONDENSED INTERIM FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 28, 1996 AND JULY 1, 1995
(UNAUDITED)
1. GENERAL
-------
In the opinion of management, the accompanying unaudited condensed interim
financial statements contain all adjustments necessary to present fairly the
financial position of The Klein Companies ("Klein") as of June 28, 1996 and
December 31, 1995, and the results of its operations and cash flows for the
three months and six months ended June 28, 1996 and July 1, 1995. All such
adjustments were of a normal recurring nature. The results of operations in any
interim period are not necessarily indicative of results for the full year.
2. THE BUSINESS
------------
The Klein Companies consists collectively of The George R. Klein News Co.,
Central News Co., and Newspaper Sales, Inc., all Ohio corporations and all
independent magazine, book, and newspaper ("periodical") distributors.
3. PENDING SHAREHOLDER ACTIONS
---------------------------
Effective September 14, 1996, the Company entered into a Stock Transfer and
Exchange Agreement with Klein and the sole shareholder of Klein (the "Klein
Shareholder"), pursuant to which the Klein Shareholder agreed to contribute his
shares of stock of Klein to the Company in exchange for Common Stock of the
Company and Senior and Subordinated Debentures of the Company.
The transaction has been closed into escrow pending a favorable vote of the
shareholders of UNIMAG on the transaction. Upon the UNIMAG shareholders voting
in favor of the acquisition 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 UNIMAG, OPD, which is controlled by Ronald E.
Scherer, and R. David Thomas, another significant shareholder of UNIMAG, have
each agreed to vote their shares in favor of the transactions with Klein.
Together these shareholders are entitled to vote more than 50% of the stock of
UNIMAG. Since approval of the transactions is assured and UNIMAG had effective
control over the operations of the companies, Klein has been included in the
consolidated financial statements of UNIMAG subsequent to mid-September of 1996.
4. PROVISION FOR INCOME TAXES
--------------------------
There is no provision made for income taxes for Central News Company and
Newspaper Sales, Inc. because the shareholder of those companies included in The
Klein Companies has elected to be taxed under provisions of the Internal Revenue
Code related to S Corporations. Taxes for the interim periods relate to the
operations of Geo. R. Klein News Company.
202
<PAGE> 215
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF
THE KLEIN EXCHANGE AGREEMENT AMONG THE COMPANY, KLEIN AND THE KLEIN SHAREHOLDER
AND THE TRANSFER BY THE KLEIN SHAREHOLDERS OF ALL OF THE STOCK OF KLEIN TO THE
COMPANY IN EXCHANGE FOR SHARES OF COMMON STOCK OF THE COMPANY AND SENIOR AND
SUBORDINATED DEBENTURES ISSUED BY THE COMPANY IN ACCORDANCE WITH THE TERMS OF
SUCH KLEIN EXCHANGE AGREEMENT.
203
<PAGE> 216
PROPOSAL EIGHT: ELECTION OF DIRECTORS IF ALL OF THE ACQUISITIONS SET
FORTH IN PROPOSALS ONE THROUGH SEVEN ARE APPROVED BY
THE SHAREHOLDERS.
NUMBER AND ELECTION OF DIRECTORS
The Code of Regulations of the Company provides for a Board of
Directors of not less than three nor more than 25, with each director to serve
for a one-year term or until his or her successor is duly elected and qualified.
All of the terms of the current members of the Board of Directors expire at the
conclusion of the Annual Meeting (assuming successors are duly elected and
qualified). In the event that the exchanges and acquisitions set forth in
Proposals One, Two, Three, Four, Five, Six, Seven and Ten are approved by the
shareholders at the Annual Meeting and not otherwise abandoned, then, at the
Annual Meeting, shares represented by proxies, unless otherwise specified, will
be voted to fix the number of directors at thirteen and to elect the following
ten persons to the Board of Directors, each to serve until the next Annual
Meeting of Shareholders and until his or her successor is duly elected and
qualified: Ronald E. Scherer, Eugene J. Alfonsi, Thaddeus A. Majerek, David B.
Thompson, R.L. Richards, Richard H. Stoll, Sr., Nancy Stoll Lyman, William D.
Parker, Robert H. Monnaville and George R. Klein. No decision has been made to
fill the remaining three vacancies, nor has any candidate been considered and
approved by the Board of Directors; however, pursuant to the terms of the Klein
Exchange Agreement, George R. Klein will have the right to designate a board
member for one of the three vacant spots and such designated member would be
appointed by the Board to fill one of the three vacancies.
Each of the nominees named below has consented to stand for election
and serve as a director. In the event any person nominated fails to stand for
election, the proxies shall be voted for the election of such person or persons
as shall be designated by the persons named in the proxy. Other vacancies on the
Board of Directors may be filled by the directors. The reason that the Company
proposes to create these other vacancies on the Board is to enable the Board of
Directors to appoint additional directors who bring special expertise and
experience to the Company between meetings of the shareholders. Additionally,
the Company anticipates that any person or entity that provides a significant
debt or equity financing to the Company will likely request one or more seats on
the Board. Except for the right of George R. Klein to designate a director to
fill one of the three vacancies, no decision has been made to fill the
vacancies, nor has any candidate been considered and approved by the Board of
Directors. To date, George R. Klein has not nominated or designated any person
to fill a vacancy.
Proxies cannot be voted for a greater number of persons than the actual
number of nominees described above.
Pursuant to the terms of the Exchange Agreements described in Proposals
One through Seven, the Stoll Shareholders, the Michiana Shareholders, the Klein
Shareholder, and certain Scherer Affiliates and family members have entered into
a Shareholder Voting Agreement pursuant to which they have agreed to vote their
shares for election to the Board of two representatives of the Scherer
Affiliates, two Stoll representatives, one Michiana representative and two Klein
representatives. The two Scherer Affiliate designees are Ronald E. Scherer and
Eugene J. Alfonsi, the two Stoll representative designees are Richard H. Stoll,
Sr. and Nancy Stoll Lyman, the Michiana representative designee is Thaddeus A.
Majerek, and the two Klein representatives are George R. Klein and a director to
be decided by George R. Klein after the Annual Meeting.
Ohio law and the Code of Regulations of the Company provide that, if
notice in writing is given to the President, a Vice President or the Secretary
of the Company by any shareholder not less than 48 hours before the time fixed
for the holding of the Annual Meeting, that such shareholder desires that voting
for the election of directors be cumulative, and if announcement of the giving
of such notice is made upon the convening of the Annual Meeting by the Chairman
or Secretary by or on behalf of the shareholder giving such notice, each
shareholder will have the right to cumulate his votes equal to the number of
shares he owns multiplied by the number of directors to be elected. All of such
votes may be cast for a single nominee or may be distributed among any two or
more nominees as such shareholder may desire. If cumulative voting is invoked,
and unless contrary instructions are given by a shareholder who signs a proxy,
all votes represented by such proxy will be divided evenly among the candidates
nominated by the Board of Directors, except that if such
204
<PAGE> 217
distribution of votes should for any reason not be effective to elect all of the
Board's nominees, then such votes will be cast so as to maximize the number of
the Board's nominees elected to the Board.
Nominees receiving the highest number of votes will be elected to the
Board of Directors. Abstentions and broker non-votes will not be counted in
determining the votes cast in the election of directors, and will not have a
positive or negative effect on the 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 47 Chairman of the Board of
Directors; President and Chief
Executive Officer
Eugene J. Alfonsi 59 President and Chief Operating
Officer of Scherer Companies
Thaddeus A. Majerek 46 Director
David B. Thompson 57 Director; Treasurer
Robert H. Monnaville 52 Director and President of Service
News Company
Richard Stoll, Sr. 64 None
Nancy Stoll Lyman 36 None
George R. Klein 55 None
R.L. Richards 48 None
William D. Parker 60 None
Executive Officer Not Named Above
Thomas L. Gerlacher 54 Chief Financial Officer
RONALD E. SCHERER, age 47, 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.
205
<PAGE> 218
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.
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 64, 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 55, 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
206
<PAGE> 219
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).
WILLIAM D. PARKER, age 60, has been nominated for election to the Board
of Directors. Mr. Parker is retired from The Kroger Company. From September of
1993 through January of 1997, Mr. Parker served as President of the Kroger
Columbus Marketing Area. Prior to being named President of the Columbus Area,
Mr. Parker served five years as President of the Kroger Dallas and Memphis
Marketing Areas. Mr. Parker served in numerous other merchandising and general
operations positions during his 40 year tenure with Kroger, beginning in 1956.
Mr. Parker has also served on over 30 public and private boards during his years
as president of the Columbus and Dallas areas, with a strong emphasis on
community service. Additionally, Mr. Parker has served as chairman for several
charitable events in recent years.
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "The Stock and Asset Exchanges - `Conflicts of Interest
and Related Party Transactions'."
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "34 Act"), requires officers, directors, and beneficial
owners of more than 10% of the Company's Common Stock to file periodic
reports on Forms 3, 4 and 5 of ownership and changes in ownership with
the Securities and Exchange Commission. Based solely on its review of
copies of Forms 3 and 4 and amendments thereto received by the Company
during its most recent fiscal year and copies of Form 5 and amendments
thereto received by the Company with respect to its most recent fiscal
year, the Company believes that all filing requirements applicable to
its officers, directors and beneficial owners of more than 10% of the
Company's Common Stock were satisfied.
MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors held five meetings in fiscal year 1995. Each
current member of the Board of Directors attended or participated by telephone
in all of the meetings of the Board of Directors. The Board of Directors also
took actions by written consent in lieu of a meeting, in accordance with Ohio
law, on five occasions in fiscal year 1995. The Board of Directors held four
meetings and took actions by written consent on five occasions in fiscal year
1996.
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 $100,000.
208
<PAGE> 220
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------- ------------
Annual Compensation Awards Payouts
------------- ----------- -------------- -------------- -------------- ------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Under- All Other
Compen- Stock lying LTIP Compen-
Name and Fiscal Salary Bonus sation Award(s) Options/ Payouts sation
Positions Year ($) ($) ($) ($) SAR's(#) ($) ($)
- --------------- ----------- ------------- ----------- -------------- -------------- -------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronald E. 1996 $50,000 None $40,000 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)
<FN>
(1) Mr. Scherer, although president and chief executive officer of
the Company, was not an employee of the Company prior to July
of 1996, and the salary reflected in the table is from July,
1996 through September 28, 1996, the end of the Company's
fiscal year. 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. The Company has allocated $40,000 of the total
management fee of $270,000 paid by the Company to Scherer
Companies in fiscal year 1996 as other compensation of Mr.
Scherer. 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 of $58,800 in 1995 and $84,650 in
1994 as noted under the "All Other Compensation" column. He
became an employee of Service News Company in April of 1995.
</TABLE>
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 is
in the process of finalizing three year employment agreements with
Ronald E. Scherer, David B. Thompson, and Eugene J.
208
<PAGE> 221
Alfonsi. Such agreements are to be for three year terms and, based upon
information provided by the Hay Group, a national employment consulting
firm, the recommendation of the Board compensation committee is that
the agreements provide for an annual salary for Mr. Scherer of
$491,000, for Mr. Thompson of $224,000 and for Mr. Alfonsi of $195,000.
The employment agreements also include a provision for a discretionary
bonus, however, there is no set bonus or incentive compensation under
the agreements.
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 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 $159,000. See
"The Stock and Asset Exchanges - `Conflicts of Interest and Related
Party Transactions'."
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.
210
<PAGE> 222
PROPOSAL NINE: ELECTION OF DIRECTORS IN THE EVENT THAT THE EXCHANGES
AND ACQUISITIONS SET FORTH IN PROPOSALS ONE, TWO,
THREE, FOUR, FIVE, SIX AND SEVEN ARE NOT APPROVED.
NUMBER AND ELECTION OF DIRECTORS
The Code of Regulations of the Company provides for a Board of
Directors of not less than three nor more than 25, with each director to serve
for a one-year term or until his or her successor is duly elected and qualified.
All of the terms of the current members of the Board of Directors expire at the
conclusion of the Annual Meeting (assuming successors are duly elected and
qualified).
In the event that the exchanges and acquisitions set forth in Proposals
One, Two, Three, Four, Five, Six, Seven and Ten are not approved by the
shareholders at the Annual Meeting or are otherwise abandoned, then, at the
Annual Meeting, shares represented by proxies, unless otherwise specified, will
be voted to fix the number of directors at seven and to elect the following five
persons to the Board of Directors, each to serve until the next Annual Meeting
of Shareholders and until his successor is duly elected and qualified: Ronald E.
Scherer, Eugene J. Alfonsi, Thaddeus A. Majerek, David B. Thompson, and Robert
H. Monnaville. No decision has been made to fill the vacancies, nor has any
candidate been considered approved by the Board of Directors.
Each of the nominees named below has consented to stand for election
and serve as a director. In the event any person nominated fails to stand for
election, the proxies shall be voted for the election of such person or persons
as shall be designated by the persons named in the proxy. Other vacancies on the
Board of Directors may be filled by the directors. The reason that the Company
proposes to create these other vacancies on the Board is to enable the Board of
Directors to appoint additional directors who bring special expertise and
experience to the Company between meetings of the shareholders. Additionally,
the Company anticipates that any person or entity that provides a significant
debt or equity financing to the Company will likely request one or more seats on
the Board.
In either event, proxies cannot be voted for a greater number of
persons than the actual number of nominees described above.
Ohio law and the Code of Regulations of the Company provide that, if
notice in writing is given to the President, a Vice President or the Secretary
of the Company by any shareholder not less than 48 hours before the time fixed
for the holding of the Annual Meeting, that such shareholder desires that voting
for the election of directors be cumulative, and if announcement of the giving
of such notice is made upon the convening of the Annual Meeting by the Chairman
or Secretary by or on behalf of the shareholder giving such notice, each
shareholder will have the right to cumulate his votes equal to the number of
shares he owns multiplied by the number of directors to be elected. All of such
votes may be cast for a single nominee or may be distributed among any two or
more nominees as such shareholder may desire. If cumulative voting is invoked,
and unless contrary instructions are given by a shareholder who signs a proxy,
all votes represented by such proxy will be divided evenly among the candidates
nominated by the Board of Directors, except that if such distribution of votes
should for any reason not be effective to elect all of the Board's nominees,
then such votes will be cast so as to maximize the number of the Board's
nominees elected to the Board.
Nominees receiving the highest number of votes will be elected to the
Board of Directors. Abstentions and broker non-votes will not be counted in
determining the votes cast in the election of directors, and will not have a
positive or negative effect on the 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:
210
<PAGE> 223
Director Nominees
<TABLE>
<CAPTION>
Name Age Positions Held with the Company
- ---- --- -------------------------------
<S> <C> <C>
Ronald E. Scherer 47 Chairman of the Board of Directors;
President and Chief Executive Officer
Eugene J. Alfonsi 59 President and Chief Operating Officer
of Scherer Companies
Thaddeus A. Majerek 46 Director
David B. Thompson 57 Director; Treasurer
Robert H. Monnaville 52 Director and President of Service News
Company
</TABLE>
Executive Officer Not Named Above
Thomas L. Gerlacher 54 Chief Financial Officer
Business histories for the above named individuals have been included
under Proposal Eight. Additionally, information about executive compensation has
been included under Proposal Eight.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "The Stock and Asset Exchanges - `Conflicts of Interest
and Related Party Transactions'."
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "34 Act"), requires officers, directors, and beneficial
owners of more than 10% of the Company's Common Stock to file periodic
reports on Forms 3, 4 and 5 of ownership and changes in ownership with
the Securities and Exchange Commission. Based solely on its review of
copies of Forms 3 and 4 and amendments thereto received by the Company
during its most recent fiscal year and copies of Form 5 and amendments
thereto received by the Company with respect to its most recent fiscal
year, the Company believes that all filing requirements applicable to
its officers, directors and beneficial owners of more than 10% of the
Company's Common Stock were satisfied.
MEETINGS OF THE BOARD OF DIRECTORS
The Board of Directors held five meetings in fiscal year 1995. Each
current member of the Board of Directors attended or participated by telephone
in all of the meetings of the Board of Directors. The Board of Directors also
took actions by written consent in lieu of a meeting, in accordance with Ohio
law, on five occasions in fiscal year 1995. The Board of Directors held four
meetings and took actions by written consent on five occasions in fiscal year
1996.
EXECUTIVE COMPENSATION
See Shareholder Proposals - Proposal Eight - `Executive Compensation'.
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 directors' fees; however,
the Company does pay reasonable out-of-pocket expenses incurred in the
attendance of meetings of the Board of Directors.
210
<PAGE> 224
PROPOSAL TEN: TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION, AS
AMENDED, TO EFFECT A ONE-FOR-TEN REVERSE STOCK SPLIT
OF THE COMPANY'S COMMON STOCK, WITHOUT PAR VALUE.
GENERAL
The Board of Directors of the Company has approved an amendment to the
Company's Articles of Incorporation, as amended (the "Articles of
Incorporation") to effect a one-for-ten reverse split of the Company's issued
and outstanding shares of Common Stock (the "Reverse Stock Split"). In
connection with the proposed amendment, the Company intends to restate its
Articles of Incorporation and a copy of the proposed amended and restated
Articles of Incorporation effecting the Reverse Stock Split, in substantially
the form in which it is proposed to be filed with the Ohio Secretary of State,
is attached as Exhibit D. If the Reverse Stock Split is approved by
shareholders, the Board of Directors will determine the date on which the
Reverse Stock Split will become effective. Each share of Common Stock issued and
outstanding immediately prior to that effective date will be reclassified as and
changed into one-tenth of one share of Common Stock.
PURPOSE AND EFFECT OF THE REVERSE STOCK SPLIT
As described in Proposals One through Seven, above, the Board
of Directors is proposing that the Company acquire all of the issued
and outstanding common stock of Michiana, Stoll, OPD, Scherer
Companies, MacGregor and Klein, and such of the net assets of Northern
and Wholesalers as relate to the wholesale distribution of periodicals.
The purchase prices for the various acquisitions are to be paid in a
combination of Common Stock of the Company and Senior and Subordinated
Debentures. As of July 25, 1997, the number of unissued and unreserved
shares of Common Stock of the Company available for issuance totaled
26,188,705 shares. In the event that the Company enters into all of the
acquisition transactions, the number of shares of Common Stock of the
Company which it would be required to issue is approximately
43,494,760, which currently exceeds the number of authorized shares
available for issuance. Upon completion of the Reverse Stock Split, the
Company would have a sufficient number of shares of Common Stock of the
Company available for issuance in connection with the acquisitions and
approximately 46,161,061 shares available for future issuance for
capital raising activities of the Company, compensation and benefit
plan arrangements or other corporate purposes.
The principal effect of the Reverse Stock Split will be to
decrease the number of outstanding shares of Common Stock of the
Company from 26,760,334 (as of September 28, 1996) to approximately
2,676,034 shares (assuming that no additional shares have been issued
subsequent to September 28, 1996). The Common Stock of the Company
issued pursuant to the Reverse Stock Split will be fully paid and
nonassessable. The respective voting rights and other rights that
accompany the Common Stock of the Company will not be altered by the
Reverse Stock Split (other than as a result of payment of cash in lieu
of fractional shares, as discussed below), and the Common Stock of the
Company will continue to be without par value. Consummation of the
Reverse Stock Split will not alter the number of authorized shares of
the Common Stock of the Company, which will remain at 53,250,000, of
which approximately 50,573,966 shares of Common Stock of the Company
would constitute authorized but unissued and unreserved shares.
Additionally, the Board of Directors believes that a high
number of shares of Common Stock of the Company outstanding and a
related low per-share market price may impair the development of a
trading market for the Common Stock of the Company and its
acceptability to certain institutional investors and other members of
the investing public. While the number of shares outstanding should
not, by itself, affect the marketability of a stock, the type of
investor who acquires such stock, or the Company's reputation in the
financial community, the Company believes that, in practice, this is
not necessarily the case, as certain investors view low-priced,
infrequently traded stock as unattractive or, as a matter of policy,
are precluded from purchasing low-priced shares. In addition, certain
brokerage houses, as a matter of policy, will not extend margin credit
on stocks trading at low prices. On the other hand, certain other
investors may be attracted to low-priced stock because of the greater
trading volatility sometimes associated with such securities.
213
<PAGE> 225
There can be no assurance that the Reverse Stock Split will
not adversely affect the market price of, or the development of a
trading market for, the Common Stock of the Company, that the
marketability of the Common Stock of the Company will improve as a
result of approval of the Reverse Stock Split or that the approval of
the Reverse Stock Split will otherwise have any of the effects
described herein.
As of July 25, 1997, the Company was not in arrears with
respect to the payment of any dividends to the holders of any of its
outstanding securities.
CERTIFICATES AND FRACTIONAL SHARES
The certificates presently representing shares of Common Stock
of the Company will be deemed, at the effective time of the reverse
stock split, to represent one-tenth the number of shares of Common
Stock of the Company after the effective date of the Reverse Stock
Split. As soon as is practicable following the effective date of the
Amended and Restated Articles of Incorporation effecting the Reverse
Stock Split, shareholders will be notified and requested to surrender
their current certificates to a designated stock transfer agent in
exchange for the issuance of new certificates reflecting the Reverse
Stock Split. No fractional shares of Common Stock of the Company will
be issued and, in lieu thereof, shareholders holding a number of shares
of Common Stock of the Company not evenly divisible by ten, and
shareholders holding less than ten shares of Common Stock of the
Company, upon surrender of their old certificates, will receive cash in
lieu of fractional shares of Common Stock of the Company. The price
payable by the Company for the fractional shares of Common Stock of the
Company will be $1.50 per share of pre-reverse split Common Stock of
the Company, which is the post-acquisition but pre-reverse split price
per share of Common Stock of the Company used by the Company in
connection with the acquisitions.
The reverse stock split could result in shareholders of the
Company owning stock in blocks of less than 100 shares. Typically,
stock is traded in large denominations, with blocks of 100 shares being
the smallest denomination traded. Trades of stock in blocks of less
than 100 shares are called "odd-lot" trading. Because of the unusual
nature of odd-lot trading, brokers typically charge higher commissions
and brokerage fees in connection with odd lot trades. Shareholders of
the Company who end up with odd-lot holdings following the reverse
stock split could be subjected to these higher commissions and fees for
trades made by them. Currently there is no active trading market in the
Company's stock and there can be no assurance that an active trading
market will develop. The Company does not have an odd-lot redemption
program nor does it anticipate having such a program in the future
SOURCE OF FUNDS; NUMBER OF HOLDERS
The funds required to purchase the fractional shares are
available and will be paid from the current cash reserves of the
Company. The Company's shareholder list indicates that a portion of the
outstanding Common Stock of the Company is registered in the names of
clearing agencies and broker nominees. It is, therefore, not possible
to predict with certainty the number of fractional shares and the total
amount that the Company will be required to pay for fractional share
interests. However, it is not anticipated that the funds necessary to
effect the cancellation of fractional shares will be material.
As of July 25, 1997, approximately 2,881 persons were holders
of record of Common Stock of the Company. The Company does not
anticipate that the Reverse Stock Split and the payment of cash in lieu
of fractional shares will result in a significant reduction in the
number of holders of record of Common Stock of the Company. The Company
does not presently intend to seek, either before or after the Reverse
Stock Split, any change in the Company's status as a reporting company
for federal securities law purposes.
FEDERAL INCOME TAX CONSEQUENCES
Except as described below with respect to cash received in
lieu of fractional share interests, the receipt of Common Stock of the
Company in the Reverse Stock Split should
214
<PAGE> 226
not result in any taxable gain or loss to shareholders for federal
income tax purposes. If the Reverse Stock Split is approved, the tax
basis of Common Stock of the Company received as a result of the
Reverse Stock Split (including any fractional share interests to which
a shareholder is entitled) will be equal, in the aggregate, to the
basis of the shares exchanged for the Common Stock of the Company. For
tax purposes, the holding period of the shares immediately prior to the
effective date of the Reverse Stock Split will be included in the
holding period of the Common Stock of the Company received as a result
of the Reverse Stock Split, including any fractional share interests to
which a shareholder is entitled. A shareholder who receives cash in
lieu of fractional shares of Common Stock of the Company will be
treated as first receiving such fractional shares and then receiving
cash as payment in exchange for such fractional shares of Common Stock
of the Company, and will recognize capital gain or loss in an amount
equal to the difference between the amount of cash received and the
adjusted basis of the fractional shares treated as surrendered for
cash. See "The Stock and Asset Exchanges - `Federal Income Tax
Consequences of the Acquisitions'."
EFFECTIVENESS
In accordance with Ohio law and notwithstanding approval of
the amendment by shareholders, at any time prior to the filing of the
Certificate of Amended and Restated Articles of Incorporation to effect
the Reverse Stock Split, the Board of Directors may, in its sole
discretion, abandon the proposed amendment without any further action
by shareholders. Unless the amendment is abandoned, the Reverse Stock
Split shall be effective upon the filing of the Certificate.
VOTING
Assuming the presence of a quorum, the affirmative vote of the
holders of a majority or more of the voting power of the outstanding
shares of Common Stock is necessary for approval of the Amended and
Restated Articles of Incorporation to effect the Reverse Stock Split.
Abstentions and non-votes by brokers holding shares of Common Stock of
the Company in street name will have the same effect as shares of
Common Stock of the Company cast against the proposed Amended and
Restated Articles of Incorporation. Ronald E. Scherer, OPD and R. David
Thomas, who together have the right to vote more than 50% of the
outstanding shares of Common Stock of the Company, have agreed to vote
in favor of the proposed Amended and Restated Articles of
Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF
THE AMENDED AND RESTATED ARTICLES OF INCORPORATION TO EFFECT THE REVERSE STOCK
SPLIT.
214
<PAGE> 227
PROPOSAL ELEVEN: TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION, AS
AMENDED, TO CHANGE ITS PRINCIPAL PLACE OF BUSINESS
REFERENCED IN THE ARTICLES TO DUBLIN, OHIO.
GENERAL
The Board of Directors of the Company has approved an amendment to the
Company's Articles of Incorporation, as amended (the "Articles of
Incorporation"), to change the Company's principal place of business to Dublin,
Ohio. This change is a technical correction, since the Company's principal
offices have been located in Dublin, Ohio for a number of years.
In connection with the proposed amendment and the proposed amendment to
effectuate a reverse stock split contained in Proposal Ten, the Company intends
to restate its Articles of Incorporation and a copy of the proposed amended and
restated Articles of Incorporation in substantially the form in which it is
proposed to be filed with the Ohio Secretary of State is attached as Exhibit D.
The Company views this proposed amendment to the Articles of
Incorporation to change its principal place of business as a simple technical
correction. Under Ohio law, a corporation's articles of incorporation are
required to state its principal place of business. The Articles of Incorporation
of the Company currently state that its principal place of business is Columbus,
Ohio. However, for a number of years, the Company's principal offices have been
located in Dublin, Ohio, a suburb of Columbus. The proposed amendment, if
adopted, will change the Articles of Incorporation to reflect this.
EFFECTIVENESS
In accordance with Ohio law, and notwithstanding approval of the
amendment by shareholders, at any time prior to the filing of a certificate of
amendment to effect the amendment, the Board of Directors may, in its sole
discretion, abandon the proposed amendment without any further action by
shareholders. Unless the amendment is abandoned, the amendment shall be
effective upon the filing of the certificate.
VOTING
Assuming the presence of a quorum, the affirmative vote of the holders
of a majority or more of the voting power of the outstanding shares of Common
Stock of the Company is necessary for approval of the amendment. Abstentions and
non-votes by brokers holding shares of Common Stock of the Company in street
name will have the same effect as shares of Common Stock of the company cast
against the proposed amendment. Ronald E. Scherer, OPD and R. David Thomas, who
together have the right to vote more than 50% of the outstanding shares of
Common Stock of the Company, have agreed to vote in favor of the proposed
amendment.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF
THE AMENDMENT TO THE ARTICLES OF INCORPORATION TO CHANGE THE COMPANY'S PRINCIPAL
PLACE OF BUSINESS TO DUBLIN, OHIO.
215
<PAGE> 228
PROPOSAL TWELVE: TO RATIFY THE APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors has selected Arthur Andersen LLP as the
Company's independent public accountants for the current fiscal year. Arthur
Andersen LLP has served as the Company's independent public accountants for each
of the last six years. It is expected that a representative of Arthur Andersen
LLP will be present during the Annual Meeting. The representative will have an
opportunity to make a statement if he or she so desires and is expected to be
available to respond to appropriate questions from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPOINTMENT
OF ARTHUR ANDERSEN LLP AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR THE
CURRENT FISCAL YEAR.
216
<PAGE> 229
SENIOR AND SUBORDINATED DEBENTURES
The following is a more complete description of the Senior and
Subordinated Debentures of the Company to be issued in connection with the
Acquisitions.
DESCRIPTION OF SECURITIES
-------------------------
SENIOR DEBENTURES
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 began to
accrue interest from August 24, 1996. In accordance with the terms of
the Debenture Agreement, up to $41,000,000 of Senior Debentures may be
issued in connection with the Exchange Transactions. The principal
amount of the Senior Debentures issued to the Stoll Shareholders shall
hereinafter be referred to as the "Stoll Senior Debt", the principal
amount of the Senior Debentures issued to the Scherer Companies or
their shareholders shall hereinafter be referred to as the "Scherer
Senior Debt", the principal amount of the Senior Debentures issued to
the Michiana Shareholders shall hereinafter be referred to as the
"Michiana Senior Debt" and the principal amount of any Senior
Debentures issued to Klein or its shareholders shall hereinafter be
referred to as the "Klein Senior Debt".
Interest on the Senior Debentures is payable quarterly on
January 1, April 1, July 1 and October 1 of each year during the period
in which any sums under the Senior Debentures remain outstanding,
commencing, with respect to the Senior Debentures issued in connection
with each particular acquisition, on the interest payment date
immediately following the final closing of such acquisition. Interest
on the Senior Debentures is being accrued through the date of the
Annual Meeting. Interest accrued through June 30, 1997 is approximately
$2,913,000. Interest on the Senior Debentures is computed on the basis
of a 360-day year consisting of 12 30-day months. The person in whose
name any Senior Debenture is registered at the close of business on any
record date with respect to any interest payment date shall be entitled
to receive the interest and principal payable with respect to such
debenture on such interest payment date. The term "record date" with
respect to any interest payment date shall mean the December 15, March
15, June 15 or September 15 preceding such January 1, April 1, July 1
or October 1 interest payment date. Principal on the Senior Debentures
is payable quarterly on each interest payment date commencing on April
1, 1997, provided, however, that no payment of principal shall be made
with respect to Senior Debentures issued in connection with a
particular Exchange Transaction until the final closing of such
transaction. At July 1, 1997, two principal payments totaling
$3,329,295 had been deferred. As a result, no principal or interest
payments have been made on the Senior Debentures to date.
Notwithstanding the foregoing, quarterly payments of principal
and interest under the Senior Debentures will be paid to the holders of
the Senior Debentures in the following order: first, all sums for the
payment of principal and interest under the Senior Debentures shall be
paid to the Stoll Shareholders until the Stoll Senior Debt has been
paid in full, and thereafter, all sums for the payment of principal and
interest under the Senior Debentures remaining outstanding shall be
paid to the holders of such Senior Debentures, pro rata, in proportion
to the principal amount of Senior Debentures held by such persons.
Notwithstanding the payment schedule described above, the
Company has agreed with the proposed holders of the Senior Debentures
that the Company shall use reasonable efforts to retire the Senior
Debentures as soon as practical either through the acquisition of
additional equity funds or through additional financing. At such time
as the Company obtains such equity funds or new financing which is not
allocated for working capital or other purposes, the first $16,800,000
of such funds shall be paid first to those persons holding the Stoll
Senior Debt, and no other holders of Senior Debentures shall be
entitled to any payment of principal from such funds until the Stoll
Senior Debt has been paid in full. Thereafter, the balance of such
equity funding or new financing shall be paid to the holders of the
Senior Debentures remaining outstanding, pro rata, in proportion to the
principal amount of Senior Debentures held by such persons.
The Senior Debentures are secured by liens granted by the
Company and its subsidiaries in all of their respective assets
(collectively, the "Senior Debenture Security
218
<PAGE> 230
Interests") which Senior Debenture Security Interests are evidenced by
certain mortgages, security agreements and financing statements
executed by the Company and their subsidiaries, as appropriate, in
favor of the trustee (described under the subheading "Appointment of
Trustee" described later in this section) acting for the benefit and on
behalf of the holders of the Senior Debentures, and filed in the
appropriate jurisdictions. Notwithstanding the foregoing, in the event
the Company or one of its subsidiaries is unable to grant a mortgage or
security interest in any asset because it would cause a default with
respect thereto, the Company has agreed that no future mortgage or
security interest in such asset shall be granted to any other party.
The Senior Debenture Security Interests are subordinate to (a)
all existing mortgages, security interests, liens, encumbrances,
easements, restrictions, encroachments and other claims (collectively,
"Encumbrances") set forth on Schedule 1 to the Debenture Agreement and
Encumbrances in connection with any refinancing, deferrals, renewals,
extensions and refunding of and any amendments, modifications or
supplements thereof; (b) any Encumbrances granted in conjunction with
indebtedness incurred to prepay or refinance all or any part of the
Senior Debentures; (c) any Encumbrances granted in conjunction with
indebtedness incurred for working capital purposes in an amount,
including the indebtedness covered under (a) above, not to exceed at
any one time eight percent (8%) of the Company's consolidated net
sales; and (d) purchase money Encumbrances granted to secure
indebtedness incurred in connection with the purchase of any asset or
equipment for use in the Company's business. In general, payments with
respect to the Senior Debentures are subordinate and subject to the
prior payment of all principal and interest due and owing on the
indebtedness secured by the Encumbrances (collectively, "Senior
Indebtedness") which are due and payable under the terms of the Senior
Indebtedness or whether such payments are due as a result of (a) the
maturity of the Senior Indebtedness, (b) a dissolution, winding-up,
liquidation, or certain reorganizations of the Company, whether
voluntary or involuntary or in bankruptcy, insolvency, receivership, or
other proceedings, with respect to which there will occur a
distribution of cash, property or securities, (c) an event of default
under the Senior Debentures, regardless of whether the Senior
Debentures matured pursuant to their terms. The Debenture Agreement
provides that, upon the occurrence of an event described under (a), (b)
or (c) above, all outstanding Senior Indebtedness together with unpaid
interest thereon must be paid in full prior to the payment of any sums
under the Senior Debentures.
The holders of the Senior Debentures are entitled to an equal
and proportionate benefit to the Senior Debenture Security Interests,
without preference, priority or distinction of any Senior Debenture
holder over any other Senior Debenture holder, except that the holders
of the Stoll Senior Debt shall be entitled to be preferred as to
payment from any realization upon any of the collateral for the Senior
Debentures.
SUBORDINATED DEBENTURES
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.
In accordance with the terms of the Debenture Agreement, up to
$33,000,000 of Subordinated Debentures may be issued in connection with
the Exchange Transactions. Any increase in the purchase price to be
paid in connection with an Exchange Transaction will likely require the
issuance of additional Subordinated Debentures in excess of the
aggregate number of Subordinated Debentures required by the Debenture
Agreement in which event the total amount of Subordinated Debentures to
be issued under the Debenture Agreement may be increased.
Interest is payable quarterly on January 1, April 1, July 1
and October 1 of each year during the period in which any sums under
the Subordinated Debentures remain outstanding, commencing, with
respect to the Subordinated Debentures issued in connection with each
particular acquisition, on the interest payment date immediately
following the final closing of such acquisition. Interest on the
Subordinated Debentures is being accrued through the date of the Annual
Meeting. Interest accrued through June 30, 1997 is approximately
$2,103,000. No interest payments have been made on the Subordinated
Debentures to date. Interest on the Subordinated Debentures is computed
on the basis of a
219
<PAGE> 231
360-day year consisting of 12 30-day months. The person in whose name
any Subordinated Debenture is registered at the close of business on
any record date with respect to any interest payment date shall be
entitled to receive the interest and principal payable on such interest
payment date. The term "record date" with respect to any interest
payment date shall mean the December 15, March 15, June 15 or September
15 preceding such January 1, April 1, July 1 or October 1 interest
payment date. Principal on the Subordinated Debentures is payable
quarterly on each interest payment date commencing April 1, 1999. The
quarterly payments of interest and principal under the Subordinated
Debentures will be paid to the holders of the Subordinated Debentures
pro rata in proportion to the principal amount of Subordinated
Debentures held by such parties; provided, however, that no principal
shall be paid on the Subordinated Debentures until the Senior
Debentures have been paid in full. In the event that a scheduled
payment of principal on the Subordinated Debentures cannot be made
because the Senior Debentures have not been paid in full, then the
amount otherwise payable as principal on the Subordinated Debentures
shall be applied to the payment of the Senior Debentures, to the extent
of the outstanding principal and interest thereon.
The Subordinated Debentures are secured by separate liens
granted by the Company and its subsidiaries in all of their respective
assets (collectively, the "Subordinated Debenture Security Interests")
which Subordinated Debenture Security Interests are evidenced by
certain mortgages, security agreements and financing statements
executed by the Company and their subsidiaries, as appropriate, in
favor of the trustee (described under the subheading "Appointment of
Trustee" described later in this section) acting for the benefit and on
behalf of the holders of the Subordinate Debentures, and filed in the
appropriate jurisdictions. Notwithstanding the foregoing, in the event
the Company or one of its subsidiaries is unable to grant a mortgage or
security interest in any asset because it would cause a default with
respect thereto, the Company has agreed that no future mortgage or
security interest in such asset shall be granted to any other party.
The Subordinated Debenture Security Interests are subordinated
(a) to all Encumbrances securing Senior Indebtedness, (b) to the Senior
Debenture Security Interests, and (c) to Encumbrances granted to secure
the principal of and premium, if any, and interest on all indebtedness
subject to a security interest or mortgage of the Company and any
subsidiary in which the Company holds at least 51% of the voting stock
("Controlled Subsidiary"), whether presently existing or hereafter
incurred, including without limitation, (i) for money borrowed by the
Company or any Controlled Subsidiary (including lease financing
indebtedness), (ii) for money borrowed by others (including lease
financing indebtedness) and guaranteed, directly or indirectly, by the
Company or any Controlled Subsidiary, or (iii) for purchase money
indebtedness, or indebtedness secured by property at the time of the
acquisition of such property by the Company or any Controlled
Subsidiary, for the payment of which the Company or any Controlled
Subsidiary is directly or contingently liable; and to all deferrals,
renewals, extensions and refundings of, and amendments, modifications,
and supplements to, any such indebtedness, provided that by the terms
of the instrument creating or evidencing any such indebtedness referred
to above, it is expressly provided that such indebtedness is superior
in right of payment to the Subordinated Debentures. Payments with
respect to the Subordinated Debentures shall be subordinate and subject
to the prior payment of all payments of principal and interest under
the Senior Indebtedness and the Senior Debentures and, in general, to
of all other debts senior to the Subordinated Debentures which are due
and payable under the terms of the Senior Indebtedness, the Senior
Debentures or other senior debt or whether such payments are due as a
result of (a) the maturity of the Senior Indebtedness, Senior
Debentures or other senior debt, (b) a dissolution, winding-up,
liquidation, or certain reorganizations of the Company, whether
voluntary or involuntary or in bankruptcy, insolvency, receivership, or
other proceedings, with respect to which there will occur a
distribution of cash, property or securities, or (c) an event of
default under the Subordinated Debentures, regardless of whether the
Subordinated Debentures matured pursuant to their terms. The Debenture
Agreement provides that, upon the occurrence of an event described
under (a), (b) or (c) above, all outstanding Senior Indebtedness,
including the Senior Debentures and other senior debt, together with
unpaid interest thereon must be paid in full prior to the payment of
any sums under the Subordinated Debentures.
220
<PAGE> 232
The holders of the Subordinated Debentures shall be entitled
to an equal and proportionate benefit to the Subordinate Debenture
Security Interests, without preference or priority or distinction of
any Subordinated Debenture holder over any other Subordinated Debenture
holder.
REDEMPTION AND PREPAYMENT OF DEBENTURES
The Senior Debentures and the Subordinated Debentures
(collectively, the "Debentures") may be redeemed and prepaid at the
discretion of the Company, in whole or from time to time in part,
without premium or penalty, at a redemption price equal to the
principal amount thereof together with accrued interest to the date of
redemption. None of the Subordinated Debentures may be redeemed or
prepaid so long as any amount of principal or interest is outstanding
on the Senior Debentures, unless such amounts are to be paid in full at
the time of the redemption of all or a portion of the Subordinated
Debentures.
Until such time as the principal and interest on the Stoll
Senior Debt has been paid in full, all prepayments and redemptions of
principal on the Senior Debentures shall be paid to those persons
holding the Stoll Senior Debt, in proportion to the principal amount of
Senior Debentures held by them, and no other holders of Senior
Debentures shall be entitled to redemption and prepayment of principal
on the Senior Debentures held by them. After the principal and interest
on the Stoll Senior Debt has been paid in full, then all prepayments
and redemptions of principal on the Senior Debentures shall be paid pro
rata to the holders of the Scherer Senior Debt, the Michiana Senior
Debt and the Klein Senior Debt in proportion to the principal amount of
Senior Debentures held by them.
EVENTS OF DEFAULT UNDER SENIOR DEBENTURES AND SUBORDINATE DEBENTURES
In accordance with the terms of the Debenture Agreement, the
occurrence of any of the shall be deemed Events of Default by the
Company with respect to the Debentures and a breach of the Debenture
Agreement:
(a) Failure to pay any installment of interest upon any of the
Debentures as and when the same shall become due and payable, and
continuance of such failure for a period of 30 days after written
notice of such failure from the Trustee; or
(b) Failure to pay the principal of any of the Debentures as
and when the same shall become due and payable, by declaration or
otherwise, and the continuance of such failure for a period of 30 days
after written notice of such failure from the Trustee; or
(c) Failure on the part of the Company duly to observe or
perform any other of the covenants or agreements on the part of the
Company in the Debentures or in this Agreement with respect to the
Debentures which has continued for a period of 60 days after the date
on which written notice of such failure, requiring the Company to
remedy the same, shall have been given to the Company by the Trustee;
or
(d) Failure on the part of the Company or any subsidiary to
perform, observe or satisfy any obligation or agreement under any
security agreement or mortgage in favor of the Trustee which has
continued for a period of 60 days after the date on which written
notice of such failure, requiring the Company to remedy the same, shall
have been given to the Company by the Trustee; or
(e) Commencement by the Company of a voluntary case or other
proceeding seeking liquidation, reorganization, or other relief with
respect to itself or its debts under any bankruptcy, insolvency, or
other similar laws now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian, or other
similar official of it or any substantial part of its property, or
consent by the Company to any such relief or to the appointment of or
taking possession by any such official in an involuntary case or other
proceeding commenced against it, or the making of a general assignment
for the benefit of creditors, or a failure generally to pay its debts
as they become due; or
220
<PAGE> 233
(f) An involuntary case or other proceeding shall be commenced
against the Company seeking liquidation, reorganization, or other
relief with respect to it or its debts under any bankruptcy,
insolvency, or other similar laws now or hereafter in effect or seeking
the appointment of a trustee, receiver, liquidator, custodian, or other
similar official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain undismissed and
unstayed for a period of 90 consecutive days.
Upon the occurrence of any Event of Default set forth at
subsections (e) or (f), all of the principal and accrued interest then
outstanding on all of the Debentures shall automatically without any
action by the Trustee, and without demand, notice or legal process of
any kind, be declared, and immediately shall become, due and payable in
full. Upon the occurrence of any Event of Default set forth at
subsections (a), (b), (c) or (d), or at any time thereafter, unless the
principal of all of the Debentures shall have already become due and
payable, the Trustee, by one or more notices in writing to the Company,
may declare the principal of all the Senior Debentures, or the
principal of all the Senior and Subordinated Debentures, and the
interest accrued thereon to be due and payable immediately, and upon
any such declaration, the same shall become and shall be immediately
due and payable. Notwithstanding the foregoing, if, at any time after
the principal of the Debentures shall have been so declared due and
payable, and before any judgment or decree for the payment of the
monies due shall have been obtained or entered as hereinafter provided,
the Company shall pay or shall deposit with the Trustee a sum
sufficient to pay all matured installments of interest upon all the
Debentures and the principal of any and all Debentures which shall have
become due otherwise than by acceleration [with interest on overdue
installments of interest (to the extent that payment of such interest
is enforceable under applicable law) and on such principal at the rate
borne by the Debentures, to the date of such payment or deposit] and
the expenses of such Trustee, if any, and all defaults under this
Agreement, other than the nonpayment of principal of and accrued
interest on Debentures which shall have become due by acceleration,
shall have been remedied, then and in every such case, the Trustee, by
one or more written notices to the Company, shall waive all defaults
and rescind and annul such declaration and its consequences; but no
such waiver or rescission and annulment shall extend to or shall affect
any subsequent default, or shall impair any right consequent thereon.
Upon the occurrence and continuance of an Event of Default, the Trustee
may pursue any other remedy available to enforce payment of any
payments due under the Debentures.
RESTRICTIONS ON INDEBTEDNESS
The Debenture Agreement does not contain any restrictions on
the incurrence by the Company of additional indebtedness. However,
because the Debentures are to be secured by mortgages and security
interests in all the assets of the Company and the Acquisition Parties,
as a practical matter, the Debenture Agreement restricts the incurrence
of secured debt not specifically given priority status under the
agreement.
RESTRICTIONS ON TRANSFER
The transfer of the Debentures is restricted and shall not be
effected without the Company's consent except to a purchaser's spouse,
parents, grandparents, children, grandchildren, or siblings, or to the
trustee of a trust for the principal benefit of one or more such
persons. In addition, no transfer may be effected unless the Debentures
have been duly registered under all applicable federal and state
securities laws pursuant to then-effective registrations which
contemplate the proposed transfer or unless the proposed transfer is
exempt from any such registration. All restrictions on transfer shall
apply to a transferee.
APPOINTMENT OF TRUSTEE
Pursuant to the Debenture Agreement, a trustee shall be
appointed to represent the interests and take all actions on behalf of
the holders of the Debentures (the "Trustee"), including, but not
limited to, all actions with respect to the collection of sums due
under the
221
<PAGE> 234
Debentures and enforcement of any rights of the holders of the
Debentures in the Senior Debenture Security Interests and Subordinated
Debenture Security Interests securing such Debentures. John J. Heiniger
has been appointed as the Trustee. Mr. Heiniger is currently the Chief
Financial Officer of Stoll, and is expected to enter into an employment
agreement with the Company following the Exchange Transactions. It is
anticipated that the holders of the Debentures will select a new
trustee who will not be an employee of the Company. However, such new
trustee must be selected unanimously by a committee consisting of
Ronald E. Scherer, Richard H. Stoll, Sr., Richard H. Stoll, Jr.,
Thaddeus S. Majerek and George R. Klein, Jr.
222
<PAGE> 235
ADDITIONAL INFORMATION ABOUT THE COMPANY
FINANCIAL INFORMATION
Set forth in this Section is additional information about the Company,
including Selected Financial Data, financial statements for the year ended
September 28, 1996, and for the six months ended March 28, 1997, and its
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
SELECTED FINANCIAL DATA
The following selected historical financial data of the Company should
be read in conjunction with the Company's consolidated financial statements and
notes thereto. 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
</TABLE>
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 Team Logos Sportstuff, Inc. for a full year; Service News Company
doing business as Yankee News Company from May 24, 1993 to October 2, 1993;
Sportstuff Marketing, Inc. from March, 1993 to October 2, 1993; Citizens Rental,
Inc. through March 12, 1993; and Service News Company's investment in MDI L.P.
through May 24, 1993.
223
<PAGE> 236
5. Includes a full-year of Citizens Rental, Inc. and Service News Company's
Investment in MDI L.P. and two months of Team Logos Sportstuff, Inc..
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS OF UNIMAG FOR THE YEARS ENDED SEPTEMBER 28, 1996
AND SEPTEMBER 30, 1995
REVIEW OF OPERATIONS
The following table provides financial information for the year ended
September 28, 1996 and describes the operating results of the Company for the
UNIMAG entities prior to the acquisitions, for the Acquisition Parties combined,
and the related cost of goodwill amortization and debenture interest.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Amortization of
Acquisition Goodwill
Prior Acquisition and Debenture
Unimag Parties Interest Combined Total
- ---------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 28,
1996:
- ---------------------------------------------------------------------------------------------------
Results of operations $(000):
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 50,384 $ 29,848 $ -- $ 80,232
- ---------------------------------------------------------------------------------------------------
Gross margin 12,496 7,459 -- 19,955
- ---------------------------------------------------------------------------------------------------
Selling, general and (13,721) (8,482) -- (22,203)
administrative
- ---------------------------------------------------------------------------------------------------
Net loss (3,686) (1,572) (1,130) (6,388)
- ---------------------------------------------------------------------------------------------------
As a percent of revenue:
- ---------------------------------------------------------------------------------------------------
Gross margin 24.80% 24.99% -- 24.87%
- ---------------------------------------------------------------------------------------------------
Selling, general and (27.23%) (28.42%) -- (27.67%)
administrative
- ---------------------------------------------------------------------------------------------------
Net loss (7.32%) (5.27%) -- (7.96%)
- ---------------------------------------------------------------------------------------------------
</TABLE>
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 (with
approximately $50,384,000, or 63% derived from prior UNIMAG operations), an
increase of 227% over 1995 revenue. Substantially all of the growth was
attributable to the acquisitions during 1996 for the periods included in the
preceeding 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.
225
<PAGE> 237
The most significant development during 1996 was the reduction in
revenue from existing chain customers of both UNIMAG and the Acquisition
Parties where new discounts, rebates and amortization of signing bonuses caused
an approximate 5% 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 approximately 24.9% in
1996. This trend was not unique to UNIMAG or to the Acquisition Parties, 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 and the Acquisition
Parties, as a percentage of the retail price to the customer, remained
relatively constant, however due to volume of business the Acquisition Parties
cost of production was slightly less than the prior UNIMAG.
Selling, general and administrative expenses, as a percent of revenue,
increased by 1.5% to 27.7% in 1996 versus 26.2% in 1995 with prior UNIMAG at
27.2% and Acquisition Parties at 28.4%. Included in this increase was
administrative cost increases in 1996 over 1995 of $1,049,000 for legal and
accounting expenses. Payroll expenses for UNIMAG and the Acquisition Parties,
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 approximately 1% less.
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. Depreciation and amortization as a
percentage of sales before purchase accounting was consistent between periods.
The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates was
accounted for using purchase price accounting. Accordingly, goodwill was created
in the amount of $17,083,000 for Michiana, $50,173,000 for Stoll, $33,290,000
for Klein, $789,000 for Read-Mor and $39,631,000 for Scherer Affiliates. This
goodwill is being amortized over 40 years with 1996 amortization of two months
for Michiana, Stoll, Read-Mor and Scherer Affiliates and two weeks for Klein.
All of these changes resulted in an increase in the net loss from
operations to $4,922,784 (6.1% of revenue) in 1996 compared to $830,582 (3.4% of
revenue) in 1995. The 1996 net loss after taxes of $6,387,795 included
$1,781,161 of interest expense while the 1995 net income of $1,864,100 include
interest expense of $347,809 and a settlement gain of $2,352,170. The 1996 net
loss included approximately $3,686,000 from prior UNIMAG, $1,572,000 from
Acquisition Parties and $1,130,000 of acquisition amortization of goodwill and
interest.
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. These debentures increased interest expense
for 1996 by approximately $664,000. In addition, Prior UNIMAG 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.
As a result of the application of the Section 382 limitation, a
significant amount of pre-change net operating losses of the Combined Company
should expire unutilized. UNIMAG estimates that over $20 million of such net
operating losses should expire unutilized as a result of such limitation
(assuming that the limitation is not increased in respect of any built-in
gains).
The operating results of Prior UNIMAG are more favorable currently
since the synergy plans had not been fully implemented by September 28, 1996.
In addition, the net loss of the Acquisition Parties was more favorable
due to these entities being less leveraged than Prior UNIMAG along with the
additional amortization relating to the Wilmington and Pittsburgh acquisitions.
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
226
<PAGE> 238
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. On January 26, 1995 UNIMAG reached final settlement of the
lawsuit against Prudential Insurance Company of America and two of its
affiliates. As part of the settlement UNIMAG received $3,000,000, less related
professional fees of $648,000. The $2,352,000 net settlement was included in the
"other income" and increased the Company's liquidity by a corresponding amount.
UNIMAG then used part of the settlement proceeds to negotiate payments to
vendors of Team Logos Sportstuff, Inc., an inactive, wholly-owned subsidiary, in
final settlement of liabilities to those vendors. These settlements of vendor
accounts payable resulted in $665,000 of other income during 1995.
At September 28, 1996 the Company had current liabilities of
$116,474,000 (which includes $4,370,000 of the current portion of Senior
Debentures and accrued debenture interest) and current assets of $71,291,000 for
a working capital deficit of $45,183,000. Included in the $45,183,000 is
$6,207,000 of related party debt, and it is anticipated that $4,500,000 of that
will be converted to long-term debt. The Company also has $4,470,000 in current
debt and accrued interest related to debentures issued to the Acquisition
Parties. The Company is reviewing refinancing alternatives for this debt. The
Company also plans further reductions in current liabilities by refinancing of
current debt and an infusion of additional working capital using longer term
debt or new equity.
The Company anticipates improvements in EBITDA in fiscal 1997 versus
1996 due to reductions in selling, general and administrative expenses through
consolidation synergies. It is anticipated that the margin reductions in
selling, general and administrative expenses will come primarily from the
Acquisition Parties. The Combined Company does not anticipate any further
declines in gross margins and has identified some opportunities for recovery of
some of the lost margin in the latter part of fiscal 1997.
The acquisition transactions of the Company since June 30, 1996 have
added $141 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 $3,524,000
for this goodwill and initial annual interest of approximately $5,050,000
related to these transactions.
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 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.
227
<PAGE> 239
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 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.
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.
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
227
<PAGE> 240
retailers in net long term prepaid signing bonuses still 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 legal and accounting
expenses, 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.
228
<PAGE> 241
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.
Distribution Rate Base is a number similar to that of the advertising rate base
for an advertiser. It is predicated on the consumer pull potential of a magazine
as analyzed by the SMARTS system for Lifestyle Cluster Groups and then
consolidated into Social Rankings for anticipated impressions per thousands by
retailer. 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.
The consolidation of the contiguous Acquisition Parties enables the
Company to achieve considerable cost savings and operating efficiencies through
the elimination of redundant overhead and the consolidation of overlapping
facilities. Subsequent to September 28, 1996 the Company converted nine
warehouse locations in the states of Michigan, Ohio and Indiana to delivery
depots by consolidating the majority of office and warehouse functions in three
locations. The cost to eliminate this redundant overhead and to consolidate was
insignificant and was reflected in the periods in which the changes were made.
Savings occurred from the elimination of duplicate administrative and
distribution functions, and additional savings result from spreading the costs
of technology over a larger customer base. Additionally, the consolidation of
the businesses of the Company and the Acquisition Parties will increase
purchasing power and the ability to negotiate future favorable quantity
discounts with publishers and national brokers.
The Company anticipates that the gross margin pressure which occurred
in the latter half of 1996, will continue into 1997. The Company, and the entire
industry, has begun the process of margin recovery which includes new
negotiations with suppliers regarding pricing and discounts, changing the mix of
higher margin magazines versus lower margin magazines, and consolidating book
purchases for volume discounts. The Company anticipates a significant recovery
over time; however, the amount and timing are not quantifiable at this point in
time.
The decline in the gross margin percent will be offset by reductions in
selling, general and administrative expenses to below 20% after the
consolidations are complete. The higher percentage of selling, general and
administrative in 1996 reflects the impact of absorbing most of the added
payroll related costs for increase in service-related product management
functions. The future reduction of this percentage will be supported by
opportunities to increase the revenue base without a corresponding increase in
the related fixed and semi-variable expenses.
229
<PAGE> 242
Although a definitive plan had not been adopted prior to September 28,
1996, subsequent to September 28, 1996 the Company anticipates being able
through facility consolidations to terminate approximately 15% of the total
full-time work force that was in place at September 28, 1996. During fiscal 1997
a plan was defined and has started to be implemented. The additional cost of
these terminations have not been significant and were reflected in the period
when the termination took place. The annual savings is estimated at
approximately $2.7 million, once the plan is fully implemented.
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 will issue 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 R. David Thomas will
purchase an additional $500,000 of common stock. 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.
COMMITMENTS AND CONTINGENCIES
230
<PAGE> 243
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.
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 Management's Discussion and Analysis of Financial Condition and
Results of Operation 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
and 1998; 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; 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, 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.
232
<PAGE> 244
UNITED MAGAZINE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
TOGETHER WITH AUDITORS' REPORT
232
<PAGE> 245
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
233
<PAGE> 246
<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 regulation 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)
234
<PAGE> 247
<TABLE>
<CAPTION>
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.
235
<PAGE> 248
<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.
236
<PAGE> 249
UNITED MAGAZINE COMPANY
Consolidated Statements of Shareholders' Equity
For the Years Ended September 28, 1996 and September 30, 1995
<TABLE>
<CAPTION>
Number of Shares
Outstanding Treasury Obligation
(post-split) Shares Common Paid-in to Issue Treasury
(post-split) Stock Capital Common Stock Stock
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, October 1, 1994 2,139,199 1,606,413 $ 25 $ 42,467,355 $ -- $ --
Issuance of common stock 22,305 -- -- 223,046 -- --
Purchase of shares previously (1,059) 1,059 -- -- -- (16,998)
issued
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 -- -- -- -- -- --
--------- --------- ------------ ------------ ------------ ------------
------------ ------------ ------------
BALANCE, September 30, 1995 2,160,445 1,607,472 250 42,701,846 -- (16,998)
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:
23,449 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 -- -- -- -- -- --
Minimum pension liability -- -- -- -- -- --
adjustment
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, September 28, 1996 2,193,894 1,607,472 $ 250 $ 43,079,563 $ 65,242,138 $ (16,998)
============ ============ ============ ============ ============ ============
<CAPTION>
Minimum
Pension
Unrealized Liability Retained
Loss Adjustment Deficit Total
<S> <C> <C> <C> <C> <C>
BALANCE, October 1, 1994 $ -- $ -- $(42,415,750) $ 51,855
Issuance of common stock -- -- -- 223,046
Purchase of shares previously -- -- -- (16,998)
issued
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 -- -- (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 -- (108,204) -- (108,204
adjustment
Net loss -- -- (6,387,795) (6,387,795)
------------ ------------ ------------ ------------
BALANCE, September 28, 1996 $ (31,219) $ (108,204) $(46,939,365) $ 61,226,165
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
237
<PAGE> 250
<TABLE>
<CAPTION>
UNITED MAGAZINE COMPANY
-----------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
-------------------------------------------------------------
INCREASE (DECREASE) IN CASH
---------------------------
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 (used in) 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)
Receipt of payment (issuance of) on notes receivable from
related parties 347,941 (500,000)
----------- -----------
Net cash provided by (used in) investing activities 481,765 (1,148,647)
----------- -----------
</TABLE>
(Continued on next page)
238
<PAGE> 251
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
INCREASE (DECREASE) IN CASH
(Continued)
1996 1995
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
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.
239
<PAGE> 252
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 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.
240
<PAGE> 253
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.
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.
(e) MARKETABLE SECURITIES - The Company accounts for its marketable
securities in accordance with Statement of Financial Accounting
Standards No. 115. The Company's investment in marketable
securities represent securities that are "available for sale". The
securities have been recorded at fair
241
<PAGE> 254
market value as of September 28, 1996 with an unrealized loss
of $31,219 reported as a separate component of shareholders'
equity.
(f) 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.
(g) 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.
(h) 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.
(i) 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.
(j) 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.
(k) DISCOUNTS AND REBATES - The Company records all discounts and
rebates given to the customer on the accrual basis of accounting as
a reduction in net sales.
(l) INCOME TAXES - The Company follows SFAS No. 109 "Accounting for
Income Taxes" (SFAS 109). (See Note 8).
(m) 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.
(n) 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
242
<PAGE> 255
included in the weighted average shares outstanding from the
respective acquisition dates as discussed in Note 4.c.
(o) 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.
(p) 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
and the purchase of the business option in 1995. The following
summarizes the allocation of fair values of the various assets and
liabilities acquired:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 67,856
Accounts receivable, net 663,726
Inventories 842,292
Property and equipment 337,654
Note receivable - prior owners 47,456
Other assets 2,950
Sales O&R records 76,950
Covenants not to compete 425,000
Goodwill 5,206,159
Accounts payable and accrued expenses (3,161,768)
Advanced from UNIMAG (3,403,542)
Intercompany payable (289,242)
Reserve for gross profit on sales returns (357,000)
Debt obligations (458,490)
-----------
Option exercise price $ 1
===========
</TABLE>
243
<PAGE> 256
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. The following summarizes the allocation of
purchase price based on the fair values of the various assets and
liabilities acquired:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 39,768
Accounts receivable, net 3,223,097
Inventories 1,951,043
Property and equipment 627,623
Receivables from related parties 244,356
Other assets 12,509
Sales O&R records 162,215
Goodwill 6,857,280
Accounts payable and accrued expenses (6,626,452)
Advanced from related parties (126,739)
Reserve for gross profit on sales returns (712,800)
Deferred benefit obligations (2,985,084)
-----------
Total purchase price $ 2,666,816
============
</TABLE>
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 $143 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. The following summarizes the allocation of purchase price
based on the fair values of the various assets and liabilities
acquired:
244
<PAGE> 257
<TABLE>
<S> <C>
Cash $ 3,462,905
Accounts receivable, net 21,362,374
Inventories 29,905,639
Property and equipment 11,132,211
Receivable from related parties 3,012,859
Other assets 5,023,552
Deposits and prepaid signing bonuses 3,350,692
Note receivable - related party 3,756,686
Investments 7,500,000
Covenants not to compete 219,139
Goodwill 140,834,624
Accounts payable and accrued expenses (63,553,227)
Advanced from related parties (400,000)
Reserve for gross profit on sales returns (8,248,918)
Income taxes payable (978,243)
Accrued pension and post retirement obligations (1,848,342)
Other liabilities (913,799)
Debt obligations (23,083,850)
------------
Total purchase price $130,534,302
============
</TABLE>
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.
- -------------------------------------------------------------------------------
in 000's, except EPS 1996 1995
- -------------------------------------------------------------------------------
Net Revenue $280,751 $276,756
- -------------------------------------------------------------------------------
Net Income (Loss) (21,523) (877)
- -------------------------------------------------------------------------------
EPS $ (3.09) $ (.13)
- -------------------------------------------------------------------------------
(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:
1996
(a) Note from shareholder $5,000,000
(b) Other related parties 1,206,853
----------
$6,206,853
==========
(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
245
<PAGE> 258
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%.
<TABLE>
<CAPTION>
Long term Debt Obligations
---------------------------
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.
(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 totaling
246
<PAGE> 259
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.
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
------------ ------------
Total 39,919,815 18,559,707
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.
However, no payments on subordinated debentures are allowed until all senior
debentures have been paid. 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>
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.
247
<PAGE> 260
(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>
Related
Fiscal Year Party Other Total
------------------- ------------- ------------- -------------
<S> <C> <C> <C>
1997 $ 871,000 $1,458,000 $ 2,329,000
1998 604,000 1,077,000 1,681,000
1999 434,000 628,000 1,062,000
2000 112,000 535,000 647,000
2001 7,000 404,000 411,000
Thereafter - 201,000 201,000
---------- ---------- -----------
Total $2,028,000 $4,303,000 $ 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.
(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
---------------------------
Current tax expense:
<S> <C> <C>
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.
248
<PAGE> 261
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.
As a result of the application of the Section 382 limitation, a
significant amount of pre-change net operating losses of the UNIMAG Group
should expire unutilized. The Company estimates that over $20 million of
such net operating losses should expire unutilized as a result of such
limitation (assuming that the limitation is not increased in respect of any
built-in gains).
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.
(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>
<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>
249
<PAGE> 262
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%
Net pension cost for 1996 included the following components:
<TABLE>
<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 Stoll Company recorded a curtailment loss of approximately $410,000
prior to the acquisition by UNIMAG, representing the expected loss to be
recognized upon termination of the plan.
The following table sets forth the plan's funding status at September 28,
1996.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
-------------------------------------------------------------------------------
<S> <C>
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.
250
<PAGE> 263
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
==========
</TABLE>
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<S> <C>
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.
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
251
<PAGE> 264
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 shares of UNIMAG stock (post-reverse
split).
(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.
(d) The Company has lease agreements for facilities from the former
owners of the fourth quarter acquisitions. These lease payments will
be 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.
252
<PAGE> 265
(13) CONTINGENCIES AND COMMITMENTS
-----------------------------
(a) Prudential Settlement
---------------------
In January, 1992, UNIMAG filed an $85 million suit against
Prudential Insurance Company of America and two of its affiliates in
the United States District Court for the Southern District of Ohio,
Eastern Division. The suit charges the insurer and its affiliates
with breaching agreements to provide $10 million in equity and $40
million in financing for the acquisition of SNC and future
acquisitions. This breach forced UNIMAG to make other corporate
reorganization and financing arrangements detrimental to its
business and caused it to suffer unanticipated related expenses and
loss of profits.
On January 26, 1995, the Company reached final settlement of its
lawsuit against Prudential Insurance Company of America and two if
its affiliates. As part of the settlement, the Company received
$3,000,000 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 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:
253
<PAGE> 266
(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 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 litigation
matters including those discussed above. Management intends to
vigorously defend these outstanding claims. The Company believes it
has adequate accrued loss contingencies for all legal matters and
the current or threatened litigation matters will not have a
material adverse impact on the Company's financial position or
results of operations.
254
<PAGE> 267
UNITED MAGAZINE COMPANY
FINANCIAL INFORMATION
FOR THE SECOND QUARTER ENDED MARCH 29, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations of UNIMAG for the three months ended
March 29, 1997 and March 30, 1996
Review of Operations
The results of operations for the quarter ended March 29, 1997 are not
indicative of results from prior quarters, nor are the results for the quarter
indicative of the future. 1996 was a unique transition year which featured
industry wide consolidations, declines in gross margin as a percent of revenue,
and increases in payroll costs related to increased levels of service. These
trends have continued into 1997, and the Company has continued its consolidation
and cost reduction efforts to offset the impact of these trends.
The following table provides comparative financial information for the first two
fiscal quarters of 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended
- ----------------------------------------------------------------------------------------------------------------------
March 29, 1997 December 28, 1996 March 30, 1996 December 30, 1995
-------------- ----------------- -------------- -----------------
Results of Operations ($000):
<S> <C> <C> <C> <C>
Revenue $75,675 $74,429 $13,560 $6,469
Gross Margin 16,580 16,463 3,406 1,736
Selling, General and 16,433 17,376 3,387 1,546
Administrative
EBITDA 147 (913) 19 100
Net Loss (3,733) (4,874) (491) (212)
As a Percent of Revenue:
Gross Margin 21.9 22.1 25.1 26.8
Selling, General and 21.7 23.3 25.0 23.9
Administrative
EBITDA .2 (1.2) .1 1.5
Net Loss (4.9) (6.5) (3.6) (3.3)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table provides financial information for the period(s) presented
which describes the operating results of the Company for the UNIMAG entities
prior to the acquisitions, for the acquisition companies combined, and the
related cost of goodwill amortization and debenture interest.
255
<PAGE> 268
<TABLE>
<CAPTION>
Amortization of
Acquisition
Goodwill and
Prior Acquisition Debenture Combined
UNIMAG Companies Interest Total
------------ -------------- ----------------- -------------
<S> <C> <C> <C> <C>
QUARTER ENDED MARCH 29, 1997:
Results of operations $(000):
Revenue $ 15,986 $ 59,689 $ -- $ 75,675
Gross margin 3,424 13,156 -- 16,580
Selling, general and
administrative (3,887) (12,546) -- (16,433)
Net loss (1,036) (554) (2,143) (3,733)
As a percent of revenue:
Gross margin 21.42% 22.04% -- 21.91%
Selling, general and administrative
(24.32%) (21.02%) -- (21.72%)
Net loss (6.48%) (0.93%) -- (4.93%)
QUARTER ENDED DECEMBER 28, 1996:
Results of operations $(000):
Revenue $ 16,503 $ 57,926 $ -- $ 74,429
Gross margin 3,798 12,665 -- 16,463
Selling, general and
administrative (4,031) (13,345) -- (17,376)
Net loss (916) (1,815) (2,143) (4,874)
As a percent of revenue:
Gross margin 23.01% 21.86% -- 22.12%
Selling, general and administrative
(24.43%) (23.04%) -- (23.35%)
Net loss (5.55%) (3.13%) -- (6.55%)
</TABLE>
The revenue for the Combined Company for the quarter ended March 29, 1997 was
$75,675,010, with approximately $59,689,000, or 75% derived from the acquisition
companies. This was an increase of 458% over revenue for the quarter ended March
30, 1996 and an increase of 1.7% over the previous fiscal quarter ended December
28, 1996.
The Acquisition Companies grew by 3.0% from the first quarter to the second
quarter while the Prior UNIMAG Companies declined by 3.1%. During 1996 the
Company and the industry experienced reductions in gross margins from existing
chain customers because of new discounts, rebates and amortization of up-front
signing bonuses. As a result of these approximate 5% reductions in revenue, the
gross margin, as a percentage of revenue, declined from 25.1% in the second
fiscal quarter of 1996 and 22.1% in the previous fiscal quarter to approximately
21.9% in the second fiscal quarter of 1997.
The decline in the Prior UNIMAG's gross margin in the second quarter was
attributable in part on increased chain sales at lower margins in major
markets.
Selling, general and administrative expenses, as a per cent of revenue,
decreased to 21.7% with prior UNIMAG at 24.3% and acquisition companies at
21.0%, in 1997 versus 25.0% in 1996 and 23.3% in the previous fiscal quarter.
The in-store service component of payroll expense increased in 1997 over 1996 as
a result of increased in-store service for the large retail customers. This
increase in in-store service cost, created by commitments
257
<PAGE> 269
under contract by the Company to increase the levels of service to the retailers
and to assume certain product management functions previously performed by the
retailer, also was representative of changes occurring in the industry. These
increases were partially offset by the benefit of the reduction of full-time
employees in Michigan, Indiana and Ohio. The Acquisition Parties' percent
declined more rapidly because the synergies from consolidation were in the
Acquisition Parties' markets when warehouses were converted to depots and
personnel reductions were made.
Depreciation and amortization expense increased due to the depreciation of fixed
assets acquired from the Acquisitions Parties and due to the amortization of
goodwill relating to the several business combinations in 1996. The
acquisitions of Wilmington, Triangle, Michiana, Stoll, Klein, Read-Mor and
Scherer Affiliates were accounted for using purchase price accounting.
Accordingly, goodwill was created in the amount of approximately $154,000,000.
This goodwill is being amortized over 40 years at an approximate amount of
$962,500 per quarter.
This resulted in a change in the net loss to $3,732,83, or 4.9% of revenue in
the second fiscal quarter of 1997 compared to a loss of $490,705, or 3.6% in
1996 and a loss of $4,874,309, or 6.5% in the preceding quarter. The net loss
for the quarter ended March 29, 1997 included approximately $1,036,000 from
prior UNIMAG versus $916,000 in the previous quarter, $554,027 from Acquisition
Companies versus $1,815,000 in the previous quarter and approximately $2,143,000
in amortization of goodwill and debenture interest for each quarter relating to
the Acquisition Parties.
The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates is
being financed by the issuance of Common Stock of the Company, 8% Senior
Debentures in the aggregate amount of $39,920,000 and 10% Subordinated
Debentures in the aggregate amount of $18,560,000. These debentures accrue
interest for the entire quarter. This increased interest expense for the second
quarter of 1997 by approximately $1,262,000.
Because of the loss for the quarter and because of loss carryforwards, UNIMAG
had no federal income tax expense for the second quarter of 1997. The Company
has a net operating loss (NOL) of approximately $56,000,000 at March 29, 1997;
however, the Company has not recognized any benefits from that NOL through March
29, 1997. As a result of the application of the Section 382 limitation, a
significant amount of pre-change net operating losses of the Combined Company
should expire unutilized. The Company estimates that over $20 million of such
net operating losses should expire unutilized as a result of such limitation
(assuming that the limitation is not increased in respect of any built-in
gains).
The calculation of earnings per common share and weighted average number of
shares outstanding includes the shares to be issued for Michiana, Stoll, Klein,
Read-Mor and Scherer Affiliates for the periods determined under the respective
agreements. In addition, the calculation of earnings per share reflects the one
for ten reverse split to be submitted to the Shareholders for approval at the
1997 Annual Meeting of Shareholders. The effects of the one for ten reverse
stock split have been included because two shareholders holding more than 50% of
the shares of Common Stock of the Company have agreed to vote in favor of the
split.
258
<PAGE> 270
- --------------------------------------------------------------------------------
Results of Operations of UNIMAG for the six months ended March 29, 1997
and March 30, 1996
- --------------------------------------------------------------------------------
Review of Operations
The results of operations for the six months ended March 29, 1997 are not
indicative of results from prior quarters, nor are the results for the six
months indicative of the future. The following table provides comparative
financial information for the first six months of 1997 and 1996.
<TABLE>
<CAPTION>
March 29, March 30,
1997 1996
------------ -------------
<S> <C> <C>
Results of Operations $(000):
Revenue $ 150,104 $ 20,029
Gross Margin 33,043 5,142
Selling, General and Administrative (33,809) (4,933)
Net Loss (8,607) (703)
As a Percent of Revenue:
Gross Margin 22.0 25.7
Selling, General and Administrative (22.5) (24.6)
Net Loss (5.7) (3.5)
</TABLE>
The following table provides financial information for the six months ended
March 29, 1997 presented and describes the operating results of the Company for
the UNIMAG entities prior to the acquisitions, for the acquisition companies
combined, and the related cost of goodwill amortization and debenture interest.
<TABLE>
<CAPTION>
Amortization of
Acquisition
Goodwill and
Prior Acquisition Debenture Combined
UNIMAG Companies Interest Total
------------ -------------- ----------------- -------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED MARCH 29, 1997:
Results of operations $(000):
Revenue $ 32,489 $ 117,615 $ -- $ 150,104
Gross margin 7,222 25,821 -- 33,043
Selling, general and
administrative
(7,918) (25,891) -- (33,809)
Net loss (1,952) (2,369) (4,286) (8,607)
As a percent of revenue:
Gross margin 22.23% 21.95% -- 22.01%
Selling, general and
administrative
(24.37%) (22.01%) -- (22.52%)
Net loss (6.01%) (2.01%) -- (5.73%)
</TABLE>
The revenue for the Combined Company for the six months ended March 29, 1997 was
$150,103,512, with approximately $117,615,000, or 78% derived from the
Acquisition Companies. This was an increase of 649%
259
<PAGE> 271
over revenue for the six months ended March 30, 1996. This increase is primarily
attributable to the inclusion of revenue from the acquisition parties' companies
during the entire six months ended March 29, 1997 with Acquisition Companies
growing at a faster rate during the second quarter than did prior Unimag
Companies.
During 1996 the Company and the industry experienced reductions in gross margins
from existing chain customers because of new discounts, rebates and amortization
of up-front signing bonuses. As a result of these approximate 5% reductions in
revenue, the gross margin, as a percentage of revenue, declined from 25.7% in
the first six months of 1996 to approximately 22.0% in the first six months of
1997 with the Acquisition Companies having a slightly better percent.
Selling, general and administrative expenses, as a per cent of revenue,
decreased to 22.5% with prior UNIMAG at 24.4% and Acquisition Companies at
22.0%, in 1997 versus 24.6% in 1996. The in-store service component of payroll
expense increased in 1997 over 1996 as a result of increased in-store service
for the large retail customers. This increase in in-store service cost, created
by commitments under contract by the Company to increase the levels of service
to the retailers and to assume certain product management functions previously
performed by the retailer, also was representative of changes occurring in the
industry. These increases were more than fully offset by the benefit of the
reduction of full-time employees in Michigan, Indiana and Ohio. As a result, the
Acquisition Companies were able to decrease their percents more efficiently.
Depreciation and amortization expense increased due to the depreciation of fixed
assets acquired from Acquisition Parties and due to the amortization of goodwill
relating to the several business combinations in 1996. The acquisitions of
Wilmington, Triangle, Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates
were accounted for using purchase price accounting. Accordingly, goodwill was
created in the amount of approximately $154,000,000. This goodwill is being
amortized over 40 years at approximately $3,850,000 annually.
This resulted in an increase in the net loss to $8,607,141 or 5.7% of revenue in
1997 compared to $702,892, or 3.5% in 1996. The net loss for the six months
included approximately $1,952,000 from prior UNIMAG, $2,369,000 from Acquisition
Companies, and $4,286,000 for amortization of goodwill and debenture interest,
relating to the Acquisition Parties. The loss as percentage of revenue was
6.00% for Prior Unimag and 2.0% for the Acquisition Parties before the impact
of purchase accounting. This is reflective of the synergies being achieved
within the Acquisition Parties.
The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates is
being financed by the issuance of Common Stock of the Company, 8% Senior
Debentures in the aggregate amount of $39,920,000 and 10% Subordinated
Debentures in the aggregate amount of $18,560,000. These debentures accrue
interest for the entire quarter. This increased interest expense for the first
six months of 1997 by approximately $2,524,000.
Because of the loss for the quarter and because of loss carryforwards, UNIMAG
had no federal income tax expense for the first six months of 1997. The Company
has a net operating loss (NOL) of approximately $56,000,000 at March 29, 1997;
however, the Company has not recognized any benefits from that NOL through March
29, 1997.
As a result of the application of the Section 382 limitation, a significant
amount of pre-change net operating losses of the UNIMAG Group should expire
unutilized. The Company estimates that over $20 million of such net operating
losses should expire unutilized as a result of such limitation (assuming that
the limitation is not increased in respect of any built-in gains).
The calculation of earnings per common share and weighted average number of
shares outstanding includes the shares to be issued for Michiana, Stoll, Klein,
Read-Mor and Scherer Affiliates for the periods determined under the respective
agreements. In addition, the calculation of earnings per share reflects the one
for ten reverse split to be submitted to the Shareholders for approval at the
1997 Annual Meeting of Shareholders. The effects of the one for ten reverse
stock split have been included because two shareholders holding more than 50% of
the shares of Common Stock of the Company have agreed to vote in favor of the
split.
260
<PAGE> 272
- --------------------------------------------------------------------------------
Liquidity
- --------------------------------------------------------------------------------
The Company measures its liquidity primarily in Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA). However, EBITDA should not be considered
as an alternative to net income or as an indicator of cash flows generated by
operating, investing or financing activities.
EBITDA for the second quarter of 1997 was $147,000 versus $(913,000) for the
preceding quarter. EBITDA for the first six months of 1997 was $(766,000) versus
$119,000 for the first six months of 1996. The 1997 EBITDA has been impacted
negatively by the gross margin and payroll pressures during UNIMAG's period of
ownership of the acquisition companies, and the Company has not received the
full benefits from implementation of expected consolidation synergies with the
acquisition companies because of the time and complexity involved in the
consolidations.
During the quarter ended March 28, 1996, the working capital deficit increased
by $2,834,000 to $53,514,000 with $3,021,000 of the increase due to increases in
current debenture principal and interest owed. Included in the $53,514,000 is
$16,149,000 for related party debt and for debenture principal and interest.
The Company anticipates improvements in EBITDA during the remainder of fiscal
1997 due to continued reductions in selling, general and administrative expenses
through consolidation synergies and through some improvement in gross margins.
It is anticipated that the major reduction in selling, general and
administrative expenses will come primarily from the Acquisition Parties.
The Company is closing or converting to delivery depots several warehouse
locations in the states of Michigan, Indiana and Ohio by consolidating the
majority of the office and warehouse functions in three existing locations. The
gross margin improvement plans include the negotiation of more favorable terms
with suppliers, changing the sales mix to higher margin products, and
consolidating book purchases for volume discounts.
The acquisition transactions of the Company since June 30, 1996 have added
$140,966,000 of goodwill to the Company's assets and $58,480,000 of Senior and
Subordinated Debentures to the Company's liabilities. On an annual basis the
Company anticipates future amortization of approximately $3,524,000 for this
goodwill and initial annual interest of approximately $5,050,000 related to
these transactions.
Cash Flows - Operating Activities
During the first six months of 1997 the Company experienced an increase in net
cash provided from operations of $2,058,000 compared to a deficit of $(112,000)
in 1996. The 1997 increase is due primarily to a net increase in current
liabilities, primarily vendor payables, of approximately $10,937,000 versus a
net increase in current assets, primarily trade accounts receivable offset by a
reduction in inventory, of approximately $2,605,000. The loss for the six months
of $8,607,000 was partially offset by depreciation and amortization of
$4,576,000. The operating cash flow results for the first six months of fiscal
1996 were due primarily to changes associated with the acquisitions of
Wilmington and Pittsburgh.
Cash Flows - Investing Activities
The Company spent $680,000 in the first six months of 1997 for capital
expenditures and $1,061,000 for other long term assets. During that same period
the Company sold an airplane held for resale for $1,240,000. The investing cash
flow results for the first six months of fiscal 1996 included capital
expenditures of $282,000.
Cash Flows - Financing Activities
During the first six months of 1997 the Company made net reductions of debt
obligations of $3,389,000 including $1,686,000 of current debt and $1,703,000 of
long-term debt. The financing results for the first six months of fiscal 1996
included debt reductions of $226,000.
261
<PAGE> 273
Capital Resources
Through its acquisitions the Company has banking relationships with several
banks; however, the Company is seeking to consolidate its borrowing and increase
its borrowing capacity with one or more large financial institutions following
the Annual Meeting of Shareholders.
Capital Requirements
During 1997, the Company expects that its requirements for capital expenditures
will not be significant. Through route consolidations and greater use of
in-store service personnel, the Company anticipates minimal increases in its
delivery fleet. The Company does anticipate additional expenditures for store
fixtures; however, these fixture increases have historically generated enough
additional revenue and gross margin to pay for the fixture costs with one year.
Operational Measures
The receivables of the Company and its Acquisition Parties increased during the
first six months of 1997 due to an increase in payment time periods by certain
large retailers. This increase in receivables caused a corresponding increase in
trade payables. The Company has centralized and consolidated its chain
collection efforts to improve future cash flow by reducing the number of days
outstanding of receivables.
In addition, through the Company's SMARTS System (which stands for Sales
Magazine Analysis React Transmit System) and related inventory management and
purchasing consolidation efforts, the Company has begun to reduce the amount of
inventory required to maintain and increase sales levels. During the quarter
ended March 29, 1997, the Company accelerated the amount of magazine and book
returns for vendor credit. This caused a decrease in the amount of estimated
reserve for the gross margin on future returns. The Company anticipates a
continuation of this effort during the balance of 1997.
Operating Synergies
The acquisition transactions will enable the Combined Company to successfully
leverage its investment in its sophisticated and proprietary SMARTS System,
acquired from the Scherer Affiliates, for more efficient product allocation and
higher per store revenue. The SMARTS System develops a Distribution Rate Base
("DRB") which is used by publishers to reach targeted customer growth. The
Company charges for the use of the DRB information, and this offsets the cost of
higher levels of service and the use of improved technology. Management believes
that, as the Combined Company continues to expand, the SMARTS System, which
provides a unique competitive advantage, will improve same store revenue as it
is introduced to new retail locations, and it will provide a critical
competitive advantage over other regional wholesalers in obtaining important new
accounts.
In addition to the proprietary SMARTS System, the Combined Company's current and
future high impact marketing programs provide an important competitive advantage
by customizing magazine displays to utilize otherwise wasted space in retail
stores. The implementation of these programs has historically enabled the
Company to improve a specific retail location's sales level by as much as 20-25%
when the program is introduced into the retail location. The Company expects
that the introduction of the high impact marketing program to Acquisition
Parties customers locations not currently using it will improve sales levels of
the Combined Company.
Through the consolidation of the contiguous Acquisition Parties, management
expects the Combined Company to achieve considerable cost savings and operating
efficiencies through the elimination of redundant overhead and the consolidation
of overlapping facilities. Duplicate administrative and distribution functions
can be eliminated, and the costs and benefits of technology can be spread over a
larger customer base. Additionally, the consolidation of the businesses of the
Company and the Acquisition Parties should increase purchasing power and the
ability to negotiate favorable quantity discounts with publishers and national
brokers.
Management continues to implement the consolidated staffing plan for the
Combined Company and expects significant employee reductions and labor cost
savings as the operations of the Acquisition Parties are systematically
consolidated in the quarters following the consummation of the proposed
transactions. The
262
<PAGE> 274
Company has terminated or sent notices of pending termination to approximately
15% of the 1996 total initial full-time work force that was in place at
September 28, 1996. The consolidation process focused on Michigan during the
quarter ended December 28, 1996 and Ohio during the quarter ended March 29,
1997. The consolidation of Indiana is expected to be completed during the third
fiscal quarter of 1997.
Commitments and Contingencies
The Company has entered into long-term contracts (generally three years) with
its most important customers. These contracts resulted in gross margin
reductions in the latter half of fiscal 1996 and the first six months of 1997.
The Company has been named as a defendant in various litigation matters.
Management intends to vigorously defend these outstanding claims. The Company
believes it has an adequate accrual for these claims and that any current
pending or threatened litigation matters will not have a material adverse impact
on the Company's results of operations or financial conditions.
Financing Arrangements
Each of the Exchange Agreements contemplates that stock or assets of the various
Acquisition Parties will be contributed to the Company in exchange for Common
Stock of the Company, valued at $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 will issue a $4,5000,000 Subordinated Debenture and make 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.
The Company anticipates the purchase of an additional $500,000 of common stock
by R. David Thomas. The Company also will issue $242,211 of Senior Debentures
and $94,594 of Subordinated Debentures in connection with the acquisition of
Read-Mor. The Company anticipates the purchase of an additional $500,000 of
common stock by R. David Thomas after the Annual meeting.
The Senior Debentures are designated as "8% Senior Debentures Due 2002", mature
on January 1, 2002, and bear interest at the rate of 8% per annum from July 1,
1996, provided, however, that Senior Debentures issued pursuant to the Klein
Exchange Agreement will begin to accrue interest from August 24, 1996. Interest
is payable quarterly on January 1, April 1, July 1 and October 1, commencing on
the date of final closing of a particular acquisition. Principal on the Senior
Debentures will be paid quarterly on each interest payment date in accordance
with the schedule and priority set forth in the Debenture Agreement, commencing
on the date of final closing of a particular acquisition.
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. However, the Company has not
received a financing commitment nor reached agreement regarding such financing.
263
<PAGE> 275
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.
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 Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward looking statements as defined by the Private
Securities Litigation Reform Act of 1995 (the Reform Act). These forward-looking
statements express the beliefs and expectations of management regarding UNIMAG's
future results and performance and include, without limitation, the following:
statements concerning the Company's outlook for the balance of 1997; the
Company's plans for 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 financing and refinancing; the
Company's future operational strategies to improve operating cash flow; and
other similar expressions concerning matters that are not historical facts.
Such statements are based on current expectations and involve a number of known
and unknown uncertainties that could cause the actual results, performance,
and/or achievements of the Company to differ materially from any future results,
performances, and/or achievements of the Company, express 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; 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.
262
<PAGE> 276
<TABLE>
<CAPTION>
UNITED MAGAZINE COMPANY
-----------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
AS OF MARCH 29, 1997 AND SEPTEMBER 28, 1996
-------------------------------------------
March 29, September 28,
ASSETS 1997 1996
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 714,166 $ 2,546,785
Accounts receivable, net 40,795,550 29,835,357
Inventories 29,214,740 35,746,922
Marketable securities 278,563 473,556
Notes receivable from related parties 1,577,646 1,352,646
Prepaids and other 1,315,582 1,335,458
------------- -------------
Total current assets 73,260,684 71,290,724
------------- -------------
PROPERTY AND EQUIPMENT, at cost:
Land 290,706 290,706
Building and improvements 2,260,740 2,260,740
Furniture and equipment 6,521,120 6,174,452
Vehicles 5,117,802 4,789,336
Leasehold improvements 526,816 522,336
------------- -------------
14,717,184 14,037,570
Less - accumulated depreciation and amortization (3,297,732 (1,585,503
------------- -------------
Total property and equipment, net 11,419,452 12,452,067
------------- -------------
ASSETS HELD FOR SALE -- 1,239,605
------------- -------------
OTHER ASSETS:
Sales orders and regulation records, net 296,600 423,720
Costs in excess of net assets acquired, net 152,323,477 154,518,179
Covenants not to compete, net 443,187 538,777
Notes receivable from related parties 1,788,645 1,788,645
Prepaids 4,572,378 5,501,703
Other assets, net 4,094,378 3,617,107
------------- -------------
Total other assets 163,518,665 166,388,131
------------- -------------
Total assets $ 248,834,364 $ 251,370,527
============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
264
<PAGE> 277
<TABLE>
<CAPTION>
UNITED MAGAZINE COMPANY
-----------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
AS OF MARCH 29, 1997 AND SEPTEMBER 28, 1996
-------------------------------------------
September 28,
LIABILITIES AND SHAREHOLDERS' EQUITY March 29, 1997 1996
------------------------------------ ---------------- ---------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of debt obligations $ 9,511,486 $ 10,822,386
Current portion of Senior debentures 6,658,589 3,329,295
Short-term borrowings - related parties 5,830,960 6,206,853
Accounts payable 79,842,336 70,302,971
Accrued expenses 12,761,542 12,762,143
Accrued interest on debentures 3,659,590 1,041,006
Income taxes payable 1,534,602 1,534,602
Reserve for gross profit on sales returns 7,611,462 10,474,409
------------- -------------
Total current liabilities 127,410,567 116,473,665
LONG-TERM DEBT OBLIGATIONS 7,544,961 9,247,711
DEBENTURES:
- Senior 33,261,226 36,590,520
- Subordinated 18,559,707 18,559,707
DEFERRED COMPENSATION PLAN 1,160,055 1,231,041
ACCRUED PENSION OBLIGATION 2,204,939 2,115,478
POST-RETIREMENT OBLIGATION 1,283,020 1,450,015
DEALER ADVANCE PAYMENTS AND OTHER 135,659 146,938
------------- -------------
Total liabilities 191,560,134 185,815,075
------------- -------------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT AGREEMENTS,
482,140 shares 4,622,890 4,329,287
------------- -------------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 53,250,000 shares
authorized, 4,283,506 issued and 2,676,034
outstanding (including shares
subject to Put Agreements) 250 250
Paid-in capital 43,306,872 43,079,563
Obligation to issue shares (4,349,476) 65,242,138 65,242,138
Treasury stock, at cost (16,998) (16,998)
Unrealized loss (226,212) (31,219)
Minimum pension liability adjustment (108,204) (108,204)
Retained deficit (55,546,506) (46,939,365)
------------- -------------
Total shareholders' equity 52,651,340 61,226,165
------------- -------------
Total liabilities and shareholders' equity $ 248,834,364 $ 251,370,527
============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
265
<PAGE> 278
<TABLE>
<CAPTION>
UNITED MAGAZINE COMPANY
-----------------------
FOR THE SECOND QUARTER ENDED MARCH 29, 1997
-------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
MARCH 29, 1997 AND MARCH 30, 1996
---------------------------------
3 Months Ended 3 Months 6 Months 6 Months
1997 Ended 1996 Ended 1997 Ended 1996
---------------- --------------- --------------- ---------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 75,675,010 $ 13,559,708 $ 150,103,512 $ 20,029,089
COST OF SALES 59,094,651 10,153,582 117,060,226 14,887,022
------------- ------------- ------------- -------------
Gross profit 16,580,359 3,406,126 33,043,286 5,142,067
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (16,433,126) (3,387,163) (33,808,912) (4,933,051)
DEPRECIATION AND AMORTIZATION (2,209,964) (384,100) (4,575,678) (586,200)
LOSS FROM INVESTMENT IN WILMINGTON -- -- -- (90,192)
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (2,062,731) (365,137) (5,341,304) (467,376)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES), net:
Interest expense, net (1,774,086) (154,525) (3,420,035) (277,465)
Other, net 103,985 28,957 154,198 41,949
------------- ------------- ------------- -------------
Total other income (expenses), net (1,670,101) (125,568) (3,265,837) (235,516)
------------- ------------- ------------- -------------
LOSS BEFORE TAXES (3,732,832) (490,705) (8,607,141) (702,892)
INCOME TAXES -- -- -- --
------------- ------------- ------------- -------------
NET LOSS $ (3,732,832) $ (490,705) $ (8,607,141) $ (702,892)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING
7,062,072 2,674,780 7,058,268 2,671,885
============= ============= ============= =============
LOSS PER SHARE $ (.53) $ (.18) $ (1.22) $ (.26)
============= ============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
266
<PAGE> 279
<TABLE>
<CAPTION>
UNITED MAGAZINE COMPANY
-----------------------
FOR THE SECOND QUARTER ENDED MARCH 29, 1997
-------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
----------------------------------------------
FOR THE SIX MONTHS ENDED
------------------------
MARCH 29, 1997 AND MARCH 30, 1996
---------------------------------
6 Months Ended 6 Months Ended
March 29, 1997 March 30, 1996
-------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES $ 2,058,108 $ (112,011)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (679,614) (281,792)
Additions of long-term assets (1,061,175) --
Proceeds from sale of Airplane held for resale 1,239,605 --
----------- -----------
Net cash used in investing activities (501,184) (281,792)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt obligations (3,389,543) (225,929)
Other -- 8,933
----------- -----------
Net cash used in financing activities (3,389,543) (216,996)
----------- -----------
NET DECREASE IN CASH AND EQUIVALENTS (1,832,619) 610,799
CASH, beginning of period 2,546,785 755,338
----------- -----------
CASH, end of period $ 714,166 $ 144,539
=========== ===========
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid during the period for interest $ 1,041,644 $ 33,054
Cash paid during the period for taxes 17,903 22,150
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
- -------------------------------------------------------------------
1997: None
1996: During the second quarter of 1996, UNIMAG purchased all of the outstanding
stock of Triangle News Company, Inc. See Note 7 to the Financial Statements.
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
267
<PAGE> 280
UNITED MAGAZINE COMPANY
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
FOR THE SECOND QUARTER ENDED MARCH 29, 1997
-------------------------------------------
(UNAUDITED)
-----------
1. GENERAL
-------
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of United Magazine Company and subsidiaries (UNIMAG or the
Company) as of March 29, 1997 and September 28, 1996, and the results of its
operations and cash flows for the six months ended March 29, 1997 and March 30,
1996. All such adjustments were of a normal recurring nature. The results of
operations in any interim period are not necessarily indicative of results for
the full year.
2. THE BUSINESS
------------
United Magazine Company (UNIMAG or the Company) is an Ohio corporation which was
incorporated on April 8, 1964 under the name Citizens Holding Company. UNIMAG
(the Parent) is a holding company. The operations for the quarter ended March
29, 1997 were conducted through its consolidated subsidiaries and also include
the impact of the business combinations in the fourth quarter of 1996 more fully
discussed below. The operations for the quarters ended March 29, 1997 and March
30, 1996 were conducted through its consolidated subsidiaries as follows:
Service News Company of Connecticut, doing business as Yankee News Company
(Yankee) was owned since May of 1993. Service News Company of Wilmington, North
Carolina ("Wilmington") was operated under a management agreement for the
quarter ended December 30, 1995 and was owned since January of 1996. Triangle
News Company, Inc., a Pennsylvania corporation, (Triangle) was acquired in
January of 1996. Reader's Choice (RC) was owned during the first and second
fiscal quarters of 1996 and was sold in July of 1996.
Service News Company of Connecticut, (Yankee), is engaged in wholesale magazine,
newspaper and book distribution and owns and operates four newsstands and one
bookstore.
Service News Company of Wilmington, North Carolina (Wilmington) is engaged in
wholesale magazine and book distribution.
Triangle News Company, Inc., (Triangle) is engaged in wholesale magazine,
newspaper and book distribution.
Reader's Choice (RC) was engaged in the business of managing and reporting
information on retail display allowances and collecting these allowances which
are paid by publishers to retailers.
United Magazine Company also is effecting business combinations with Michiana
News Service, Inc., a Michigan corporation ("Michiana"), The Stoll Companies, an
Ohio corporation ("Stoll"), and The George R. Klein News Co., Central News Co.,
and Newspaper Sales, Inc., all Ohio corporations (collectively, "The Klein
Companies" or "Klein") , all independent magazine, book, and newspaper
("periodical") distributors.
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".
268
<PAGE> 281
Effective July 29, 1996, the Company entered into an Asset Transfer and Exchange
Agreement with Northern, pursuant to which the Company acquired such of the
assets of that company as are related to the wholesale distribution of
periodicals (and, pursuant to the agreement with Northern, to acquire all of the
stock of MacGregor held by Northern) in exchange for Common Stock of the Company
and Senior and Subordinated Debentures of the Company. Effective July 30, 1996,
the Company entered into a Stock Transfer and Exchange Agreement with Michiana
and the shareholders of Michiana (the "Michiana Shareholders"), pursuant to
which all of the Michiana Shareholders agreed to contribute their shares of
stock of Michiana to the Company in exchange for Common Stock of the Company and
Senior and Subordinated Debentures of the Company. Effective July 31, 1996, the
Company entered into a Stock Transfer and Exchange Agreement with Stoll and the
shareholders of Stoll (the "Stoll Shareholders"), pursuant to which all of the
Stoll Shareholders agreed to contribute their shares of stock of Stoll to the
Company in exchange for Common Stock of the Company and Senior and Subordinated
Debentures of the Company. Effective August 1, 1996, the Company entered into an
Asset Transfer and Exchange Agreement with OPD, subsequently modified to a Stock
Transfer and Exchange Agreement. This agreement was further amended to provide
for the transaction to be effected as a merger. In connection with the Merger
all of the OPD Stock owned by the OPD Shareholders will be converted into common
stock of the Company and Senior and Subordinated Debentures of the Company.
Effective August 2, 1996, the Company entered into an Asset Transfer and
Exchange Agreement with Wholesalers, pursuant to which the Company agreed to
acquire substantially all of the assets and assume substantially all of the
liabilities of that company as are related to the wholesale distribution of
periodicals in exchange for Common Stock of the Company and Senior and
Subordinated Debentures of the Company. Effective August 2, 1996, the Company
entered into a Stock Transfer and Exchange Agreement with Scherer Companies and
the shareholders of Scherer Companies (the "Scherer Shareholders"), pursuant to
which the Scherer Shareholders agreed to contribute their shares of stock of
Scherer Companies to the Company in exchange for Common Stock of the Company and
Senior and Subordinated Debentures of the Company. Effective August 23, 1996,
the Company entered into a Stock Transfer and Exchange Agreement with Klein and
the sole shareholder of Klein (the "Klein Shareholder"), pursuant to which the
Klein Shareholder agreed to contribute his shares of stock of Klein to the
Company in exchange for Common Stock of the Company and Senior and Subordinated
Debentures of the Company.
Each of these transactions has been or is expected to be closed into escrow
pending a favorable vote of the shareholders of the Company on each of these
transactions. Upon the shareholders voting in favor of the acquisitions at the
Annual Meeting of Shareholders, then closing documents will be released from
escrow and the transactions will be consummated. Ronald E. Scherer, chairman of
the Company, OPD, which is controlled by Ronald E. Scherer, and R. David Thomas,
another significant shareholder of the Company, have each agreed to vote their
shares in favor of the transactions with Stoll, Michiana, Klein and the Scherer
Affiliates. Together these shareholders are entitled to vote more than 50% of
the stock of the Company. Since approval of the transactions is assured and
UNIMAG had effective control over the operations of the companies, the
Acquisition Parties have been included in the consolidated financial statements
of UNIMAG as discussed in the footnotes to the financial statements.
UNIMAG also owns three inactive subsidiaries.
3. PENDING SHAREHOLDER ACTIONS
---------------------------
UNIMAG grew significantly during 1996 by the acquisition of six wholesalers (two
in the second quarter and four in the fourth quarter). Consideration for these
acquisitions was in the form of cash, notes payable, debentures and common stock
of the Company. Due to the significant amount of shares to be issued for the
fourth quarter acquisitions, UNIMAG is required to obtain shareholder approval.
The Company is currently preparing the Proxy Statement for the shareholder vote
at the Annual Meeting of Shareholders. Upon approval by the shareholders, the
exchanges will occur and legal titles will pass. However, the Company has
already received the necessary approvals from two significant shareholders who
have agreed to vote their shares, which represent a majority of the outstanding
shares, in favor of the acquisitions discussed above, as well as a 1 for 10
reverse stock split. Since the approval is assured, the Company has reflected
the reverse stock split for all periods presented and the effects of the
acquisitions.
4. PROVISION FOR INCOME TAXES
--------------------------
The provision (benefit) for income taxes for the periods ended March 29, 1997
and March 30, 1996 is as follows:
269
<PAGE> 282
<TABLE>
<CAPTION>
3 Months 3 Months 6 Months 6 Months
Ended 1997 Ended 1996 Ended 1997 Ended 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Current $(1,493,000) $ (196,000) $(3,443,000) $ (281,000)
Deferred 1,493,000 196,000 3,443,000 281,000
------------- ------------- ------------- -------------
Total $ - $ - $ - $ -
============= ============= ============= =============
</TABLE>
The Company has provided deferred income taxes at a 40% tax rate which
represents a blended statutory federal and state income tax rate. The types of
differences between the tax bases of assets and liabilities and their financial
reporting amounts that give rise to significant portions of deferred income tax
assets and liabilities are: reserve for gross profit on sales returns, property
and equipment asset valuations, deferred compensation, amortization life of
intangibles and certain taxes.
The difference between the statutory tax rate and the effective rate of zero is
due primarily to the benefit of the net operating losses generated that may not
be realized in the future. The Company's net deferred tax assets have been fully
reserved due to the uncertainty of future realization.
270
<PAGE> 283
As of March 29, 1997, UNIMAG has approximately $56 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. As a result of the
application of the Section 382 limitation, a significant amount of pre-change
net operating losses of the Combined Company should expire unutilized. UNIMAG
estimates that over $20 million of such net operating losses should expire
unutilized as a result of such limitation (assuming that the limitation is not
increased in respect of any built-in gains).
At March 29, 1997, UNIMAG had income taxes payable of $1,534,602. This relates
primarily to Michiana's tax assessment and interest due to the Internal Revenue
Service as a result of unfavorable tax settlements relating to years 1994 and
prior that was assumed by UNIMAG.
5. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
-------------------------------------------
The following unaudited pro forma financial information presents the revenues,
net income and earnings per share from the combination of operations of the
Company and the significant acquisitions. The pro forma information is provided
as if each acquisition had occurred at the beginning of fiscal 1996. The pro
forma information is provided for information purposes only. It is based on
historical information and does not purport to reflect the results that would
have occurred had the acquisition occurred on October 1, 1995. There were two
significant acquisitions, Wilmington and Triangle, during the three months ended
March 30, 1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
6 Months Ended March 30, 1996 3 Months Ended March 30,
Pro Forma 1996
in 000's, except EPS Pro Forma
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Net Revenue $ 135,998 $ 67,040
Net Income (Loss) (5,333) (4,141)
EPS $ (.76) $ (.59)
- --------------------------------------------------------------------------------------------
</TABLE>
6. WILMINGTON ACQUISITION
----------------------
In April of 1995, UNIMAG entered into a Services and Management Agreement with
Service News Company of Wilmington, North Carolina (Wilmington). Included in the
Agreement was an option to purchase all of the outstanding stock of Wilmington.
As of December 30, 1995, UNIMAG had not exercised its option and, therefore,
treated the option as an investment and accounted for the investment under the
equity method. UNIMAG exercised their option to acquire Wilmington on January
12, 1996. The shareholders of Wilmington have shares, issued as part of the
consideration for the option to purchase the stock of Wilmington, that are
subject to future Put Agreements commencing in April of 1997. Interest is
accreted each quarter for the increase in value of the putable shares during
each quarter.
7. TRIANGLE (PITTSBURGH) ACQUISITION
---------------------------------
On January 23, 1996 UNIMAG purchased all of the outstanding stock of Triangle
News Company, Inc., a Pennsylvania corporation (Triangle). Consideration given
included cash of $1,647,000 and 10,000 shares (post-reverse split) of UNIMAG
stock. In connection with the closing, UNIMAG financed $1,000,000 through its
wholly-owned subsidiary Service News Company of Connecticut, which utilized part
of a line of credit from the Bank of Boston and financed an additional $700,000,
secured by the assets of Triangle, from the Bank of Boston.
271
<PAGE> 284
OTHER SHAREHOLDER INFORMATION
SHAREHOLDER PROPOSALS
It is anticipated that the Company's next annual meeting of
shareholders will be held on or about February 27, 1998, and proposals of
shareholders intended for inclusion in the proxy statement will be furnished to
all shareholders entitled to vote at the next annual meeting of the Company, and
must be received at the Company's principal executive offices no later than
January 27, 1998, or a reasonable time before the solicitation is made. It is
suggested that proponents submit their proposals by Certified Mail-Return
Receipt Requested.
EXPENSES AND SOLICITATION
The cost of solicitation of proxies will be borne by the Company. In
addition to soliciting shareholders by mail or by its regular employees, the
Company may request banks and brokers to solicit their customers who have stock
of the Company registered in the name of a nominee and, if so, will reimburse
such banks and brokers for their reasonable out-of-pocket costs. Solicitation by
officers and employees of the Company, none of whom will receive additional
compensation therefor, may also be made of some shareholders in person or by
mail, telephone or telegraph, following the original solicitation.
OTHER BUSINESS
The Board of Directors knows of no business which will be presented for
consideration at the Annual Meeting other than stated above. If any other
business should come before the Annual Meeting, votes may be cast pursuant to
proxies in respect to any such business in the best judgment of the person or
persons acting under the proxies.
By Order of the Board of Directors
/s/ RUTH HUNTER SMITH
---------------------------------------
Ruth Hunter Smith, Secretary
273
<PAGE> 285
Exhibit A
July 29, 1997
Securities and Exchange Commission
Division of Corporate Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Rebecca Bohland
Subject: UNITED MAGAZINE COMPANY - PRELIMINARY PROXY STATEMENT
FILED JULY 29, 1997
Dear Sirs/Madams:
We are acting as legal counsel to United Magazine Company, an Ohio
corporation (the "Company"), in connection with the acquisitions (the
"Acquisitions") described in the Company's preliminary proxy statement filed
with the Securities and Exchange Commission (the "Commission") on or about July
29, 1997 (the "Preliminary Proxy Statement"). The staff (the "Staff") of the
Commission has requested our opinion regarding whether the Acquisitions have
been consummated under Ohio law, and whether or not the vote of the shareholders
of the Company is of any relevance legally under Ohio law. The Staff has also
inquired as to whether Ohio law, or the Company's articles of incorporation or
code of regulations required the Company's board of directors to seek
shareholder approval prior to entering into management arrangements resulting in
the combinations of operations described in the Preliminary Proxy Statement. For
purposes of this opinion we have assumed the accuracy of the factual
representations of the Company set forth in the Preliminary Proxy Statement.
Additionally, this opinion is limited to the laws of the State of Ohio.
Based upon the foregoing we are of the opinion that:
1. The Acquisition of Ohio Periodical Distributors, Inc. ("OPD") has
been structured as a statutory merger of OPD into the Company. The other
Acquisitions are structured as acquisitions of stock in exchange for stock of
the Company and debentures of the Company or as acquisitions of assets in
exchange for stock of the Company and debentures of the Company. No statutory
merger has yet occurred and no certificate of merger, which is
<PAGE> 286
Securities and Exchange Commission
July 29, 1997
Page 2
required to be filed with the Secretary of State of Ohio in order to legally
consummate a merger, has been filed.
The stock, asset, and merger Acquisitions described in the
Preliminary Proxy Statement have not been legally consummated. None of the stock
of the entities being acquired has been transferred to the Company, nor has
legal title to any of the assets of the entities being acquired been transferred
to the Company, nor has the entity being acquired pursuant to a merger been
merged into the Company. As previously discussed in our letter to the Staff of
April 22, 1997, the stock of The Stoll Companies ("Stoll") and Michiana News
Service, Inc. ("Michiana") are being held in escrow pending the outcome of the
shareholder vote and the satisfaction of other escrow items mentioned in that
letter. They have not been issued or transferred to the Company. Presently, the
Stoll and Michiana shareholders each retain the right to vote and all other
ownership rights to their stock. If the conditions specified in the escrow
agreements are not met, then stock certificates will be returned to them.
Similarly, Northern News Company ("Northern News") has deposited a bill of sale
and other transfer documents into escrow to transfer legal title in certain of
its assets to the Company once the escrow terminates. Unless the conditions
described in the escrow agreement are met, the bill of sale and other transfer
documents will be destroyed and Northern News will retain title to its assets.
Similar escrow arrangements have not yet been established for the other
Acquisitions, although the definitive acquisition agreements have been signed by
the parties. Accordingly, at this time, the parties to the other Acquisitions
retain the legal title to their stock and assets.
The consideration for the stock and assets to be transferred
to the Company pursuant to the stock and asset exchanges and the merger is the
Company's stock and debentures. The Company has not legally issued or delivered
any of its stock to the entities being acquired (or merged into the Company) or
to their shareholders. In fact, the Company could not issue its stock to the
entities being acquired (or merged into the Company) in accordance with the
terms of the acquisition agreements because it does not have a sufficient number
of authorized and unissued shares absent the vote of the shareholders of the
Company to either increase the number of authorized shares or to effect a
reverse stock split as is contemplated in the Preliminary Proxy Statement.
2. The vote of the shareholders of the Company to be solicited with the
final form of the proxy materials currently on file with the Commission Staff in
preliminary form is significant and a legally necessary condition to the
completion of the Acquisitions. Pursuant to Section 1701.83, Ohio Revised Code,
a vote of the shareholders is required before the Company can issue stock in an
acquisition constituting one-sixth or more of its voting power. The common
<PAGE> 287
Securities and Exchange Commission
July 29, 1997
Page 3
shares of the Company to be issued if the Acquisitions are approved by the
Company's shareholders would constitute more than one-sixth of the Company's
voting power. Absent the shareholder vote, the issuance of such stock would be
an ultra vires act. With regard to the merger, Section 1701.78, Ohio Revised
Code, provides that in order to effect this merger the agreement of merger must
be adopted by the Company's shareholders, because after the consummation of the
merger the shareholders of the entity being acquired will hold shares of the
Company's common stock constituting more than one-sixth of its voting power.
Additionally, the Company does not currently have a sufficient number of
authorized and unissued shares to complete the transactions and the vote of the
shareholders approving a one for ten reverse stock split is needed. See Section
1701.71, Ohio Revised Code. Finally, the vote of the shareholders is
significant in that it determines whether or not shareholders of the Company
will be entitled to dissenting shareholder rights under Ohio law. See Section
1701.74, Ohio Revised Code.
3. The Staff also inquired whether a de facto merger has occurred under
Ohio law. A de facto merger of the entities to be acquired and the Company has
not occurred under Ohio law. "A de facto merger is a transaction that results in
the dissolution of the predecessor corporation and is in the nature of a total
absorption of the previous business into the successor." WELCO INDUSTRIES, INC.
V. APPLIED COMPANIES, 67 Ohio St. 3d 344, 617 N.E. 2d 1129 (1993).
An asset purchase is subject to the legal consequences of a
merger under the de facto merger exception if: (1) there is a
continuation of the enterprise of the seller in terms of
continuity of management, personnel, physical location,
assets, and operations; (2) there is a continuity of
shareholders, accomplished by payment for the assets with
shares of stock; (3) the seller ceases operations, liquidates
and dissolves as soon as legally and practically possible; and
(4) the purchasing corporation assumes the obligations of the
seller necessary for the uninterrupted continuation of
business operations. MCGRAW V. SOUTH BEND LATHE, INC., 74 Ohio
App. 3d 8, 598 N.E. 2d 18, 21 (1991).
Necessary elements of a de facto merger are missing from the present
status of the Company Acquisitions. First, none of the selling corporations have
ceased operations and dissolved. In WELCO INDUSTRIES, supra., the transaction
was not a de facto merger and the Ohio Supreme Court stated: "Nor did the
selling corporation dissolve immediately. In fact, it still exists under the
name Wesche Electric." WELCO INDUSTRIES, supra. at 349. See also CRISLIP V.
TWENTIETH CENTURY HEATING AND VENTILATING CO., 1989 WL 1195 (Ohio App. 1989). In
the
<PAGE> 288
Securities and Exchange Commission
July 29, 1997
Page 4
Company situation, each of the selling entities continues to exist and continues
to own all of its assets and can satisfy claims of creditors. Second, no stock
of the Company has been transferred. "Absent a transfer of stock, the nature and
consequences of a transaction are not those of a merger." TRAVIS V. HARRIS
CORP., 565 F.2d 443, 447 (7th Cir. 1977). Based upon the foregoing cited cases,
we are of the opinion that a de facto merger between the Company and the
acquisition parties has not occurred as of this time under Ohio law.
4. The Staff has also inquired as to whether Ohio law, the Company's
articles of incorporation or the Company's code of regulations required the
Board of Directors of the Company to seek approval of the shareholders of the
Company prior to entering into the management arrangements resulting in the
combination of operations of the parties. For purposes of this opinion, we have
assumed that the description of the management arrangements under the Joint
Operating Agreements and under the agreements for the Acquisitions, and of the
integration of operations described in the Preliminary Proxy Statement are
accurate descriptions. Section 1701.76, Ohio Revised Code, requires shareholder
approval for the "lease, sale, exchange, transfer, or other disposition of all,
or substantially all, of the assets, with or without the good will, of a
corporation." However, under the management arrangements, the Company did not
transfer its assets and business operations to any of the parties to the
Acquisitions. Rather, the other parties to the Acquisitions made their assets
and business operations available to the Company for purposes of management by
the Company. Even if the provision by the other parties to the Acquisitions of
their business operations and assets to the Company is deemed to be a transfer
of the assets of the Acquisition Parties to the Company, approval of the
shareholders of the Company would not be required under Section 1701.76, Ohio
Revised Code.
The Company had authority to enter into arrangements to manage
the operations of the Acquisition Parties. Section 1701.59, Ohio Revise Code,
provides that "Except where the law, the articles, or the regulations require
action to be authorized or taken by shareholders, all of the authority of a
corporation shall be exercised by or under the direction of its directors. There
are no provisions in Chapter 1701, Ohio Revised Code, which specifically require
shareholder approval for a corporation to manage another corporation, and, after
a review of applicable Ohio case law, we have been unable to find any Ohio
decision requiring shareholder approval before a corporation may manage another
corporation. The Company articles of incorporation specifically authorize the
corporation to enter into management arrangements. It provides the Company with
authority "to engage in any activity in connection wit the furnishing of
information, advice, financial, managerial and other services of any kind in
connection with the management of any and all kinds and types of business and
property of any kind." Finally, the code of regulations of the Company contains
no restrictions on the Company entering into
<PAGE> 289
Securities and Exchange Commission
July 29, 1997
Page 5
management arrangements. Based on the foregoing, we are of the opinion that
neither Ohio law, the Company's articles of incorporation, as amended, nor the
Company's code of regulations, as amended, required the board of directors of
the Company to seek approval of the shareholders of the Company prior to
entering into the management arrangements resulting in the integration and
combination of operations described in the proxy statement.
Very truly yours,
/s/ BAKER & HOSTETLER LLP
--------------------------
Baker & Hostetler LLP
cc: Mark Coller, Special Counsel
Securities and Exchange Commission
United Magazine Company
<PAGE> 290
EXHIBIT B
OPINION OF THE FINANCIAL ADVISOR
TO
THE COMPANY'S BOARD OF DIRECTORS
<PAGE> 291
BankBoston, N.A.
100 Federal Street
Boston, Massachusetts 02110
[BankBoston Logo]
August 8, 1997
The Board of Directors
United Magazine Company
5131 Post Road
Dublin, Ohio 43017
Members of the Board:
You have asked us to update our opinion, originally rendered on August 14, 1996,
regarding the fairness to the shareholders of United Magazine Company ("UNIMAG"
or the "Company"), from a financial point of view, of the consideration to be
paid by the Company in the proposed business combinations (collectively, the
"Transactions") with Michiana News Service, Inc., a Michigan corporation
("Michiana"), The Stoll Companies, an Ohio corporation ("Stoll"), Ohio
Periodical Distributors, Inc., an Ohio corporation ("OPD"), Northern News
Company, an Ohio Corporation ("Northern"), the Scherer Companies, Inc., an Ohio
corporation ("Scherer"), Wholesalers Leasing Corp., a Delaware corporation
("Wholesalers"), Central News Company, an Ohio corporation ("Central"), The
George R. Klein News Co., an Ohio corporation ("Klein"), and Newspapers Sales,
Inc., an Ohio corporation ("Newspapers"), collectively known as the "Acquisition
Parties".
In connection with the Transactions, the Company has entered into the following
agreements (collectively the "Acquisition Agreements") with the Acquisition
Parties:
(i) Stock Transfer and Exchange Agreement dated July 30, 1996 with Michiana and
the shareholders of Michiana pursuant to which all of the shareholders of
Michiana will contribute their shares of stock of Michiana to the Company in
exchange for 5,355,811 shares of UNIMAG common stock and $5,834,256 in senior
and subordinated debentures as adjusted by post closing audits;
(ii) Stock Transfer and Exchange Agreement dated July 31, 1996 with Stoll and
the shareholders of Stoll pursuant to which all of the shareholders of Stoll
will contribute their shares of stock of Stoll to the Company in exchange for
19,584,662 shares of UNIMAG common stock and $25,905,267 in senior and
subordinated debentures as adjusted by post closing audits;
(iii) Amended and Restated Stock Transfer and Exchange Agreement (modified from
an Asset Transfer and Exchange Agreement) dated August 1, 1996 with OPD and the
shareholders of OPD pursuant to which OPD will merger with and into the Company
in exchange for 10,190,773 shares of UNIMAG common stock and $7,480,820 in
senior and subordinated debentures as adjusted by post closing audits;
(iv) Asset Transfer and Exchange Agreement with Northern dated July, 29, 1996
pursuant to which the Company is to acquire all or such assets of Northern
(including the stock of MacGregor News Service Inc.) that are related to the
wholesale distribution of periodicals in exchange for 1,335,425 shares of
UNIMAG common stock, together with $1,924,583 in senior and subordinated
debentures as adjusted by post closing audits;
<PAGE> 292
The Board of Directors
United Magazine Company
August 8, 1997
Page 2 of 4
(v) Stock Transfer and Exchange Agreement dated August 2, 1996 with Scherer and
the shareholders of Scherer pursuant to which all of the shareholders of
Scherer will contribute their shares of stock of Scherer to the Company in
exchange for 432,980 shares of UNIMAG common stock and $624,000 in senior and
subordinated debentures as adjusted by post closing audits;
(vi) Asset Transfer and Exchange Agreement with Wholesalers dated August 2,
1996 pursuant to which the Company is to acquire all or such assets of
Wholesalers that are related to the wholesale distribution of periodicals in
exchange for 482,599 shares of UNIMAG common stock, together with $695,510 in
senior and subordinated debentures as adjusted by post closing audits;
(vii) Stock Transfer and Exchange Agreement dated September 14, 1996 and
extended December 27, 1996 with Central, Klein and Newspapers (collectively the
"Klein Affiliates") and the shareholders of the Klein Affiliates pursuant to
which all of the shareholders of the Klein Affiliates will contribute their
shares of stock of the Klein Affiliates to the Company in exchange for
10,878,807 shares of UNIMAG common stock and $15,678,281 in senior and
subordinate debentures as adjusted by post closing audits.
In conducting our analysis and arriving at the opinion expressed herein, we
have reviewed such materials and analyzed such financial and other factors as
we deemed relevant under the circumstances, including:
(i) reviewed the publicly available consolidated financial
statements of the Company for recent years and interim periods
year to date and certain other relevant financial operating data
of the Company and the Acquisition Parties made available to us
from published sources and from the internal records of the
Company and the Acquisition Parties;
(ii) reviewed certain internal financial and operating information
relating to the Company and the Acquisition Parties (including
financial projections) prepared by Company management;
(iii) reviewed and discussed with the senior management of the Company
the business and prospects of the Company and the Acquisition
Parties, the strategic rationale for the Transactions and the
benefits of the Transactions to the Company;
(iv) reviewed the historical stock prices and trading volume of the
common stock of the Company;
(v) reviewed the Stock Transfer and Exchange Agreements entered into
between the Company and the Klein Affiliates, Michiana, OPD,
Scherer and Stoll; and reviewed the Asset Transfer and Exchange
Agreements entered into between the Company and Northern and
Wholesalers;
(vi) reviewed the public market valuations for companies engaged in
lines of business which we deemed similar to the Company;
(vii) reviewed prices paid in certain prior acquisitions of periodical
distribution companies by the Company and the Acquisition
Parties;
<PAGE> 293
The Board of Directors
United Magazine Company
August 8, 1997
Page 3 of 4
(viii) evaluated the projected earnings per share and share price
impacts of the Transactions relative to UNIMAG's projected
performance on a stand-alone basis;
(ix) reviewed such other financial studies and analyses and
performed such other investigations and took into account such
other matters as we deemed necessary or important for purposes
of this opinion.
In conducting our review and analysis and rendering our opinion, we have not
independently verified any of the foregoing information, and have relied on the
accuracy, completeness, and fairness of all information supplied or otherwise
made available to us by or on behalf of the Company, or otherwise reviewed by
us. With respect to the financial projections, we have assumed that they have
been reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the Company's management as to the Company's and the
Acquisition Parties' future financial performance. We have relied upon, without
independent verification, estimates by the Company of the revenue enhancements,
cost savings and other synergies that are expected as a result of the
Transactions. We have also relied on the representations of the Company in the
Acquisition Agreements with respect to legal and other matters.
We have relied upon management representations regarding the terms of
employment contracts, lease agreements, supply contracts and other ancillary
agreements related to the Transactions which management believes were entered
into on an arms length basis and reflect terms and conditions customary for
transactions of this type. We have not made any independent evaluation or
appraisal of the assets or liabilities of the Company or the Acquisition
Parties. Our opinion is necessarily based upon market, economic, financial and
other conditions as they exist on, and the information made available to us as
of, the date of this letter. It should be understood that subsequent
developments may affect this opinion, and may alter our opinion rendered
hereunder. We do not have any obligation however, to update, revise or reaffirm
this opinion.
We have acted as financial advisor to the Company in connection with the
Transactions and will receive a fee for our services rendering this opinion,
irrespective of whether shareholders vote to approve the Transactions, and
irrespective of other services currently being provided by Bank of Boston
Connecticut, an affiliate of BankBoston N.A., on behalf of the Company.
BankBoston N.A. has acted as financial advisor to the Company in connection with
recent efforts conducted on the Company's behalf to identify investors with
potential interest in providing financing to the Company, and will receive a
fee contingent upon the successful completion of such efforts.
This opinion does not constitute a recommendation to the Company or its Board of
Directors as to whether the Company should or should not approve the
Transactions pursuant to the Acquisition Agreements. This opinion does not
constitute a recommendation to the Company's stockholders as to whether they
should or should not vote to approve the Transactions. This opinion does not
address the relative merits of any of the Transactions or any other transactions
discussed by the Board of Directors of the Company as alternatives to the
Transactions.
<PAGE> 294
The Board of Directors
United Magazine Company
August 8, 1997
Page 4 of 4
Based upon and subject to the foregoing, it is our opinion that, as of the date
of this letter, the proposed consideration to be paid by the Company in
connection with the Transactions, together with the transactions contemplated by
the Acquisition Agreements and all related agreements, taken as a whole, is
fair, from a financial point of view, to the shareholders of the Company.
It is understood that this letter is for the information of the Board of
Directors of the Company only and is not to be quoted or referred to, in whole
or in part, in any statement or document, nor shall this letter be used for any
other purposes, without the prior written consent of BankBoston N.A.; provided,
however, that this letter may be published in its entirety in any proxy
statement or other document distributed to shareholders of the Company in
connection with the Transactions.
Very truly yours,
BankBoston N.A.
by: /s/ Gregory B. Sneddon
----------------------
Gregory B. Sneddon
Managing Director, Corporate Finance
<PAGE> 295
EXHIBIT C
Section 1701.85 Dissenting shareholder's demand for fair cash value of
shares.
(A) (1) A shareholder of a domestic corporation is entitled to relief
as a dissenting shareholder in respect of the proposals in sections 1701.74,
1701.76, and 1701.84 of the Revised Code, only in compliance with this section.
(2) If the proposal must be submitted to the shareholders of
the corporation involved, the dissenting shareholder shall be a record holder of
the shares of the corporation as to which he seeks relief as of the date fixed
for the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on such proposal was taken at the meeting of the shareholders,
the shareholder shall deliver to the corporation a written demand for payment to
him of the fair cash value of the shares as to which he seeks relief, stating
his address, the number and class of such shares, and the amount claimed by him
as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under
division (C) of section 1701.84 of the Revised Code in the case of a merger
pursuant to section 1701.80 of the Revised Code and a dissenting shareholder
entitled to relief under division (E) of section 1701.84 of the Revised Code in
the case of a merger pursuant to section 1701.801 of the Revised Code shall be a
record holder of the shares of the corporation as to which he seeks relief as of
the date on which the agreement of merger was adopted by the directors of that
corporation. Within twenty days after he has been sent the notice provided in
section 1701.80 or 1701.801 [1701.80.1] of the Revised Code, the shareholder
shall deliver to the corporation a written demand for payment with the same
information as that provided for in division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served
on the constituent corporation involved constitutes service on the surviving or
the new corporation, whether served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at
the address specified in his demand, a request for the certificates representing
the shares as to which he seeks relief, he, within fifteen days from the date of
the sending of such request, shall deliver to the corporation the certificates
requested, in order that the corporation may forthwith endorse on them a legend
to the effect that demand for the fair cash value of such shares has been made.
The corporation promptly shall return such endorsed certificates to the
shareholders. Failure on the part of the shareholder to deliver such
certificates terminates his rights as a dissenting shareholder, at the option of
the corporation, exercised by written notice sent to him within twenty days
after the lapse of the fifteen-day period, unless a court for good cause shown
otherwise directs. If shares represented by a certificate on which such a legend
has been endorsed are transferred, each new certificate issued for them shall
bear a similar legend, together with the name of the original dissenting holder
of such shares. Upon receiving a demand for payment from a dissenting
shareholder who is the record holder of uncertificated securities, the
corporation shall make an appropriate notation of the demand for payment in its
shareholder records. If uncertificated shares for which payment has been
demanded are to be transferred, any new certificate issued for the shares shall
bear the legend required for certificated securities as provided in this
paragraph. A transferee of the shares so endorsed, or of uncertificated
securities where such notation has been made, acquires only such rights in the
corporation as the original dissenting holder of such shares had immediately
after the service of a demand for payment of the fair cash value of the shares.
Such request by the corporation is not an admission by the corporation that the
shareholder is entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder shall have
come to an agreement on the fair cash value per share of the shares as to which
he seeks relief, the shareholder or the corporation, which in case of a merger
or consolidation may be the surviving or the new corporation, within three
months after the service of the demand by the shareholder, may file a complaint
in the court of common pleas of the county in which the principal office of the
corporation which issued such shares is located, or was located at the time when
the proposal was adopted by the shareholders of the corporation, or, if the
proposal was not required to be submitted to the shareholders, was approved by
the directors. Other dissenting shareholders, within the period of three months,
may join as plaintiffs, or may be joined as defendants in any such proceeding,
and any two or
<PAGE> 296
more such proceedings may be consolidated. The complaint shall contain a brief
statement of the facts, including the vote and the facts entitling the
dissenting shareholder to the relief demanded. No answer to such complaint is
required. Upon the filing of the complaint, the court, on motion of the
petitioner, shall enter an order fixing a date for a hearing on the complaint,
and requiring that a copy of the complaint and a notice of the filing and of the
date for hearing be given to the respondent or defendant in the manner in which
summons is required to be served or substituted service is required to be made
in other cases. On the day fixed for the hearing on the complaint or any
adjournment of it, the court shall determine from the complaint and from such
evidence as is submitted by either party whether the shareholder is entitled to
be paid the fair cash value of any shares and, if so, the number and class of
such shares. If the court finds that the shareholder is so entitled, the court
may appoint one or more persons as appraisers to receive evidence and to
recommend a decision on the amount of the fair cash value. The appraisers have
such power and authority as is specified in the order of their appointment. The
court thereupon shall make a finding as to the fair cash value of a share, and
shall render judgment against the corporation for the payment of it, with
interest at such rate and from such date as the court considers equitable. The
costs of the proceeding, including reasonable compensation to the appraisers to
be fixed by the court, shall be assessed or apportioned as the court considers
equitable. The proceeding is a special proceeding, and final orders in it may be
vacated, modified, or reversed on appeal pursuant to the rules of appellate
procedure and, to the extent not in conflict with those rules, Chapter 2505. of
the Revised Code. If, during the pendency of any proceeding instituted under
this section, a suit or proceeding is or has been instituted to enjoin or
otherwise to prevent the carrying out of the action as to which the shareholder
has dissented, the proceeding instituted under this section shall be stayed
until the final determination of the other suit or proceeding. Unless any
provision in division (D) of this section is applicable, the fair cash value of
the shares as agreed upon by the parties or as fixed under this section shall be
paid within thirty days after the date of final determination of such value
under this division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event, payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which such payment is made.
(C) If the proposal was required to be submitted to the shareholders of
the corporation, fair cash value as to those shareholders shall be determined as
of the day prior to that on which the vote by the shareholders was taken and, in
the case of a merger pursuant to section 1701.80 or 1701.801 [1701.80.1] of the
Revised Code, fair cash value as to shareholders of a constituent subsidiary
corporation shall be determined as of the date before the adoption of the
agreement of merger by the directors of the particular subsidiary corporation.
The fair cash value of a share for the purposes of this section is the amount
that a willing seller, under no compulsion to sell, would be willing to accept,
and that a willing buyer, under no compulsion to purchase, would be willing to
pay, but in no event shall the fair cash value of it exceed the amount specified
in the demand of the particular shareholder. In computing such fair cash value,
any appreciation or depreciation in market value resulting from the proposal
submitted to the directors or to the shareholders shall be excluded.
(D) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to pay
the fair cash value of them terminates if:
(1) Such shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(2) The corporation abandons, or is finally enjoined or
prevented from carrying out, or the shareholders rescind their adoption, of the
action involved;
(3) The shareholder withdraws his demand, with the consent of
the corporation by its directors;
(4) The corporation and the dissenting shareholder shall not
have come to an agreement as to the fair cash value per share, and neither the
shareholder nor the corporation shall have filed or joined in a complaint under
division (B) of this section within the period provided.
2
<PAGE> 297
(E) From the time of giving the demand, until either the termination of
the rights and obligations arising from it or the purchase of the shares by the
corporation, all other rights accruing from such shares, including voting and
dividend or distribution rights, are suspended. If during the suspension, any
dividend or distribution is paid in money upon shares of such class, or any
dividend, distribution, or interest is paid in money upon any securities issued
in extinguishment of or in substitution for such shares, an amount equal to the
dividend, distribution or interest which, except for the suspension, would have
been payable upon such shares or securities, shall be paid to the holder of
record as a credit upon the fair cash value of the shares. If the right to
receive fair cash value is terminated otherwise than by the purchase of the
shares by the corporation, all rights of the holder shall be restored and all
distributions which, except for the suspension, would have been made shall be
made to the holder of record of the shares at the time of termination.
3
<PAGE> 298
EXHIBIT D
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
UNITED MAGAZINE COMPANY
First: The name of the corporation shall be United Magazine Company.
Second: The place in the State of Ohio where the principal office of
the corporation is to be located is the City of Dublin, Franklin County.
Third: The purposes for which the corporation is formed are:
(a) To acquire by purchase, subscription, or otherwise, and to own,
hold for investment, to use, sell, assign, transfer, mortgage, pledge, exchange
or otherwise dispose of, shares of stock, bonds, debentures, notes, scrip,
securities, evidences of indebtedness, contracts, or obligations, of any
corporation or corporations, association or associations, domestic or foreign,
or of any firm or individual, or of the United States or any state, territory or
dependency of the United States, or of any foreign government or governmental
subdivision, and also to issue in exchange therefor stocks, bonds, or other
securities, or evidences of indebtedness of the corporation and while the owner
or holder of any such property to receive, collect and dispose of the interest,
evidences, and income, on or from such property, and to possess and exercise, in
respect thereof, all of the rights, powers and privileges of ownership,
including all voting powers thereon; to loan its moneys; and to acquire, own,
hold, lease, sell and mortgage such real estate and other personal property as
may be necessary or incident to carry out the purposes aforesaid.
To aid in any manner any corporation or association, domestic or
foreign, or any firm or individual, any shares of stock in which, or any bond,
debentures, notes, securities, evidences of indebtedness, contracts or
obligations of which, are held by or for the corporation, directly or
indirectly, or in which or in the welfare of which the corporation shall have
any interest, and to aid or participate in the reorganization, consolidation or
merger of any corporation in which or in the welfare of which the corporation
shall have any interest.
(b) To acquire, hold, encumber, transfer, guarantee, sell, assign,
mortgage, pledge or otherwise dispose of shares, bonds and other evidences of
indebtedness, securities and contracts of other persons, associations,
corporations, domestic or foreign, and to form or acquire the control of other
corporations, and, which the owner thereof, to exercise all the rights, powers
and privileges of ownership.
(c) To acquire by purchase or otherwise the good will, rights and
property and to undertake the whole or any part of the assets and liabilities of
any person, firm or corporation; to pay for the same in cash, the shares or
other securities of this corporation or otherwise; to hold or in any manner
dispose of the whole or any part of the property or business so acquired; to
conduct in any lawful manner the whole or any part of the business so acquired
and to exercise all of the powers necessary or convenient in the conduct and
management of such business.
(d) To engage in manufacturing, producing, processing, fabricating,
constructing, assembling, repairing, servicing, installing, mining, extracting,
rectifying, smelting, refining, and compounding, or in any one or more of said
activities and to purchase or otherwise acquire, own, lease, mortgage, pledge,
sell, assign, and transfer or otherwise dispose of, invest, trade, deal in and
with plants, facilities, buildings, machinery, appliances, equipment, products,
goods, wares, merchandise, and property of every kind, class and description.
(e) To engage in any activity in connection with the furnishing of
information, advice, financial, managerial and other services of any kind in
connection with the management of any and all kinds and types of business and
property of any kind.
(f) To make loans or advances of any kind or type whatsoever whether
secured or unsecured to any person, firm or corporation, to extend credit and
loan money upon, invest or reinvest in, buy, sell and otherwise deal in and
with, whether as principal or agent, any and all kinds and types of property,
whether real, personal or mixed, including but not limited to bills of lading,
trade acceptances, warehouse receipts, commercial paper,
<PAGE> 299
bank accounts, any and all contracts relating to the sale of real and personal
property, shares or other securities of any corporation and any other kind and
type of instruments or evidences of indebtedness.
(g) To borrow money without limitation; to draw, make, execute, issue,
accept, endorse, transfer, with or without recourse, and deliver notes, drafts,
bills of exchange, warrants, bonds, debentures and other negotiable and
transferable instruments or other evidences of indebtedness, whether negotiable
or nonnegotiable and to secure the same by mortgage, pledge, deed of trust or
otherwise; and to sell, pledge, mortgage, encumber or otherwise deal in and with
any of said instruments or other evidences of indebtedness to any person, firm
or corporation, including any federal or state bank or agency now or hereafter
authorized to accept, hold, own, purchase or otherwise deal in and with any of
said instruments or other evidences of indebtedness.
(h) To acquire by purchase, lease or otherwise and hold, use, sell or
in any manner deal with, including the right to grant licenses or other rights
therein, patents, inventions, improvements, processes, trademarks and
copyrights.
(i) To establish, maintain and finance organizations and agencies which
may be necessary or useful in accomplishing any of such activities and the
purposes of said corporation and to engage in any or all of such activities or
the financing thereof singly or in cooperation or association with other
persons, firms or corporations and within the State of Ohio or elsewhere without
restriction as to place or amount.
(j) To do any and all acts and things and carry on any and all business
incidental to the foregoing; and to have and exercise all the powers conferred
by the Ohio General Corporation Law.
(k) The foregoing enumeration of purposes shall be construed both as
objects and powers and it is expressly provided that such enumeration of
specific powers shall not be held to limit or restrict the powers of said
corporation in any manner.
Fourth: The maximum number of shares which the corporation is
authorized to have outstanding is fifty-three million two hundred fifty thousand
(53,250,000) common shares, without par value.
Upon the effectiveness of these Amended and Restated Articles of
Incorporation, every ten (10) common shares, without par value, of the
corporation, either issued and outstanding or held by the Company as treasury
stock, shall be automatically reclassified and converted into one (1) common
share, without par value of the Company, and no scrip or fractional shares and
no certificates representing scrip or fractional common shares shall be issued
upon such reclassification and conversion, but the cash value of such scrip or
fractional shares shall be paid upon surrender of the certificates for the
common shares outstanding prior to such reclassification and conversion to each
holder of a common share who otherwise would be entitled to receive a scrip or
fractional share following the reclassification and conversion; and that the
stated capital of the common shares, without par value, outstanding immediately
after the effectiveness of the reclassification and conversion shall be in the
aggregate equal to the stated capital of the common shares outstanding
immediately prior to the effectiveness of the reclassification and conversion.
Fifth: Notwithstanding any provisions of law of the State of Ohio
requiring, for any purpose, the vote of a designated proportion of the voting
power of the corporation or any class or classes, if any, of the shares thereof,
any action may be taken on any proposal, including any amendment of the Articles
of Incorporation so as to substantially change the purpose or purposes of this
corporation, at any meeting of shareholders by the affirmative vote of the
holders of shares entitled to exercise a majority of the voting power of the
corporation and in addition thereto by the affirmative vote of the holders of
record of the majority of each class, if any, of shares if entitled to vote
thereof as a class.
The corporation reserves the right at any time and from time to time to
change substantially any or all of its purposes and any such change authorized
or approved by the holders of shares as provided in this article shall be
binding and conclusive upon every shareholder of the corporation as fully as if
such shareholder had voted therefor and no shareholder, notwithstanding that he
may have voted against such change of purpose or
2
<PAGE> 300
purposes or may have objected thereto in writing, shall be entitled to payment
of the fair cash value of his shares.
Sixth: The corporation shall have the right to purchase or sell any
class of shares of the corporation, or hold and transfer its own shares of any
class from time to time, to such extent and in such manner and upon such terms
as its Board of Directors shall determine, or in any other manner authorized by
law, providing that no such purchase shall cause any impairment of its capital
and no such purchase shall be made so as to favor any shareholder over any
other.
Seventh: No holder of shares of any class of the corporation shall have
any preemptive right to subscribe for or to purchase shares of any class of
securities of the corporation now or hereafter authorized, or to purchase or
subscribe for, securities convertible into or exchangeable for shares of any
class of the corporation, and all such shares or securities, including those
convertible into or exchangeable for shares of any class of the corporation, may
be sold on such terms, at such prices, and to such persons, firms or
corporations as the Board of Directors, in its discretion, may from time to time
determine.
Eighth: A director of this corporation shall not be disqualified by his
office from dealing or contracting with the corporation as vendor, purchaser,
employee, agent, or otherwise, nor shall any transaction or contract or act of
this corporation be void or voidable or in any way affected or invalidated by
reason of the fact that any director or any firm of which any director is a
member or any corporation of which any director is a shareholder or director is
in any way interested in such transaction or contract or act, provided the fact
that such director or such firm or such corporation is so interested shall be
disclosed or shall be known to the Board of Directors or such members thereof as
shall be present at any meeting of the Board of Directors at which action upon
any such contract or transaction or act shall be taken; nor shall any such
director be accountable or responsible to the corporation for or in respect to
any such transaction or contract or act of this corporation or for any gains or
profits realized by him by reason of the fact that he or any firm of which he is
a member or any corporation of which he is a shareholder or director is
interested in such transaction or contract or act; and any such director may be
counted in determining the existence of a quorum at any meeting of the Board of
Directors of the corporation shall authorize or take action in respect of any
such contract or transaction or act, and may vote thereat to authorize, ratify
or approve any such contract or transaction or act with like force and effect as
if he or any firm of which he is a member or any corporation of which he is a
shareholder or director were not interested in such transaction or contract or
act.
Ninth: Section 1701.831 of the Ohio Revised Code shall not apply to
control share acquisitions of shares of this corporation.
3
<PAGE> 301
UNITED MAGAZINE COMPANY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Daniel S. Kaiser, John E. Lewis and
Pamela S. Bobson and each of them, with full power of substitution, proxies to
vote and act with respect to all Common Shares, without par value ("Shares"), of
United Magazine Company (the "Company"), which the undersigned is entitled to
vote, at the Annual Meeting of Shareholders to be held Wednesday, September 3,
1997, at the Holiday Inn, 2350 Westbelt Drive, Columbus, Ohio 43228, at 10:00
a.m. Eastern Time, and at any and all adjournments thereof, with all the powers
the undersigned would possess if present in person, on the following proposals
and any other matters that may properly come before the Meeting:
1. PROPOSAL TO APPROVE THE STOCK TRANSFER AND EXCHANGE AGREEMENT AMONG THE
COMPANY, MICHIANA NEWS SERVICE, INC. ("MICHIANA") AND ITS SHAREHOLDERS AND
THE TRANSFER OF ALL OF THE STOCK OF MICHIANA TO THE COMPANY IN ACCORDANCE
WITH THE TERMS OF SUCH AGREEMENT.
FOR ____ AGAINST ____ ABSTAIN ____
2. PROPOSAL TO APPROVE THE STOCK TRANSFER AND EXCHANGE AGREEMENT AMONG THE
COMPANY, THE STOLL COMPANIES ("STOLL") AND ITS SHAREHOLDERS AND THE
TRANSFER OF ALL OF THE STOCK OF STOLL TO THE COMPANY IN ACCORDANCE WITH
THE TERMS OF SUCH AGREEMENT.
FOR ____ AGAINST ____ ABSTAIN ____
3. PROPOSAL TO APPROVE THE STOCK TRANSFER AND EXCHANGE AGREEMENT AND TO ADOPT
THE MERGER AGREEMENT AMONG THE COMPANY, OHIO PERIODICAL DISTRIBUTORS, INC.
("OPD") AND ITS SHAREHOLDERS IN ACCORDANCE WITH THE TERMS OF SUCH AGREEMENT
AND THE MERGER OF OPD INTO THE COMPANY IN ACCORDANCE WITH THE TERMS OF SUCH
MERGER AGREEMENT.
FOR ____ AGAINST ____ ABSTAIN ____
4. PROPOSAL TO APPROVE THE ASSET TRANSFER AND EXCHANGE AGREEMENT BETWEEN
THE COMPANY AND NORTHERN NEWS COMPANY ("NORTHERN") AND THE ACQUISITION
BY THE COMPANY OF ASSETS AND ASSUMPTION OF LIABILITIES OF NORTHERN IN
ACCORDANCE WITH THE TERMS OF SUCH AGREEMENT.
FOR ____ AGAINST ____ ABSTAIN ____
5. PROPOSAL TO APPROVE THE STOCK TRANSFER AND EXCHANGE AGREEMENT AMONG THE
COMPANY, SCHERER COMPANIES ("SCHERER COMPANIES") AND ITS SHAREHOLDERS
AND THE TRANSFER OF ALL OF THE STOCK OF SCHERER COMPANIES TO THE
COMPANY IN ACCORDANCE WITH THE TERMS OF SUCH AGREEMENT.
FOR ____ AGAINST ____ ABSTAIN ____
6. PROPOSAL TO APPROVE THE ASSET TRANSFER AND EXCHANGE AGREEMENT BETWEEN
THE COMPANY AND WHOLESALERS LEASING CORP. ("WHOLESALERS"), AND THE
ACQUISITION BY THE COMPANY OF CERTAIN ASSETS AND THE ASSUMPTION OF
LIABILITIES OF WHOLESALERS IN ACCORDANCE WITH THE TERMS OF SUCH AGREEMENT.
FOR ____ AGAINST ____ ABSTAIN ____
<PAGE> 302
7. PROPOSAL TO APPROVE THE STOCK TRANSFER AND EXCHANGE AGREEMENT AMONG THE
COMPANY, THE GEORGE R. KLEIN NEWS CO., CENTRAL NEWS CO., AND NEWSPAPER
SALES, INC. (COLLECTIVELY,"KLEIN") AND THEIR SHAREHOLDERS AND THE
TRANSFER OF ALL OF THE STOCK OF KLEIN TO THE COMPANY IN ACCORDANCE
WITH THE TERMS OF SUCH AGREEMENT.
FOR ____ AGAINST ____ ABSTAIN ____
8. IF NINE DIRECTORS ARE TO BE ELECTED, WITH ____ OR WITHOUT ____
AUTHORITY TO FIX THE NUMBER OF DIRECTORS OF THE COMPANY AT 13 AND TO
ELECT ALL NOMINEES LISTED BELOW AS DIRECTORS (EXCEPT AS MARKED TO THE
CONTRARY BELOW):
RONALD E. SCHERER EUGENE J. ALFONSI THADDEUS A. MAJEREK
DAVID B. THOMPSON R.L. RICHARDS RICHARD H. STOLL, SR.
NANCY A. LYMAN GEORGE R. KLEIN WILLIAM D. PARKER
ROBERT H. MONNAVILLE
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH HIS OR HER NAME.
9. IF FIVE DIRECTORS ARE TO BE ELECTED, WITH ____ OR WITHOUT ___ AUTHORITY
TO FIX THE NUMBER OF DIRECTORS OF THE COMPANY AT 7 AND TO ELECT ALL
NOMINEES LISTED BELOW AS DIRECTORS (EXCEPT AS MARKED TO THE CONTRARY
BELOW):
RONALD E. SCHERER EUGENE J. ALFONSI THADDEUS A. MAJEREK
DAVID B. THOMPSON ROBERT H. MONNAVILLE
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, STRIKE A
LINE THROUGH HIS NAME.
10. PROPOSAL TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION TO EFFECT A
ONE-FOR-TEN REVERSE STOCK SPLIT OF THE COMPANY'S COMMON SHARES,
WITHOUT PAR VALUE.
FOR ____ AGAINST ____ ABSTAIN ____
11. PROPOSAL TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION TO CHANGE THE
COMPANY'S PRINCIPAL PLACE OF BUSINESS TO DUBLIN, OHIO.
FOR ____ AGAINST ____ ABSTAIN ____
12. PROPOSAL TO RATIFY THE APPOINTMENT OF THE FIRM OF ARTHUR ANDERSEN LLP
AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE CURRENT FISCAL YEAR.
FOR ____ AGAINST ____ ABSTAIN ____
<PAGE> 303
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER MATTERS
AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED UPON THE PROPOSALS
LISTED ABOVE IN ACCORDANCE WITH THE INSTRUCTION GIVEN BY THE SHAREHOLDER, BUT IF
NO INSTRUCTION IS GIVEN, THIS PROXY WILL BE VOTED FOR THE PROPOSALS LISTED IN
ITEMS 1, 2, 3, 4, 5, 6, 7, 10, 11, AND 12 ABOVE AND TO FIX THE NUMBER OF
DIRECTORS AND ELECT ALL NOMINEES AS SET FORTH IN ITEM 8, ABOVE, AND IN THE
DISCRETION OF THE PROXIES ON ANY OTHER MATTER WHICH PROPERLY COMES BEFORE THE
MEETING.
Dated
-----------------------------------------
---------------------------------------------
(Signature of Shareholder)
---------------------------------------------
(Signature of Shareholder)
(Please sign legibly exactly as the name
is printed on this page.) If the share
registration is as attorney, executor,
administrator, trustee or guardian,
please sign full title as such.
