<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- ------------------------------------------------------------------------------
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
- ------------------------------------------------------------------------------
For the First Quarter Ended December 28, 1996
Commission File Number: 0-2675
United Magazine Company
An Ohio Corporation
I.R.S. Number: 31-0681050
W
5131 Post Road
Dublin, Ohio 43017
Registrant's Telephone Number: (614) 792-0777
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
Yes: X No:
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
The Registrant's number of common shares, without par value, outstanding
as of February 1, 1997 was 26,760,334. After adjustment for the anticipated one
for ten reverse split to be effective after the 1997 Annual Meeting of
Shareholders, the adjusted number of common shares is 2,676,034.
Traditional Small Business Disclosure Format (check one):
Yes: X No:
--- ---
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UNITED MAGAZINE COMPANY
FORM 10-QSB
FOR THE FIRST QUARTER ENDED DECEMBER 28, 1996
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets 3
December 28, 1996 and September 28, 1996
Condensed Consolidated Statements of Operations (Unaudited) 5
For the Three Months Ended December 28, 1996
and December 30, 1995
Condensed Consolidated Statements of Cash Flow (Unaudited) 6
For the Three Months Ended December 28, 1996
and December 30, 1995
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II - OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings 17
Item 2. Change in Securities 17
Item 3. Default Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
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UNITED MAGAZINE COMPANY
FORM 10-QSB
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 28, 1996 AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
December 28, September 28,
ASSETS 1996 1996
-------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,171,796 $ 2,546,785
Accounts receivable, net of allowance for doubtful accounts 38,452,691 29,835,357
Inventories 34,781,410 35,746,922
Marketable securities 210,144 473,556
Notes receivable from related parties 1,352,646 1,352,646
Prepaids and other 1,225,056 1,335,458
------------- -------------
Total current assets 77,193,743 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 6,441,886 6,174,452
Vehicles 4,901,621 4,789,336
Leasehold improvements 526,816 522,336
------------- -------------
14,421,769 14,037,570
Less - accumulated depreciation and amortization (2,593,645) (1,585,503)
------------- -------------
Total property and equipment, net 11,828,124 12,452,067
------------- -------------
ASSETS HELD FOR SALE - 1,239,605
------------- -------------
OTHER ASSETS:
Sales orders and regulatory records, net of accumulated
amortization 360,160 423,720
Costs in excess of net assets acquired, net of accumulated
amortization 154,242,219 154,518,179
Covenants not to compete, net of amortization 515,794 538,777
Notes receivable from related parties 1,788,645 1,788,645
Prepaids 4,438,920 5,501,703
Other assets, net 4,889,358 3,617,107
------------- -------------
Total other assets 166,235,096 166,388,131
------------- -------------
Total assets $ 255,256,963 $ 251,370,527
============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
3
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UNITED MAGAZINE COMPANY
FORM 10-QSB
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 28, 1996 AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
December 28, September 28,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1996
-------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of debt obligations $ 9,346,050 $ 10,822,386
Current portion of Senior debentures 4,993,942 3,329,295
Short-term borrowings - related parties 5,875,892 6,206,853
Accounts payable 78,507,248 70,302,971
Accrued expenses 14,718,108 12,762,143
Accrued interest on debentures 2,303,466 1,041,006
Income taxes payable 1,534,602 1,534,602
Reserve for gross profit on sales returns 10,594,409 10,474,409
------------- -------------
Total current liabilities 127,873,717 116,473,665
LONG-TERM DEBT OBLIGATIONS 8,329,264 9,247,711
DEBENTURES:
- Senior 34,925,873 36,590,520
- Subordinated 18,559,707 18,559,707
DEFERRED COMPENSATION PLAN 1,231,041 1,231,041
ACCRUED PENSION OBLIGATION 2,115,478 2,115,478
POST-RETIREMENT OBLIGATION 1,463,317 1,450,015
DEALER ADVANCE PAYMENTS AND OTHER 45,984 146,938
------------- -------------
Total liabilities 194,544,381 185,815,075
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COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT AGREEMENTS, 482,140 shares 4,476,088 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 43,196,394 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 (263,412) (31,219)
Minimum pension liability adjustment (108,204) (108,204)
Retained deficit (51,813,674) (46,939,365)
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Total shareholders' equity 56,236,494 61,226,165
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Total liabilities and shareholders' equity $255,256,963 $251,370,527
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</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
4
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UNITED MAGAZINE COMPANY
FORM 10-QSB
FOR THE FIRST QUARTER ENDED DECEMBER 28, 1996
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
DECEMBER 28, 1996 AND DECEMBER 30, 1995
<TABLE>
<CAPTION>
3 Months 3 Months
Ended Ended
December 28, December 30,
1996 1995
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET SALES $ 74,428,502 $ 6,469,381
COST OF SALES (57,965,575) (4,733,440)
------------- -------------
Gross profit 16,462,927 1,735,941
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (17,375,786) (1,545,888)
DEPRECIATION AND AMORTIZATION (2,102,081) (202,100)
INCOME (LOSS) FROM INVESTMENT IN WILMINGTON - (90,192)
------------- -------------
LOSS FROM OPERATIONS (3,014,940) (102,239)
------------- -------------
OTHER INCOME (EXPENSES), net:
Interest expense, net (1,792,751) (122,940)
Other, net (66,618) 12,992
------------- -------------
Total other income (expenses), net (1,859,369) (109,948)
------------- -------------
INCOME (LOSS) BEFORE TAXES (4,874,309) (212,187)
INCOME TAXES - -
------------- -------------
NET INCOME (LOSS) $ (4,874,309) $ (212,187)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 7,054,495 2,669,020
============= =============
EARNINGS (LOSS) PER SHARE $ (.69) $ (.08)
============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
5
<PAGE> 6
UNITED MAGAZINE COMPANY
FORM 10-QSB
FOR THE FIRST QUARTER ENDED DECEMBER 28, 1996
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED
DECEMBER 28, 1996 AND DECEMBER 30, 1995
<TABLE>
<CAPTION>
3 Months 3 Months
Ended Ended
December 28, December 30,
1996 1995
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 1,004,878 $ (426,987)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (379,719) (108,373)
Additions of long-term assets (514,009) -
Proceeds from sale of Airplane held for resale 1,239,605 -
------------- -------------
Net cash provided by (used in) investing activities 345,877 (108,373)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt obligations (2,725,744) (63,334)
Other - 78,880
------------- -------------
Net cash provided by (used in) financing activities (2,725,744) 15,546
------------- -------------
NET DECREASE IN CASH (1,374,989) (519,814)
CASH, beginning of year 2,546,785 755,338
------------- -------------
CASH, end of period $ 1,171,796 $ 235,524
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 487,280 $ 6,454
Cash paid during the period for taxes 11,881 12,250
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
1997: None
1996: None
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
6
<PAGE> 7
UNITED MAGAZINE COMPANY
FORM 10-QSB
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FIRST QUARTER ENDED DECEMBER 28, 1996
(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 December 28, 1996 and September 28, 1996, and the results of its
operations and cash flows for the three months ended December 28, 1996 and
December 30, 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
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 December
28, 1996 were conducted through its consolidated subsidiaries and also include
the impact of the business combinations in the fourth quarter of fiscal 1996
more fully discussed below. The operations for the quarters ended December 28,
1996 and December 30, 1995 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
fiscal quarter of 1996 and was sold in July of 1996.
Service News Company of Connecticut, (Yankee), is engaged in wholesale
magazine, newspaper and book distribution and owns and operates four newsstands
and one bookstore.
Service News Company of Wilmington, North Carolina (Wilmington) is engaged in
wholesale magazine and book distribution.
Triangle News Company, Inc., (Triangle) is engaged in wholesale magazine,
newspaper and book distribution.
Reader's Choice (RC) was engaged in the business of managing and reporting
information on retail display allowances and collecting these allowances which
are paid by publishers to retailers.
United Magazine Company also is effecting business combinations with Michiana
News Service, Inc., a Michigan corporation ("Michiana"), The Stoll Companies,
an Ohio corporation ("Stoll"), and The George R. Klein News Co., Central News
Co., and Newspaper Sales, Inc., all Ohio corporations (collectively, "The Klein
Companies" or "Klein"), all independent magazine, book, and newspaper
("periodical") distributors.
7
<PAGE> 8
The Company is also effecting business combinations with a number of companies
affiliated with Ronald E. Scherer ("Ronald E. Scherer"), the Company's
chairman, also engaged in wholesale periodical distribution (the "Scherer
Affiliates"): Ohio Periodical Distributors, Inc., an Ohio corporation ("OPD"),
Northern News Company, a Michigan corporation ("Northern"), Wholesalers
Leasing, Corp., a Delaware corporation ("Wholesalers"), Scherer Companies, a
Delaware corporation ("Scherer Companies") and, pursuant to the agreement with
Northern to acquire all of the stock of MacGregor News Services, Inc., a
Michigan corporation ("MacGregor"). The Company also is acquiring the stock of
Read-Mor Bookstores, Inc. (Read-Mor), a company managed by Scherer Companies.
Read-Mor owns six retail locations and was an insignificant acquisition.
Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates are collectively known
as the "Acquisition Parties". The Acquisition Parties in combination with the
other entities of UNIMAG are collectively known as the "Combined Company".
Effective July 29, 1996, the Company entered into an Asset Transfer and Exchange
Agreement with Northern, pursuant to which the Company acquired such of the
assets of that company as are related to the wholesale distribution of
periodicals (and, pursuant to the agreement with Northern, to acquire all of the
stock of MacGregor held by Northern) in exchange for Common Stock of the Company
and Senior and Subordinated Debentures of the Company. Effective July 30, 1996,
the Company entered into a Stock Transfer and Exchange Agreement with Michiana
and the shareholders of Michiana will (the "Michiana Shareholders"), pursuant to
which all of the Michiana Shareholders agreed to contribute their shares of
stock of Michiana to the Company in exchange for Common Stock of the Company and
Senior and Subordinated Debentures of the Company. Effective July 31, 1996, the
Company entered into a Stock Transfer and Exchange Agreement with Stoll and the
shareholders of Stoll (the "Stoll Shareholders"), pursuant to which all of the
Stoll Shareholders agreed to contribute their shares of stock of Stoll to the
Company in exchange for Common Stock of the Company and Senior and Subordinated
Debentures of the Company. Effective August 1, 1996, the Company entered into an
Asset Transfer and Exchange Agreement with OPD, subsequently modified to a Stock
Transfer and Exchange Agreement, pursuant to which all of the OPD Shareholders
agreed to contribute their shares of stock of OPD to the Company in exchange for
Common Stock of the Company and Senior and Subordinated Debentures of the
Company. Effective August 2, 1996, the Company entered into an Asset Transfer
and Exchange Agreement with Wholesalers, pursuant to which the Company agreed to
acquire substantially all of the assets and assume substantially all of the
liabilities of that company as are related to the wholesale distribution of
periodicals in exchange for Common Stock of the Company and Senior and
Subordinated Debentures of the Company. Effective August 2, 1996, the Company
entered into a Stock Transfer and Exchange Agreement with Scherer Companies and
the shareholders of Scherer Companies (the "Scherer Shareholders"), pursuant to
which the Scherer Shareholders agreed to contribute their shares of stock of
Scherer Companies to the Company in exchange for Common Stock of the Company and
Senior and Subordinated Debentures of the Company. Effective September 14, 1996,
the Company entered into a Stock Transfer and Exchange Agreement with Klein and
the sole shareholder of Klein (the "Klein Shareholder"), pursuant to which the
Klein Shareholder agreed to contribute his shares of stock of Klein to the
Company in exchange for Common Stock of the Company and Senior and Subordinated
Debentures of the Company.
Each of these transactions has been or is expected to be closed into escrow
pending a favorable vote of the shareholders of the Company on each of these
transactions. Upon the shareholders voting in favor of the acquisitions at the
Annual Meeting of Shareholders, then closing documents will be released from
escrow and the transactions will be consummated. Ronald E. Scherer, chairman of
the Company, OPD, which is controlled by Ronald E. Scherer, and R. David
Thomas, another significant shareholder of the Company, have each agreed to
vote their shares in favor of the transactions with Stoll, Michiana, Klein
8
<PAGE> 9
and the Scherer Affiliates. Together these shareholders are entitled to vote
more than 50% of the stock of the Company. Since approval of the transactions is
assured and UNIMAG had effective control over the operations of the companies
since their respective acquisition dates, 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 quarters ended December 28,
1996 and December 30, 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
Current $(1,950,000) $ (85,000)
Deferred 1,950,000 85,000
----------- -------------
Total $ - $ -
----------- -------------
</TABLE>
The Company has provided deferred income taxes at a 40% tax rate which
represents a blended statutory federal and state income tax rate. The types of
differences between the tax bases of assets and liabilities and their financial
reporting amounts that give rise to significant portions of deferred income tax
assets and liabilities are: reserve for gross profit on sales returns, property
and equipment asset valuations, deferred compensation, amortization life of
intangibles and certain taxes.
The difference between the statutory tax rate and the effective rate of zero is
due primarily to the benefit of the net operating losses generated that may not
be realized in the future. The Company's net deferred tax assets have been
fully reserved due to the uncertainty of future realization.
9
<PAGE> 10
As of December 28, 1996, UNIMAG has approximately $49 million of Federal net
operating loss (NOL) carryforwards for tax purposes. The amount that UNIMAG can
utilize each year is restricted due to multiple changes in ownership. The NOL
carryforwards will expire in the years 2003 through 2011.
At December 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.
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 no
significant acquisitions during the three months ended December 28, 1996.
<TABLE>
<CAPTION>
3 Months Ended
December 30, 1995
in 000's, except EPS Pro Forma
---------------------------- -------------------
<S> <C>
Net Revenue $ 68,958
Net Income (Loss) (1,192)
EPS $ (.17)
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- -------------------------------------------------------------------------------
Results of Operations of UNIMAG for the three months ended December 28, 1996
and December 30, 1995
- -------------------------------------------------------------------------------
Review of Operations
The results of operations for the quarter ended December 28, 1996 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.
The following table provides comparative financial information for the first
fiscal quarters of 1997 and 1996 and for the transitional fourth fiscal quarter
ended September 28, 1996.
<TABLE>
<CAPTION>
December 28, December 30, September 28,
1996 1995 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
Results of Operations ($000):
Revenue $74,429 $ 6,469 $45,510
Gross Margin 16,463 1,736 11,233
Selling, General and Administrative 17,376 1,546 13,752
EBITDA (913) 100 (2,457)
Net Income (Loss) (4,874) (212) (5,284)
As a Percent of Revenue:
Gross Margin 22.1 26.8 24.7
Selling, General and Administrative 23.3 23.9 30.2
EBITDA (1.2) 1.5 (5.4)
Net Income (Loss) (6.5) (3.3) (11.6)
</TABLE>
The revenue for the Combined Company for the quarter ended December 28, 1996
was $74,428,502, an increase of 1,051% over revenue for the quarter ended
December 30, 1995 and an increase of 64% over the previous fiscal quarter which
included results of the Acquisition Parties for only part of that quarter.
These increases are primarily attributable to the inclusion of revenues from
the acquisition parties' companies during the entire quarter ended December 28,
1996.
During 1996 the Company and the industry experienced reductions in gross
margins from existing chain customers because of new discounts, rebates and
amortization of up-front signing bonuses. As a result of these reductions in
revenue, the gross margin, as a percentage of revenue, declined from 26.8 % in
the first fiscal quarter of 1996 to 22.1% in the first fiscal quarter of 1997.
Selling, general and administrative expenses, as a per cent of revenue,
decreased by .6% to 23.3% in 1997 versus 23.9% in 1996. The in-store service
component of payroll expense, which is the largest operating expense, increased
in 1997 over 1996 as a result of increased in-store service for large customers.
This increase in in-store service cost, created by commitments under contract by
the Company to increase the levels of
11
<PAGE> 12
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 partial
benefit of initial reduction of full-time employees in Michigan during the
quarter ended December 28, 1996. The selling, general and administrative
percent for the quarter ended September 28, 1996 of 30.2% included
approximately 2.2% from non-recurring legal and accounting expenses.
Depreciation and amortization expense increased due to the depreciation of fixed
assets acquired 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 was 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.
All of these changes resulted in an increase in the net loss from operations to
6.5% of revenue in 1997 compared to 3.3% in 1996 and 11.6% in the preceding
quarter.
The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates is
being financed by the issuance of Common Stock of the Company, 8% Senior
Debentures in the aggregate amount of $39,920,000 and 10% Subordinated
Debentures in the aggregate amount of $18,560,000. These debentures accrue
interest for the entire quarter. This increased interest expense for the first
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 first quarter of 1997. The Company
has a net operating loss (NOL) of approximately $49,000,000 at December 28,
1996; however, the Company has not recognized any benefits from that NOL
through December 28, 1996.
The calculation of earnings per common share and weighted average number of
shares outstanding includes the shares to be issued for Michiana, Stoll, Klein,
Read-Mor and Scherer Affiliates for the periods determined under the respective
agreements. In addition, the calculation of earnings per share reflects the one
for ten reverse split to be submitted to the Shareholders for approval at the
1997 Annual Meeting of Shareholders. The effects of the one for ten reverse
stock split have been included 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.
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 first quarter of 1997 was $(913,000) versus $100,000 for 1996
and $(2,457,000) for the preceding fourth fiscal quarter of 1996. The 1997
EBITDA was impacted negatively by the gross margin and payroll pressures during
the period of ownership, and the Company delayed the implementation of some
expected consolidation synergies with the acquisition companies during the
initial periods of ownership until consolidation plans could be finalized.
12
<PAGE> 13
The Company anticipates improvements in EBITDA during the remainder of fiscal
1997 due to continued reductions in selling, general and administrative
expenses through consolidation synergies and through some improvement in gross
margins.
The acquisition transactions of the Company since June 30, 1996 have added
$140,966,000 of goodwill to the Company's assets and $58,480,000 of Senior and
Subordinated Debentures to the Company's liabilities. On an annual basis the
Company anticipates future amortization of approximately $3,524,000 for this
goodwill and initial annual interest of approximately $5,050,000 related to
these transactions.
Cash Flows - Operating Activities
During the first fiscal quarter of 1997 the Company experienced an increase in
net cash provided from operations of $1,005,000 compared to a deficit of
$427,000 in 1996. The 1997 increase is due primarily to a net increase in
current liabilities, primarily vendor payables, of approximately $11,400,000
versus a net increase in current assets, primarily trade accounts receivable,
of approximately $5,900,000. The loss for the quarter of $4,874,000 was
partially offset by depreciation and amortization of $2,102,000. The operating
cash flow results for the first quarter of fiscal 1996 were not comparable and
were not significant.
Cash Flows - Investing Activities
The Company spent $380,000 in the first quarter of 1997 for capital
expenditures and $514,000 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 quarter of fiscal 1996 were not comparable and were
not significant.
Cash Flows - Financing Activities
During the first fiscal quarter of 1997 the Company made payments on debt
obligations of $2,726,000 including $1,807,000 of current debt and $919,000 of
long-term debt. The financing results for the first quarter of fiscal 1996 were
not comparable and were not significant.
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.
13
<PAGE> 14
Operational Measures
The receivables of the Company and its Acquisition Parties increased during the
first fiscal quarter 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 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 a future reduction in 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
(Sales Magazine Analysis React Transmit System), acquired from the Scherer
Affiliates, for more efficient product allocation and higher per store revenue.
The SMARTS System develops a Distribution Rate Base ("DRB") which is used by
publishers to reach targeted customer growth. The Company charges for the use of
the DRB information, and this offsets the cost of higher levels of service and
the use of improved technology. Management believes that, as the Combined
Company continues to expand, the SMARTS System, which provides a unique
competitive advantage, will improve same store revenue as it is introduced to
new retail locations and will provide a critical competitive advantage over
other regional wholesalers in obtaining important new accounts.
In addition to the proprietary SMARTS System, the Combined Company's current
and future high impact marketing programs provide an important competitive
advantage by customizing magazine displays to utilize otherwise wasted space in
retail stores. The implementation of these programs has historically enabled
the Company to improve a retail location's sales level by as much as 20-25%
when the program is introduced into a given retail location. The Company
expects that the introduction of the high impact marketing program to
Acquisition Parties not currently using it will improve sales levels of the
Combined Company.
Through the consolidation of the contiguous Acquisition parties, management
expects the Combined Company to achieve considerable cost savings and operating
efficiencies through the elimination of redundant overhead and the
consolidation of overlapping facilities. Duplicate administrative and
distribution functions can be eliminated, and the costs and benefits of
technology can be spread over a larger customer base. Additionally, the
consolidation of the businesses of the Company and the Acquisition Parties
should increase purchasing power and the ability to negotiate favorable
volume discounts with publishers and national brokers.
Management is currently implementing the consolidated staffing plan for the
Combined Company and expects significant employee reductions and labor cost
savings as the operations of the Acquisition Parties are consolidated in the 12
months following the consummation of the proposed transactions. The Company has
terminated or sent notices of pending termination to approximately 15% of the
1996 total full-time work force.
Commitments and Contingencies
The Company has entered into long-term contracts (generally three years) with
many of its chain customers. These contracts resulted in gross margin reductions
in the latter half of fiscal 1996 and the first fiscal quarter of 1997.
14
<PAGE> 15
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 anticipates issuing a $4,5000,000 Subordinated Debenture
and a cash payment of $500,000 in exchange for a $5,000,000 note owned by OPD to
KDR Limited, an Ohio limited liability company whose owners include R. David
Thomas, a principal shareholder of the Company, and R. L. Richards, a director
nominee. In connection with this transaction the Company anticipates the
purchase of an additional $500,000 of common stock by R. David Thomas. The
Company also will issue $242,211 of Senior Debentures and $94,594 of
Subordinated Debentures in connection with the acquisition of Read-Mor.
The Senior Debentures are designated as "8% Senior Debentures Due 2002", mature
on January 1, 2002, and bear interest at the rate of 8% per annum from July 1,
1996, provided, however, that Senior Debentures issued pursuant to the Klein
Exchange Agreement began 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 began 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 $40,000,000. In connection with such refinancing, the
Company has engaged Bank of Boston as financial advisor to the Company's Board
of Directors. Bank of Boston has been requested to provide fee based services
in connection with the development of a financing restructuring for the
transactions and with the related placement of debt and/or equity securities.
The Company has had discussions with several different entities, introduced to
the Company by Bank of Boston, interested in providing such financing. The
Company has received a signed letter of intent from Bain Capital, Inc. to
provide such financing, subject to certain terms and conditions and subject to
due diligence; however, the Company has not received a financing commitment nor
reached a definitive agreement regarding such financing.
15
<PAGE> 16
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.
16
<PAGE> 17
PART II. OTHER INFORMATION AND SIGNATURES
Item 1. LEGAL PROCEEDINGS
Except as set forth below, there have been no material developments in
legal proceedings involving either the Company or its subsidiaries since the
filing of the Company's Annual Report on Form 10-KSB for the Fiscal Year Ended
September 28, 1996.
None
Item 2. CHANGE IN SECURITIES: None
Item 3. DEFAULT UPON SENIOR SECURITIES: None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
Item 5. OTHER INFORMATION:
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
None
17
<PAGE> 18
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED MAGAZINE COMPANY
Registrant
/s/ RONALD E. SCHERER
----------------------------------
Ronald E. Scherer
President and Chief Executive Officer
/s/ THOMAS L. GERLACHER
----------------------------------
Thomas L. Gerlacher
Chief Financial Officer
18
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