<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- -------------------------------------------------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------------------------------------
For the Third Quarter Ended July 04, 1998
Commission File Number: 0-2675
United Magazine Company
An Ohio Corporation
I.R.S. Number: 31-0681050
5131 Post Road
Dublin, Ohio 43017
Registrant's Telephone Number: (614) 792-0777
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
Yes: X No:
------ -------
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
The Registrant's number of common shares, without par value, outstanding
as of July 04, 1998 was 7,411,314.
Traditional Small Business Disclosure Format (check one):
Yes: No: X
------ -------
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UNITED MAGAZINE COMPANY
-----------------------
FORM 10-Q
---------
FOR THE THIRD QUARTER ENDED JULY 04, 1998
-----------------------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
July 04, 1998 and September 27, 1997 1-2
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months and Nine Months Ended
July 04, 1998 and June 28, 1997 3
Condensed Consolidated Statements of Cash Flow (Unaudited)
For the Nine Months Ended
July 04, 1998 and June 28, 1997 4-5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-18
PART II - OTHER INFORMATION AND SIGNATURES
- ------------------------------------------
Item 1. Legal Proceedings 19
Item 2. Change in Securities 19
Item 3. Default Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
</TABLE>
i
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UNITED MAGAZINE COMPANY
-----------------------
FORM 10-Q
---------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
AS OF JULY 04, 1998 AND SEPTEMBER 27, 1997
-------------------------------------------
(Dollar Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
ASSETS July 04, September 27,
------ 1998 1997
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 1,774 $ 2,085
Trade accounts receivable, net
-related party 1,579 1,579
-other 61,911 43,269
Inventories 25,315 40,534
Notes receivable from related parties 431 431
Advances to related parties 2,846 9,243
Prepaids and other 1,404 746
--------- ---------
Total current assets 95,260 97,887
--------- ---------
PROPERTY AND EQUIPMENT, at cost:
Land 291 291
Building and improvements 2,115 2,143
Furniture and equipment 7,887 6,167
Vehicles 4,300 3,932
Leasehold improvements 1,438 977
--------- ---------
16,031 13,510
Less - accumulated depreciation and amortization (5,256) (3,621)
--------- ---------
Total property and equipment, net 10,775 9,889
--------- ---------
OTHER ASSETS:
Costs in excess of net assets acquired, net of accumulated
amortization 158,297 152,601
Notes receivable from related parties 2,013 2,228
Prepaid signing bonuses 6,082 3,626
Other assets, net 9,441 5,372
--------- ---------
Total other assets 175,833 163,827
--------- ---------
Total assets $ 281,868 $ 271,603
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
1
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UNITED MAGAZINE COMPANY
-----------------------
FORM 10-Q
---------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
AS OF JULY 04, 1998 AND SEPTEMBER 27, 1997
------------------------------------------
(Dollar Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY July 04, September 27,
------------------------------------ 1998 1997
--------- ---------
(Unaudited) (Audited)
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of debt obligations $ 7,701 $ 1,842
Accounts payable 101,848 113,370
Accrued expenses 14,131 13,650
Accrued interest on debentures 2,283 6,091
Income taxes payable 0 827
Reserve for gross profit on sales returns 8,398 8,351
--------- ---------
Total current liabilities 134,361 144,131
LONG-TERM DEBT OBLIGATIONS 38,681 22,390
DEBENTURES HELD BY SHAREHOLDERS:
- Senior 34,920 39,920
- Subordinated 23,060 18,560
DEFERRED COMPENSATION PLAN 955 1,077
ACCRUED PENSION OBLIGATION 1,720 1,623
POST-RETIREMENT OBLIGATION 1,404 1,604
DEALER ADVANCE PAYMENTS AND OTHER 0 144
--------- ---------
Total liabilities 235,101 229,449
--------- ---------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT AGREEMENTS,
476,543 shares 4,974 4,833
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 53,250,000 shares
authorized, 9,204,832 and 4,277,909 issued, and
7,411,134 and 2,670,437 outstanding (including
shares subject to Put Agreements), and paid in
capital 117,686 43,698
Obligation to issue shares (0 and 4,349,476) 0 65,242
Treasury stock, at cost (1,799,295 and 1,613,069 shares) (3,730) (101)
Minimum pension liability adjustment (58) (58)
Retained deficit (72,105) (71,460)
--------- ---------
Total shareholders' equity 41,793 37,321
--------- ---------
Total liabilities and shareholders' equity $ 281,868 $ 271,603
========= =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
2
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<TABLE>
<CAPTION>
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-Q
---------
FOR THE THIRD QUARTER ENDED JULY 04, 1998
-----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
JULY 04, 1998 AND JUNE 28, 1997
-------------------------------
(Dollar Amounts in Thousand, Except Share Data)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
1998 1997 1998 1997
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 82,692 $ 79,601 $ 236,714 $ 229,704
COST OF SALES 62,154 62,039 180,215 179,099
----------- ----------- ----------- -----------
Gross Profit 20,538 17,562 56,499 50,605
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (18,715) (16,109) (52,478) (49,918)
DEPRECIATION AND (2,682) (2,112) (6,933) (6,394)
AMORTIZATION ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (859) (659) (2,912) (5,707)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES), net:
Interest Expense, net (2,347) (1,604) (5,979) (5,318)
Other, net (287) (24) 8,246 131
----------- ----------- ----------- -----------
Total other income (2,634) (1,628) 2,267 (5,187)
(expenses), net ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES (3,493) (2,287) (645) (10,894)
INCOME TAXES -- -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (3,493) $ (2,287) $ (645) $ (10,894)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING 7,443,007 7,069,413 7,229,592 7,061,978
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE $ (.47) $ (.32) $ (.09) $ (1.54)
=========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
3
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UNITED MAGAZINE COMPANY
-----------------------
FORM 10-Q
---------
FOR THE THIRD QUARTER ENDED JULY 04, 1998
-----------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
----------------------------------------------
FOR THE NINE MONTHS ENDED
-------------------------
JULY 04, 1998 AND JUNE 28, 1997
-------------------------------
(Dollar Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
9 Months 9 Months
Ended Ended
July 04, 1998 June 28, 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
NET CASH (USED IN) OPERATING ACTIVITIES $(15,857) $ 3,695
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of operating assets 2,700 0
Sale of stock 500 0
Purchase of stock of companies (2,552) 0
Cash used for asset purchase (4,050) 0
Purchases of property and equipment (665) (831)
Additions of long-term assets (1,398) (1,366)
Sale of airplane held for resale 0 1,240
-------- --------
Net cash provided by (used in) investing (5,465) (957)
activities -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt obligations 42,241 0
Payment of debt obligations (19,234) (3,824)
Cash used for financing costs (1,657) 0
Redemption of putable shares of common stock (339) 0
-------- --------
Net cash provided by (used in) financing 21,011 (3,824)
activities -------- --------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS (311) (1,086)
CASH, beginning of year 2,085 2,547
-------- --------
CASH, end of year $ 1,774 $ 1,461
======== ========
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid during the period for interest $ 1,785 $ 1,653
Cash paid during the period for taxes 1,371 23
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
- -------------------------------------------------------------------
1998: The Company received treasury shares back as part of the sale of
certain operating assets and as part of a litigation settlement. The
Company issued shares to convert $4,910,000 of debt to equity and sold
shares valued at $3,000,000 to a related party for $15.00 per share.
The Company received a $2,500,000 note in connection with the sale of
certain operating assets of Yankee and converted $4,500,000 of
short-term debt to a subordinated debenture.
1997: None
4
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The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
Remainder of Page Intentionally Left Blank.
5
<PAGE> 8
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-Q
---------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
FOR THE THIRD QUARTER ENDED JULY 04, 1998
-----------------------------------------
(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 July 04, 1998 and September 27, 1997, and the results of its
operations and cash flows for the nine months ended July 04, 1998 and June 28,
1997. 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, both directly and through its subsidiary corporations, is engaged in the
wholesale distribution of magazines, books and other periodicals, and operates
some retail bookstores.
The operations for the quarters ended July 04, 1998 and June 28, 1997 were
conducted through its consolidated subsidiaries and also include the impact of
five business combinations, which the Company operated beginning in the fourth
quarter of 1996, and which are more fully discussed below. The following were
the consolidated subsidiaries: Service News Company (of Waterbury, Connecticut),
a Connecticut corporation, doing business as Yankee News Company ("Yankee");
Service News Company (of Wilmington, North Carolina), a North Carolina
corporation ("Wilmington") ; and Triangle News Company, Inc., a Pennsylvania
corporation ("Triangle"). These were merged into the Company on March 6, 1998.
Yankee was engaged in wholesale magazine, newspaper and book distribution and
owned and operated four newsstands and one bookstore. Certain operating assets
of Yankee were sold in January of 1998.
Wilmington is engaged in wholesale magazine and book distribution.
Triangle is engaged in wholesale magazine, newspaper and book distribution.
United Magazine Company also completed 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. These transactions were accounted for as a purchase
as of July, 1996 (September 14, 1996 for Klein).
The Company also completed business combinations with a number of companies
affiliated with Ronald E. Scherer, the Company's chairman ("Ronald E. Scherer"),
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
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("Wholesalers"); Scherer Companies, a Delaware corporation ("Scherer
Companies"); and, pursuant to the agreement with Northern (further described
herein), MacGregor News Services, Inc., a Michigan corporation ("MacGregor").
The Company also acquired the stock of Read-Mor Bookstores, Inc., an Ohio
corporation ("Read-Mor"), a company managed by Scherer Companies. Read-Mor owned
six retail bookstore locations and was an insignificant acquisition. These
transactions were accounted for as a purchase as of July, 1996.
Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates are collectively known
as the "Acquisition Parties". The defined terms "UNIMAG" and the "Company" also
include the Acquisition Parties in combination with the other entities of
UNIMAG.
Each of these transactions was closed into escrow pending a favorable vote of
the shareholders of the Company on each of these transactions at the Annual
Meeting of Shareholders held on September 3, 1997. At the Annual Meeting of
Shareholders, the shareholders voted in favor of the acquisitions. Closing
documents were released from escrow in February of 1998, and the transactions
were consummated.
Shareholders who were entitled to vote more than 50% of the stock of the Company
had agreed to vote their shares in favor of the transactions. Since approval of
the transactions was assured and UNIMAG had effective control over the
operations of the companies, the Acquisition Parties were included in the
consolidated financial statements of UNIMAG.
UNIMAG also owns three inactive subsidiaries, two of which were merged into the
Company on March 6, 1998.
In February of 1998, the Company acquired certain assets and liabilities of SKS,
which had wholesale and retail operations similar to the Company in the States
of Michigan, Ohio, Indiana and Kentucky. SKS was organized by three of the
Company's directors, Ronald E. Scherer, George R. Klein and Richard H. Stoll,
Sr.
On March 2, 1998, the Company acquired the stock of Central Wholesale, Inc.
("Central") and Penn News Company, Inc. ("Penn"), both Pennsylvania
corporations. Both of these were merged into the Company on March 6, 1998.
3. PROVISION FOR INCOME TAXES
--------------------------
The provision (benefit) for income taxes for the periods ended July 04, 1998 and
June 28, 1997 is as follows:
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended 1998 Ended 1997 Ended 1998 Ended 1997
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Current $(1,397) $ (915) $ (258) $(4,358)
Deferred 1,397 915 258 4,358
------- ------- ------- -------
Total $ 0 $ 0 $ 0 $ 0
======= ======= ======= =======
</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
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<PAGE> 10
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 and to the utilization of net operating losses to
offset the tax liability on the gain on the sale of Yankee's operating assets.
The Company's net deferred tax assets have been fully reserved due to the
uncertainty of future realization.
As of July 04, 1998, UNIMAG has approximately $30 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, as defined
under Section 382 of the Internal Revenue Code. The estimated annual limit is
approximately $2 million per year. This resulted in a loss of approximately $35
million of the previous $65 million NOL available to the Company prior to the
change in ownership. The NOL carryforwards will expire in the years 2003 through
2012.
At September 27, 1997, UNIMAG had income taxes payable of approximately
$827,000. This related primarily to Michiana's tax assessment and interest of
approximately $1,371,000 due to the Internal Revenue Service as a result of
unfavorable tax settlements relating to years 1994 and prior that was assumed by
UNIMAG, net of certain refund claims. This obligation was paid in full with the
proceeds from the refinancing in February of 1998.
4. SIGNIFICANT EVENTS
------------------
SALE OF CERTAIN OPERATING ASSETS AND LIABILITIES OF YANKEE. In January of 1998,
the Company entered into an agreement to sell certain operating assets and
liabilities of Yankee to a third party for approximately $8.3 million.
Consideration was in the form of cash ($3.1 million), notes ($2.5 million) and
UNIMAG stock held by the buyer ($3.1 million). The final selling price will be
determined based partially upon the closing balance sheet of Yankee as of the
transaction date. The Company anticipates that a gain of approximately $8
million will be recognized on the sale. The total net sales of Yankee included
in the consolidated financial statements for the quarter ended January 03, 1998
was approximately $8.2 million.
FINANCING ARRANGEMENT. On February 6, 1998, the Company entered into a Credit
Agreement with a group of banks that provided a Revolving Credit Commitment of
$30 million, a Term Loan of $5 million and a Capital Expenditure Loan of $3
million. The amount available to the Company under the Revolving Credit
Commitment is based on certain amounts of eligible accounts receivable and
eligible inventories. Subsequently, the amount available to the Company under
the Revolving Credit Commitment was increased to $33 million. The Revolving
Credit Commitment is scheduled to revert from $33 million to $30 million,
effective October 15, 1998. The purpose of the loans was for the Company to
refinance certain debt obligations, finance ongoing working capital
requirements, finance the acquisition of certain machinery, equipment and
vehicles and for general corporate purposes. All the loans have variable
interest rates to be designated by the Company based on the prime rate +.5% or
LIBOR +2.5%. The Capital Expenditure Loan and Revolving Credit Commitments
mature in February 2003, and the Term Loan matures in February 2001.
Quarterly principal payments of $416,667 on the term loan began in April 1998.
The outstanding amount of the Capital Expenditure Loan as of February 2000 is
required to be converted to a term loan that will have consecutive equal monthly
principal and interest payments beginning at the time of conversion through the
maturity of the Capital Expenditure Loan. The agreement is collateralized by
substantially all of the
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Company's assets. The agreement contains financial and non-financial covenants,
including, among other restrictions, limitations on capital expenditures,
minimum income before interest, taxes, depreciation and amortization, a minimum
cash flow ratio, minimum net worth and a maximum debt to income before interest,
taxes, depreciation and amortization ratio.
The Company was required to meet certain financial and non-financial covenants
beginning in the fiscal quarter ending March 1998. Based upon information
available, management believes it is in compliance or has obtained the necessary
waivers for any non-compliance for the quarters ended March and June of 1998.
ACQUISITION OF SKS. In February of 1998, the Company acquired certain assets and
liabilities of SKS.The consideration for the acquisition included cash of $4
million. The total net sales of SKS included in the consolidated financial
statements for eight weeks of ownership during the quarter ended April 04, 1998
was approximately $8.2 million, an amount approximately equal to the quarterly
revenue lost through the sale of Yankee operating assets.
Remainder of Page Intentionally Left Blank.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
----------------------------------------------------------
RESULTS OF OPERATIONS OF UNIMAG FOR THE THREE MONTHS ENDED
JULY 04, 1998 AND JUNE 28, 1997
----------------------------------------------------------
REVIEW OF OPERATIONS
- --------------------
The results of operations for the quarter ended July 04, 1998 are not indicative
of results from prior quarters, nor are the results for the quarter indicative
of the future.
The following table provides comparative financial information for the third
fiscal quarters of 1998 and 1997.
<TABLE>
<CAPTION>
July 04, 1998 June 28, 1997
------------------------ ----------------------
<S> <C> <C>
Results of Operations ($000):
Revenue $ 82,692 $ 79,601
Gross Margin 20,538 17,562
Selling, General and Administrative 18,715 16,109
EBITDA from Operations 1,823 1,453
Net loss (3,493) (2,287)
As a Percent of Revenue:
Gross Margin 24.8 22.0
Selling, General and Administrative 22.6 20.2
EBITDA from Operations 2.2 1.8
Net loss (4.2) (2.9)
</TABLE>
The revenue for the Company for the quarter ended July 04, 1998 was $82,692,000,
an increase of 3.9% over revenue for the quarter ended June 28, 1997. The
increase was due primarily to the impact of revenue from the acquisition of SKS
assets, net of the revenue lost in the sale of Yankee.
During 1996 and 1997, 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. The 1998 gross margin increased by
2.8% over 1997 because the Company benefited from margin recovery plans within
the magazine industry. The majority of these plans became effective around April
of 1998.
Selling, general and administrative expenses, as a percent of revenue, increased
by 2.4% to 22.6% in 1998, versus 20.2% in 1997. The increase in selling, general
and administrative expenses was due to full accrual accounting for all expense
categories applied across all of the acquisition companies on a more consistent
basis.
The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates was
accounted for using purchase price accounting. Accordingly, goodwill was created
in the approximate amount of $154 million. The acquisition of certain operating
assets of SKS and the stock of Central and Penn added an approximate
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<PAGE> 13
additional $8.8 million of goodwill. Goodwill is being amortized over 40 years
at an approximate amount of $1,000,000 per quarter. The increase in depreciation
and amortization was caused by depreciation in assets acquired for SKS, Central
and Penn, and by adjustments in the quarter for year-to-date amortization of
display fixtures.
The improvement in gross margin of 2.8% offset the 2.4% increase in selling,
general and administrative expenses, and resulted in a .4% increase in EBITDA
from operations.
The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates was
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. During the second quarter of 1998, the Company
repaid $5 million of Senior Debentures and added $4.5 million of Subordinated
Debentures. The increase in interest expense for the quarter from $1.6 million
to $2.3 million is primarily attributable to the approximate $40 million in
average bank borrowings under the new loan agreements entered into in February
of 1998.
The increase in the quarter for depreciation, amortization and interest resulted
in an increase in the net loss from $2.3 million to $3.5 million.
Because of loss carryforwards, UNIMAG had no federal income tax expense for the
third quarter of 1998 and 1997. Because of a change of control in February of
1998, the Company anticipates the loss of approximately $35 million of NOL from
the estimated $65 million at September 27, 1997.
The calculation of earnings per common share and weighted average number of
shares outstanding includes the shares issued for Michiana, Stoll, Klein,
Read-Mor and Scherer Affiliates for the periods determined under the respective
agreements. The calculation also includes shares issued in connection with the
purchase of certain operating assets of SKS, shares issued in the conversion of
debt to equity, shares sold during 1998, and shares returned to treasury during
1998. In addition, the calculation of earnings per share reflects the one for
ten reverse split approved by the Shareholders at the 1997 Annual Meeting of
Shareholders.
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS OF UNIMAG FOR THE NINE MONTHS ENDED
JULY 04, 1998 AND JUNE 28, 1997
- -------------------------------------------------------------------------------
REVIEW OF OPERATIONS
- --------------------
The results of operations for the nine months ended July 04, 1998 are not
indicative of results from prior comparable periods, nor are the results for the
six months indicative of future periods.
Remainder of Page Intentionally Left Blank.
11
<PAGE> 14
The following table provides comparative financial information for the first
nine months of 1998 and 1997.
<TABLE>
<CAPTION>
July 04, 1998 June 28, 1997
------------------------ ----------------------
<S> <C> <C>
Results of Operations ($000):
Revenue $ 236,714 $ 229,704
Gross Margin 56,499 50,605
Selling, General and Administrative 52,478 49,918
EBITDA from Operations 4,021 687
Net Loss (645) (10,894)
As a Percent of Revenue:
Gross Margin 23.9 22.0
Selling, General and Administrative 22.2 21.7
EBITDA from Operations 1.7 .3
Net Loss (0.3) (4.7)
</TABLE>
The revenue for the Company for the nine months ended July 4, 1998 was
$236,714,000, an increase of 3.1% over revenue for the nine months ended June
28, 1997. The increase was due primarily to the impact of revenue from the
acquisition of SKS assets net of the revenue lost from the sale of Yankee.
During 1996 and 1997, 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. The 1998 gross margin increased by
1.9% over 1997 because the Company benefited from margin recovery plans within
the magazine industry. The majority of these plans became effective around April
of 1998.
Selling, general and administrative expenses, as a percent of revenue, increased
by .5% to 22.2% in 1998, versus 21.7% in 1997. The increase in selling, general
and administrative expenses was due to full accrual accounting for all expense
categories applied across all of the acquisition companies on a more consistent
basis.
The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates was
accounted for using purchase price accounting. Accordingly, goodwill was created
in the approximate amount of $154 million. The acquisition of certain operating
assets of SKS and the stock of Central and Penn added an approximate additional
$8.8 million of goodwill. Goodwill is being amortized over 40 years at an
approximate amount of $1,000,000 per quarter. The increase in depreciation and
amortization was caused by depreciation in assets acquired for SKS, Central and
Penn, and by adjustments in the third fiscal quarter for year-to-date
amortization of display fixtures.
The 1.4% increase in EBITDA from operations was due to the 1.9% increase in
gross margin reduced by the .5% increase in selling, general and administrative
expenses.
The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates was
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. During the second quarter of 1998, the Company
repaid $5 million of Senior Debentures and added $4.5 million o f Subordinated
Debentures. The increase in interest expense for the nine months from $5.3
million to $6 million is primarily
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<PAGE> 15
attributable to the approximate $40 million in average bank borrowing in the
third fiscal quarter of 1998 under the new loan agreement entered into in
February of 1998.
During the quarter ended April 04, 1998, the Company sold certain operating
assets of Yankee for a gain of approximately $8 million. The Company also
generated other income in connection with the discounting of notes payable in
connection with the refinancing.
As a result of the gain in the sale of the assets of Yankee, the Company had a
loss of $645,000 for the first nine months of 1998, versus a loss of $10,894,000
in the first nine months of 1997.
Because of the loss carryforwards, UNIMAG had no federal income tax expense for
the nine months of 1998 and 1997. Because of a change of control in February of
1998, the Company anticipates the loss of approximately $35 million of NOL from
the estimated $65 million at September 27, 1997.
The calculation of earnings per common share and weighted average number of
shares outstanding includes the shares issued for Michiana, Stoll, Klein,
Read-Mor and Scherer Affiliates for the periods determined under the respective
agreements. . The calculation also includes shares issued in connection with the
purchase of certain operating assets of SKS, shares issued in the conversion of
debt to equity, shares sold during 1998, and shares returned to treasury during
1998. In addition, the calculation of earnings per share reflects the one for
ten reverse split approved by the Shareholders at the 1997 Annual Meeting of
Shareholders.
- ------------------------------------------------------------------------------
LIQUIDITY
- ------------------------------------------------------------------------------
EBITDA
- ------
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 from operations for the third quarter of 1998 was $1,823,000, versus
$1,453,000 for the third quarter of 1997. EBITDA from operations for the first
nine months of 1998 was $4,021,000, versus $687,000 for the first nine months of
1997. The improvement in EBITDA from operations was attributable to the
improvement in gross margin offset by higher selling, general and administrative
changes in the third fiscal quarter of 1998.
The 1997 EBITDA was impacted negatively by the industry-wide gross margin
pressures and by payroll costs.
The Company anticipates improvement in EBITDA during the remainder of the fiscal
year due to continued sales increases and reductions in selling, general and
administrative expenses. During the second quarter of 1998, the Company made
acquisitions of the operations of two contiguous businesses with combined
annualized sales of approximately $60 million. Due to their contiguous
locations, the opportunity exists for incremental profit increases as that
business is assimilated into the existing Company business during the balance of
the fiscal year. During the second fiscal quarter of 1998, the Company was
successful in negotiating margin recovery programs for approximately two-thirds
of its magazine volume. During the
13
<PAGE> 16
fourth fiscal quarter, the Company anticipates additional programs will be
implemented. On a weighted average basis, these programs should improve margins
over the first two fiscal quarters by over 2%.
The acquisition transactions of the Company in 1996 added $154 million of
goodwill to the Company's assets and $58.5 million of Senior and Subordinated
Debentures to the Company's liabilities. The acquisition of certain operating
assets of SKS and the stock of Central and Penn added an approximate additional
$8 million of goodwill. On an annual basis, the Company anticipates future
amortization of approximately $4,000,000 related to this goodwill. During the
second quarter of 1998, the Company entered into new financing agreements which
have resulted in an increase in interest expense.
WORKING CAPITAL
- ---------------
At September 27, 1997, the Company had a deficit working capital of $46.2
million. At January 03, 1998, the deficit working capital was $46.6 million.
During the quarter ended April 04, 1998, this working capital deficit decreased
by $15.2 million to $31.4 million. While the purchase of certain operating
assets of SKS and the stock of Central and Penn increased the deficit by
approximately $7 million, the sale of certain operating assets of Yankee reduced
the deficit by approximately $4.3 million, and the conversion of debenture
interest to stock reduced the deficit by $4.9 million. The balance of the
reduction in the working deficit was due to cash flow from operations and to
refinancing, which converted short-term debt to long-term debt. The Company also
exchanged $4.5 million of current debt for a $4.5 million subordinated
debenture.
During the quarter ended July 04, 1998, the working capital deficit increased by
approximately $7.7 million, due primarily to the loss of $3.5 million and to a
$3.5 million increase in short-term debt caused, in part, by the increase in
receivables. Approximately $1 million of this working capital deficit was
reflected in increases in accrued debenture interest. The balance was primarily
reflected in decreases in inventory, increases in accounts receivable and
increases in accounts payable and accrued expenses.
CASH FLOWS - OPERATING ACTIVITIES
- ---------------------------------
During the third quarter of 1998, the Company used $2.3 million of cash in
operations. The increase in receivables was offset by a decline in inventory
levels, and both of these changes were impacted by the July 04 date for quarter
end closing. Payables and accrued expenses increased by approximately $6.0
million.
The 1997 increase in cash from operations was caused by increases in current
liabilities used to offset losses, net of depreciation and amortization.
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
During the first nine months of 1998, the Company spent a net of $5.5 million on
investing activities, with the SKS, Central and Penn transactions requiring $6.6
million. The Company generated $3.2 million from the Yankee transaction and the
sale of stock. Purchases of fixed assets used $.7 million cash and the purchase
of long-term assets used $1.4 million cash.
In 1997, the sale of a Company plane acquired in the Stoll transaction provided
$1.2 million in cash, while purchases of fixed assets and long-term assets used
$2.2 million in cash.
14
<PAGE> 17
CASH FLOWS - FINANCING ACTIVITIES
- ---------------------------------
During the third quarter of 1998, the Company increased borrowings by $3.4
million and made debt reductions of $.9 million.
During the second quarter of 1998, the Company obtained new borrowings of $38.8
million, and paid $18.1 million of debt with the proceeds. The Company also used
$1.7 million cash for fees associated with the financing and redeemed $255,000
of treasury stock for cash. During the first quarter of 1998, the Company paid
$.3 million of debt.
During 1997, the Company paid $2.7 million of debt in the first quarter and $.7
million of debt in the second quarter, and $.4 million of debt in the third
quarter.
CAPITAL RESOURCES
- -----------------
During the second quarter of 1998, the Company completed a loan package with two
banks. Note 4 describes the $38,000,000 loan arrangement obtained by the
Company. See also "Financing Arrangements" below.
CAPITAL REQUIREMENTS
- --------------------
During the balance of 1998, the Company expects that its requirements for
capital expenditures will not be significant. Through route consolidations and
greater use of in-store service personnel, the Company anticipates minimal
increases in its delivery fleet. The Company does anticipate additional
expenditures for store fixtures; however, these fixture increases have
historically generated enough additional revenue and gross margin to pay for the
fixture costs within one year.
OPERATIONAL MEASURES
- --------------------
The Company has converted all locations to its computer system, and receivables
and payables can now be managed on a more consistent, company-wide basis. The
Company continues to be engaged in collection efforts to reduce the average days
outstanding, with excess cash proceeds earmarked for reductions in vendor
payables.
OPERATING SYNERGIES
- -------------------
The acquisition transactions enable the Company to successfully leverage its
investment in its sophisticated and proprietary SMARTS System (which stands for
Sales Magazine Analysis React Transmit System) 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, which
offsets the cost of higher levels of service and the use of improved technology.
Management believes that, as the Company continues to expand and as all
locations are converted to the Company's computer system, 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 Company's current and future
high impact marketing programs provide an important competitive advantage by
customizing magazine displays to utilize
15
<PAGE> 18
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
customers not currently using it will improve sales levels of the Company.
Through the continued consolidation of the Company's warehouse and office
functions, management expects the Company to achieve additional cost savings and
operating efficiencies through the elimination of redundant overhead and the
reduction of required facility square footage. Duplicate administrative and
distribution functions are being eliminated, and the costs and benefits of
technology are being spread over a larger customer base. Additionally, the
consolidation of the businesses of the Company should increase purchasing power
and the ability to negotiate favorable quantity discounts with publishers and
national brokers.
MARGIN RECOVERY EFFORTS
- -----------------------
The magazine industry has recognized that the loss of margin sustained by
wholesalers in 1996 and 1997 created a problem that needed resolution. During
fiscal 1998, wholesalers, national distributors and publishers developed a
variety of plans to provide margin recovery to wholesalers. The majority of
these plans were implemented in the third fiscal quarter of 1998, with the
expectation that there will be an annual margin recovery in excess of 2% from
that point forward.
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 1996 and 1997. Many of these contracts are up for renewal in 1999,
and the impact on the Company at that time is uncertain.
Previously, the Company was named as a defendant in various litigation matters.
Subsequent to September 27, 1997, most of the claims were settled. 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 future results of operations or financial conditions.
FINANCING ARRANGEMENTS
- ----------------------
Each of the Acquisition Agreements with Stoll, Michiana, Klein and the Scherer
Affiliates contemplated that stock or assets of the various Acquisition Parties
would be contributed to the Company in exchange for Common Stock of the Company,
valued at $15.00 per share, and for Senior and Subordinated Debentures. In
addition, the Company issued a $4,500,000 Subordinated Debenture and made a cash
payment of $500,000 in exchange for a $5,000,000 note owed 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 of the Company. KDR
also received warrants to purchase 187,657 shares of Common Stock of the Company
at $12.00 per share in connection with the exchange. R. David Thomas also
purchased an additional 33,333 shares of Common Stock of the Company at a price
of $15.00 per share. The Company also issued $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 on August 24, 1996.
16
<PAGE> 19
Interest is payable quarterly on January 1, April 1, July 1 and October 1.
Principal on the Senior Debentures was 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, 1997; however, the parties to the
Debenture Agreements agreed to accrue the required payments until the date of
final closing and subordinate a portion of the payments in connection with debt
refinancing described below by the Company. The debenture holders subsequently
agreed in February of 1998 to accept Company stock for 2/3 of the accrued
interest due at December 31, 1997, and to receive the balance of the accrued
interest due over a sixteen-month period.
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 in the Company's stock quarterly on January 1,
April 1, July 1 and October 1. 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;
however, the parties to the Debenture Agreements agreed to modify the timing of
the required payments and subordinate a portion of the payments in connection
with the debt refinancing described below. The debenture holders subsequently
agreed in February of 1998 to accept Company stock for 2/3 of the accrued
interest due at December 31, 1997, and to receive the balance of the accrued
interest due over a sixteen-month period.
The issuance of the Company's 1997 annual report to shareholders caused the
Company to be in non-compliance with certain non-financial covenants contained
in the bank agreement. The banks have forborne their available rights and
remedies under the bank agreement until October 4, 1998. The Company believes
that it will be in compliance with all covenants or have obtained a waiver of
any non compliance by the October 4th date. As part of the forbearance
agreement, the Company has agreed to not make any cash interest payments due on
the Senior Debentures for the period beginning January 1, 1998. By a
modification of the Debenture Agreement, the holders of the Senior Debentures
have agreed to this non-payment.
The Debenture Agreement pursuant to which the Senior and Subordinated Debentures
were issued to the Acquisition Parties required the Company to use its best
efforts to refinance the Senior Debentures, which aggregated approximately
$39,920,000. In connection with such refinancing, the Company engaged the firm
of Carleton, Holmes & McCreary ("CMH") as financial advisor to the Company's
Board of Directors. CMH was 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.
In February of 1998, the Company restructured existing bank and third party
debt, including the payment of $5,000,000 of Senior Debentures, and consolidated
banking relationships with both Key Capital, Inc. and The Chase Manhattan Bank.
In connection with this restructuring, the Company expanded its bank lines of
credit to support working capital and other requirements. The credit agreement
entered into provided a revolving credit commitment of $30 million, subsequently
increased to $33 million, a term loan of $5 million and a capital expenditure
loan of $3 million. The amount available to the Company under the revolving
credit commitment is based on certain amounts of eligible accounts receivable
and eligible inventories.
The Company, through an investment advisor, is reviewing other opportunities for
additional debt and/or equity financing for the Company. At present, the Company
has not entered into any agreements for any new debt and/or equity placements.
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.
17
<PAGE> 20
SEASONALITY
- -----------
The sale of magazines, books, and newspapers is subject to minimal seasonality;
however, the second fiscal quarter of the Company is historically the slowest
revenue quarter.
YEAR 2000 ISSUES
- ----------------
The Company continues to address the Year 2000 Issue. The Company has hired two
additional programmers to free up resources needed to update its in-house
software. The Company also has initiated the process of seeking new financial
reporting software to replace existing software, including general ledger,
payroll, fixed assets, employee benefits and other related areas. The costs to
date have not been material and have been expensed when incurred. The Company
seeks to complete these plans during calendar 1998.
The Company must coordinate with customers, suppliers and creditors, and the
Company is in the process of analyzing the size of this coordination. At
present, the Company is not aware of any material event or uncertainty or
related cost that would negatively impact future reported costs in a material
amount.
The Company may develop some competitive advantages from the Year 2000 Issue if
it continues to modify its industry software in areas where its competition may
fall short.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - SAFE HARBOR
- --------------------------------------------------------------
CAUTIONARY STATEMENT
- --------------------
This report contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995 (the Reform Act). These forward-looking
statements express the beliefs and expectations of management regarding UNIMAG's
future results and performance and include, without limitation, the following:
statements concerning the Company's outlook for the balance of 1998; the
Company's plans for revenue growth and operational cost reductions; the
Company's plans for future consolidations and changes in properties; the
Company's plans for future financing and refinancing; the Company's future
operational strategies to improve operating cash flow; the Company's plans for
margin recovery; 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: the loss of chain
customer business, 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 additional financing; the timing of the
implementation of operating synergies; further changes in the industry,
including margin recovery results; 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.
18
<PAGE> 21
PART II. OTHER INFORMATION AND SIGNATURES
---------------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
Except as set forth below, there have been no material developments in
legal proceedings involving either the Company or its subsidiaries since the
filing of the Company's Form 10-Q for the Quarter Ended April 04, 1998: 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:
--------------------------------
(a) None
(b) Change in filing status. Effective October 2, 1994, UNIMAG began
filing as an SB filer. The first such filing was the Company's Form 10-QSB for
the first quarter of fiscal 1995. The Company's SB filing terminated with the
filing of Form 10-KSB for September 27, 1997. The regular filing status resumed
with Form 10-Q for the quarter ended January 03, 1998.
ITEM 7. 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/ John B. Calfee, Jr.
------------------------------------
John B. Calfee, Jr.
Chief Financial Officer
19
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