<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 First Quarter Ended January 03, 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: No: X
------- -------
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 March 28, 1998 was 7,411,314.
Traditional Small Business Disclosure Format (check one):
Yes: No: X
------- -------
<PAGE> 2
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-Q
---------
FOR THE FIRST QUARTER ENDED JANUARY 03, 1998
--------------------------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
- ------------------------------
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
January 03, 1998 and September 27, 1997 1-2
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months Ended January 03, 1998
and December 28, 1996 3
Condensed Consolidated Statements of Cash Flow (Unaudited)
For the Three Months Ended January 03, 1998
and December 28, 1996 4
Notes to Condensed Consolidated Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
PART II - OTHER INFORMATION AND SIGNATURES
- ------------------------------------------
Item 1. Legal Proceedings 16
Item 2. Change in Securities 16
Item 3. Default Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
</TABLE>
i
<PAGE> 3
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-Q
---------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
AS OF JANUARY 03, 1998 AND SEPTEMBER 27, 1997
---------------------------------------------
(Dollar Amounts in Thousands, Except Share Data)
January 03, September 27,
ASSETS 1998 1997
------ ----------- -------------
(Unaudited) (Audited)
CURRENT ASSETS:
Cash $ 3,042 $ 2,085
Trade accounts receivable, net of allowance
for doubtful accounts:
-related party 2,313 1,579
-other 42,596 43,269
Inventories 37,023 40,534
Notes receivable from related parties 431 431
Advances to related parties 10,113 9,243
Prepaids and other 1,192 746
-------- --------
Total current assets 96,710 97,887
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Land 291 291
Building and improvements 2,143 2,143
Furniture and equipment 6,291 6,167
Vehicles 3,959 3,932
Leasehold improvements 1,183 977
-------- --------
13,867 13,510
Less - accumulated depreciation and amortization (4,130) (3,621)
-------- --------
Total property and equipment, net 9,737 9,889
-------- --------
OTHER ASSETS:
Costs in excess of net assets acquired, net of
accumulated amortization 151,622 152,601
Notes receivable from related parties 2,228 2,228
Prepaid signing bonuses 2,543 3,626
Other assets, net 5,326 5,372
-------- --------
Total other assets 161,719 163,827
-------- --------
Total assets $268,166 $271,603
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
1
<PAGE> 4
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-Q
---------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
AS OF JANUARY 03, 1998 AND SEPTEMBER 27, 1997
---------------------------------------------
(Dollar Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
January 03, September 27,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
------------------------------------ ----------- -------------
(Unaudited) (Audited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of debt obligations $ 1,842 $ 1,842
Accounts payable 109,995 113,370
Accrued expenses 14,242 13,650
Accrued interest on debentures 7,364 6,091
Income taxes payable 827 827
Reserve for gross profit on sales returns 9,031 8,351
-------- --------
Total current liabilities 143,301 144,131
LONG-TERM DEBT OBLIGATIONS 22,069 22,390
DEBENTURES HELD BY SHAREHOLDERS:
- Senior 39,920 39,920
- Subordinated 18,560 18,560
DEFERRED COMPENSATION PLAN 1,035 1,077
ACCRUED PENSION OBLIGATION 1,623 1,623
POST-RETIREMENT OBLIGATION 1,604 1,604
DEALER ADVANCE PAYMENTS AND OTHER 108 144
-------- --------
Total liabilities 228,220 229,449
-------- --------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT AGREEMENTS,
476,543 shares 4,992 4,833
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 53,250,000 shares
authorized, 4,277,909 issued and 2,670,437
outstanding (including shares subject to Put
Agreements) and paid in capital 43,698 43,698
Obligation to issue shares (4,349,476) 65,242 65,242
Treasury stock, at cost (101) (101)
Minimum pension liability adjustment (58) (58)
Retained deficit (73,827) (71,460)
-------- --------
Total shareholders' equity 34,954 37,321
-------- --------
Total liabilities and shareholders' equity $268,166 $271,603
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
2
<PAGE> 5
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-Q
---------
FOR THE FIRST QUARTER ENDED JANUARY 03, 1998
--------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
JANUARY 03, 1998 AND DECEMBER 28, 1996
--------------------------------------
(Dollar Amounts in Thousands, Except Share Data)
3 Months 3 Months Ended
Ended December 28,
January 03, 1996
1998
----------- --------------
(Unaudited) (Unaudited)
NET SALES $ 77,311 $ 74,429
COST OF SALES (59,048) (57,966)
---------- ----------
Gross profit 18,263 16,463
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (16,729) (17,376)
DEPRECIATION AND AMORTIZATION (2,082) (2,102)
---------- ----------
LOSS FROM OPERATIONS (548) (3,015)
---------- ----------
OTHER INCOME (EXPENSES), net:
Interest expense, net (1,819) (1,793)
Other, net 0 (66)
---------- ----------
Total other income (expenses), net (1,819) (1,859)
---------- ----------
INCOME (LOSS) BEFORE TAXES (2,367) (4,874)
INCOME TAXES -- --
---------- ----------
NET INCOME (LOSS) $ (2,367) $ (4,874)
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 7,075,638 7,054,495
========== ==========
EARNINGS (LOSS) PER SHARE $ (.33) $ (.69)
========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
3
<PAGE> 6
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-Q
---------
FOR THE FIRST QUARTER ENDED JANUARY 03, 1998
--------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
----------------------------------------------
FOR THE THREE MONTHS ENDED
--------------------------
JANUARY 03, 1998 AND DECEMBER 28, 1996
--------------------------------------
(Dollar Amounts in Thousands, Except Share Data)
<TABLE>
<CAPTION>
3 Months 3 Months
Ended Ended
January 03, December 28,
1998 1996
----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
NET CASH (USED IN) OPERATING ACTIVITIES $2,183 $ 1,005
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (357) (380)
Additions of long-term assets (548) (514)
Sale of airplane held for resale 0 1,240
------ -------
Net cash provided by (used in) investing activities (905) 346
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt obligations (321) (2,726)
------ -------
Net cash provided by (used in) financing activities (321) (2,726)
------ -------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS 957 (1,375)
CASH, beginning of year 2,085 2,547
------ -------
CASH, end of year $3,042 $ 1,172
====== =======
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid during the period for interest $ 387 $ 487
Cash paid during the period for taxes 0 12
Supplemental Schedule of Noncash Investing and Financing Activities
- -------------------------------------------------------------------
1998: None
1997: None
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
4
<PAGE> 7
UNITED MAGAZINE COMPANY
-----------------------
FORM 10-Q
---------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
FOR THE FIRST QUARTER ENDED JANUARY 03, 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 January 03, 1998 and September 27, 1997, and the results of its
operations and cash flows for the three months ended January 03, 1998 and
December 28, 1996. All such adjustments were of a normal recurring nature. The
results of operations in any interim period are not necessarily indicative of
results for the full year.
2. THE BUSINESS
------------
United Magazine Company ("UNIMAG" or the "Company") is an Ohio corporation,
which was incorporated on April 8, 1964 under the name Citizens Holding Company.
UNIMAG, 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 January 03, 1998 and December 28, 1996
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").
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
5
<PAGE> 8
("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.
In February of 1998, the Company acquired certain assets and liabilities of SKS
Enterprises, Limited, an Ohio limited liability company ("SKS"), organized by
three directors, Ronald E. Scherer, George R. Klein and Richard H. Stoll, Sr.
SKS had wholesale and retail operations similar to the Company in the states of
Michigan, Ohio, Indiana and Kentucky.
3. PROVISION FOR INCOME TAXES
--------------------------
The provision (benefit) for income taxes for the quarters ended January 03, 1998
and December 28, 1996 is as follows:
1998 1997
---- ----
Current $ 0 $ 0
Deferred 0 0
---- ----
Total $ 0 $ 0
==== ====
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.
6
<PAGE> 9
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.
As of January 03, 1998, UNIMAG has approximately $65 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, which could cause up to $35 million of the
$65 million NOL to be lost. The NOL carryforwards will expire in the years 2003
through 2012.
At January 03, 1998, UNIMAG had income taxes payable of approximately $827,000.
This relates 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. SUBSEQUENT 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
$7,800,000 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
$30,000,000, a Term Loan of $5,000,000 and a Capital Expenditure Loan of
$3,000,000. The amount available to the Company under the Revolving Credit
Commitment is based on certain amounts of eligible accounts receivable and
eligible inventories. 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 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 on information
available, management believes it is in compliance or has obtained the necessary
waivers for any non-compliance.
7
<PAGE> 10
Acquisition of SKS. In February 1998, the Company acquired certain assets and
liabilities of SKS. The consideration for the acquisition was cash of $4 million
and UNIMAG stock valued at $3 million.
Remainder of Page Intentionally Left Blank.
8
<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 January 03, 1998
and December 28, 1996
- --------------------------------------------------------------------------------
1. REVIEW OF OPERATIONS
--------------------
The results of operations for the quarter ended January 03, 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 first
fiscal quarters of 1998 and 1997.
January 03, 1998 December 28, 1996
---------------- -----------------
Results of Operations ($000):
Revenue $77,311 $74,429
Gross Margin 18,263 16,463
Selling, General and Administrative 16,729 17,376
EBITDA 1,534 (979)
Net Income (Loss) (2,367) (4,874)
As a Percent of Revenue:
Gross Margin 23.6 22.1
Selling, General and Administrative 21.6 23.3
EBITDA 2.0 (1.3)
Net Income (Loss) (3.1) (6.5)
The revenue for the Company for the quarter ended January 3, 1998 was
$77,311,000, an increase of 3.9% over revenue for the quarter ended December 28,
1996. The revenue for the Company for the quarter ended December 28, 1996 was
$74,429,000, an increase of 1,051% over revenue for the quarter ended December
30, 1995. The 1996 increase was attributable to the inclusion of revenue for all
of the acquisition companies for the entire quarter. This increase makes most
percentage comparisons between 1996 and 1995 non-applicable.
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
over 1997 because of full accrual accounting for all source of revenue applied
across all of the Acquisition Companies on a more consistent basis. A decline in
1996 from 1995 was due to discounting and related changes within the industry.
Selling, general and administrative expenses, as a percent of revenue, decreased
by 1.7% to 21.6 % in 1998 versus 23.3% in 1997. The reduction in selling,
general and administrative expenses was due to the Company's cost-cutting
efforts and consolidation of operations. Selling, general and administrative
expenses, as a percent of revenue, decreased by .6% to 23.3% in 1996 versus
23.9% in 1995.
9
<PAGE> 12
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. This goodwill is being amortized over
40 years at an approximate amount of $962,500 per quarter.
All of these changes resulted in a decrease in the net loss from operations to
(.7)% of revenue in 1998 compared to (4.1)% in 1997.
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. These debentures accrued interest from July 1,
1996 for Michiana, Stoll, Read-Mor and Scherer Affiliates and from August 24,
1996 for Klein. This results in charges for debenture interest expense for the
first quarter of 1998 and 1997 of approximately $1,262,000. Other interest
charges in both periods are for accreted interest on the Puts and interest on
bank and other loans.
Because of the loss for the quarter and because of loss carryforwards, UNIMAG
had no federal income tax expense for the first quarter of 1998 and 1997. The
Company has a net operating loss (NOL) of approximately $65,000,000 at January
03, 1998; however, the Company has not recognized any benefits from that NOL
through January 03, 1998. Because of a change of control in February of 1998,
the Company anticipates the loss of approximately $35 million of the NOL.
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. 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.
2. 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 1998 was $1,534,000 versus $(979,000) for 1997,
an increase of $2,513,000. The improvement in EBITDA was attributable to an
increase of $1,800,000 in gross margin and a decrease of $647,000 in selling,
general and administrative expenses. The gross margin increase included an
improvement of 1.5% and a revenue increase of $2,882,000.
The 1997 EBITDA was impacted negatively by the gross margin and payroll
pressures during the quarter, and the Company delayed the implementation of some
expected consolidation synergies with the acquisition companies during the
initial periods of ownership until final consolidation plans could be made.
During the quarter ended January 03, 1998, the working capital deficit increased
by $347,000 to $46,591,000, a .8% increase.
The Company anticipates improvement in EBITDA during the remainder of the fiscal
year due to continued sales increases and continued reductions in selling,
general and administrative expenses. During the second fiscal quarter, the
Company sold assets of its Connecticut operations for a gain of approximately
$7.8 million. Also, during the second quarter, the Company made acquisitions of
the operations of two contiguous businesses with combined annualized sales of
approximately $60 million. Due to their
10
<PAGE> 13
contiguous locations, the opportunity exists for incremental profit increases as
that business is assimilated into the existing Company business. During the
second fiscal quarter of 1998, the Company was successful in negotiating margin
recovery programs for approximately two-thirds of its magazine volume. On a
weighted average basis, these programs will improve margins during the last two
fiscal quarters by approximately 2%.
The acquisition transactions of the Company since June 30, 1996 have added $154
million of goodwill to the Company's assets and $58.5 million of Senior and
Subordinated Debentures to the Company's liabilities. On an annual basis, the
Company anticipates future amortization of approximately $3,850,000 related to
this goodwill, and initial annual interest of approximately $5,050,000 related
to these debentures.
3. CASH FLOWS - OPERATING ACTIVITIES
---------------------------------
During the first quarter of 1998, the Company had $2,183,000 in net cash
provided from operations, a $1,178,000 increase over the 1997 amount of
$1,005,000. The increase was attributable to a $2,507,000 decrease in the net
loss, offset by minor changes in current assets and current liabilities.
4. CASH FLOWS - INVESTING ACTIVITIES
---------------------------------
The Company spent $357,000 in the first quarter of 1998 for capital expenditures
and $548,000 for display fixtures versus $380,000 and $514,000, respectively,
for 1997. During 1997, the Company also sold an airplane held for resale for
$1,240,000.
5. CASH FLOWS - FINANCING ACTIVITIES
---------------------------------
During the first fiscal quarter of 1998, the Company made payments on debt
obligations of $321,000 versus $2,726,000 in 1997. The 1997 payments included
$1,807,000 of current debt and $919,000 of long-term debt.
6. CAPITAL RESOURCES
-----------------
During the first quarter of 1998, the Company negotiated with two banks. Note 4
describes the $38,000,000 loan arrangement obtained by the Company.
7. CAPITAL REQUIREMENTS
--------------------
During 1998, as in 1997, the Company expects that its requirements for capital
expenditures will not be significant. Through route consolidations and greater
use of in-store service personnel, the Company anticipates minimal increases in
its delivery fleet. The Company does anticipate additional expenditures for
store fixtures; however, these fixture increases have historically generated
enough additional revenue and gross margin to pay for the fixture costs within
one year.
8. OPERATIONAL MEASURES
--------------------
The Company has converted all locations except one to its computer system, and
receivables 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.
11
<PAGE> 14
9. 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 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 consolidation of the Company's warehouse and office functions,
management expects the Company to achieve considerable 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.
10. 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 to be resolved.
Wholesalers, national distributors and publishers have been working on a variety
of plans to provide margin recovery to wholesalers. The majority of these plans
are scheduled for implementation 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.
11. 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 of 1996 and 1997.
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.
12
<PAGE> 15
12. 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. 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
fifteen-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 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 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, a term loan
of $5 million and a capital expenditure
13
<PAGE> 16
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.
13. 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.
14. SEASONALITY
-----------
The sale of magazines, books, and newspapers is subject to minimal seasonality.
15. YEAR 2000 ISSUES
----------------
The Company is in the process of addressing 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.
16. 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 1998; the Company's plans for
revenue growth and operational cost reductions; the Company's plans for future
acquisitions; 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
14
<PAGE> 17
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.
Remainder of Page Intentionally Left Blank.
15
<PAGE> 18
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 27, 1997. 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
The Company delayed filing its Form 10-KSB for the fiscal year ended
September 27, 1997 and its Form 10-Q for the quarter ended January 03, 1998
until completion of its certified financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) None
(b) Change in filing status. Effective October 2, 1997, 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/ Thomas L. Gerlacher
-------------------------------------
Thomas L. Gerlacher
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> JAN-03-1998
<CASH> 3,042
<SECURITIES> 0
<RECEIVABLES> 49,409
<ALLOWANCES> 4,500
<INVENTORY> 37,023
<CURRENT-ASSETS> 96,710
<PP&E> 13,867
<DEPRECIATION> 4,130
<TOTAL-ASSETS> 268,166
<CURRENT-LIABILITIES> 143,301
<BONDS> 80,549
0
0
<COMMON> 0
<OTHER-SE> 34,954
<TOTAL-LIABILITY-AND-EQUITY> 268,166
<SALES> 77,311
<TOTAL-REVENUES> 77,311
<CGS> 59,048
<TOTAL-COSTS> 18,811
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,819
<INCOME-PRETAX> (2,367)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,367)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,367)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
