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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
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X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the fiscal year ended September 27, 1997
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
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Commission File Number: 0-2675
UNITED MAGAZINE COMPANY
an Ohio Corporation
I.R.S. Number: 31-0681050
5131 Post Road
Dublin, Ohio 43017
Registrant's Telephone Number: (614) 792-0777
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, Without Par Value
-------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
Yes: No: X
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. ______
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 28, 1998 was $15,386,825, based on a value of
$15.00 per share. There is no active trading market in the Registrant's shares,
and this value is based upon an agreed valuation for the Registrant's shares in
previous acquisition transactions.
The Registrant's revenues for the fiscal year ended September 27, 1997
were $301,341,037.
The Registrant's number of common shares, without par value,
outstanding as of March 28, 1998 was 7,411,314, after adjustment for the one for
ten reverse split, effective October 7, 1997 (after the 1997 Annual Meeting of
Shareholders held on September 3, 1997).
DOCUMENTS INCORPORATED BY REFERENCE
None
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i
UNITED MAGAZINE COMPANY
FORM 10-KSB
FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 1997
INDEX
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PART I PAGE NUMBER
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ITEM 1. BUSINESS 1-9
ITEM 2. PROPERTIES 9-10
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10-11
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 12
ITEM 6. SELECTED FINANCIAL DATA 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14-23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24-50
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 51
PART III
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ITEM 10. DIRECTORS 52-54
ITEM 11. EXECUTIVE COMPENSATION 55-56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 57-60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 61-66
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 67-69
SIGNATURES 70
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PART I
ITEM 1. 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 year ended September 27, 1997 were conducted
through its consolidated subsidiaries and also include the full-year impact of
five business combinations, which the Company operated beginning in the fourth
quarter of 1996, and which are more fully discussed below. The operations for
the year ended September 27, 1997 were conducted through the following
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").
The operations for the year ended September 28, 1996 were conducted
through its consolidated subsidiaries and also include the partial-year impact
of the five business combinations. The operations for the year ended September
28, 1996 were conducted through the following consolidated subsidiaries: Yankee,
which was owned for 12 months; Wilmington, which was operated under a management
agreement for three months and was owned for nine months; Triangle , which was
owned for nine months; and Reader's Choice, Inc., an Ohio corporation ("RC"),
which was owned for nine months and sold in July of 1996.
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.
RC was engaged in the business of managing and reporting information on
retail display allowances and collecting these allowances which are paid by
publishers to retailers. RC was sold in July of 1996.
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 ("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.
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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.
The following is a more detailed description of the business
combinations that occurred with the Acquisition Parties.
Effective July 29, 1996, the Company entered into an Asset Transfer and
Exchange Agreement with Northern, pursuant to which the Company acquired such of
the assets of that company as were related to the wholesale distribution of
periodicals (and, pursuant to the agreement with Northern, acquired all of the
stock of MacGregor held by Northern) in exchange for Common Stock of the Company
and Senior and Subordinated Debentures of the Company. Effective July 30, 1996,
the Company entered into a Stock Transfer and Exchange Agreement with Michiana
and the shareholders of Michiana (the "Michiana Shareholders"), pursuant to
which all of the Michiana Shareholders contributed their shares of stock of
Michiana to the Company in exchange for Common Stock of the Company and Senior
and Subordinated Debentures of the Company. Effective July 31, 1996, the Company
entered into a Stock Transfer and Exchange Agreement with Stoll and the
shareholders of Stoll (the "Stoll Shareholders"), pursuant to which all of the
Stoll Shareholders contributed their shares of stock of Stoll to the Company in
exchange for Common Stock of the Company and Senior and Subordinated Debentures
of the Company. Effective August 1, 1996, the Company entered into an Asset
Transfer and Exchange Agreement with OPD, subsequently modified to a Stock
Transfer and Exchange Agreement and later modified to include a Merger
Agreement, pursuant to which OPD was merged with and into the Company, and
shareholders of OPD received shares of Common Stock of the Company and Senior
and Subordinated Debentures of the Company. Effective August 2, 1996, the
Company entered into an Asset Transfer and Exchange Agreement with Wholesalers,
pursuant to which the Company acquired substantially all of the assets and
assumed substantially all of the liabilities of that company that were related
to the wholesale distribution of periodicals in exchange for Common Stock of the
Company and Senior and Subordinated Debentures of the Company. Effective August
2, 1996, the Company entered into a Stock Transfer and Exchange Agreement with
Scherer Companies and the shareholders of Scherer Companies (the "Scherer
Shareholders"), pursuant to which the Scherer Shareholders contributed their
shares of stock of Scherer Companies to the Company in exchange for Common Stock
of the Company and Senior and Subordinated Debentures of the Company. Effective
September 14, 1996, the Company entered into a Stock Transfer and Exchange
Agreement with Klein and the sole shareholder of Klein (the "Klein
Shareholder"), pursuant to which the Klein Shareholder contributed his shares of
stock of Klein to the Company in exchange for Common Stock of the Company and
Senior and Subordinated Debentures of the Company.
Each of these transactions 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 as discussed in the footnotes to the
financial statements.
UNIMAG also owns three inactive subsidiaries.
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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.
BUSINESS OF THE COMPANY
The Company is a regional wholesaler of periodicals. It distributes its
products to retail outlets such as supermarkets, discount variety stores,
convenience stores, drug stores, and newsstands that offer mass market reading
materials to consumers. The Company also maintains retail bookstores that sell
its products and related products to consumers.
BUSINESS OF YANKEE
Yankee, UNIMAG's wholly owned subsidiary, was headquartered in a 34,000
square foot facility leased for approximately $96,000 per year, located in
Waterbury, Connecticut. From this facility Yankee distributed magazines, books,
newspapers and various sundry items to retailers who sell to customers in the
Connecticut market. Yankee also operated four retail "Newsrack" outlets, which
sell magazines, newspapers, and related products and operated one retail
bookstore. During fiscal 1996, Yankee generated approximately 33% of UNIMAG's
net sales during twelve months of operations, and, during fiscal 1997, Yankee
generated approximately 10% of net sales during twelve months of operations.
Certain operating assets of Yankee were sold in January of 1998.
BUSINESS OF WILMINGTON
Wilmington, acquired on January 13, 1996, is headquartered in a 20,000
square foot facility located in Wilmington, North Carolina. From this location,
Wilmington distributes magazines, books and various sundry items to retailers
who sell to customers primarily in eastern North Carolina. During fiscal 1996,
Wilmington generated approximately 7% of UNIMAG's net sales during nine months
of operations. During fiscal 1997, Wilmington generated approximately 3% of
UNIMAG's net sales during twelve months of operations.
BUSINESS OF TRIANGLE
Triangle, acquired on January 23, 1996, is headquartered in a 62,400
square foot facility located in Pittsburgh, Pennsylvania. From this location,
Triangle distributes magazines, newspapers, books and various sundry items to
retailers who sell to customers in western Pennsylvania, West Virginia, and
eastern Ohio. During fiscal 1996, Triangle generated approximately 22% of
UNIMAG's net sales during nine months of operations. During fiscal 1997,
Triangle generated approximately 9% of UNIMAG's net sales during twelve months
of operations.
BUSINESS OF MICHIANA, STOLL, KLEIN, READ-MOR AND SCHERER AFFILIATES
The business of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates
is the wholesale distribution of magazines, books, newspapers and various sundry
items and the operation of related retail locations throughout the Midwest and
predominately in Ohio, Michigan, and Indiana. During fiscal 1996, these
companies generated approximately 37% of UNIMAG's net sales during the periods
they were operated by the Company. During fiscal 1997, these companies generated
approximately 78% of UNIMAG's net sales during twelve months of operations.
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REVENUES
Following the consummation of the exchange and acquisition
transactions, the Company is a dominant regional periodical wholesaler in Ohio,
Indiana, Michigan and western Pennsylvania, with an estimated market share of
greater than fifty percent (50%). The transactions with the Acquisition Parties
have transformed the Company from an entity which generated annualized pro forma
net sales of approximately $57 million in fiscal year 1995 (from Yankee,
Wilmington, and Pittsburgh) to a Company with combined net sales, on a pro forma
basis, for fiscal year 1996 of approximately $281 million for all entities and
with combined net sales for fiscal 1997 of approximately $301 million.
EMPLOYEES
At September 27, 1997, the Company employed approximately 2,241
employees, including 1,135 full-time employees, of which 240 were represented by
various locals of the Teamsters Union with contracts expiring through 2001. In
the opinion of management, relations with both union and non-union employees
have been satisfactory.
PRODUCTS
The Company generates revenue primarily from the sale and distribution
of mass market reading materials including magazines, paperback and hardback
books, newspapers and other complementary items.
o Magazines. There are over 4,000 different magazine titles
published annually, which focus on a diverse range of consumer
interest topics. Sales of magazines currently represent
approximately 85% of total Company revenue.
o Books. The Company distributes approximately 18,700 different
paperback and hardcover titles per year at an approximate
average retail price of $5.00 per paperback and $22.00 per
hardcover. Sales of paperback and hardcover books, including
sales in the Company's retail bookstores, currently represent
approximately 13% of total Company revenue.
o Newspapers. In selected Ohio markets, the Company distributes
over 50 local and national newspapers including daily, weekly
and Sunday only titles seven days a week. Sales of newspapers
currently represent approximately 1% of total Company
revenues.
o Other. The Company also distributes other items such as
trading cards, maps and calendars; however, this category does
not represent a significant component of the Company's
business. Sales of these items currently represent
approximately 1% of total Company revenues.
It is anticipated that the Company will generate revenues from
substantially the same product segments in the future, although the Company may
experience a higher percentage of total Company revenue in the future from sales
of hardcover and paperback books as large supermarket chains expand their sales
of these products.
SUPPLIERS AND PRICING
The Company purchases approximately 80% of its product from five
suppliers, which are national distributors: The Hearst Distribution Group,
Warner Publisher Services, Murdoch Magazine Distribution, Inc., Curtis
Circulation Co. and Kable Distribution Services. These suppliers represent
approximately 75% of accounts payable. The retail prices of the periodicals that
the Company distributes are established by publishers such as Time Warner,
Hearst and Hachette.
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The Company purchases periodicals from these and other national
distributors at a discount to the suggested retail price and then sells them to
retailers at a lesser discount. Most of the larger retailers, such as The Kroger
Company, Giant Eagle, Meijer and Big Bear Stores, a division of the Penn Traffic
Company, have entered into multi-year contracts with wholesale distributors.
This has resulted in an increase in the discount to retailers and a reduction in
the gross margin to the wholesale distributors.
DISTRIBUTION SYSTEM
The distribution system starts with the publisher who provides
editorial content to printers who prepare the product and ship it directly to
the wholesale distributor. The national distributors do not physically touch the
product. Instead, they function as brokers of information and collectors of
funds from the wholesale distributor for remittance to the publishers. The more
sophisticated wholesale distributors, like UNIMAG, maintain and analyze data on
product, customers, and consumers and make product allocation decisions as
category managers for the retailers. In addition, the wholesale distributors
provide packaging, delivery, display and in-store merchandising services to the
retailers. The wholesale distributors bill the retailer, collect the
receivables, and remit payments to the national distributors.
The Company's distribution facilities receive product in bulk form
every day during the week. The distribution facilities are especially active on
Fridays and Mondays when weekly titles such as People Magazine, TV Guide and the
National Enquirer are received, packaged and delivered to retailers. Delivery of
weekly periodicals must be made within 24 hours after receipt of such
periodicals by the distribution facilities.
As inventory is received, a copy of each title is sent to the receiving
department where a validation clerk scans the title to verify the BIPAD number,
retail prices and quantity. After the quantity is verified, the receiving
department enters the item into the tracking system. If the allotted quantity in
the system does not match the quantity received, the clerk manually enters the
correct amount. A receiving clerk scans the product and identifies the location
for the product on the automatic conveyor system (the "Tie Line"). The product
is then immediately routed to the proper position on the Tie Line where it is
stacked and bundled for shipment.
The Tie Line operates throughout the week. Because magazines have "on
sale" dates and, thus, a limited shelf life, a minimum inventory level is
maintained to meet daily delivery needs. Packing receipts are transported down
the Tie Line with corresponding order information displayed automatically in
front of each packaging station indicating the appropriate count for each title
to be stacked for that particular order. Stacks are bundled at the end of the
Tie Line by a strap machine and placed onto route sequenced interbodies and
loaded into trucks for delivery to the retailer.
Sales to both the wholesaler and retailer are made on a guaranteed
basis. Retailers are able to return unsold product to the wholesaler for full
credit. The wholesaler, in turn, is able to receive full credit from the
publisher and/or national distributor.
When product is returned to the Company, titles are individually
scanned into a returned inventory tracking system and sent down a conveyer belt
to be shredded and baled. The Company generates additional revenue from the sale
of these bales of scrap paper to a recycler. The price for baled paper
fluctuates on the open market.
During 1997, the Company transformed several of its warehouse
facilities into depots by shifting warehouse and office functions into larger,
centralized facilities. The Company currently maintains large processing centers
in Cincinnati, Ohio, Jackson, Michigan, Solon, Ohio, Pittsburgh, Pennsylvania
and Wilmington, North Carolina. These processing centers support additional
contiguous delivery depots.
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MARKETING AND SALES
The increasing size and sophistication of retailers has led them to
demand more assistance in managing and positioning their product lines to
maximize sales and to eliminate unnecessary costs. In response to these demands,
the Company has sought ways to expand upon the wholesaler's basic delivery
service to seek ways to provide value-added services to its customer base. The
Company believes that by integrating certain of its basic marketing programs
described below with a sophisticated and proprietary system, known as the
"SMARTS System" (which stands for Sales Magazine Analysis React Transmit
System), the Company will be able to effectively position its products leading
to higher revenues and more efficient product allocation. The Company's basic
marketing programs include the following:
o Mainline Fixture Program. This program is the basis of all
magazine sales beyond those at the checkout line. Mainline
fixtures serve as the primary location of magazines within a
store. Mainline fixtures include a minimum four foot long
rack, up to a maximum of 52 feet, capable of holding up to 26
titles per foot. Mainline titles typically have a higher cover
price (over $3.00) and produce over 50% of revenues in a given
location. In addition, the larger magazine mainline fixtures
may have an additional 100 linear feet of bookracks.
o Checkout Sales. This component is designed to promote the sale
of magazines at the checkout counter by closely managing title
selection. Services, for which the retailer receives display
placement fees from publishers, include display fixture
production and installation.
o Family Reading Center. Family Reading Centers provide up to
100 running feet of shelf space which allow the wholesaler to
showcase more titles than a Mainline Fixture Program and
display them with a full facing rather than the typical
quarter or half facing.
o Impact Marketing Program. This marketing program customizes
magazine displays to utilize otherwise wasted space in retail
outlets like structural columns, freezer bases and end caps,
thereby increasing the number of displays within a store from
two to up to seven. These locations are usually in the highest
traffic areas within the store and represent excellent cross
merchandising opportunities.
o Store Within a Store. This component replicates the product
selection and size of a newsstand but is housed within a
larger retailer such as a supermarket. It represents the
transition from the "pass and browse" approach of the mainline
fixtures to a "stop and shop" theme. The Store within a Store
can range anywhere from 50 to 150 running feet and delivers
maximum results for high traffic oriented retailers by
increasing the number of unit purchases per customer.
o Auxiliary Display Program. This program utilizes small spinner
racks, special promotion dump displays and counter displays to
create additional display opportunities within a retail outlet
to increase sales. These displays can be uniquely placed
throughout the store for one to three week periods of
increased sales.
o Display Growth - Incentive. This component is tailored to
existing retailers to provide incentives to expand their
display space for magazines by offering display placement
allowances and rebates for increased sales. It is part of the
Company's strategy to up-tier its basic marketing programs
with retailers into those that utilize more floor space.
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THE SMARTS SYSTEM
The SMARTS System, which management believes is the only system of
its kind in the wholesale periodical distribution industry, was developed by
internal management information systems professionals at Scherer Companies. The
SMARTS System analyzes the market area of each retail location to customize
product allocation to correspond to the buying habits and trends of the primary
consumer base. Through customer profiling and product placement programs, the
SMARTS System increases sales by pinpointing the product that the consumer is
most likely to buy and strategically placing it on display in an optimum
location within the store.
o Consumer Profiling. Utilizing sophisticated data from the US
Census Bureau, the SMARTS System is a proprietary product
allocation system that provides a detailed consumer profile
for a particular market area, enabling the Company to target
its product mix based upon the demographic (i.e., age,
population, gender, occupation, income, ethnicity, marital
status, religion and education level) and psychographic (i.e.,
lifestyle and purchasing behavior) characteristics of the
market area.
These characteristics group consumers into lifestyle cluster
groups. A retail location is then assigned to one of 72
lifestyle cluster groups. The preferences of lifestyle cluster
groups are compared to historical sales information to
optimize sales opportunities and product mix in each retail
location. The Company is able to tailor its distribution focus
to products identified by the cluster group that meet the
demand of the consumer at each retail location, ultimately
improving sales and distribution efficiency. The SMARTS System
provides the Company with a key competitive advantage over
other regional wholesalers and is expected to become more
valuable to the Company as it expands its market area
throughout the midwestern United States.
o Product Placement. The SMARTS System also provides product
placement assistance in two ways. The Floor Planogram is used
to determine the location of display fixtures within the
store. This sophisticated program increases sales potential by
positioning displays in high traffic, high visibility areas
while maximizing the available display space. This program
enables management to exploit additional selling opportunities
by identifying under-utilized space in the store such as
structural columns, in aisle freezer bases, and the sides of
end aisle displays. These opportunities are targeted for
customer design display racks to feature titles focused around
particular products and topics reflective of the products
offered in that area. For example, a display may be positioned
in the wine section to display magazines such as Food and
Wine.
The Display Planogram is used to determine the position of a
specific title and/or category of titles within the display
fixture. Product space is allocated based on sales performance
of each category within the store and benchmarked against
other comparable stores in comparable lifestyle cluster
groups. Better-ranked categories receive larger and/or better
positions on the displays. The titles within each category are
ranked based upon consumer interest, cluster rank,
profitability, and seasonality to determine which titles earn
the best locations within the category blocks. "A" titles
occupy more desirable positions on the fixtures and receive
more consumer exposure, while "B" and "C" titles earn and
receive progressively less desirable locations. This ranking
system then places the titles most likely to sell at the
consumer's fingertips.
As all locations are converted to the Company's computer
system, the SMARTS System will be expanded and rolled out to
those locations until, eventually, all appropriate customers
of the Company will be receiving the benefits of the SMARTS
System.
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CUSTOMERS
The Company has developed long standing, trusted vendor relationships
with customers in its customer base. The customer base ranges from large
national retailers such as The Kroger Company to smaller local retailers. It is
estimated that the Company has a large and diverse customer base comprised of
approximately 16,000 different retail locations representing approximately
12,000 different customers, with no one customer representing more than 5% of
sales.
During 1996, most of the larger retail chains entered into multi-year
contracts with wholesale distributors. The Company has entered into long-term
contracts ranging from one to five years, but primarily three years with the
major retailers, to be the exclusive provider of magazines and, in most cases,
related periodical products. Some of the retail chains with which the Company
has contracts include The Kroger Company, Giant Eagle, Meijer and Big Bear
stores.
COMPETITION
The Company faces competition from three different areas. These areas
include competition from other wholesalers, competition from alternative
delivery channels and competition from substitute products.
o Competition From Other Wholesalers. Principal competitors of
the Company include The Anderson Group, The News Group,
ARAMARK and the Charles Levy Company, all of which are
regional wholesalers in neighboring territories. Although
these regional wholesalers represent potential competition in
certain markets in which the Company operates, management does
not believe that competition is significant due to the "Post
Office" economic model of distribution which makes it
difficult for other wholesalers to profitably compete in the
Company's market areas.
Because most wholesalers have access to the same periodical
titles, they must differentiate themselves from neighboring
regional wholesalers by providing value-added services to
their retail customers. With the ultimate goal of efficiently
maximizing sales of periodicals in their stores, management
believes that retailers generally have selected wholesalers
based upon the following considerations:
o The accuracy of packaging and accounting systems and
the timeliness of delivery service;
o The effectiveness of its product allocation and
display systems to the retailer;
o Technological capabilities and the resulting cost
saving afforded to the retailer;
o Competitive pricing and terms;
o The wholesaler's reputation as a "direct store
delivery" vendor and success as an overall category
manager to the retailer; and
o The wholesaler's ability to generate and communicate
new specific customer knowledge to the retailer.
o Competition From Alternative Channels of Distribution.
Periodical wholesalers compete with other delivery sources for
the sale of periodicals to the consumer. These alternative
delivery sources include subscriptions offered by the
publishers and electronic transmissions over the Internet.
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At one time, subscription sales represented the only
alternative source of delivery for a periodical to the
ultimate consumer. Although it is not a profitable delivery
channel for most publishers, subscription sales are
principally used to establish information about the
circulation base of a magazine to assist the publisher in
attracting focused advertisers and in establishing advertising
rates. Management believes that the vast majority of magazine
sales are a retail impulse purchase and that subscriptions do
not represent a significant competitive threat. In addition,
management believes that as the SMARTS System (as described
and defined above) becomes integrated and utilized by the
Company in all of its businesses, the demographic and
psychographic information utilized in the product allocation
decision can be used by publishers to attract focused
advertisers and establish advertising rates.
Many of the major publishers are now offering samples of their
magazines on the Internet through either direct ordering,
viewing on line, or downloading of articles. Although certain
sources estimate that as much as 40% of the population now has
access to the Internet, this service has not had any
quantifiable effect on retail periodical sales due to the
impulse nature of the purchase.
o Competition From Substitute Products. The periodical industry
competes for the non-active leisure time of consumers (in
contrast to active leisure time, which includes activities
such as participant sports). For several decades, the
periodical industry has competed with alternative products
such as the radio, television, home videos, home computers and
the Internet for consumers' non-active leisure time. Rather
than hindering the growth in the wholesale periodical
distribution industry, the growth of these substitute products
has generated increased consumer interest in new magazines
like Stereo Review, TV Guide, Video Review, PC magazine and
Internet Life which are focused on the interests and hobbies
of consumers.
ITEM 2. PROPERTIES
FACILITIES
Generally, the Company utilizes its wholesale facilities as warehouse
and distribution centers, although certain of the facilities may also contain
the business offices for the Company's operations. A number of these facilities,
identified below with an asterisk, are leased from principals of the Acquisition
Parties. Currently, the Company owns or leases the following properties with the
following remaining terms:
COMPANY'S WHOLESALE FACILITIES:
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o 62,400 sq. ft. Pittsburgh, PA 2 Year Lease
o 20,000 sq. ft. Wilmington, NC 2 Year Lease
o 65,000 sq. ft. Columbus, OH* 2 Year Lease
o 35,000 sq. ft. Cincinnati, OH Owned (Subject to Mortgage)
o 17,000 sq. ft. Petoskey, MI* 2 Year Lease
o 17,000 sq. ft. Mt. Pleasant, MI* 8 Year Lease
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COMPANY'S WHOLESALE FACILITIES (CONT):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
o 84,000 sq. ft. Jackson, MI* 5 Year Lease (Renewal)
o 25,500 sq. ft. Madison Heights, MI* 5 Year Lease
o 78,000 sq. ft. Indianapolis, IN* 2 Year Lease
o 46,800 sq. ft. Niles, MI* 2 Year Lease
o 14,200 sq. ft. Ft. Wayne, IN* Being Purchased
o 98,000 sq. ft. Cleveland, OH* Month-to-Month Lease
o 85,000 sq. ft. Solon, OH 5 Year Lease
o 10,000 sq. ft. Cleveland, OH* 3 Year Lease
</TABLE>
COMPANY'S RETAIL FACILITIES:
The Company maintains lease agreements with respect to approximately
90,000 sq. ft. for 27 retail outlets and bookstore locations.
The Company also maintained lease agreements with respect to
approximately 7,500 sq. ft. for one bookstore and four Newsrack retail outlets
in Connecticut. These leases were transferred as part of the sale of Yankee
operating assets in January of 1998.
COMPANY'S CORPORATE FACILITIES:
Additionally, the Company leases from an affiliate of Ronald E. Scherer
approximately 17,400 square feet of space at 5131 Post Road, Dublin, Ohio, for
its corporate offices, the majority of which was previously leased by Scherer
Companies. The lease has a remaining term of 8 years. Management believes that
the leased facilities are and will be adequate for the Company's operations in
the foreseeable future.
In the opinion of management of the Company, all of the foregoing
described properties, which are owned by the Company, and all of the contents of
the owned and leased facilities, are adequately covered by insurance.
It is anticipated that as the operations of the Company continue to be
consolidated over the next 12 months, the Company will require less operational
space to service and expand current market territories. Management expects to
achieve additional cost savings by selling or subleasing certain of these
facilities when consolidation plans are completed and operations are combined.
ITEM 3. LEGAL PROCEEDINGS
See Note 12 of the United Magazine Company consolidated financial
statements as of September 27, 1997 included in Item 8 of this report, which is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on September 3, 1997, the
shareholders of the Company approved all of the Stock and Asset Transfer
Agreements relating to the business combinations with Stoll, Michiana, OPD,
Northern, Scherer Companies, Wholesalers and Klein in Proposal One through
Proposal Seven. See Item 1 for a description of these business combinations.
10
<PAGE> 13
The shareholders also approved proposals to fix the number of directors
at 13 and to elect the following 10 nominated directors, to effect a one-for-ten
reverse stock split of the shares of Common Stock of the Company, to change the
Company's principal place of business in the Articles of Incorporation to
Dublin, Ohio, and to ratify the firm of Arthur Andersen LLP as independent
auditors.
The following table sets forth the number of votes cast for and
against, abstentions and broker non-votes using pre-split share numbers with
26,760,334 eligible shares.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Proposal Description For Against Abstain/Withheld Broker Non-Votes
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 Michiana Exchange 17,081,645 311,235 39,301 0
- ----------------------------------------------------------------------------------------------------------------------------
2 Stoll Exchange 17,081,570 311,085 39,526 0
- ----------------------------------------------------------------------------------------------------------------------------
3 OPD Exchange 17,081,500 311,335 39,346 0
- ----------------------------------------------------------------------------------------------------------------------------
4 Northern Exchange 17,081,820 310,735 39,626 0
- ----------------------------------------------------------------------------------------------------------------------------
5 Scherer Exchange 17,081,920 310,635 39,626 0
- ----------------------------------------------------------------------------------------------------------------------------
6 Wholesalers 17,080,820 311,335 40,026 0
Exchange
- ----------------------------------------------------------------------------------------------------------------------------
7 Klein Companies 17,083,420 310,635 38,126 0
Exchange
- ----------------------------------------------------------------------------------------------------------------------------
8 Election of See Below See Below See Below See Below
Directors
- ----------------------------------------------------------------------------------------------------------------------------
9 Election of See Below See Below See Below See Below
Directors
- ----------------------------------------------------------------------------------------------------------------------------
10 1 for 10 Reverse 17,123,281 252,308 56,592 0
Split
- ----------------------------------------------------------------------------------------------------------------------------
11 Change Place of 17,139,984 254,457 37,740 0
Business
- ----------------------------------------------------------------------------------------------------------------------------
12 Ratification of 17,155,951 238,395 37,835 0
Auditors
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Individual
Director's Votes
Proposal No. 8 Proposal No. 9
- ------------------------------------------------------------- -----------------------------------------------------------
Name For Abstain Name For Abstain
- ------------------------------------------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ronald E. Scherer 17,163,735 268,446 Ronald E. Scherer 17,164,129 268,052
- ------------------------------------------------------------- -----------------------------------------------------------
Eugene J. Alfonsi 17,158,790 273,391 Eugene J. Alfonsi 17,158,929 273,252
- ------------------------------------------------------------- -----------------------------------------------------------
Thaddeus A. Majerek 17,178,790 253,391 Thaddeus A. Majerek 17,179,429 252,752
- ------------------------------------------------------------- -----------------------------------------------------------
David B. Thompson 17,178,802 253,379 David B. Thompson 17,179,441 252,740
- ------------------------------------------------------------- -----------------------------------------------------------
Robert H. Monnaville 17,178,642 253,539 Robert H. Monnaville 17,179,441 252,740
- ------------------------------------------------------------- -----------------------------------------------------------
Richard H. Stoll 17,178,802 253,379
- -------------------------------------------------------------
Nancy Stoll Lyman 17,178,802 253,379
- -------------------------------------------------------------
George R. Klein 17,178,702 253,479
- -------------------------------------------------------------
William D. Parker 17,178,802 253,379
- -------------------------------------------------------------
R.L. Richards 17,178,302 253,879
- -------------------------------------------------------------
</TABLE>
11
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON SHARES OF UNIMAG
The common shares of UNIMAG were previously traded in a very limited
local over-the-counter market, however, there is currently no established public
trading market for this class of common equity, which is the only class of
equity securities of the Company.
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C>
First Quarter Not Quoted First Quarter Not Quoted
- ------------------------------------------------------------- ---------------------------------------------------------
Second Quarter Not Quoted Second Quarter Not Quoted
- ------------------------------------------------------------- ---------------------------------------------------------
Third Quarter Not Quoted Third Quarter Not Quoted
- ------------------------------------------------------------- ---------------------------------------------------------
Fourth Quarter Not Quoted Fourth Quarter Not Quoted
- ------------------------------------------------------------- ---------------------------------------------------------
</TABLE>
During the fiscal year 1996, the Company had transactions at the
following prices, all at values adjusted for the one for ten reverse split
effective after the 1997 Annual Meeting of Shareholders. The 10,000 shares
issued in connection with the Pittsburgh (Triangle) transaction in January of
1996 were valued for accounting purposes at $9.10 per share. All of the shares
issued in connection with the acquisition of Michiana, Stoll, Scherer Affiliates
and Klein were valued in the acquisition agreements at $15.00 per share. The
shares issued to MDI, under terms of the Company's agreement, were valued in the
agreement at $10.00 per share through June 28, 1996 and were valued at $15.00
per share after June 28, 1996 and through fiscal 1997. During the fiscal year
1997, shares were redeemed from the Marshall family, in connection with the
Wilmington Put Agreement, at a value of $15.00 per share. Subsequent to
year-end, the Company received shares of its Common Stock, valued at $15.00 per
share, back from MDI as part of the sale of Yankee operating assets and issued
new shares valued at $15.00 per share in connection with the conversion to
equity of shareholder debenture accrued interest and in connection with the
acquisition of the assets of SKS Enterprises, Limited.
The foregoing should not be taken as an indication of the value of the
shares or the price at which the Company's shares may be purchased or sold
should a trading market develop or should a holder desire to sell shares through
other means.
SHAREHOLDERS
As of March 28, 1998, UNIMAG had 2,902 shareholders of record.
DIVIDENDS
There were no dividends declared or paid by UNIMAG during fiscal years
1997 or 1996. The Company does not anticipate declaring or paying a dividend in
the foreseeable future, and it expects to use future available funds for the
growth and development of the business. Also, in connection with a loan
agreement closed in February of 1998, the Company is restricted in paying
dividends without the consent of the lenders during the term of the loan.
Remainder of Page Intentionally Left Blank.
12
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data of UNIMAG should be
read in conjunction with UNIMAG's consolidated financial statements and notes
thereto (see Item 8). All per share data has been adjusted to reflect the one
for ten reverse split approved at the Annual Meeting of Shareholders.
<TABLE>
<CAPTION>
UNIMAG Fiscal Year Ended
[in 000's except gain (loss) per share
and equity per share] 1997 (1) 1996 (2) 1995 (3) 1994 (4) 1993 (5)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated income statement
data:
Net sales $301,341 $ 80,232 $24,562 $24,687 $10,857
Income (loss) from $(24,521) $ (6,388) $ 1,864 $ (892) $(6,511)
Continuing operations
before taxes and extra-
ordinary items
Weighted average shares 7,065 3,226 2,390 2,151 2,064
outstanding
Net income (loss) per share $ (3.47) $ (1.98) $ .78 $ (.41) $ (3.15)
from continuing operations
before extra-ordinary items
Consolidated balance sheet data:
Total assets $271,603 $251,371 $12,334 $ 8,502 $ 9,753
Long-term debt obligations $ 80,870 $ 64,398 $ 138 $ 688 $ 400
Stockholder's Equity per share including
putable shares $ 5.00 $ 9.38 $ 2.25 $ .02 $ .19
</TABLE>
(1) Includes Yankee, Wilmington, Triangle, Michiana, Stoll, Read-Mor,
Scherer Affiliates and Klein for a full year.
(2) Includes Yankee for a full year, Readers Choice from September 29, 1995
through June 30, 1996, UNIMAG's investment in Wilmington from September
29, 1995 through December 30, 1995, Wilmington's operations from
December 31, 1995 through September 28, 1996, Triangle's operations
from December 31, 1995 through September 28, 1996, the operations of
Michiana, Stoll, Read-Mor and Scherer Affiliates from July 28, 1996
through September 28, 1996 and Klein operations from September 14, 1996
through September 28, 1996.
(3) Includes Reader's Choice, an Ohio corporation, which was a subsidiary
of the Company sold in July of 1996, from April 11, 1995 through
September 30, 1995, UNIMAG's investment in Wilmington from April 5,
1995 through September 30, 1995, and other subsidiaries for a full
year.
(4) Includes all then-existing subsidiaries for a full year.
(5) Includes Team Logos Sport Stuff, Inc. for a full year; Yankee from May
24, 1993 to October 2, 1993; Sport Stuff Marketing, Inc. from March,
1993 to October 2, 1993; Citizens Rental, Inc. through March 12, 1993;
and Yankee's investment in MDI L.P. through May 24, 1993.
Remainder of Page Intentionally Left Blank.
13
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS OF UNIMAG FOR THE YEARS ENDED SEPTEMBER 27, 1997 AND
SEPTEMBER 28, 1996
INTRODUCTION
The Company, through its subsidiaries, operated wholesale periodical
distribution operations primarily in central Connecticut, eastern North
Carolina, and western Pennsylvania. Additionally, through the business
combinations, which have been accounted for since the fourth fiscal quarter of
1996, the Company added to its operations the wholesale periodical distribution
operations of Stoll, which distributed primarily in central Indiana,
northwestern Ohio and southern Michigan, the wholesale periodical distribution
operations of Michiana, which distributed primarily in southern Michigan,
northern Indiana and western Ohio, the wholesale periodical distribution
operations of Klein, which distributed primarily in northern Ohio, and the
wholesale periodical distribution operations of OPD, MacGregor, Northern,
Wholesalers and Scherer Companies, which distributed in central and southern
Ohio and northern Michigan. The Company also acquired retail bookstores in
connection with these operations.
Following the business combinations, the Company emerged as a dominant
wholesale periodical distribution company in Ohio, Indiana, Michigan and western
Pennsylvania, with an estimated market share for that region of greater than
50%. This market dominance is expected to strengthen existing relationships with
customers and suppliers and enable the Company to successfully compete with
other regional wholesalers for major retail accounts.
BACKGROUND
The periodical wholesale distribution industry has undergone
significant consolidation during the past two years. Prior to this period of
consolidation, wholesale periodical distributors historically operated in
defined geographic territories without much competition from other wholesalers
due to the difficulty and cost of distributing in another wholesaler's
territory. Within the past two years, large retailers began to consolidate
vendor relationships with larger suppliers so that the retailers acquired
periodicals from one or a few wholesalers for all of their retail locations
rather than from separate wholesalers in each geographic area where a retail
location is based. As a result, the industry rapidly evolved from a supplier
based push distribution system to a consumer based pull allocation system. This
resulted in a smaller number of wholesalers distributing within many geographic
locations and in more direct competition for retail business. As a result, a
number of small wholesalers have been unable to remain in business. Gross
margins have decreased as more price competition has occurred, and a number of
wholesalers affiliated or otherwise consolidated their operations to reduce
duplicative operating expenses to compete effectively for large retail accounts
while providing additional value-added services to the retailers.
The wholesale periodical distribution industry is poised for some
additional significant consolidation over the next few years. Management
believes that the consolidation of the Company and the Acquisition Parties will
significantly reduce both fixed and variable costs once the Company's
consolidation of these operations is completed. It is anticipated that these
cost reductions will act to offset decreasing margins and greater pricing
pressures and will increase the ability of the enterprises comprising the
Company to compete more effectively.
Although there are currently approximately 60 entities that are
distributing periodicals in the United States, management believes that the
wholesale periodical distribution industry is dominated by fewer than ten
companies across the United States. As smaller local wholesalers continue
consolidating with larger and financially stronger regional wholesalers,
management believes that some additional acquisition opportunities will become
available over the next 12 months.
14
<PAGE> 17
INDUSTRY OVERVIEW
The $4.3 billion wholesale periodical distribution industry in North
America is comprised of approximately 60 regional and local wholesalers
operating out of approximately 260 distribution locations. Management believes
that these 60 wholesalers account for approximately 95% of all magazines
purchased by consumers in retail outlets such as newsstands, drug stores,
convenience stores, discount variety stores and grocery stores. The wholesale
periodical distribution industry is highly fragmented and regionalized. However,
there has been significant consolidation activity driven by major retailers'
desire to consolidate their vendor relationships and by the desire of many local
wholesalers to take advantage of the favorable economics available to larger
regional wholesale organizations by consolidating with neighboring wholesalers.
It is estimated that the five largest wholesaler groups in the country
account for approximately 60% of magazine sales and the ten largest account for
approximately 90%. In addition to these ten large wholesalers, there are
approximately 50 small and mid-size independent wholesalers making up the
balance of the markets served in the United States.
Based upon industry information, management of the Company believes
that the wholesale periodical distribution industry has grown approximately five
percent (5%) per year for the last several years. Management believes that the
continued growth of the industry depends upon the following factors:
o The magazine publisher's ability to continue to provide
newsworthy or entertaining publications to consumers;
o The publishers' and wholesalers' ability to maintain a profit
structure appealing to the retailers;
o Improvement in the efficiency and accuracy of product
allocation to capitalize on the impulse nature of the purchase
decision and to optimize sales; and
o Maintaining a cost-effective delivery system.
INDUSTRY TRENDS
Historically, the wholesale periodical distribution industry had not
been characterized by significant competition. Because publishers and retailers
had recognized the favorable economics of local distribution, they had supported
the exclusive territories that had evolved over time, minimizing competition
from neighboring local or regional wholesalers. In 1995, however, these barriers
began to break down, leading to a more competitive environment as a result of
the following trends:
o Vendor Consolidation Efforts of Large Retailers. Many national
retailers such as Wal-Mart have consolidated the number of
suppliers from which they purchased in an effort to streamline
their purchasing process. This change in purchasing behavior
was driven, among other reasons, by the retailers' demands for
chain-wide or divisional billing to minimize their
administrative costs, by standardization of improved service
levels, and by an opportunity to improve profitability. This
trend began to eliminate the traditional regional barriers
that existed in the industry for decades and has shifted the
emphasis of the wholesaler/retailer relationship from the
local level to the corporate or regional level. Although a
regional wholesaler can, in the short run, increase sales by
establishing a relationship with a large retailer, it becomes
more difficult for that wholesaler to service far reaching
locations of the large retailers in a profitable manner.
Consequently, the regional wholesaler must unite with the
local or other regional wholesalers serving those far reaching
territories either through joint ventures or consolidations in
order to optimize delivery efficiency and long term
profitability.
15
<PAGE> 18
o Industry Consolidation. The industry has undergone
considerable consolidation for several reasons. Because
wholesalers must operate under the constraints of a price
ceiling established by the publishers, successful wholesalers
are concentrating on cost cutting measures in order to remain
competitive. Through mergers and consolidations with
competitors in neighboring regions, local wholesalers are
becoming able to achieve significant cost savings and
economies of scale in their distribution operations by
consolidating distribution plants and eliminating redundant
overhead.
o Marketing Initiatives with Retailers. As "direct store
delivery" vendors, periodical wholesalers are responsible for
determining the most effective way to market their products in
a particular retail location. Wholesalers' merchandising
decisions typically rely upon information derived from
knowledge of buying habits of consumers, distribution and
return records by title and issue of each magazine, and other
related information for each retail location. This historical
information is kept in a database known as "Order & Regulation
Records" which is owned and maintained by the wholesaler. It
enables the wholesaler to electronically monitor and evaluate
the historic distribution information for greater efficiency
and profit.
o Technology Initiatives with Retailers. In addition to
maintaining Order & Regulation Records, the most successful
wholesalers, including the Company, have used other tools to
work with retailers to increase sales and profitability of
periodicals. These include "Electronic Data Interchange" and
"Efficient Consumer Response". Electronic Data Interchange
uses bar codes and UPC codes in conjunction with sophisticated
scanning systems to track the movement of periodicals between
the wholesaler and retailer as well as to control the billing
process throughout the distribution chain. Efficient Consumer
Response is a real time analysis tool that assists the
wholesaler in tracking the retailers' periodical sales within
a given month. It enables the wholesaler to manage the
allocation of products within a given month and replenish or
re-deploy in-store inventory where needed.
o Process Automation. The periodical distribution process
involves a significant amount of labor for activities such as
sorting, scanning, loading and unloading trucks and shredding
returned periodicals. Consistent with such a business model,
labor costs represent one of the largest operating expenses of
most wholesalers. In an effort to reduce overhead expenses,
wholesalers have increasingly sought to automate the handling
of the magazines they distribute through the acquisition and
development of more sophisticated and integrated machinery and
equipment.
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.
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
16
<PAGE> 19
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
fifteen-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 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.
REVIEW OF OPERATIONS
The results of operations for 1997 are not comparable to results from
prior years, nor are the results for 1997 necessarily indicative of the future.
1996 and 1997 were unique transition years which featured industry wide
consolidations, declines in gross margin as a percent of revenue, and increases
in payroll costs related to increased levels of service. UNIMAG had only one
operating entity, Yankee,
17
<PAGE> 20
reporting for the entire 12 months of fiscal 1996. In addition, during fiscal
1996, UNIMAG reported operations for nine months for Wilmington, Pittsburgh and
Readers Choice, two months for Michiana, Stoll, Read-Mor and Scherer Affiliates,
and two weeks for Klein. During 1997, UNIMAG reported results of operations for
the entire twelve months for all locations.
During 1997, the revenue for the Combined Company from operations was
$301.3 million, an increase of 276% over 1996 revenue. This increase is
primarily attributable to the inclusion of revenues from all locations for the
entire twelve months of 1997. The increase of $20.6 million over 1996 pro forma
revenue of $280.7 million, an increase of 7.3%, is attributable to the Company's
marketing efforts coupled with normal industry growth.
The revenue for the Company for the various periods of operations
reported for each of the entities in 1996 was $80.2 million, an increase of 227%
over 1995 revenue. This increase was primarily attributable to the inclusion of
revenues from the Acquisition Parties' companies during 1996 for the periods
included in the preceding paragraph. On a pro forma basis, the revenues of
UNIMAG increased by 1.4% from 1995 to 1996, if revenues from the Acquisition
Parties were included for the same periods of 1995. In markets serviced by the
Company and the Acquisition Parties, the business of certain large retail chains
was lost early in calendar 1996. However, the Company obtained increases in new
business from chains previously serviced by other wholesalers not part of the
Company. Other increases in new business came from the increased use of high
impact marketing programs in large retail customer locations.
The most significant development during 1996 was the reduction in
revenue from existing chain customers where new discounts, rebates and
amortization of signing bonuses caused an approximate 5% reduction in revenue
without a corresponding reduction in the related cost of the products for
equivalent numbers of magazines sold. As a result, the Company realized less
revenue per comparable magazine sold in 1996 versus 1995. This trend continued
in 1997.
The gross margin, as a percentage of revenue, declined from 27.0 % in
1995 to 24.9% in 1996 and to 22.5% in 1997. This trend was not unique to UNIMAG,
as it was representative of changes throughout the entire industry in 1996 and
1997. During 1996 and 1997, the 2.1% and 2.4% declines in gross margin were
attributable almost totally to the discounting and rebating changes during 1996
that continued into 1997. The cost of product to UNIMAG, as a percentage of the
retail price to the customer, remained relatively constant. The Company did
begin to see some minor margin recovery in the fourth fiscal quarter of 1997.
The reduction in selling, general and administrative expenses, as a
percent of revenue, from 27.7% in 1996 to 25.0% in 1997 was due to the Company's
cost cutting efforts and the consolidation of operations during a time of pro
forma revenue increases of approximately 7.3%. The 1997 selling, general and
administrative expenses included approximately $2.9 million (.9%) in
non-recurring legal and accounting fees and litigation settlement expenses. The
Company's reductions in selling, general and administrative expenses from 1996
to 1997 included reductions in payroll and facility related expenses due to
facility consolidations, offset somewhat by higher freight and distribution
charges.
Selling, general and administrative expenses, as a percent of revenue,
increased by 1.5% to 27.7% in 1996, versus 26.2% in 1995. Included in the 1996
increase were administrative cost increases in 1996 over 1995 of $1,049,000 for
legal and accounting expenses. Payroll expenses, the largest operating expense
component, increased in 1996 over 1995 as a result of increased in-store service
for the large retail customers. This increase in in-store service cost, created
by commitments under contract by the Company to increase the levels of service
to the retailers and to assume certain product management functions previously
performed by the retailer, also was representative of changes occurring in the
industry. The reduction in revenue from discounts, rebates and amortization
during 1996 reduced the comparative revenue base. Without this reduction in
revenue, the selling, general and administrative percent would have been 26.9%
instead of the 27.7% amount.
18
<PAGE> 21
Depreciation and amortization expense increased due to the depreciation
of fixed assets acquired and to the amortization of goodwill relating to the
several business combinations in 1996 for an entire year in 1997. The
acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates was
accounted for using purchase price accounting. Accordingly, goodwill was created
in the amount of $17,083,000 for Michiana, $50,173,000 for Stoll, $33,290,000
for Klein, $789,000 for Read-Mor and $39,631,000 for Scherer Affiliates. This
goodwill is being amortized over 40 years, with 1996 amortization of two months
for Michiana, Stoll, Read-Mor and Scherer Affiliates and two weeks for Klein. As
a percent of revenue, the 1997 depreciation remained unchanged from 1996.
The margin decline of 2.4% in 1997, net of the 2.7% reduction in
selling, general and administrative expenses and the elimination of the loss
from investment in Wilmington resulted in a .6% decline to a (5.5)% loss from
operations.
The corresponding changes in 1996 from 1995 resulted in an increase in
the net loss from operations to 6.1% of revenue in 1996 compared to 3.4% in
1995.
The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer
Affiliates was financed by the issuance of $72,742,138 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 increased interest expense
for 1997 by $5,049,600, versus $664,000 in 1996. In addition, the Company
assumed debt in the acquisitions, which accrued interest for the entire year of
1997. Furthermore, the Company incurred a noncash interest charge of $587,000 in
1997 and $525,000 in 1996 for the accretion of shares subject to put agreements.
Because of the loss for the year and because of loss carryforwards,
UNIMAG had no federal income tax expense for 1997 and 1996. The Company has a
net operating loss (NOL) of approximately $65,000,000 at September 27, 1997,
which will be limited due to change of control. The Company has not recognized
any benefits from the NOL through 1997.
The calculation of earnings per common share and weighted average
number of shares outstanding includes the shares issued to 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, which was effective in October, 1997.
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 1997 was $(7,381,000), or (2.4)%, versus $(2,277,000) in
1996, or (2.8)%. The 1997 EBITDA was impacted negatively by the 2.4%
(approximately $7,200,000) decline in gross margin, and the $2,833,000 in
non-recurring legal and accounting and litigation settlement expenses. In
addition, planned savings in facility consolidations were not achieved in both
the magnitude and time frame originally planned. The Company experienced
substantial delays in regulatory approval of the transactions and was unable to
fully implement all planned savings for 1997.
The 1996 EBITDA of $(2,277,000) was impacted negatively over 1995's
level of $217,000, after adjustment for $2,483,000 of net non-operating
activities, by gross margin and payroll pressures during the periods of
ownership.
19
<PAGE> 22
At September 27, 1997, the Company had current liabilities of
$144,131,000 and current assets of $97,887,000, for a working capital deficit of
$(46,244,000). Included in the $(46,244,000) deficit was $2,030,000 in accrued
interest, which was converted to term debt, and $4,061,000 of accrued interest,
which was converted to equity, both in February of 1998.
At September 28, 1996 the Company had current liabilities of
$116,474,000 and current assets of $71,726,000 for a working capital deficit of
$(44,748,000). Included in the $(44,748,000) deficit was $6,207,000 of related
party debt, including $4,500,000 that was subsequently converted to long-term
debt. The Company also had $4,470,000 in current debt and accrued interest
related to debentures issued to the Acquisition Parties.
The Company anticipates improvements in EBITDA in fiscal 1998 versus
1997 due to continual reductions in selling, general and administrative expenses
through new consolidation synergies in the latter half of 1998 in the northeast
Ohio/western Pennsylvania areas and to receiving the benefits of 1997 synergies
for an entire year. The Company also anticipates improvement in EBITDA from the
elimination of non-recurring accounting and legal expenses and litigation
settlements. Subsequent to year-end, the Company sold the operating assets of
Yankee for a gain of approximately $7,800,000. The Company also completed two
acquisitions in the second fiscal quarter of 1998, which are expected to
increase EBITDA substantially. In addition, the Company has negotiated some
additional opportunities for recovery of gross margin, primarily in the latter
two quarters of fiscal 1998, with negotiations ongoing for all suppliers.
The acquisition transactions of the Company since June 30, 1996 have
added $145 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 $3,938,000
related to this goodwill and initial annual interest of approximately $5,050,000
related to these debentures.
CASH FLOWS - OPERATING ACTIVITIES
During 1997, the Company improved its net cash provided from operations
to $4,008,000, a $5,326,000 improvement over 1996. The increase was due
primarily to a $43,067,000 increase in vendor payables, a $6,412,000 increase in
accrued liabilities and $9,200,000 in non-cash depreciation and amortization.
These offset a net loss of $24,521,000, a $14,180,000 increase in accounts
receivable, a $4,787,000 increase in inventories, an $8,473,000 increase in
receivables and advances to related parties (primarily in connection with a
subsequent acquisition), and a reduction of $2,123,000 in the reserve for gross
profit.
During 1996, the Company experienced a decline in net cash provided
from operations of $(3,402,000) from $2,084,000 in 1995 to a deficit of
$(1,318,000) in 1996. The 1996 deficit was due primarily to the net loss of
$6,388,000 for 1996; however, the Company also paid $2,002,000 to retailers in
net long term prepaid signing bonuses still to be amortized over the lives of
the contracts. Both accounts receivable and accounts payable increased by
approximately $2,000,000. Other significant increases in cash flow from
operations included depreciation and amortization of $2,513,000 and an increase
in accrued liabilities, primarily related to legal and accounting expenses, of
$2,924,000.
CASH FLOWS - INVESTING ACTIVITIES
In 1997, investing activities used $1,084,000 of cash, with the sale of
an asset generating $1,240,000. Additions to property and equipment were
$693,000, and $2,113,000 was used for additional acquisition costs.
The Company spent $1,066,000 in 1996 for capital expenditures,
primarily for vehicles. The acquisition transactions did not require the
spending of any significant amounts for additional capital expenditures since
the acquired companies had adequate investments in capital assets.
20
<PAGE> 23
CASH FLOWS - FINANCING ACTIVITIES
During 1997, the Company borrowed $3,400,000 under debt obligations.
The Company made payments of $6,701,000 under debt obligations and paid $84,000
to redeem treasury stock, for a net cash outflow used in financing of
$3,386,000.
During 1996 the Company borrowed $4,352,000 under debt obligations. The
Company made payments of $1,724,000 under debt obligations for a net cash
provided by financing of $2,628,000.
CAPITAL RESOURCES
Through its acquisitions, the Company inherited banking relationships
with several banks. In February of 1998, the Company consolidated its borrowing
and increased its borrowing capacity through a debt instrument with Key
Corporate Capital, Inc. and The Chase Manhattan Bank.
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 capital
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 receivables of the Company increased during both 1997 and 1996 due
to an increase in payment time periods by certain large retailers and to
increases in revenue. The Company is engaged in collection efforts to reduce the
number of days outstanding of receivables. The Company has converted all
locations except one to its computer system, and receivables now can be managed
on a more consistent, company-wide basis.
Vendor payables increased during 1997 due to an increase in inventory
levels and due to payments of vendor accounts payable for affiliates in tandem
with the Company's own vendor payables.
Following the sale of the operating assets of Yankee, the acquisition
of the operating assets and liabilities of two companies in the second fiscal
quarter of 1998, and the refinancing in February of 1998, the Company will be
positioned to build a better balance between current assets and current
liabilities, with future positive cash flow used for current liability
reductions.
OPERATING SYNERGIES
The acquisition transactions enabled the Company to successfully
leverage its investment in its sophisticated and proprietary SMARTS System
(which stands for Sales Magazine Analysis React Transmit System), acquired from
the Scherer Affiliates, for more efficient product allocation and higher per
store revenue. The SMARTS System develops a Distribution Rate Base ("DRB") which
is used by publishers to reach targeted customer growth. The Company charges for
the use of the DRB information, and this offsets the cost of higher levels of
service and the use of improved technology. Management believes that, as the
Company continues to expand, the SMARTS System, which provides a unique
competitive advantage, will improve same store revenue as it is introduced to
new retail locations and will provide a critical competitive advantage over
other regional wholesalers in obtaining important new accounts.
21
<PAGE> 24
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.
The consolidation of the contiguous Acquisition parties enabled the
Company to achieve some cost savings and operating efficiencies through the
elimination of redundant overhead and the consolidation of overlapping
facilities. During 1997, the Company converted several warehouse locations in
the states of Michigan, Ohio and Indiana to delivery depots by consolidating the
majority of office and warehouse functions in three locations. The cost to
eliminate this redundant overhead and to consolidate was reflected in the
periods in which the changes were made. Savings occurred from the elimination of
duplicate administrative and distribution functions, and additional savings
resulted from spreading the costs of technology over a larger customer base.
Additionally, the consolidation of the businesses of the Company increased
future purchasing power and the ability to negotiate future favorable quantity
discounts with publishers and national brokers.
The gross margin pressure, which occurred in the latter half of 1996,
continued into 1997 with some minimal recovery in the latter half of 1997. The
Company, and the entire industry, has begun the process of margin recovery,
which includes new negotiations with suppliers regarding pricing and discounts,
changing the mix of higher margin magazines versus lower margin magazines, and
consolidating book purchases for volume discounts. The Company anticipates a
significant recovery over time; however, the amount and timing are not
quantifiable at this point in time, and an annual impact in excess of 2% of
revenue is not expected until the third fiscal quarter of 1998.
The decline in the gross margin percent was offset by reductions in
selling, general and administrative expenses as a percent of sales as
consolidations were being performed. The higher percentage of selling, general
and administrative in 1996 over 1995 reflected the impact of absorbing most of
the added payroll related costs for increase in service-related product
management functions. The reduction of this percentage in 1997 and beyond will
be supported by opportunities to increase the revenue base without a
corresponding increase in the related fixed and semi-variable expenses.
COMMITMENTS AND CONTINGENCIES
The Company has entered into long-term contracts (generally three
years) with its most important customers. These contracts resulted in the gross
margin reductions of 1996 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. (See Note
12 to the Consolidated Financial Statements.)
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.
22
<PAGE> 25
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.
INFLATION
The impact of inflation on wholesale and retail operations is difficult
to measure. The Company cannot easily pass magazine costs on to customers unless
the publisher increases the cover price of the periodical, so it must control
inflation at the point of purchase. The Company is engaged in activities to
control these costs. As a result, the Company believes that the effect of
inflation, if any, on the results of operations and financial condition has been
minor and is expected to remain so in the future.
SEASONALITY
The sale of magazines, books, and newspapers is subject to minimal
seasonality.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - SAFE HARBOR CAUTIONARY
STATEMENT
This report contains forward-looking statements as defined by the
Private Securities Litigation Reform Act of 1995 (the Reform Act). These
forward-looking statements express the beliefs and expectations of management
regarding UNIMAG's future results and performance and include, without
limitation, the following: statements concerning the Company's outlook for 1998;
the Company's plans for revenue growth and operational cost reductions; the
Company's plans for future acquisitions (as discussed in "Background" above);
the Company's plans for future consolidations and changes in properties (as
discussed in "Operating Synergies" above); the Company's plans for future
financing and refinancing (as discussed in "Financing Arrangements" above); the
Company's future operational strategies to improve operating cash flow; 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; the factors discussed in paragraph four of
the Opinion in the Report of Independent Public Accountants and the related Note
2 to the financial statements; and other risks described from time to time in
the Company's Securities and Exchange Commission filings. The Company undertakes
no obligation to publicly release any revisions to these forward looking
statements for events occurring after the date hereof or reflect any other
unanticipated events.
Remainder of Page Intentionally Left Blank.
23
<PAGE> 26
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UNITED MAGAZINE COMPANY
=======================
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
TOGETHER WITH AUDITORS' REPORT
24
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
United Magazine Company:
We have audited the accompanying consolidated balance sheets of United Magazine
Company (an Ohio corporation) and Subsidiaries as of September 27, 1997 and
September 28, 1996, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Magazine
Company and Subsidiaries as of September 27, 1997 and September 28, 1996, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring operating
losses, was in default under certain of its debt agreements prior to refinancing
in 1998, obtained waivers relating to the 1998 refinancing and has current
liabilities in excess of current assets of approximately $46 million. These
matters among others raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The accompanying consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. The accompanying consolidated financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Columbus, Ohio,
April 24, 1998.
25
<PAGE> 28
UNITED MAGAZINE COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash $ 2,085,118 $ 2,546,785
Trade accounts receivable, net of allowance for doubtful
accounts of $4.5 million in 1997 and $3.0 million in 1996:
- related party 1,578,820 833,189
- other 43,269,498 29,835,357
Inventories 40,533,817 35,746,922
Marketable securities - 473,556
Notes receivable from related parties 430,618 1,352,646
Advances to related parties 9,243,500 594,336
Prepaids and other 745,872 343,454
------------ ------------
Total current assets 97,887,243 71,726,245
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Land 290,706 290,706
Building and improvements 2,142,874 2,260,740
Furniture and equipment 6,166,495 5,675,808
Vehicles 3,932,450 4,189,336
Leasehold improvements 977,235 522,336
------------ ------------
13,509,760 12,938,926
Less - accumulated depreciation and amortization (3,621,238) (1,585,503)
------------ ------------
Total property and equipment, net 9,888,522 11,353,423
------------ ------------
ASSET HELD FOR SALE - 1,239,605
------------ ------------
OTHER ASSETS:
Costs in excess of net assets acquired, net of accumulated
amortization of $4,941,630 in 1997 and $911,143 in 1996 152,600,639 154,518,179
Notes receivable from related parties 2,228,305 1,788,645
Prepaid signing bonuses 3,625,746 5,501,703
Other assets, net 5,372,271 5,242,727
------------ ------------
Total other assets 163,826,961 167,051,254
------------ ------------
Total assets $271,602,726 $251,370,527
============ ============
</TABLE>
(Continued on next page)
26
<PAGE> 29
UNITED MAGAZINE COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------------------------------ ---- ----
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of debt obligations $ 1,841,934 $ 10,822,386
Current portion of Senior debentures - 3,329,295
Short-term borrowings - related parties - 6,206,853
Accounts payable 113,369,666 70,302,971
Accrued expenses 13,650,921 12,762,143
Accrued interest on debentures 6,090,606 1,041,006
Income taxes payable 827,254 1,534,602
Reserve for gross profit on sales returns 8,351,034 10,474,409
------------ ------------
Total current liabilities 144,131,415 116,473,665
LONG-TERM DEBT OBLIGATIONS 22,390,408 9,247,711
DEBENTURES HELD BY SHAREHOLDERS:
- Senior 39,919,815 36,590,520
- Subordinated 18,559,707 18,559,707
DEFERRED COMPENSATION PLAN 1,076,859 1,231,041
ACCRUED PENSION OBLIGATION 1,622,974 2,115,478
POST-RETIREMENT OBLIGATION 1,603,500 1,450,015
DEALER ADVANCE PAYMENTS AND OTHER 144,378 146,938
------------ ------------
Total liabilities 229,449,056 185,815,075
------------ ------------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT AGREEMENTS, 476,543 and 482,140 shares
in 1997 and 1996, respectively 4,832,536 4,329,287
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 53,250,000 shares authorized, 4,277,909
and 4,283,506 issued, 2,670,437 and 2,676,034 outstanding (including
shares subject to Put Agreements), in 1997 and 1996, respectively 250 250
Paid-in capital 43,698,045 43,079,563
Obligation to issue shares (4,349,476) 65,242,138 65,242,138
Treasury stock, at cost (100,956) (16,998)
Unrealized loss - (31,219)
Minimum pension liability adjustment (58,043) (108,204)
Retained deficit (71,460,300) (46,939,365)
------------ ------------
Total shareholders' equity 37,321,134 61,226,165
------------ ------------
Total liabilities and shareholders' equity $271,602,726 $251,370,527
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
27
<PAGE> 30
UNITED MAGAZINE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
NET SALES $301,341,037 $80,232,472
COST OF SALES (233,550,538) (60,277,303)
------------ -----------
Gross profit 67,790,499 19,955,169
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (75,212,322) (22,203,107)
DEPRECIATION AND AMORTIZATION (9,199,561) (2,511,654)
LOSS FROM INVESTMENT IN WILMINGTON - (163,192)
------------ -----------
Loss from operations (16,621,384) (4,922,784)
------------ -----------
OTHER INCOME (EXPENSES), net:
Interest expense (8,181,788) (1,781,141)
Interest income 241,312 182,123
Other, net 40,925 134,007
------------ -----------
Total other income (expenses), net (7,899,551) (1,465,011)
------------ -----------
Loss before taxes (24,520,935) (6,387,795)
INCOME TAXES - -
------------ -----------
Net loss $(24,520,935) $(6,387,795)
============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 7,064,721 3,225,729
============ ===========
LOSS PER SHARE $ (3.47) $ (1.98)
============ ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
28
<PAGE> 31
UNITED MAGAZINE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
Obligation
Number of to Issue
Shares Treasury Common Paid-in Common
Outstanding Shares Stock Capital Stock
----------- ------ ----- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, September 30, 1995 2,160,445 1,607,472 $250 $42,701,846 $ -
Issuance of common stock 33,449 - - 325,491 -
Obligation to issue 4,349,476
shares of common stock - - - - 65,242,138
Shares earned under consulting
agreement:
- 23,449 shares earned in 1995
issued in 1996 - - - (234,491) -
- 25,096 shares earned but not
issued in 1996 - - - 286,717 -
Unrealized loss on investments held
for sale - - - - -
Minimum pension liability adjustment - - - - -
Net loss - - - - -
--------- --------- --- ----------- -----------
BALANCE, September 28, 1996 2,193,894 1,607,472 250 43,079,563 65,242,138
Issuance of warrants - - - 75,000 -
Shares earned under consulting
agreement:
- 30,635 shares earned but not
issued in 1997 - - - 459,524 -
Redemption of putable shares - 5,597 - 83,958 -
Realized loss on investments held - - - - -
for sale
Minimum pension liability adjustment - - - - -
Net loss - - - - -
--------- --------- ---- ----------- -----------
BALANCE, September 27, 1997 2,193,874 1,613,069 $250 $43,698,045 $65,242,138
========= ========= ==== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Minimum
Pension
Treasury Unrealized Liability Retained
Stock Loss Adjustment Deficit Total
----- ---- ---------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, September 30, 1995 $ (16,998) $ - $ - $(40,551,570) $ 2,133,528
Issuance of common stock - - - - 325,491
Obligation to issue 4,349,476
shares of common stock - - - - 65,242,138
Shares earned under consulting
agreement:
- 23,449 shares earned in 1995
issued in 1996 - - - - (234,491)
- 25,096 shares earned but not
issued in 1996 - - - - 286,717
Unrealized loss on investments held
for sale - (31,219) - - (31,219)
Minimum pension liability adjustment - - (108,204) - (108,204)
Net loss - - - (6,387,795) (6,387,795)
---------- ------- --------- ------------ -----------
BALANCE, September 28, 1996 (16,998) (31,219) (108,204) (46,939,365) 61,226,165
Issuance of warrants - - - - 75,000
Shares earned under consulting
agreement:
- 30,635 shares earned but not
issued in 1997 - - - - 459,524
Redemption of putable shares (83,958) - - - -
Realized loss on investments held - 31,219 - - 31,219
for sale
Minimum pension liability adjustment - - 50,161 - 50,161
Net loss - - - (24,520,935) (24,520,935)
---------- ------- --------- ------------- -----------
BALANCE, September 27, 1997 $(100,956) $ - $(58,043) $(71,460,300) $37,321,134
========== ======= ========= ============= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
29
<PAGE> 32
UNITED MAGAZINE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(24,520,935) $(6,387,795)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities -
Loss on investment in Wilmington - 163,192
Consulting fee paid with common stock 459,524 286,717
Loss on sale of marketable securities 31,219 -
Accretion of interest on common stock subject to put
agreements 587,207 525,102
Depreciation and amortization 9,199,561 2,512,574
Changes in certain assets and liabilities, net of the effect of
acquisitions in 1996-
(Increase) decrease in certain assets:
Trade accounts receivable (14,179,772) (2,017,379)
Inventories (4,786,895) (464,131)
Prepaids and other (402,418) 496,841
Other assets (10,532,615) (191,532)
Prepaid signing bonuses 1,950,957 (2,002,379)
Increase (decrease) in certain liabilities:
Accounts payable 43,066,695 2,053,805
Accrued expenses 6,411,934 2,924,386
Reserve for gross profit on sales returns (2,123,375) 892,598
Other liabilities (709,908) 34,899
Deferred compensation plan (154,182) (109,181)
Accrued pension obligation (442,343) (95,526)
Post-retirement obligation 153,485 59,611
------------ -----------
Net cash provided by (used in) operating activities
4,008,139 (1,318,198)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (693,167) (1,066,245)
Proceeds from the sale of an asset held for resale 1,239,605 -
Cash used for acquisitions, net of cash acquired - 1,200,069
Receipt of payments on notes receivable from related parties 482,368 347,941
Cash used for acquisition costs (2,112,947) -
------------ -----------
Net cash provided by investing activities (1,084,141) 481,765
------------ -----------
</TABLE>
(Continued on next page)
30
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
INCREASE (DECREASE) IN CASH
(Continued)
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt obligations $ 3,399,591 $ 4,352,266
Payments on debt obligations (6,701,298) (1,724,386)
Redemption of putable shares of common stock (83,958) -
----------- -----------
Net cash provided by (used in) financing activities
(3,385,665) 2,627,880
----------- -----------
NET INCREASE (DECREASE) IN CASH (461,667) 1,791,447
CASH, beginning of year 2,546,785 755,338
----------- -----------
CASH, end of year $ 2,085,118 $ 2,546,785
=========== ===========
Supplemental Disclosure of Cash Flow Information
- -------------------------------------------------
Cash paid during the year for interest $ 2,184,000 $ 532,000
Cash paid during the year for taxes $ - $ 49,000
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
- --------------------------------------------------------------------
1997
- ----
The Company transferred marketable securities during the year to a third party
as part of the settlement of a lawsuit.
1996
- ----
The company made six significant acquisitions in 1996. In addition, they
disposed of an insignificant subsidiary. See Note 4 for additional discussion.
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
31
<PAGE> 34
UNITED MAGAZINE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
(1) ORGANIZATION
United Magazine Company (UNIMAG or the Company) is an Ohio corporation
which was incorporated on April 8, 1964. UNIMAG (the Parent) is a holding
company. All operations for the year were conducted through its
wholly-owned subsidiaries. UNIMAG also has three inactive subsidiaries.
Business of UNIMAG
UNIMAG operates wholesale operations primarily in the northern midwest
(Ohio, Michigan, Indiana and Western Pennsylvania), Connecticut and North
Carolina. From various distribution facilities UNIMAG distributes
approximately 4,000 different titles of magazines to its customers on a
weekly basis. UNIMAG also distributes books and various other sundry
items. In addition to the wholesaling business, UNIMAG has 27 retail
bookstores.
UNIMAG grew significantly during 1996 by the acquisition of six
wholesalers (two in the second quarter and four in the fourth quarter).
Consideration for these acquisitions was in the form of cash, notes
payable, debentures and common stock of the Company. Due to the
significant amount of shares to be issued for the fourth quarter
acquisitions, UNIMAG was required to obtain shareholder approval. The
shareholders of the Company approved the fourth quarter acquisitions at
the Annual Meeting of Shareholders during September 1997. Subsequent to
year-end, in February 1998, the consideration was released from escrow.
In June, 1996, the Company had received the necessary approvals prior to
the shareholders meeting from two significant shareholders who agreed to
vote their shares, which represented a majority of the outstanding
shares, in favor of the acquisitions discussed above as well as a 1 for
10 reverse stock split. Since the approval was assured, the Company
reflected the reverse stock split for all periods presented and the
effect of the acquisitions.
(2) MANAGEMENT PLAN (Unaudited)
The loss of margin and the delays encountered in completing the final
closings of the acquisitions have led to operating losses and negative
EBITDA by the Company in 1996 and 1997. These have had an adverse effect
on the Company's short term liquidity. The Company has current
liabilities in excess of current assets of approximately $46 million in
1997 and $45 million in 1996.
32
<PAGE> 35
During 1996, due to increased levels of competition and to fundamental
changes within the entire periodical distribution industry, the Company
and the industry experienced significant reductions in profitability due
to margin reduction and to increased costs of providing higher levels of
customer service. The margin reduction continued through 1997 and into
the first half of 1998 before the industry was able to begin a margin
recovery process with the cooperation of publishers, national
distributors and wholesalers. During 1997 the Company was able to achieve
some substantial reductions in operating costs through consolidations and
improving the consistency of operations; however, due to delays in
regulatory approval, the Company was unable to achieve all of its
targeted savings within its original time parameters.
Although it may take some time before the Company is able to return to
pre-1996 levels of margin, the Company plans to return closer to
historical industry levels of EBITDA by the fourth fiscal quarter of
1998. The Company's first quarter EBITDA is approximately $1.5 million
and the Company's second quarter EBITDA, before an approximate $7.8
million gain on the sale of operating assets and liabilities of Yankee,
is expected to be break-even. During the second quarter of 1998, the
Company completed the acquisition of the operations of SKS Enterprises,
Limited. This acquisition will strengthen the Company's Midwest presence
and create opportunities for additional consolidation synergies and
economies of scale. During the second quarter of 1998 the Company also
completed an acquisition in western Pennsylvania which will add
significant business with a larger incremental profit to existing
facilities in western Pennsylvania and northeastern Ohio. The Company
will continue to evaluate acquisition opportunities within its primary
geographic boundaries.
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 will improve margins
during the last two fiscal quarters by approximately 2%. The Company
anticipates even higher levels of margin recovery on virtually all of its
magazine volume by 1999. The Company also has taken steps to improve the
margins associated with hardback and paperback books.
The Company will have completed its conversion of all computer systems to
the Company's system by the third quarter of 1998. This will provide
management with better reporting information for decision making.
The Company has completed its most recent initial analysis of building
requirements and has identified several opportunities to continue to
reduce existing warehouse size.
The Company's management has identified several additional opportunities
for improved profitability. Revenue plans include adding the Company's
Impact Marketing and SMARTS System to additional chains and to additional
stores within existing chains
33
<PAGE> 36
currently using the programs in selected stores. The Company also plans
to continue aggressive marketing to new business in contiguous markets to
create a net new customer growth during the year.
The Company's cost reduction plans include continued rerouting of its
customers as a result of the second quarter acquisitions, the
consolidation of the warehouse and office functions in the northeastern
Ohio/western Pennsylvania markets, the consolidation into one location of
the Company's direct ship operations, its sundry sale operations, its
delivery functions and its book distribution, the closing of unprofitable
retail locations, the combining of employee benefit plans, and the
reduction of professional fees.
The consolidation of the computer operations will permit reductions in
computer hardware and software and maintenance costs and the reduction of
office personnel in certain locations. The Company also is evaluating
additional personnel reductions and the application of uniform expense
control over compensation and travel for in-store personnel.
Through its acquisitions the Company had inherited several banking
relationships. In February of 1998 the Company consolidated its banking
with Key Corporate Capital, Inc. and The Chase Manhattan Bank with a $38
million loan facility. In connection with this borrowing the Company
restructured its short term and long term debt and strengthened its cash
management position. Also, in connection with this refinancing, certain
shareholders and debenture holders of the Company converted approximately
$4.9 million of accrued interest to equity, accepted extended terms for
$2.5 million of accrued interest, and extended scheduled debenture
principal repayment terms.
The Company continues to pursue additional equity through both private
and public equity offerings and has negotiated an increase in its current
debt lines. There is, however, no assurance that the Company will be able
to obtain additional equity through either private or public offerings.
In summary, the Company believes that it has weathered an industry wide
two year reduction of operating profits and has taken and is taking the
necessary steps to create positive EBITDA for the balance of 1998 and
thereafter. The Company has developed strategic financial relationships
to assist in future funding and has made operational and computer changes
to continue cost reduction efforts. There can be no assurance that the
Company's plans will succeed. The financial statements do not include any
adjustments relating to the recoverability and classification of asset
carrying amounts or the amounts and classification of liabilities that
might result should the Company be unable to continue as a going concern.
34
<PAGE> 37
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Fiscal Year - UNIMAG follows the practice of a 52/53 week fiscal
year which ends on the Saturday nearest to September 30.
(b) Principles of Consolidation - All intercompany balances and
transactions have been eliminated in the consolidated financial
statements.
(c) Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions, such as allowance for doubtful
accounts and the reserve for gross profit on sales returns, that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from their estimates.
(d) Inventories - Inventories are valued at the lower of cost or market
as determined by the first-in, first-out (FIFO) cost method.
(e) Marketable Securities - The Company accounts for its marketable
securities in accordance with Statement of Financial Accounting
Standards No. 115. The Company's investment in marketable
securities in 1996 represents securities that were "available for
sale".
(f) Property and Equipment - Property and equipment are stated at cost
or acquired cost (fair value) after acquisition. Depreciation is
provided on the straight-line method over the estimated useful
lives of the related assets as follows:
Years
-----
Building 31
Building improvements 10
Furniture and equipment 5-7
Vehicles 3-5
Leasehold improvements are being amortized on a straight-line basis
over the life of the lease.
The cost and accumulated depreciation and amortization applicable
to assets retired are removed from the accounts and any resulting
gain or loss on disposition is recognized in income. Betterments,
renewals and extraordinary repairs that extend the life of the
asset are capitalized; other maintenance and repair costs are
expensed as incurred.
35
<PAGE> 38
(g) Asset Held For Sale - The Company had an airplane that was part of
the fourth quarter acquisitions in 1996. The airplane was sold
during 1997.
(h) Prepaid Signing Bonuses - The Company has entered into supplier
contracts with many of their large chain customers. As part of the
contract UNIMAG paid the customer an up-front payment (signing
bonus) for obtaining a multi-year contract. These payments are being
amortized straight-line against revenue over the life of the
contract.
(i) Excess of Cost Over Net Assets Acquired - Excess of cost over net
assets acquired (goodwill) consists of the excess of the cost to
acquire an entity over the estimated fair market value of the net
assets acquired. Goodwill is amortized on a straight-line basis over
40 years. The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated
useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. In evaluating whether
goodwill is recoverable, the Company estimates the sum of the
expected future cash flows, undiscounted and without interest
charges, derived from such goodwill over its remaining life. The
Company believes that no such impairment existed at September 27,
1997.
(j) Revenue Recognition - Revenues and cost of sales from the sale of
periodical inventories are recognized upon shipment to the
customers. However, due to the significant volume of merchandise
returns that are typical in the periodical industry, the Company has
recorded a reserve for gross profit on sales returned in the
accompanying consolidated financial statements. This reserve is
based on the gross profit margin on merchandise sold in the current
period that is estimated to be returned by the customers in the
subsequent period. The Company receives credit for the cost of such
returns from the publisher.
(k) Discounts and Rebates - The Company records all discounts and
rebates given to the customer on the accrual basis of accounting as
a reduction in net sales.
(l) Income Taxes - The Company follows SFAS No. 109 "Accounting for
Income Taxes" (SFAS 109). (See Note 10).
(m) Fair Value of Financial Instruments - The carrying amounts of
current assets and liabilities approximate their fair market value
because of the short-term maturity of these financial instruments.
The fair market value of long-term debt is discussed further in Note
5.
(n) Weighted Average Shares Outstanding - The weighted average number of
shares outstanding for earnings per share purposes is calculated
using common shares outstanding, shares earned but not issued under
a consulting agreement, shares obligated to be issued as well as
common shares subject to put agreements. The shares obligated to be
issued have been included in the weighted average shares outstanding
from the respective acquisition dates as discussed in Note 4.c.
36
<PAGE> 39
(o) Concentration of Credit Risk - Financial instruments that
potentially subject the Company to concentrations of credit risk
consist principally of trade accounts receivable. The majority of
the Company's revenues are derived from chain and independent
grocery stores through the territories discussed in Note 1. No one
chain represents a significant portion of the Company's revenue.
(p) Reclassifications - Certain reclassifications have been made to the
consolidated financial statements for 1996 to conform with the 1997
presentation.
(q) Accounting Pronouncements Not Yet Effective - In June 1997, the
Financial Accounting Standards Board issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." Both are required for
financial statements in fiscal years beginning after December 15,
1997.
SFAS No. 130 requires comprehensive income to be reported in a
financial statement that is displayed with the same prominence as
other financial statements. The Company currently has two items that
would qualify for disclosure; minimum pension liability adjustment
and unrealized losses on marketable securities.
SFAS No. 131 requires entities to disclose financial and detailed
information about its operating segments in a manner consistent with
internal segment reporting used by the Company to allocate resources
and assess financial performance. The Company has not completed the
analyses required to determine the additional disclosures
requirements, if any, for the adoption of SFAS No. 131.
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings Per Share". SFAS No. 128 supersedes the
previous standard (APB No. 15), modifies the methodology for
calculating earnings per share, and is effective for fiscal periods
ending after December 15, 1997; early adoption is not permitted.
Upon adoption in its consolidated financial statements for the
fiscal year ending September 30, 1998, the Company will be required
to restate its previously reported earnings (loss) per share data to
conform with the requirements of SFAS No. 128. Had the provisions of
SFAS No. 128 been applicable to the accompanying consolidated
financial statements, basic and diluted earnings (loss) per share,
as calculated in accordance with SFAS No. 128, would not have been
different than the loss per share amounts reported herein.
(4) ACQUISITIONS AND DISPOSITIONS
In 1996, the Company made significant acquisitions through three
different transactions as described below.
a. In January 1996, the Company exercised its option for a nominal
amount to acquire the outstanding stock of Service News Company of
Wilmington, North Carolina.
37
<PAGE> 40
b. Also in January 1996, the Company acquired the operations of
Triangle News Company (Triangle) in Pittsburgh, Pennsylvania. UNIMAG
acquired Triangle for approximately $2.7 million in a transaction
accounted for as a purchase. The consideration given was in the form
of cash, seller financing and 10,000 shares of UNIMAG stock
(estimated fair value of $9.10 per share). The amount of goodwill
recorded from this transaction was approximately $6.9 million. The
results of operations for Triangle were included in the consolidated
statement of operations from January 1996 forward. Triangle
generated revenue of $18 million during the nine month period ended
September 28, 1996.
c. As part of a regional rollup, at the end of July 1996 the Company
acquired the periodical and management operations of Northern News
Company, Ohio Periodical Distributors, Inc., MacGregor News Agency,
Inc., Wholesalers Leasing Corp. and Scherer Companies (collectively
referred to as the Scherer Affiliates), Michiana News Services, Inc.
(Michiana) and The Stoll Company. In the middle of September the
rollup was completed by the addition of Klein News Company and
affiliates. UNIMAG also acquired a small retail bookstore chain
(Read-Mor Books, Inc.). This bookstore chain acquisition was not
considered significant for financial reporting purposes.
UNIMAG acquired the various companies with UNIMAG common stock of
$65.2 million (estimated fair value of $15 per share) and
subordinated debentures of $58.5 million in a transaction accounted
for as a purchase. In the Company's allocation of the purchase price
to the fair value of net assets acquired, goodwill of approximately
$145 million was recorded. The results of operations for these
entities were included in the consolidated results of UNIMAG from
their respective acquisition dates forward (July 31, 1996 and
September 14, 1996), and represented approximately $30 million of
the consolidated revenues for the year ended September 28, 1996.
d. In July 1996, UNIMAG sold the operations of Readers Choice for
approximately $500,000 which approximated book value. This
disposition was not considered significant for financial reporting
purposes.
The following unaudited pro forma summary presents the revenues, net
income and earnings per share from the combination of operations of the
Company and the significant acquisitions. The pro forma information is
provided as if each acquisition had occurred at the beginning of fiscal
1996. The pro forma information is provided for informational purposes
only.
in 000's, except Loss Per
Share 1996
--------------------------- -------------
Net Revenue $280,751
Net Loss (21,523)
Loss Per Share $ (3.09)
38
<PAGE> 41
(5) DEBT OBLIGATIONS
The components of the Company's debt obligations at September 27, 1997
and September 28, 1996 are as follows:
Short Term Borrowings
---------------------
The Company has short term demand notes as of September 27, 1997 and
September 28, 1996 as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- ------------
<S> <C> <C>
(a) Note from shareholder $ $5,000,000
-
(b) Other related parties - 1,206,853
============== ==========
$ - $6,206,853
============== ==========
</TABLE>
(a) The Company had a $5 million note from a company affiliated
with a shareholder. This loan was assumed as part of the
acquisitions made during the fourth quarter of 1996. The note
accrued interest at 11.75% and was collateralized by 5 million
shares of UNIMAG stock. $4,500,000 of this note was converted
to a subordinated debenture in February 1998. Therefore, it has
been recorded as long-term in the accompanying consolidated
financial statements.
(b) The other related party loans are primarily with employees of
Michiana. $407,000 was paid during 1997 and the residual was
offset against the related party notes receivable.
Long term Debt Obligations
--------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -------------
<S> <C> <C>
(a) Lines of Credit $ 8,482,763 $ 7,778,192
(b) Term Loans with financial institutions 670,958 1,973,453
(c) Seller Financing 8,705,604 8,998,622
(d) Loans from Related Parties 6,101,093 320,132
(e) Notes with Publishers 271,924 999,698
----------- ------------
Total 24,232,342 20,070,097
Less: current portion (1,841,934) (10,822,386)
----------- ------------
Long-term portion of debt obligations $22,390,408 $ 9,247,711
=========== ============
</TABLE>
(a) At September 27, 1997 and September 28, 1996, the Company has
five lines of credit with banks. The lines of credit bear
interest at rates ranging from prime (8.50% and 8.25% at
September 27, 1997 and September 28, 1996, respectively) to
9.25%. The balance outstanding at September 27, 1997 and
September 28, 1996
39
<PAGE> 42
was $8,482,763 and $7,778,192, respectively. Those lines were
paid off in February 1998 as part of the refinancing (see Note
13). The weighted average interest rates on the outstanding
borrowings under the lines of credit as of September 27, 1997
and September 28, 1996 were approximately 8.6% and 8.3%,
respectively.
(b) The Company has various term loans with financial institutions.
These loans accrue interest at rates ranging from 7.5% to 9.5%.
Principal payments are made on a monthly basis. These loans
expire at various times during 1998 through April 1999.
$600,000 of the balance was paid-down as part of the
refinancing in February 1998 (see Note 13).
(c) Seller financing represents the portion of the consideration
associated with an acquisition that was funded by the seller.
These obligations relate primarily to prior acquisitions made
by the companies that were acquired by UNIMAG during the fourth
quarter of 1996. These loans bear interest at rates ranging
from 5.8% to 11.0%. Principal payments are made primarily on a
monthly basis. These loans expire at various times during 1998
through February 2011. Approximately $2.4 million of the
balance was paid-down as part of the refinancing in February
1998 (see Note 13).
(d) The loans from related parties are from the former shareholders
of Michiana and Klein News. These notes accrue interest at
rates ranging from 7% to 11.75%. The notes expire at various
times through April 1999. Approximately $900,000 of the balance
was paid-down with the proceeds from the refinancing in
February 1998 (see Note 13). In addition, the short-term note
of $5,000,000 disclosed in note (a) of short-term borrowings,
has been included as long-term due to its conversion to a
long-term debenture in February 1998.
(e) The Company had entered into agreements with two significant
vendors which converted certain publisher payables balances
into secured term loans. These notes accrued interest at 10%.
Principal and interest payments are made monthly. As of
September 27, 1997, only one vendor loan remained which was
paid on December 15, 1998.
The remaining loans after the refinancing discussed in Note 13 do
not have any significant covenants. See Note 13 for discussion on
the covenants relating to the refinancing.
Michiana, acquired by the Company in the fourth quarter of 1996, has
guaranteed debt of one of its affiliated companies. The outstanding
balance of this guaranteed debt was approximately $882,000 at
September 28, 1996. This debt was paid-off with the proceeds from
the refinancing, therefore the guarantees were terminated at that
time.
40
<PAGE> 43
The George R. Klein News Company, acquired by the Company in the
fourth quarter of 1996, has guaranteed approximately $147,000 of
debt of another company that is 50% owned by George R. Klein.
Shareholder Debentures
As part of the 1996 acquisitions described in Note 4, the Company
issued Senior and Subordinated debentures. The components of these
debentures are as follows:
<TABLE>
<CAPTION>
Shareholder Group Senior Subordinated 1997 Total 1996 Total
----------------------------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Stoll Company $16,800,000 $9,105,267 $25,905,267 $25,905,267
Michiana 3,500,000 2,334,256 5,834,256 5,834,256
Scherer Affiliates 9,197,604 1,527,309 10,724,913 10,724,913
Klein 10,180,000 5,498,281 15,678,281 15,678,281
Read-Mor 242,211 94,594 336,805 336,805
----------- ---------- ----------- -----------
Total 39,919,815 18,559,707 58,479,522 58,479,522
Less: current portion - - - (3,329,295)
----------- ----------- =========== ===========
Long-term portion of debentures $39,919,815 $18,559,707 $58,479,522 $55,150,227
=========== =========== =========== ===========
</TABLE>
The senior debentures began to accrue interest on July 1, 1996
(August 24, 1996 for Klein) at 8% payable quarterly commencing on
the closing date of the acquisitions. Quarterly principal and
interest payments are scheduled from April 1, 1997 through January
1, 2002 in accordance with the schedule and priority set forth in
the Debenture Agreement. Quarterly payments of principal and
interest were not paid during 1997. In February 1998 the Company
paid the accrued interest with 1/3 in a short-term note and 2/3 in
common stock. In connection with the refinancing in February 1998
(see Note 13), the Company paid $5 million of the senior debentures
to the Stoll family. Additionally, the debenture holders entered
into subordination agreements that prohibit the Company from making
principal payments on the senior and junior debentures through the
maturity of the Term Loan discussed in Note 13. The senior
debentures are secured by all of the assets of the Company, however,
these debentures are subordinated to substantially all of the
long-term debt obligations discussed above. The entire $16,800,000
of Stoll Senior debentures must be paid before any other debentures
may be paid. In connection with the financing arrangement discussed
in Note 13(b), $5,000,000 of Stoll senior debentures were paid.
The subordinated debentures began to accrue interest on July 1, 1996
(August 24, 1996 for Klein) at 10% payable quarterly commencing on
the closing date of the acquisitions. Quarterly principal payments
are scheduled from April 1, 1999 through January 1, 2004. However,
no payments on subordinated debentures are allowed until all senior
debentures have been paid. The subordinated debentures are secured
by all the assets of the Company, however, these subordinated
debentures are subordinated to the senior debentures.
41
<PAGE> 44
Maturities of all debt obligations at September 27, 1997 after reflecting
the impact of the refinancing discussed in Note 13, are as follows:
<TABLE>
<CAPTION>
Long-Term
Debt
Fiscal Year Obligations Debentures Total
--------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1998 $ 1,841,934 $ - $ 1,841,934
1999 1,362,189 - 1,362,189
2000 1,936,383 - 1,936,383
2001 1,388,056 40,044,000 41,432,056
2002 1,635,941 7,868,000 9,503,941
Thereafter 16,067,839 10,567,522 26,635,361
----------- ----------- -----------
Total $24,232,342 $58,479,522 $82,711,864
=========== =========== ===========
</TABLE>
The carrying value of the long-term debt obligations described above
approximates its fair value because of the limited fluctuation in
interest rates during the year, the significant portion that has been
recently refinanced or is variable rate based that is repriced
frequently.
(6) LEASE COMMITMENTS
UNIMAG or its subsidiaries have entered into operating lease agreements
for facilities and certain vehicles and equipment. Expenses related to
these leases were as follows:
<TABLE>
<CAPTION>
Related
Fiscal Year Party Other Total
------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997 $1,684,000 $1,393,000 $3,077,000
1996 187,000 1,157,000 1,344,000
</TABLE>
As of September 27, 1997, the future minimum annual rental commitments of
lease agreements are as follows:
<TABLE>
<CAPTION>
Related
Fiscal Year Party Other Total
------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998 $1,344,000 $1,711,000 $3,055,000
1999 1,057,000 1,472,000 2,529,000
2000 647,000 1,008,000 1,655,000
2001 118,000 811,000 929,000
2002 7,000 436,000 443,000
Thereafter - 73,000 73,000
---------- ---------- ----------
Total $3,173,000 $5,511,000 $8,684,000
========== ========== ==========
</TABLE>
42
<PAGE> 45
(7) COMMON STOCK
The Company is obligated to issue 4,349,476 shares valued at $15 per
share pursuant to the acquisition agreements entered into during the
fourth quarter of 1996. These shares were issued in February 1998.
The Company redeemed 5,597 shares subject to Put, see Note 12.a.
(8) INCOME TAXES
The provision (benefit) for income taxes for the years ended 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Current tax expense:
Federal $ - $ -
State - -
Deferred tax expense (benefit):
(Increase) in deferred tax assets - (2,555,000)
Increase in valuation allowance - 2,555,000
-------------- --------------
Income tax provision $ - $ -
============== ==============
</TABLE>
The Company has provided deferred income taxes at a 40% tax rate which
represents a blended statutory federal and state income tax rate. The
types of differences between the tax bases of assets and liabilities and
their financial reporting amounts that give rise to significant portions
of deferred income tax assets and liabilities are: property and equipment
asset valuation, deferred compensation, allowance for doubtful accounts
and accrued vacation.
The Company's net deferred tax assets have been fully reserved due to the
uncertainty of future realization.
The difference between the statutory tax rate and the effective rate of
zero is due primarily to the benefit of the net operating losses
generated that may not be realized in the future.
As of September 27, 1997, 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 $1.5-2.1 million per year, which could cause up
to approximately $42 million of the $65 million NOL to be lost. The NOL
carryforwards will expire in the years 2003 through 2012.
43
<PAGE> 46
At September 27, 1997, UNIMAG had income taxes payable of approximately
$827,000. This relates primarily to Michiana's tax assessment and
interest due to the Internal Revenue Service of approximately $1,371,000
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 1998.
(9) BENEFIT PLANS
Multi-Employer Plans
The Company's Connecticut subsidiary (Yankee) participates in a union
sponsored, collectively bargained, multi-employer pension and welfare
plan. Contributions are determined in accordance with the provisions of
negotiated labor contracts and generally are based on the number of
labor-hours worked. The Company made contributions of approximately
$32,000 in fiscal year 1997 and $30,000 in fiscal year 1996.
Under the provisions of the Multi-Employer Pension Plan Amendments Act of
1980 covering such pension plans, certain events, such as withdrawal or
plan termination, may cause the Company to be obligated to fund its share
of any unfunded vested benefits in this plan. Data concerning the funded
status or this multi-employer plan is not available. The Company sold
certain operating assets and liabilities of Yankee in January 1998 (see
Note 13), including the obligation to fund its share of any unfunded
vested benefits.
The Company's Michigan subsidiary participates in a multi-employer
defined benefit pension plan which provides benefits to certain union
employees of the Company. The Company's estimated unfunded benefit
obligation at September 27, 1997 is approximately $563,000. However, the
Company has no current intention to withdraw from the plan. The Company
made contributions of approximately $62,000 in fiscal year 1997 and
$19,000 in fiscal year 1996.
Union Pension Plan
As a result of the acquisition of Triangle, the Company has defined
benefit pension plans covering various employees whose retirement
benefits are subject to collective bargaining. The benefits are based on
years of service multiplied by the yearly amount of basic retirement
income. The Company's funding policy for the plan is to make the minimum
annual contribution required by applicable regulations.
44
<PAGE> 47
The following table sets forth the plan's funding status and amounts
recognized in the Company's financial statements:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations $3,544,594 $3,429,833
Non-vested benefit obligations 140,785 177,718
---------- -----------
Accumulated benefit obligation (ABO) $3,685,379 $3,607,551
========== ==========
Projected benefit obligation (PBO) $3,685,379 $3,607,551
Plan assets at fair value (2,062,405) (1,793,548)
---------- ----------
Projected benefit obligation in excess of plan assets 1,622,974 1,814,003
Unrecognized net loss (58,043) (108,204)
---------- ----------
Accrued pension cost 1,564,931 1,705,799
Additional minimum pension liability 58,043 108,204
---------- ----------
Accrued pension and minimum liability $1,622,974 $1,814,003
========== ==========
</TABLE>
The key assumption used in determining the projected benefit obligation
in 1997 and 1996 were as follows:
Discount rate 7%
Expected long-term rate of return on
assets 8%
Net pension cost included the following components:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Asset loss $(27,801) $(89,027)
Service cost 68,700 56,961
Interest cost on projected benefit obligation 240,703 179,674
Actual return on plan assets (111,803) (9,125)
-------- --------
Net pension cost $169,799 $138,483
======== ========
</TABLE>
Funding of the plan was approximately $311,000 and $200,000 in 1997 and
1996, respectively.
Other Pension Plan
The former Stoll Company has certain non-collective bargaining employees
who are covered by a noncontributory defined benefit pension plan. In
connection with the acquisition of the Stoll Company by UNIMAG, the Stoll
Company elected to terminate the plan. During 1997 the assets were
distributed to the participants.
45
<PAGE> 48
Other Postretirement Benefit Plans
In addition to the Company's defined benefit pension plan, certain of the
Company's subsidiaries sponsor defined benefit postretirement health care
and life insurance plans that provides postretirement health care and
life insurance benefits to full-time collective bargaining employees who
have met required service periods with the Company and have attained age
requirements as defined in the plan. The plans contain certain
cost-sharing features such as deductibles and coinsurance.
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's balance sheets:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligations:
Current retirees $ 659,230 $ 685,176
Other fully eligible participants 216,430 242,825
Other active plan participants 731,000 515,613
----------- ----------
Accumulated postretirement benefit obligations in excess
of plan assets 1,606,660 1,443,614
Unrecognized net gain (loss) (3,160) 6,401
========== ==========
Accrued postretirement benefit cost $1,603,500 $1,450,015
========== ==========
</TABLE>
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Service cost $ 58,155 $ 27,610
Interest cost 106,931 66,455
Amortization of gain and loss 36,075 -
---------- ----------
Net periodic postretirement benefit cost $ 201,161 $ 94,065
========== ==========
</TABLE>
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits (i.e., health care cost trend rate) for 1997 and
1996 are 10% and 11%, respectively, for participants less than age 65 and
8% and 8.5%, respectively, for participants 65 and older. The rate is
assumed to decrease over 8 years to 6% and remain at that level
thereafter. The health care cost trend rate assumption has a significant
effect on the amounts reported. For example, increasing assumed health
care cost trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of September 27,
1997 and September 28, 1996 by approximately $213,000 and $163,000,
respectively, and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1997 and 1996
by approximately $26,000 and $15,000, respectively.
46
<PAGE> 49
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7% and 7.5% at September 27, 1997
and September 28, 1996, respectively.
Retirement Savings Plan
Effective April 1994, the Company adopted a defined contribution
retirement savings plan for substantially all nonbargaining employees.
The provisions of the plan allow employees to contribute 15% of their
salary with a maximum of $9,240 for pre-tax contributions. The plan
provides for a matching contribution at the discretion of the Company.
Employees are fully vested in the Company's contributions after 3 years.
The Company has not made any significant contributions to the plan.
Deferred Compensation Plan
An officer and former owner of the Stoll Company is entitled to receive
deferred compensation pursuant to an agreement in effect prior to the
acquisition. The agreement provides for the payment of $250,000 a year
for a five year period beginning in 1997 and $100,000 a year for a period
of seven years thereafter. The present value of this obligation is
approximately $1.2 million. Approximately $154,000 is classified as
current in accrued expenses in the accompanying financial statements.
(10) SIGNIFICANT VENDORS
The Company purchased approximately 73% and 75% of its product from five
publishers in 1997 and 1996, respectively. These publishers represent
approximately 64% and 70% of accounts payable in 1997 and 1996,
respectively.
(11) RELATED PARTY TRANSACTIONS
The Company had the following related party transactions:
(a) In 1993, the Company's Connecticut subsidiary entered into a
consulting agreement with MDI (a Northeast wholesaler) and its
majority shareholder for a period of 10 years. During the first five
years of the agreement, the consulting fee is calculated as 2% of
the subsidiaries agency net sales and is payable 1% in cash and 1%
in UNIMAG stock (valued at $10 per share). During the last five
years of the agreement, the consulting fee is calculated as 1% of
Yankee's agency net sales, payable in cash. This consulting
agreement was terminated with the sale of this subsidiary in January
1998 (see Note 13).
The expense was approximately $767,000 and $538,000 in 1997 and
1996, respectively. The $767,000 is to be paid in cash of $306,000
and through the issuance of 30,637 shares of UNIMAG stock. The
Company has not issued 55,731 shares related to this agreement;
however, the requirement to issue those shares was terminated with
the sale of certain operating assets and liabilities of Yankee (see
note 13).
47
<PAGE> 50
(b) The Company had notes receivable from related parties of
approximately $2,700,000 at September 27, 1997 and $3,100,000 at
September 28, 1996. At September 27, 1997 and September 26, 1996,
respectively, approximately $2,200,000 and $3,000,000 of this amount
was due from Hall of Cards and Books, Inc., which is owned by the
former shareholders of Michiana, and which operates retail stores
that are supplied by the Michiana division of UNIMAG. The interest
rate on the note is 9.25% and the repayment of the note is secured
by a pledge of the stock of Hall of Cards and Books, Inc. and the
UNIMAG stock received by the Michiana shareholders as part of
UNIMAG's acquisition of Michiana. The remaining notes receivable are
due from former shareowners of Michiana and Scherer Affiliates.
Amounts due in 1998 pursuant to these agreements are approximately
$431,000, with the remaining amounts due in equal installments over
the subsequent four years.
(12) CONTINGENCIES AND COMMITMENTS
(a) Common Stock Subject to Put Agreements
In conjunction with the Company's acquisition of a subsidiary,
476,543 shares of common stock are subject to Put Agreements. In the
event the put options are exercised as they become exercisable, the
related payments would be $335,832, $3,599,534, $335,831, $335,831
and $335,839 in 1998, 1999, 2000, 2001 and 2002, respectively and
$2,825,541 in total over the next succeeding 11 years. As of
September 27, 1997 the Company was delinquent in redeeming 5,597
shares for $83,958; however, these shares were redeemed in February
1998.
(b) Union Claims
A demand was made on the Company by the Newspaper and Mail
Delivers'-Publishers' Pension Fund (Fund) for withdrawal liability
payments arising from the January 23, 1991 cessation of covered
operations under that plan by Imperial News Company (an inactive
subsidiary).
In addition, on February 3, 1992, the Newspaper and Mail Delivers'
Union of New York and Vicinity (NMDU) and certain trustees of the
Fund filed a complaint against the Company and its Connecticut
subsidiary, MDI, MDI L.P. and two related parties alleging damages,
in an unspecified amount, had been suffered by approximately 100
NMDU members formerly employed by Imperial. A final settlement was
reached pursuant to which the Company will pay a total of $643,000
in three equal annual installments, and the NMDU and the Fund have
released all claims against the Company and its affiliates. MDI and
its affiliates will also pay $643,000 as part of this global
settlement.
48
<PAGE> 51
(c) San and Wagner Suit
The Company was named as a defendant in an action for breach of
contract and promissory estoppel, inter alia, was filed in the
Common Pleas Court of Franklin County, Ohio. The parties settled
this case and resolved all claims and cross-claims in April 1998 for
approximately $345,000, net of value of stock returned to UNIMAG.
All proceedings among all the parties, including any suit filed in
the United States District Court, District of Connecticut, by the
Company's subsidiary, Team Logos Sportstuff, Inc. against San and
Wagner for breach of fiduciary duty, have been dismissed as part of
this settlement.
(d) Taubman Suit
The Company and its inactive subsidiary, Team Logos Sportstuff, Inc
(TLSI) were named as defendants, along with several unrelated
parties, in a suit by the Taubman Company in the United States
District Court, Eastern District of Michigan, Southern Division. In
January 1998, the parties settled for $1.5 million. All pending
appeals have now been dismissed.
(e) Other Legal Matters
The Company has been named as a defendant in various other
litigation matters. Management intends to vigorously defend these
few outstanding claims. The Company believes it has adequate accrued
loss contingencies for all legal matters, and any current or
threatened litigation matters will not have a material adverse
impact on the Company's financial positions or results of
operations.
(13) SUBSEQUENT EVENTS
(a) Sale of Certain Operating Assets and Liabilities of Yankee News
Company
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 ($2.7 million), notes ($2.5 million) and UNIMAG stock held by
the buyer ($3.1 million). The purchase price provides for
adjustments based 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 year ended September 27, 1997 is approximately
$31 million.
(b) Financing Arrangement
On February 6, 1998, the Company entered into a Credit Agreement
(the 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
49
<PAGE> 52
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 Commitment 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 of the financial and
nonfinancial covenants beginning in the fiscal quarter ending March
1998. The Company is in compliance or has obtained the necessary
waivers for any non-compliance.
(c) Acquisition of SKS Enterprises, Limited
In January 1998, the Company acquired certain assets and liabilities
of SKS Enterprises, Limited (SKS). The consideration for the
acquisition was cash of $4 million and UNIMAG stock valued at $3
million.
50
<PAGE> 53
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
51
<PAGE> 54
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following information is set forth with respect to each person
serving as a director and with respect to the executive officers of the Company:
o Directors:
Name Age Positions Held with the Company
---- --- -------------------------------
Ronald E. Scherer 48 Chairman of the Board of
Directors; President and
Chief Executive Officer
David B. Thompson 58 Vice-Chairman, Treasurer
Robert H. Monnaville 53 President
Eugene J. Alfonsi 61 Vice-President
George R. Klein 56 Division President
Thaddeus A. Majerek 48 Vice-President, Customer
Corporate Relations
Richard Stoll, Sr. 65 None
Nancy Stoll Lyman 38 None
R.L. Richards 49 None
William D. Parker 61 None
o Executive Officer Not Named Above.
Thomas L. Gerlacher 55 Chief Financial Officer
RONALD E. SCHERER, age 48, has been a member of the Board of Directors
since 1989. Mr. Scherer was appointed President and Chief Executive Officer of
the Company in August 1989, became Chairman of the Board of Directors in
February 1992, and has acted in those capacities since his respective
appointments. Mr. Scherer has also served as Chairman of the Board of Directors
of Scherer Companies since 1982 and was appointed Senior Chairman of such Board
of Directors in 1993. Other companies under Mr. Scherer's ownership, control or
management have engaged in such businesses as real estate, manufacturing,
pharmaceutical distribution, and data processing. Mr. Scherer is an executive
officer and shareholder of the National Wholesale Drug Co., which filed a
voluntary petition under Chapter 11 in the United States Bankruptcy Court for
the Eastern District of Michigan in February 1993.
DAVID B. THOMPSON, age 58, has been a member of the Board of Directors
since 1988. He also was appointed Treasurer and Chief Financial Officer of the
Company in August 1989, but ceased serving as Chief Financial Officer in
December 1993. Additionally, Mr. Thompson, a Certified Public Accountant, was
affiliated with Scherer Companies since 1973 when he was elected as a Director
and appointed Treasurer and Chief Financial Officer. In 1993, Mr. Thompson
became Chairman of the Board of Directors and Chief Executive Officer of
52
<PAGE> 55
Scherer Companies. Currently, Mr. Thompson is an officer and/or a director of a
number of companies owned, controlled or managed by Mr. Scherer. Mr. Thompson
graduated in 1963 with a BS degree in Accounting from the University of Detroit.
Mr. Thompson is an executive officer of the National Wholesale Drug Co., which
filed a voluntary petition under Chapter 11 in the United States Bankruptcy
Court for the Eastern District of Michigan in February 1993.
ROBERT H. MONNAVILLE, JR., age 53, has been a member of the Board of
Directors of the Company since March of 1995. Mr. Monnaville has served as
President of the Company since September of 1997. Mr. Monnaville was President
of Service News Company, d/b/a Yankee News Company, one of the Company's
subsidiaries, from March of 1995. From May, 1993 to March, 1995, Mr. Monnaville
served as the General Manager of Yankee News Company. From September, 1992 to
May, 1993, Mr. Monnaville served as the General Manager of National Wholesale
Drug Co., a wholesale pharmaceutical distributor, and, again, from 1990 to July,
1992, Mr. Monnaville served as General Manager of Yankee News Company.
Altogether, Mr. Monnaville has served in several executive capacities with the
Company since 1982. Mr. Monnaville is a graduate of John Carroll University and
has a law degree from Cleveland State University. Prior to joining Yankee News
Company, Mr. Monnaville engaged in the practice of law as a labor attorney for
United Technologies in Connecticut. Additionally, Mr. Monnaville serves on the
Board of Directors of Blue Cross/Blue Shield of Connecticut.
EUGENE J. ALFONSI, age 61, has been a member of the Board of Directors
since 1992. Mr. Alfonsi currently is a Vice-President of the Company. Mr.
Alfonsi was the President of the Periodical Division of Scherer Companies from
1986 to September 1993. In September 1993, Mr. Alfonsi was appointed as the
President and Chief Operating Officer of Scherer. Prior to joining Scherer
Companies in 1986, he owned and managed several wholesale periodical
distribution companies, a business in which he has been employed for most of his
adult life. Mr. Alfonsi graduated in 1963 with a B. A. degree in Economics and
Finance from Milliken University in Illinois.
GEORGE R. KLEIN, age 56, has been a member of the Board of Directors
since September of 1997. Mr. Klein has been President of the Cleveland, Ohio
Division of the Company since September of 1996. Mr. Klein was formerly Vice
Chairman of The George R. Klein News Co., Central News Co. and Newspaper Sales,
Inc. In addition, for over ten years, Mr. Klein has served as President and
Chairman of the Executive Committee for East Texas Distributing Co., a magazine
wholesaler located in Houston, Texas. Mr. Klein also has ownership interests in
other magazine wholesale companies and in other companies including companies
that provide real estate and management services to Klein. Mr. Klein is a
graduate of Colorado College in 1964 with a Bachelor of Science degree and has
an MBA from the University of Denver in 1965.
THADDEUS A. MAJEREK, age 48, has been a member of the Board of
Directors since 1992. Since 1997, Mr. Majerek has been Vice-President of
Customer Corporate Relations of the Company. From 1988 to February of 1998, Mr.
Majerek served as the President and Chief Executive Officer of Michiana News
Service, Inc. in Niles, Michigan. Mr. Majerek graduated in 1974 with a BS degree
in Business and Physical Education from Eastern Michigan University, and in 1989
with an MBA degree from the University of Notre Dame. Mr. Majerek has been
active in the magazine distribution business since 1971. He has managed magazine
distribution companies in Utah, Indiana, and Michigan.
RICHARD H. STOLL, SR., age 65, has been a member of the Board of
Directors since September of 1997. Mr. Stoll Sr. was the Chairman of the Board
of Directors and Chief Executive Officer of The Stoll Companies and was employed
by The Stoll Companies from July of 1954 to July of 1997. Mr. Stoll Sr. is a
graduate of Colgate University in 1954 with a degree in history. Mr. Stoll is
the father of Nancy Stoll Lyman.
NANCY STOLL LYMAN, age 38, has been a member of the Board of Directors
since September of 1997. Ms. Lyman was a Director of The Stoll Companies. Ms.
Lyman is the Founder and Managing Consultant for the Executive Development
Group, a management and consulting firm formed in 1991. Previously Ms. Lyman was
the Manager of Management Training and Development at Merrill Lynch and an
Associate with Morgan Stanley in the Fixed Income Division. Ms. Lyman is a
Certified Public Accountant who graduated from Saint Mary's College
53
<PAGE> 56
in Notre Dame, Indiana, with a Bachelor of Business Administration degree, and
from Boston College with an MBA. Mrs. Lyman is the daughter of Richard H. Stoll,
Sr.
R.L. RICHARDS, age 49, has been a member of the Board of Directors
since September of 1997. Since 1978, Mr. Richards has been a managing director
of RDT Limited, or its affiliates, a private investment company owned by R.
David Thomas, a principal shareholder of the Company. Mr. Richards is also a
member of KDR Limited. Mr. Richards has been employed by affiliates of Mr.
Thomas since 1978. Mr. Richards is a graduate of Wittenberg University with a
degree in economics and political science, and has a law degree from The Ohio
State University. Mr. Richards serves as a director of Acceptance Insurance
Companies (NYSE), and of several non-public companies including Fifth Third Bank
of Columbus, Inc. and Stanley Steemer International, Inc. Previously, Mr.
Richards served as a director for Clinton Gas Systems, Inc. (OTC) and Orange Co.
(NYSE).
WILLIAM D. PARKER, age 61, has been a member of the Board of Directors
since September, 1997. Mr. Parker is retired from The Kroger Company. From
September of 1993 through January of 1997, Mr. Parker served as President of the
Kroger Columbus Marketing Area. Prior to being named president of the Columbus
area, Mr. Parker served five years as president of the Kroger Dallas and Memphis
marketing areas. Mr. Parker served in numerous other merchandising and general
operations positions during his forty-year tenure with Kroger, beginning in
1956. Mr. Parker has also served on over thirty public and private boards during
his years as president of the Columbus and Dallas areas, with a strong emphasis
on community service. Additionally, Mr. Parker has served as chairman for
several charitable events in recent years.
o Other Executive Officer:
THOMAS L. GERLACHER, age 55, has served as Chief Financial Officer of
the Company since December 1993. Since July 1992, Mr. Gerlacher has also served
in other financial executive capacities at the Company's wholly owned
subsidiaries. From December 1991 to July 1992, Mr. Gerlacher was employed as
Chief Financial Officer of Team Logos Corporation. From 1987 through 1992, Mr.
Gerlacher, who is a Certified Public Accountant, was President of CFO Resource
Network Company. From 1976 through 1987, Mr. Gerlacher was employed as Vice
President of Budgeting and Planning of Chemlawn, Inc. Mr. Gerlacher graduated in
1964 with a BS degree in Accounting from the University of Notre Dame and in
1967 with an MBA degree from The Ohio State University.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3, 4 and 5, and amendments thereto,
furnished to the Company, except as set forth below, the Company is not aware of
any director, officer or beneficial owner of more than 10% of the Company's
Common Stock who failed to file, on a timely basis, reports required by Section
16(a) of the Exchange Act during the fiscal year ended September 28, 1997. The
following persons, who were elected to the Board of Directors on September 3,
1997, were required to file a Form 3 within ten days to report their initial
share ownership as a director, but failed to do so: George R. Klein, Nancy Stoll
Lyman, William D. Parker, Richard H. Stoll, Sr.
Remainder of Page Intentionally Left Blank.
54
<PAGE> 57
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Company's Chief
Executive Officer and the Company's four most highly compensated executive
officers, other than the Chief Executive Officer, who were serving as executive
officers at the end of the most recently completed fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------------
Annual Compensation Awards Payouts
----------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Annual Restricted Under- All Other
Compen- Stock lying LTIP Compen-
Name and Fiscal Salary Bonus sation Award(s) Options/ Payouts sation
Position(s) Year ($) ($) ($) ($) SAR's(#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronald E. Scherer, 1997 $491,000 None $235,000 None None None None
Chairman of the 1996 $50,000 None None None None None None
Board of 1995 None None None None None None None
Directors and
Chief Executive
Officer(1)
David B. Thompson, 1997 $224,000 None $75,000 None None None None
Vice Chairman and 1996 $37,000 None None None None None None
Treasurer(1) 1995 None None None None None None None
Robert H. 1997 $164,000 None None None None None
Monnaville, 1996 $130,000 None None None None None None
President (2) 1995 $52,000 None None None None None $58,800
Eugene J. Alfonsi, 1997 $180,000 None None None None None None
Senior Vice 1996 $32,500 None None None None None None
President(1) 1995 None None None None None None None
George R. Klein, 1997 None None None None None None $527,000
Division 1996 None None None None None None None
President(3) 1995 None None None None None None None
</TABLE>
(1) Mr. Scherer, Mr. Thompson and Mr. Alfonsi, although executive officers of
the Company, were not employees of the Company prior to July of 1996. Mr.
Scherer, Mr. Thompson and Mr. Alfonsi were employed by Scherer Companies,
and their services were provided to the Company pursuant to a management
agreement between Scherer Companies and the Company. The employment
contracts for Mr. Scherer, Mr. Thompson and Mr. Alfonsi became effective
in September of 1997 following the Annual Meeting of Shareholders.
(2) During 1994 and part of 1995, Mr. Monnaville provided services to the
Company as an independent contractor, for which he received consulting
fees. He became an employee of the Company in April of 1995.
55
<PAGE> 58
(3) In accordance with the terms of the Klein Exchange Agreement, the Company
agreed that, following the acquisition of Klein, it would enter into
employment agreements with certain employees of Klein. In addition,
George R. Klein, elected as director of the Company, is president of
Klein Management Company. Effective September of 1997, the Company
entered into a management agreement with Mr. Klein for a three-year term,
pursuant to which Mr. Klein and Klein Management Company will provide
services to the Company. Klein Management Company is to receive an annual
fee of $159,000, plus the reimbursement of employee benefits. During
fiscal 1997, Klein Management Company received a management fee of
$527,000.
EMPLOYMENT AGREEMENTS
Effective September of 1997, the Company has entered into three year
employment agreements with Ronald E. Scherer, David B. Thompson, and Eugene J.
Alfonsi, pursuant to which they are to receive annual salaries in the following
respective amounts: $491,000, $224,000 and $195,000.
DEFERRED COMPENSATION AGREEMENT
As part of the acquisition terms with Stoll, the Company has assumed a
deferred compensation agreement with Richard Stoll, Sr., who has been elected to
the Company's board of directors. Under the agreement, Stoll will pay Mr. Stoll
the sum of $250,000 per year for a period of five years and $100,000 per year
for a period of seven years thereafter.
COMPENSATION OF DIRECTORS
The Company has a policy which provides that each outside director of
the Company will receive the sum of $3,000 for each meeting of the Board of
Directors attended by such director and $2,000 for each Committee Meeting
attended by such director; the Company also plans to provide outside directors
stock options in connection with such meetings, but has not issued any stock
options to date. The Company does pay reasonable out-of-pocket expenses incurred
in the attendance of meetings of the Board of Directors for all directors.
Remainder of Page Intentionally Left Blank.
56
<PAGE> 59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
The following tables set forth, to the knowledge of management, the
number of shares of Common Stock of the Company and the percentage of
outstanding shares of Common Stock of the Company represented thereby, owned by
each person or entity who is the beneficial owner of more than 5% of the shares
of Common Stock of the Company outstanding as of March 28, 1998 and by each
executive officer and director of the Company. The tables reflect the
one-for-ten reverse stock split approved by the shareholders at the 1997 Annual
Meeting of Shareholders and which took effect on October 7, 1997.
TABLE FOR FIVE PERCENT (5%) SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Shares of Percentage of
Name and Address Common Stock Common Stock
of Beneficial Owner Beneficially Owned (1) Outstanding (2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Ronald E. Scherer 1,814,501(3)(4)(5) 24.48%
Chairman of the Board
of Directors, President
and Chief Executive Officer
5131 Post Road
Dublin, OH 43017
Linda (Hayner) Scherer Talbott 1,279,451(5) 17.26%
5131 Post Road
Dublin, OH 43017
Roger L. Scherer Trust 1,245,450(5) 16.81%
F/B/O Ronald E. Scherer,
Dated June 14, 1979
5131 Post Road
Dublin, OH 43017
Roger L. Scherer Trust 1,245,450(5) 16.81%
F/B/O Linda Hayner (Scherer) Talbott,
Dated June 14, 1979
5131 Post Road
Dublin, OH 43017
R. David Thomas 520,990(2) 7.03%
One Bay Colony
Ft. Lauderdale, FL 33308
Richard H. Stoll, Sr. 421,750(4)(7)(8) 5.69%
Director
6477 Mill Ridge Road
Maumee, Oh. 43537
George R. Klein 1,169,502(4) 15.78%
Director
1771 East 30th Street
Cleveland, Ohio 44114
Total 3,926,743 52.98%
</TABLE>
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<PAGE> 60
Table for Officers and Directors
<TABLE>
<CAPTION>
Number of Shares of Percentage of
Name and Address Common Stock Common Stock
of Beneficial Owner Beneficially Owned (1) Outstanding (2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Ronald E. Scherer 1,814,501(3)(4)(5) 24.48%
Chairman of the Board
of Directors, President
and Chief Executive Officer
5131 Post Road
Dublin, OH 43017
David B. Thompson 2,264(3) .03%
Director, Treasurer
5131 Post Road
Dublin, Ohio 43017
Eugene J. Alfonsi 5,000 .07%
Director
5131 Post Road
Dublin, Ohio 43017
Thaddeus A. Majerek 279,212(6) 3.77%
Director
2232 S. 11th Street
Niles, MI 49120
Robert H. Monnaville, Jr. 39,925 .54%
Director
62 Harper Avenue
Waterbury, CT 06705
Thomas L. Gerlacher 1,900 .03%
Chief Financial Officer
5131 Post Road
Dublin, Ohio 43017
Nancy Stoll Lyman 153,350(4)(5)(7)(8) 2.07%
Director
203 N. Wabash, Suite 1504
Chicago, IL 60601
William D. Parker 0 0
Director
5131 Post Road
Dublin, Ohio 43017
</TABLE>
58
<PAGE> 61
<TABLE>
<CAPTION>
Number of Shares of Percentage of
Name and Address Common Stock Common Stock
of Beneficial Owner Beneficially Owned (1) Outstanding (2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Richard H. Stoll, Sr. 421,750(4)(5)(7)(8) 5.69%
Director
6477 Mill Ridge Road
Maumee, Ohio 43537
R.L. Richards 188,907(2) 2.55%
Director
5131 Post Road
Dublin, Ohio 43017
George R. Klein 1,169,502(4) 15.78%
Director
1771 E. 30th Street
Cleveland, Ohio 44114
All Directors and Executive Officers as 4,076,311 55.00%
a Group
(6 persons before the Annual Meeting,
10 persons after the Annual Meeting)
</TABLE>
(1) Unless otherwise specified, the beneficial owners of the shares of
Common Stock have sole voting and investment power over such shares.
(2) The total number of shares of Common Stock of the Company outstanding
on the date hereof is 7,411,314 shares. Except as noted below, none of
the executive officers, directors or holders of 5% or more of the
Company's issued and outstanding Common Stock hold any options or
warrants to acquire Common Stock. R. David Thomas and R.L. Richards own
an interest in KDR, which received warrants to purchase 187,657 shares
of the Common Stock of the Company at $12.00 per share. Accordingly,
these warrants are reflected as beneficially owned by Mr. Thomas and
Mr. Richards.
(3) The table does not include 58,900 shares of Common Stock of the Company
held of record by RAP Diversified, Inc. ("RAP"), the sole shareholder
of which is David B. Thompson, Trustee for a trust of which the
children of Ronald E. Scherer are the beneficiaries. Mr. Scherer and
Mr. Thompson disclaim any beneficial ownership of such shares.
The table includes 144,476 (1.95%) shares of Common Stock of the
Company received by Northern in the Exchange Transactions and 52,488
(0.71%) shares of Common Stock of the Company received by Wholesalers
in the Exchange Transactions. Mr. Scherer has voting power over the
shares of Common Stock of the Company held by these companies by virtue
of his position as Chief Executive Officer of these Companies.
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<PAGE> 62
(4) All of such shares of Common Stock of the Company are subject to a
shareholders' voting agreement dated as of October 9, 1996, among
Ronald E. Scherer, certain of the Scherer Affiliates, the Stoll
Shareholders, the Michiana Shareholders and the Klein Shareholder,
pursuant to which they have agreed to act together in the election of
directors of the Company until such time as all principal and interest
on the Debentures have been paid in full. The parties to the agreement
have agreed to vote for the election to the Board of Directors of two
Scherer representatives, two Stoll representatives, one Michiana
representative and two Klein representatives.
(5) 49.5% of the stock of OPD is owned by a trust established for the
benefit of Ronald E. Scherer and his family, and 49.5% of the stock of
OPD is owned by a trust established for the benefit of Linda Scherer
Talbott, the sister of Ronald E. Scherer, and her family. The table
reflects that both Ronald E. Scherer and Linda (Hayner) Scherer Talbott
beneficially own these shares because each of them shares voting power
over the shares held in such trust.
(6) Includes 279,212 (3.77%) shares of Common Stock of the Company owned by
a trust over which Thaddeus A. Majerek shares voting power as one of
the co-trustees. Does not include 290,609 (3.92%) shares of Common
Stock of the Company owned by another family trust, over which Mr.
Majerek disclaims any beneficial ownership.
(7) Does not include 1,955,418 (26.38%) shares of Common Stock of the
Company held by other members of the Stoll family, over which Nancy
Stoll Lyman disclaims any beneficial ownership.
(8) Does not include 1,687,018 (22.76%) shares of Common Stock of the
Company held by other members of the Stoll family, over which Richard
H. Stoll, Sr. disclaims any beneficial ownership.
Remainder of Page Intentionally Left Blank.
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<PAGE> 63
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 11 of the United Magazine Company consolidated financial
statements as of September 27, 1997, included in Item 8 of this report.
CONFLICTS OF INTEREST AND RELATED PARTY TRANSACTIONS
There are various conflicts of interest and related party transactions
in connection with the acquisitions and from other contractual arrangements.
CONSULTING AGREEMENT WITH FORMER DIRECTOR
On June 27, 1994, the Company and Yankee entered into a consulting
agreement with Charles Pastorino, a former officer of Yankee and former director
of the Company. The consulting agreement is for a term of eight years expiring
in 2002. During the first two years, the consultant was paid $4,000 per month.
During years three through five, the consultant is to be paid $5,000 per month.
During years six through eight, the consultant is to be paid $8,500 per year.
The aggregate amount paid during 1997 was $60,000.
YANKEE AGREEMENTS WITH MDI, L.P.
On May 24, 1993, the Company's wholly owned subsidiary, Yankee,
re-acquired the net operating assets of Yankee from MDI, L.P., a limited
partnership in which Yankee and Magazine Distributors, Inc. ("MDI") were
partners. MDI held more than 5% of the outstanding shares of Common Stock of the
Company. As part of this acquisition, the Company, Yankee, OPD and Northern
entered into non-competition agreements with MDI and with Robert B. Cohen, James
S. Cohen, and Michael Cohen, the majority shareholders of MDI, pursuant to which
MDI and the Cohens agreed not to compete for a period of ten years within a
specified Yankee distribution area. During the first five years of the
agreements, MDI and the Cohens were to receive compensation equal to an
aggregate of 2% of Yankee's agency net sales, payable 1% in cash and 1% in
Common Stock of the Company valued at $1.00 per share for this purpose. During
the last five years of the agreements, MDI and the Cohens were to receive
compensation equal to 1% of Yankee's agency net sales, payable in cash. The
compensation was $767,000 in 1997 and $538,000 in 1996 (one-half paid in cash
and one-half paid in shares).
As part of the sale to MDI and Hudson News of the operating assets of
Yankee, all of the prior non-competition and consulting agreements were
terminated, effective January 12, 1998. See Note 13 of the United Magazine
Company Consolidated Financial Statements as of September 27, 1997 included in
Item 8 of this report.
EMPLOYMENT AGREEMENTS
In connection with the acquisition transactions, effective September of
1997, the Company entered into employment agreements with three officers and
directors, Ronald E. Scherer, David B. Thompson and Eugene J. Alfonsi, for a
term of three years each. Each of these individuals previously had served the
Company as an officer and director without compensation for the four years
preceding the employment contracts. See Item 10, "Executive Compensation."
The Stock Exchange Agreement with Scherer Companies required, as a
condition to closing, that the Company enter into employment agreements with
four individuals, one of who is Ronald E. Scherer, Jr., the son of Ronald E.
Scherer. The employment agreement is for a term of three years, is effective
September of 1997 and provides for an annual salary of $60,000.
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<PAGE> 64
The Stock Exchange Agreement with Stoll required, as a condition to
closing, that the Company enter into employment agreements with three
individuals, one of whom was Richard Stoll, Jr., who is a significant
shareholder of the Company and who is the son of Richard Stoll, Sr. and the
brother of Nancy Stoll Lyman, both of whom have been elected to the board of
directors. Mr. Stoll's employment agreement is for a term of three years, is
effective September of 1997 and provides for an annual salary of $160,000, along
with potential bonuses upon the achievement of certain objectives.
The Stock Exchange Agreement with Michiana required, as a condition to
closing, that the Company enter into employment agreements with three
individuals. In accordance with the terms of the Michiana Exchange Agreement,
the Company agreed that, following the acquisition of Michiana, it would enter
into employment agreements, effective September of 1997, with certain employees
of Michiana, one of whom is Thaddeus A. Majerek, a director of the Company,
another of whom is David W. Majerek, the brother of Thaddeus A. Majerek, and
another of whom is Michael Gilbert, the brother-in-law of Thaddeus A. Majerek.
The employment agreements are for three-year terms; Thaddeus A. Majerek is to
receive an annual salary of $160,000, David W. Majerek is to receive an annual
salary of $60,000, and Michael Gilbert is to receive an annual salary of
$100,000.
Klein is managed by Klein Management Company, which is an independent
company owned by director George R. Klein, and which was not acquired by the
Company. For the fiscal year ended December 31, 1995, Klein paid $990,000 for
management services. For the 1996 period through August 23, 1996, Klein paid
approximately $650,000 for management services. For the 1997 period through
September of 1997, Klein paid approximately $527,000 for management services.
Effective September of 1997, the Company entered into a new management agreement
with the Klein Management Company pursuant to which Klein Management Company
will provide the services of George R. Klein to the Company for a term of three
years in exchange for an annual management fee of $159,000, plus the
reimbursement of employee benefits.
COMMON OWNERSHIP AND MANAGEMENT
The acquisitions of the Scherer Affiliates involved transactions
between related parties, because substantially the same management operated the
Scherer Affiliates and the Company, and because Ronald E. Scherer, the principal
shareholder of the Company, was also, either directly or through family trusts,
the principal shareholder of each of the Scherer Affiliates. The Company took a
number of steps to help assure itself that the acquisitions involving the
Scherer Affiliates were on an arm's length basis and no more favorable to the
Scherer Affiliates than were the transactions with independent unrelated
parties: (1) the acquisition agreements were on substantially the same terms as
the acquisition agreements with Stoll, Michiana, and Klein, independent parties;
(2) the Company used a standard in establishing the purchase price which was
used in connection with other acquisitions in the periodical industry of which
the Company is aware and which was also used in connection with the Stoll,
Michiana and Klein acquisitions (except that Wholesaler's and Scherer Companies'
price was based upon fair market value); (3) the acquisition agreements provided
for an independent audit of the financial statements of the acquired companies
by the Company's independent auditors and adjustments of the purchase prices
based upon the results of the audits; (4) the acquisitions involving the Scherer
Affiliates were reviewed and approved by an independent committee appointed by
the Board of Directors, consisting of Thaddeus A. Majerek, a board member not
then employed by the Company; and (5) the Company received a fairness opinion
from the Corporate Finance Department of the First National Bank of Boston that
stated, from a financial point of view, the consideration to be paid by the
Company for Michiana, Stoll, Klein, OPD, Northern, MacGregor and Scherer
Companies, was fair to the shareholders of the Company. Additionally, Mr.
Scherer abstained from all voting of the Board of Directors with respect to the
acquisitions of the Scherer Affiliates.
BENEFICIAL OWNERSHIP OF MICHIANA STOCK
Thaddeus A. Majerek, a director of the Company, is an officer, director
and a beneficiary of a trust, which owned stock of Michiana. Accordingly, he was
not disinterested with respect to the Michiana acquisition. Although Mr. Majerek
engaged in negotiations with the Company with respect to its acquisition of
Michiana, he did not participate in the deliberations of the Board of Directors
of the Company with respect to the acquisition and
62
<PAGE> 65
abstained in all voting by the Board of Directors of the Company related
thereto. Mr. Majerek was appointed to act as the member of an independent
committee of the Board of Directors of the Company to consider the exchange
agreements with the Scherer Affiliates. He was selected to serve in this
capacity because, at the time, he was an outside director not employed by the
Company or any of its subsidiaries.
ESCROW CLOSING
On February 9, 1998, when the closing escrow terminated, the Company
completed the acquisition of the stock of Michiana. See Item 1. In such
acquisition, Thaddeus A. Majerek, a director of the Company, received 54,133
shares of Common Stock, $332,500 principal amount of 8% Senior Debentures of the
Company due 2002, and $221,754 principal amount of 10% Subordinated Debentures
of the Company due 2004 in exchange for his shares of common stock of Michiana
exchanged in such transaction.
On February 9, 1998, when the closing escrow terminated, the Company
completed the acquisition of the stock of Stoll. See Item 1. In such
acquisition, Nancy Stoll Lyman, a director of the Company, received 153,350
shares of Common Stock, $1,226,696 principal amount of 8% Senior Debentures of
the Company due 2002, and $662,135 principal amount of 10% Subordinated
Debentures of the Company due 2004 in exchange for her shares of stock of Stoll
exchanged in such transaction. Additionally in such acquisition, Richard H.
Stoll, Sr., a director and more than 5% shareholder of the Company, received
421,750 shares of Common Stock, $3,360,000 principal amount of 8% Senior
Debentures of the Company due 2002, and $1,821,053 principal amount of 10%
Subordinated Debentures of the Company due 2004 in exchange for his shares of
common stock of Stoll exchanged in such transaction.
On February 9, 1998, when the closing escrow terminated, the Company
completed the merger of OPD into the Company, the acquisition of certain assets
of Northern, the acquisition of the stock of Scherer Companies and the
acquisition of certain assets of Wholesalers. See Item 1. In such transactions,
Ronald E. Scherer, Chairman of the Board and Chief Executive Officer of the
Company and more than 5% shareholder of the Company, received 23,451 shares of
Common Stock, $30,994 principal amount of 8% Senior Debentures of the Company
due 2002, and $277,886 principal amount of 10% Subordinated Debentures of the
Company due 2004 in exchange for his shares of common stock of Scherer
Companies. Mr. Scherer also indirectly controls, through his ownership interest
in Northern and Wholesalers, 196,964 shares of Common Stock, $1,730,183
principal amount of 8% Senior Debentures of the Company due 2002, and $779,085
principal amount of 10% Subordinated Debentures of the Company due 2004, which
Northern and Wholesalers received, in the aggregate, in exchange for assets.
Additionally, two Scherer family trusts beneficially owned by Ronald E. Scherer
and Linda (Hayner) Scherer Talbott, who are also beneficiaries, received
1,048,486 shares of Common Stock, $7,330,758 principal amount of 8% Senior
Debentures of the Company due 2002, and $75,272 principal amount of 10%
Subordinated Debentures of the Company due 2004 in the merger of OPD into the
Company.
On February 9, 1998, when the closing escrow terminated, the Company
completed the acquisition of the stock of the Klein Companies. See Item 1. In
such acquisitions, George R. Klein, a director and more than 5% shareholder of
the Company received 1,169,502 shares of Common Stock, $10,180,001 principal
amount of 8% Senior Debentures of the Company due 2002, and $5,498,282 principal
amount of the 10% Subordinated Debentures of the Company due 2004 in exchange
for his shares of common stock of the Klein Companies exchanged in such
transaction.
LEASE OF NORTHERN OFFICE AND WAREHOUSE FACILITIES
Upon completion of the acquisition from Northern of the assets related
to its wholesale periodical distribution business, the Company entered into a
real estate lease with Northern, pursuant to which the Company leased, for a
three-year term, the approximately 17,000 square foot warehouse and distribution
facility located in Petoskey, Michigan. The lease is a triple net lease, with
the Company paying the cost of all taxes, insurance,
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<PAGE> 66
utilities and other expenses, and the annual rental amount is $3.00 per square
foot. Because the stock of Northern is owned by a trust of which Ronald E.
Scherer is a primary beneficiary, he could benefit from the lease arrangement.
Management believes that the terms of this lease are no less favorable to it
than it could obtain from an independent party in an arms-length transaction.
LEASE OF CORPORATE OFFICE FACILITIES
Scherer Companies leased approximately 17,400 square feet of office
space for its principal executive offices at 5131 Post Road, Dublin, Ohio, from
NRS Equities, Inc., an entity controlled by Ronald E. Scherer. The lease is for
a term of 10 years, commencing November 1, 1995. The current rental rate is
$14.50 per square foot. Pursuant to its management agreement with the Company,
Scherer Companies subleased office and conference facilities in this building
to the Company. The Company has assumed this lease.
AMOUNT OWED BY OPD TO PRINCIPAL SHAREHOLDER
OPD owed $5,000,000, plus accrued interest, to KDR Limited, an Ohio
limited liability company ("KDR"), whose owners include R. David Thomas, a
principal shareholder of the Company, and R.L. Richards, a director. This debt
was evidenced by a promissory note dated July 31, 1992, from OPD to RDT Corp.,
and subsequently assigned to KDR, in the principal amount of $5,000,000 with
interest at the rate of 11.75% per annum (the "Note"). The Note was due on
demand. The Note was secured by a pledge from OPD of 5,000,000 shares of Common
Stock of the Company owned by OPD.
KDR exchanged the Note for a new note from UNIMAG. The new note became
a $4,500,000 Subordinated Debenture. In consideration for KDR's agreement to the
new note, the Company paid KDR accrued interest, made a $500,000 partial payment
of the principal of the note, and issued to KDR warrants to purchase an
additional 187,657 shares of Common Stock of the Company at $12.00 per share.
Additionally, the Company nominated R.L. Richards for election to
the Company's board of directors. Mr. Thomas purchased from the Company an
additional $500,000 of Common Stock of the Company at a purchase price of $15.00
per share.
DEFERRED COMPENSATION AGREEMENT
Stoll had entered into a deferred compensation agreement with Richard
Stoll, Sr., who was elected to the Company's board of directors. Under the
agreement, Stoll will pay Mr. Stoll the sum of $250,000 per year for a period
of five years and $100,000 per year for a period of seven years thereafter.
The Company has assumed this agreement.
STOLL LEASE AGREEMENTS
Stoll leased a 78,000 square foot facility located in Indianapolis,
Indiana from Richard Stoll, Sr., a director of the Company, for a monthly rental
of $25,000. This lease was on a month-to-month tenancy. As part of the Stoll
Exchange Agreement, the Company agreed to lease this facility from Richard
Stoll, Sr. for a period of 36 months for a monthly rental of $12,000.
A trust, which has been established for the benefit of the Stoll
family, owns several parcels of real property that are leased to Stoll. The
terms of the only significant lease are as follows: The Jackson, Michigan
facility contains 84,000 square feet and is leased for $300,000 per year. The
lease has approximately five years remaining.
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<PAGE> 67
TRANSACTIONS WITH HALL OF CARDS AND BOOKS, INC.
Some of the principal shareholders of Michiana, including Thaddeus A.
Majerek, a director of the Company, were also shareholders of Hall of Cards and
Books, Inc. ("HOCAB"), which operates approximately 27 retail stores, including
Hallmark stores, paperback stores and newsstands. HOCAB is a principal customer
of Michiana for books and magazines. In connection with the closing of the
Michiana transaction, The Company and HOCAB entered into a five year exclusive
supply agreement pursuant to which The Company is to be the exclusive supplier
of magazines, books and other related periodical items to HOCAB, at special
prices negotiated in the agreement. These discounts are below the prices charged
other retailers, and HOCAB is expected to benefit by an aggregate of
approximately $165,000 per year from the extra discount received by it. HOCAB is
also indebted to the Company in the amount of $2,012,618 at September 27, 1997.
The Note bears interest at a rate of 9%. The principal is to be repaid as
UNIMAG makes principal payment on the Debentures owned by the Majerek family
members. Due to the current bank loan agreement terms it is not anticipated that
principal payments on these debentures will begin until the year 2000. The note
is secured by a pledge of all of the stock of HOCAB and by a pledge of
2,392,926 shares of the Common Stock of the Company received in the Michiana
Transaction. In addition, Michiana was guaranteeing payment of all indebtedness
of a line of credit to HOCAB by 1st Source Bank. 1st Source Bank agreed to
terminate this guaranty upon the consummation of the Company's acquisition of
Michiana and the repayment of loan amounts totaling approximately $1,150,000 at
September 27, 1997 to 1st Source Bank. This repayment occurred in February of
1998.
LOANS FROM MAJEREKS
Thaddeus A. Majerek, who is a director of the Company, and his parents,
Thaddeus S. Majerek and A. Marie Majerek, had loaned various amounts to
Michiana. These loans were assumed by the Company as part of the Michiana
transaction. The loans have been transferred to HOCAB as an offset to other debt
balances.
LEASE OF MICHIANA WAREHOUSE FACILITY
Michiana entered into a lease agreement with a trust established for A.
Marie Majerek, the spouse of Thaddeus S. Majerek, to lease a warehouse building
containing approximately 46,800 square feet of space located in Niles, Michigan.
The lease is for a term of three years, and the rent is $12,000 per month. The
Company has assumed this lease as part of the Michiana transaction.
PURCHASE OF MICHIANA REAL PROPERTY
Michiana leased a 14,200 square foot distribution facility in Fort
Wayne, Indiana from a trust established for A. Marie Majerek. The Company
entered into a real estate purchase contract with the trust to purchase this
property at a price to be established by an independent appraisal firm
acceptable to both the seller and the Company.
GUARANTY OF KLEIN DEBT
The George R. Klein News Company had guaranteed $147,000 of certain
debt incurred by Northwest News Company ("Northwest") in connection with
Northwest's acquisition of several wholesale periodical distributors. George R.
Klein, who was elected a director of the Company, is a 50% owner of Northwest
and benefits from the transaction; however, Mr. Klein will reimburse the Company
if the guarantee results in a claim against the Company.
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<PAGE> 68
LEASES OF FACILITIES
There are a number of facilities that are leased by Klein from George
R. Klein, a director and principal shareholder of the Company, or persons or
entities affiliated with him. The George R. Klein News Co. leases a 98,000
square foot warehouse and distribution facility located on 30th Street in
Cleveland, Ohio. Central News Company leased a 38,000 square foot warehouse and
distribution facility in Akron, Ohio. Newspaper Sales, Inc. leases a 10,000
square foot facility located on Paynes Avenue in Cleveland, Ohio.
All leases expired on December 31, 1996. The Company entered into a
new three-year lease with Newspaper Sales, Inc., and a month-to-month lease with
a six-month termination clause with The George R. Klein News Co. The new lease
rates are at a market value, which the Company considers reasonable.
Remainder of Page Intentionally Left Blank.
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<PAGE> 69
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
3.1 Articles of Incorporation of the Registrant (incorporated by reference
from 1989 Form 10-K, Exhibit I). Amended and Restated (incorporated by
reference from the 1997 proxy for the Annual Meeting of Shareholders).
3.2 Code of Regulations of Registrant (incorporated by reference from 1989
Form 10-K, Exhibit II).
4.1 Put Agreement between UNIMAG and Donald E. Garlikov dated July 25, 1992
together with commitment letter between Donald E. Garlikov and Team Logos
Corporation dated July 7, 1992 (incorporated by reference from Exhibit 4
to the Current Report on Form 8-K of the Registrant, filed August 7,
1992).
4.2 Services and Management Agreement with Service News Company and SNPC,
Inc. and Doris R. Marshall together with related Put Agreements and
related documents dated April 5, 1995 (incorporated by reference from the
Current Report in Form 8-KA, Amendment No. 3 to Form 8-K, Current Report
filed April 17, 1995 of the registrant, filed January 13, 1996.)
10.1 Partnership Dissolution and Distribution Plan and Agreement between
UNIMAG, Service News Company and Magazine Distributors, Inc. relative to
the dissolution of MDI Distributors, Limited Partnership, dated May 24,
1993 (incorporated by reference from Exhibit 1 to the Current Report on
Form 8-K of the Registrant, filed June 8, 1993.
10.2 Services and Management Agreement with Service News Company and SNPC,
Inc. and Doris R. Marshall together with related Put Agreements and
related documents dated April 5, 1995 (incorporated by reference from the
Current Report in Form 8-KA, Amendment No. 3 to Form 8-K, Current Report
filed April 17, 1995 of the registrant, filed January 13, 1996.)
10.3 Asset Transfer and Exchange Agreement between United Magazine Company and
Northern News Company, effective July 29, 1996 (incorporated by reference
from the Current Report on Form 8-KA filed September 30, 1996, See
Exhibit 2 (a) therein).
10.4 Stock Transfer and Exchange Agreement among United Magazine Company,
Michiana News Service, Inc. and all of the shareholders of Michiana News
Service, Inc. effective July 30, 1996 (incorporated by reference from the
Current Report on Form 8-KA filed September 30, 1996, See Exhibit 2 (b)
therein).
10.5 Stock Transfer and Exchange Agreement among United Magazine Company, The
Stoll Companies and all of the shareholders of The Stoll Companies
effective July 31, 1996 (incorporated by reference from the Current
Report on Form 8-KA filed September 30, 1996, See Exhibit 2 (c) therein).
10.6 Asset Transfer and Exchange Agreement, subsequently modified to a Stock
Transfer and Exchange Agreement, and subsequently amended to a merger
agreement, between United Magazine Company and Ohio Periodical
Distributors, Inc., effective August 1, 1996 (incorporated by reference
from the Current Report on Form 8-KA filed September 30, 1996, See
Exhibit 2 (d) therein).
10.7 Asset Transfer and Exchange Agreement between United Magazine Company and
Wholesalers Leasing Corp., effective August 2, 1996 (incorporated by
reference from the Current Report on Form 8-KA filed September 30, 1996,
See Exhibit 2 (e) therein).
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10.8 Stock Transfer and Exchange Agreement among United Magazine Company,
Scherer Companies and all of the shareholders of Scherer Companies
effective August 2, 1996 (incorporated by reference from the Current
Report on Form 8-KA filed September 30, 1996, See Exhibit 2 (f) therein).
10.9 Stock Transfer and Exchange Agreement among United Magazine Company,
Read-Mor Bookstores, Inc. and all of the shareholders of Read-Mor
Bookstores, Inc. effective August 2, 1996 (incorporated by reference from
the Current Report on Form 8-KA filed September 30, 1996, See Exhibit 2
(g) therein).
10.10 Stock Transfer and Exchange Agreement among United Magazine Company, The
George R. Klein News Co., Central News Co., Newspaper Sales Inc. and the
shareholder of all of those companies, effective September 27, 1996
(incorporated by reference from the Current Report on Form 8-K filed
September 27, 1996, See Exhibit 2 therein).
Remainder of Page Intentionally Left Blank.
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21.0 Subsidiaries of the Registrant
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Name of Subsidiary Jurisdiction of Name in which
(Current) Incorporation or Organization Business is Conducted
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service News Company * Connecticut Yankee News Company
- -------------------------------------------------------------------------------------------------------------------------
Imperial News Co., Inc. Delaware Imperial News
- -------------------------------------------------------------------------------------------------------------------------
Team Logos Sportstuff, Inc. Ohio Team Logos and Sportstuff
- -------------------------------------------------------------------------------------------------------------------------
Sportstuff Marketing, Inc. * Ohio Sportstuff Marketing
- -------------------------------------------------------------------------------------------------------------------------
UNIMAG I, Inc. * Delaware N/A
- -------------------------------------------------------------------------------------------------------------------------
Service News Company
(Acquired January 12, 1996) * North Carolina Service News and Wilmington
- -------------------------------------------------------------------------------------------------------------------------
Triangle News Company
(Acquired January 23, 1996) * Pennsylvania Triangle and Pittsburgh
- -------------------------------------------------------------------------------------------------------------------------
Name of Subsidiary Jurisdiction of Name in which
(Acquisition Transaction) Incorporation or Organization Business is Conducted
- -------------------------------------------------------------------------------------------------------------------------
Michiana News Service, Inc. Michigan Michiana
- -------------------------------------------------------------------------------------------------------------------------
MacGregor News Service, Inc. Michigan MacGregor
- -------------------------------------------------------------------------------------------------------------------------
The Stoll Companies Ohio Stoll
- -------------------------------------------------------------------------------------------------------------------------
Ohio Periodical Distributors, Inc. (merged) Ohio OPD
- -------------------------------------------------------------------------------------------------------------------------
Scherer Companies Delaware Scherer Companies
- -------------------------------------------------------------------------------------------------------------------------
Read-Mor Book Store, Inc. Ohio Read-Mor
- -------------------------------------------------------------------------------------------------------------------------
The Geo. R. Klein News Co. Ohio Klein
- -------------------------------------------------------------------------------------------------------------------------
Central News Co. Ohio Klein
- -------------------------------------------------------------------------------------------------------------------------
Newspaper Sales, Inc. Ohio Klein
- -------------------------------------------------------------------------------------------------------------------------
* Merged into the Company on March 6, 1998
On March 2, 1998 the Company acquired the stock of Central Wholesale, Inc. and Penn News Company, Inc.
Both of these were merged into the Company on March 6, 1998
</TABLE>
27.0 Financial Data Schedules - EDGAR Filing.
REPORTS ON FORM 8-K
The following reports on Form 8-K, reporting on the items listed below,
were filed during the fourth fiscal quarter of 1997 through May 1, 1998:
Change in control of Registrant and acquisition of assets relative to the
Company acquiring the stock of Stoll, Michiana, Scherer Companies, The
Klein Companies and Read-Mor; the assets of Northern and Wholesalers; and
the merger with OPD in exchange for shares of Common Stock of the
Company, effective February 9, 1998 and filed February 26, 1998.
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. This Form 10-KSB for the fiscal year end September 27, 1997 is the final
filing as an SB filing. The Company's Form 10-Q for the first fiscal quarter of
1998 will be filed under regular status.
The Company currently is delinquent in its filing of this Form 10-KSB
for September 27, 1997 and its Form 10-Q for the quarter ended January 4, 1998.
The delinquency was caused by delays in completing the final audits for the
acquisitions approved by shareholders at the Annual Meeting held in September of
1997.
69
<PAGE> 72
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
UNITED MAGAZINE COMPANY
Date ______________________ By _______________________________
Ronald E. Scherer, President
Pursuant to the required Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities as stated as of the dates indicated below, and
in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
_________________________________ Director, Chairman and May 19, 1998
Ronald E. Scherer Chief Executive Officer
_________________________________ Director, Vice May 19, 1998
David B. Thompson Chairman and Treasurer
_________________________________ Director and President May 19, 1998
Robert H. Monnaville
_________________________________ Director and May 19, 1998
Eugene J. Alfonsi Vice President
_________________________________ Director and Vice President, May 19, 1998
Thaddeus A. Majerek Customer Corporate Relations
_________________________________ Director May 19, 1998
R.L. Richards
</TABLE>
70
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000020469
<NAME> UNITED MAGAZINE COMPANY
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-29-1996
<PERIOD-END> SEP-27-1997
<EXCHANGE-RATE> 1
<CASH> 2,085,118
<SECURITIES> 0
<RECEIVABLES> 49,345,319
<ALLOWANCES> 4,500,000
<INVENTORY> 40,533,817
<CURRENT-ASSETS> 97,887,243
<PP&E> 13,509,760
<DEPRECIATION> 3,621,238
<TOTAL-ASSETS> 271,602,726
<CURRENT-LIABILITIES> 144,131,415
<BONDS> 80,869,930
0
0
<COMMON> 250
<OTHER-SE> 37,320,884
<TOTAL-LIABILITY-AND-EQUITY> 271,602,726
<SALES> 301,341,037
<TOTAL-REVENUES> 301,341,037
<CGS> 233,550,538
<TOTAL-COSTS> 84,411,883
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,940,676
<INCOME-PRETAX> (24,520,935)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,520,935)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,520,935)
<EPS-PRIMARY> (3.47)
<EPS-DILUTED> (3.47)
</TABLE>
