<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
- --------------------------------------------------------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Third Quarter Ended July 3, 1999
Commission File Number: 0-2675
United Magazine Company
An Ohio Corporation
I.R.S. Number: 31-0681050
5131 Post Road
Dublin, Ohio 43017
Registrant's Telephone Number: (614) 792-0777
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
Yes: X No:
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
The Registrant's number of common shares, without par value, outstanding as of
July 31, 1999 was 7,482,614.
Traditional Small Business Disclosure Format (check one):
Yes: No: X
----- -----
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UNITED MAGAZINE COMPANY
FORM 10-Q
FOR THE THIRD QUARTER ENDED JULY 3, 1999
<TABLE>
INDEX
Page
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
July 3, 1999 and October 3, 1998 (Unaudited) 2-3
Condensed Consolidated Statements of Operations (Unaudited)
For the Three Months and Nine Months Ended
July 3, 1999 and July 4, 1998 4
Condensed Consolidated Statements of Cash Flow (Unaudited)
For the Nine Months Ended
July 3, 1999 and July 4, 1998 5-6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-19
PART II - OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings 20
Item 2. Change in Securities 20
Item 3. Default Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
</TABLE>
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<TABLE>
UNITED MAGAZINE COMPANY
FORM 10-Q
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JULY 3, 1999 AND OCTOBER 3, 1998
(Dollar Amounts in Millions, Except Per Share Data)
<CAPTION>
July 3, October 3,
ASSETS 1999 1998
------ ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4.5 $ 5.0
Trade accounts receivable, net of allowance for doubtful
accounts 46.0 66.6
Inventories 21.8 40.2
Prepaids and other 4.0 4.0
------ ------
Total current assets 76.3 115.8
------ ------
PROPERTY AND EQUIPMENT, at cost:
Land .2 .2
Building and improvements 1.4 1.3
Furniture and equipment 8.9 8.5
Vehicles 3.8 3.7
Leasehold improvements 1.5 1.6
------ ------
15.8 15.3
Less - accumulated depreciation and amortization (7.9) (5.9)
------ ------
Total property and equipment, net 7.9 9.4
------ ------
OTHER ASSETS:
Costs in excess of net assets acquired, net of accumulated
Amortization 101.2 103.4
Prepaid signing bonuses 3.5 3.4
Other assets, net 11.6 12.8
------ ------
Total other assets 116.3 119.6
------ ------
Total assets $200.5 $244.8
====== ======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
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<TABLE>
UNITED MAGAZINE COMPANY
FORM 10-Q
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JULY 3, 1999 AND OCTOBER 3, 1998
(Dollar Amounts in Millions, Except Per Share Data)
<CAPTION>
July 3, October 3,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------------------------------ ----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of debt obligations $ 39.7 $ 44.2
Accounts payable 144.0 157.5
Accrued expenses 12.4 12.0
Reserve for gross profit on sales returns 6.9 10.3
------- -------
Total current liabilities 203.0 222.0
LONG-TERM DEBT OBLIGATIONS 4.4 4.9
DEBENTURES HELD BY SHAREHOLDERS:
- Senior 33.2 33.2
- Subordinated 21.4 21.4
BENEFIT PLAN OBLIGATIONS 4.3 4.2
OTHER LONG-TERM LIABILITIES 2.7 3.7
------- -------
Total liabilities 269.0 289.4
------- -------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT AGREEMENTS,
.5 million shares 5.7 5.2
------- -------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 53.3 million shares authorized,
9.3 million issued and 7.5 million outstanding (including
Shares subject to Put Agreements) and paid in capital 117.7 117.6
Treasury stock, at cost (4.0) (4.0)
Minimum pension liability adjustment (.2) (.2)
Retained deficit (187.7) (163.2)
------- -------
Total shareholders' equity (74.2) (49.8)
------- -------
Total liabilities and shareholders' equity $ 200.5 $ 244.8
======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
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<TABLE>
UNITED MAGAZINE COMPANY
FORM 10-Q
FOR THE THIRD QUARTER ENDED JULY 3, 1999
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
JULY 3, 1999 AND JULY 4, 1998
(Dollar Amounts in Millions, Except Per Share Data)
<CAPTION>
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
1999 1998 1999 1998
----------- ----------- ----------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 65.4 $ 82.7 $207.9 $236.7
COST OF SALES 50.5 66.0 160.0 189.9
------ ------ ------ ------
Gross Profit 14.9 16.7 47.9 46.8
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (16.4) (19.7) (57.4) (55.3)
DEPRECIATION AND AMORTIZATION (2.3) (2.7) (6.7) (6.9)
------ ------ ------ ------
LOSS FROM OPERATIONS (3.8) (5.7) (16.2) (15.4)
------ ------ ------ ------
OTHER INCOME (EXPENSES), net:
Interest Expense, net (2.1) (2.4) (7.0) (6.0)
Other, net (1.3) (.3) (1.3) 8.2
------ ------ ------ ------
Total other income (expenses), net (3.4) (2.7) (8.3) 2.2
------ ------ ------ ------
INCOME (LOSS) BEFORE TAXES (7.2) (8.4) (24.5) (13.2)
INCOME TAXES -- -- -- --
------ ------ ------ ------
NET INCOME (LOSS) $ (7.2) $ (8.4) $(24.5) $(13.2)
====== ====== ====== ======
WEIGHTED AVERAGE SHARES OUTSTANDING 7.5 7.4 7.4 7.2
====== ====== ====== ======
EARNINGS (LOSS) PER SHARE $ (.96) $(1.12) $(3.32) $(1.82)
====== ====== ====== ======
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
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<TABLE>
UNITED MAGAZINE COMPANY
FORM 10-Q
FOR THE THIRD QUARTER ENDED JULY 3, 1999
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED
JULY 3, 1999 AND JULY 4, 1998
(Dollar Amounts in Millions, Except Per Share Data)
<CAPTION>
9 Months 9 Months
Ended Ended
July 3, July 4,
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
NET CASH (USED IN) OPERATING ACTIVITIES $ 2.2 $(15.8)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of operating assets 1.5 2.7
Sale of stock .0 .5
Purchase of stock of company .0 (2.6)
Cash used for asset purchases .0 (4.0)
Purchases of property and equipment (.9) (.7)
Additions of long-term assets (1.6) (1.4)
----- ------
Net cash provided by (used in) investing activities (1.0) (5.5)
----- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under debt obligations .0 42.2
Cash used for financing costs .0 (1.7)
Redemption of putable shares .0 (.3)
Payment of debt obligations (1.7) (19.7)
----- ------
Net cash provided by (used in) financing activities (1.7) 21.0
----- ------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS (.5) .3
CASH, beginning of year 5.0 2.1
----- ------
CASH, end of year $ 4.5 $ 1.8
===== ======
Supplemental Disclosure of Cash Flow Information:
- -------------------------------------------------
Cash paid during the period for interest $ 3.4 $ 1.8
Cash paid during the period for taxes 0 1.4
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
- -------------------------------------------------------------------
1999: During the first fiscal quarter of 1999, the Company contributed 108,551
shares of common stock to employees, with 108,230 of the shares being
contributed directly to the 401-K plan and 321 shares being contributed directly
to employees.
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During the third fiscal quarter of 1999 the Company sold its corporate plane to
a third party and sold eight of its retail locations to an affiliated party. As
part of these transactions, the Company received $1.5 million in cash and
reduced related party debt by approximately $.4 million. During that same period
the Company completed the closing of nine additional retail locations. In
connection with the sale of the airplane and the eight retail locations and the
closing of the nine retail locations, the Company has incurred a $1.3 million
loss during the quarter. As of July 3, 1999 the Company has six retail locations
remaining to be sold or closed. It is anticipated that these closings will occur
by the end of calendar 1999.
1998: The Company received treasury shares back as part of the sale of certain
operating assets and as part of a litigation settlement. The Company issued
shares to convert $4.9 million of debt to equity and issued shares valued at $3
million in connection with a liability assumed with the acquisition of the
operating assets of SKS Enterprises, Limited, an Ohio limited liability company
("SKS"). The Company received a $2.5 million note in connection with the sale of
certain operating assets of Yankee and converted $4.5 million of short-term debt
to a subordinated debenture.
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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UNITED MAGAZINE COMPANY
FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRD QUARTER ENDED JULY 3, 1999
(UNAUDITED)
1. GENERAL
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of United Magazine Company and subsidiaries ("UNIMAG" or the
"Company") as of July 3, 1999 and October 3, 1998, and the results of its
operations and cash flows for the nine months ended July 3, 1999 and July 4,
1998. All such adjustments were of a normal recurring nature. The results of
operations in any interim period are not necessarily indicative of results for
the full year.
2. THE BUSINESS
UNIMAG 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 retail bookstores.
The operations for the quarters ended July 3, 1999 and July 4, 1998 were
conducted through its consolidated subsidiaries and through companies merged
into the Company during 1998. The operations for the quarters ended July 3, 1999
and July 4, 1998 also include the operations of business acquired from SKS
Enterprises, Limited, an Ohio limited liability company ("SKS"), in February of
1998, and the operations of business acquired through the purchase of Central
Wholesale, Inc., a Pennsylvania corporation, ("Central") and Penn News Company,
Inc., a Pennsylvania corporation, ("Penn"), in March of 1998. The operations for
the nine months ended July 4, 1998 include the operations of Service News
Company (of Waterbury Connecticut), a Connecticut corporation doing business as
Yankee News Company ("Yankee"), whose operating assets were sold in January of
1998. The operations of all other subsidiaries were included for both periods.
The operations of the Company are primarily in the northern Midwest (Ohio,
Michigan, Indiana, Kentucky and Western Pennsylvania) and in North Carolina.
From various distribution facilities UNIMAG distributes over 3,000 different
titles of magazines weekly to retail outlets such as supermarkets, discount
variety stores, convenience stores, drug stores and newsstands that offer mass
market reading materials to consumers.
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3. PROVISION FOR INCOME TAXES
The provision (benefit) for income taxes for the periods ended July 3, 1999 and
July 4, 1998 is as follows:
<TABLE>
Three Months Three Months Nine Months Nine Months
Ended 1999 Ended 1998 Ended 1999 Ended 1998
<S> <C> <C> <C> <C>
Current $ 0 $ 0 $ 0 $ 0
Deferred 0 0 0 0
---------- ---------- ---------- ----------
Total $ 0 $ 0 $ 0 $ 0
========== ========== ========== ==========
</TABLE>
The Company has provided deferred income taxes at a 40% tax rate which
represents a blended statutory federal and state income tax rate. The difference
between the statutory tax rate and the effective rate of zero is due primarily
to the fully reserving of the benefit of the net operating losses generated that
may not be realized in the future.
On February 8, 1998 the Company had a change of control event for tax purposes.
This event reduced the amount of net operating losses ("NOL's") that can be used
in the future to an estimated $29.4 million as of February 1998. Of the $29.4
million, approximately $2.0 million can be used per year through October 2013.
Additional NOL's of approximately $41.0 million were generated from February 8,
1998 to July 3, 1999 that have no restriction on their use. That $41.0 million
expires in 2013 and 2014.
4. FINANCING ARRANGEMENTS
On February 6, 1998, the Company entered into a Credit Agreement with a group of
banks that provided a Revolving Credit Commitment of $30,000,000, a Term Loan of
$5,000,000 and a Capital Expenditure Loan of $3,000,000. The amount available to
the Company under the Revolving Credit Commitment is based on certain amounts of
eligible accounts receivable and eligible inventories. The purpose of the loans
was for the Company to refinance certain debt obligations, finance ongoing
working capital requirements, finance the acquisition of certain machinery,
equipment and vehicles and for general corporate purposes. All the loans have
variable interest rates to be designated by the Company based on the prime rate
+.5% or LIBOR +2.5%. Due to noncompliance, in December 1998 the interest rate
was increased to prime plus 2.5% for debt under the Credit Agreement. The
Capital Expenditure Loan and Revolving Credit Commitments mature in February
2003, and the Term Loan matures in February 2001. On April 15, 1998, the Company
received a temporary expansion on the Revolving Credit Commitment of $3.0
million. The expansion expires on August 31, 1999.
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, minimum income
before interest, taxes, depreciation and
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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 not in compliance with these covenants and others and has not obtained
waivers through 1999 for expected continual noncompliance.
5. DEFINITIVE AGREEMENT
On December 15, 1998, UNIMAG and Chas. Levy Circulating Co. ("Levy"), an
Illinois general partnership, entered into a Letter of Intent, whereby the
parties agreed that Levy would purchase certain assets and assume certain
liabilities of UNIMAG.
On March 18, 1999, a definitive agreement was signed by the parties whereby
UNIMAG agreed to sell substantially all of its wholesale operating assets to
Levy in return for cash and the assumption by Levy of substantially all of
UNIMAG's wholesale operating liabilities. The closing was anticipated to occur
by the end of June and was subject to due diligence by both parties and approval
by UNIMAG's shareholders.
On June 1, 1999 and June 7, 1999 Chas. Levy Circulating Co. and UNIMAG and its
subsidiaries terminated the Asset Purchase Agreement by and among Levy, UNIMAG
and the subsidiaries of UNIMAG.
6. CONTRIBUTION TO 401-K PLAN
In December of 1998, the Company made a contribution of 108,551 shares of common
stock to employees, with 108,230 of the shares being contributed directly to the
401-K plan and 321 shares being contributed directly to employees.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
Results of Operations of UNIMAG for the three months ended
July 3, 1999 and July 4, 1998
- --------------------------------------------------------------------------------
1. REVIEW OF OPERATIONS
The results of operations for the quarter ended July 3, 1999 are not indicative
of results from prior quarters, nor are the results for the quarter indicative
of the future.
The following table provides comparative financial information for the third
fiscal quarters of 1999 and 1998.
<TABLE>
July 3, 1999 July 4, 1998
------------ -------------
(As Restated)
<S> <C> <C>
Results of Operations ($ millions):
Revenue $ 65.4 $ 82.7
Gross Margin 14.9 16.7
Selling, General and Administrative 16.4 19.7
EBITDA (1.5) (3.0)
Net Income (Loss) (7.2) (8.4)
As a Percent of Revenue:
Gross Margin 22.8% 20.2%
Selling, General and Administrative 25.1% 23.8%
EBITDA (2.3)% (3.6)%
Net Income (Loss) (11.0)% (10.2)%
</TABLE>
The revenue for the Company for the quarter ended July 3, 1999 was $65.4,
million, a decrease of $17.3 million (or 20.9%) from revenue for the quarter
ended July 4, 1998. The decline in revenue for the quarter ended July 3, 1999
compared with the quarter ended July 4, 1998 was due to several factors. The
Company recently has lost several customers due to competitive pressures,
including the loss of a customer with $6 million of annual revenue in March of
1999. More important is the reduction in the units of magazine and book product
allocated to the Company for resale to its customers. The Company distributed
$133.5 million of magazine products in the third fiscal quarter of 1999 versus
$167.4 million of product in the third fiscal quarter of 1998. Magazine product
returns from customers were $80.5 million in the third fiscal quarter of 1999
versus $98.8 million in 1998. This is a net $15.6 million reduction in revenue.
Books, a smaller component of the Company's revenue, incurred a comparable
decline of approximately $2.5 million.
During fiscal 1997 and 1998, the Company and the industry experienced reductions
in gross margins from existing chain customers because of new discounts, rebates
and amortization of up-front signing bonuses. The 1999 gross margin per cent
increased over 1998, as restated, by 2.6 percentage points to 22.8%, primarily
as a result of additional margin recovery for the Company in the third quarter
of fiscal
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1999 compared to the third fiscal quarter of 1998. The gross margin decreased by
$1.8 million due to the application of a higher gross margin per cent to a lower
revenue base.
Selling, general and administrative expenses decreased by $3.7 million, with
$2.1 million due to reductions in gross payroll and $.9 million due to
reductions in professional fees. The balance of the reductions is spread
throughout the remaining components of selling, general and administrative
expenses. As a percent of revenue, selling, general and administrative expenses
increased by 1.3 percentage points to 25.1 % in 1999 versus a restated 23.8% in
1998, with the revenue decline in 1999 causing the per cent increase. The $16.4
million in selling, general and administrative expenses for the third fiscal
quarter is an improvement over the $20.3 million in quarter one and $20.7
million in quarter two, with the improvement occurring primarily in payroll and
professional fees and secondarily throughout the remaining expense components of
the Company.
The acquisitions of Michiana, Stoll, Klein, Read-Mor, Scherer Affiliates, KS,
Penn and Central were accounted for using purchase price accounting.
Accordingly, goodwill was created in the approximate amount of $165 million.
During 1998 the Company determined that the 1998 operating losses and future
cash flow projections caused an impairment in the goodwill. The Company has
written down goodwill by $70 million in 1998. This will reduce 1999 charges for
goodwill amortization by approximately $.4 million per quarter.
The increase in gross margin per cent, net of the increase in selling, general
and administrative per cent, resulted in a $1.9 million decrease in the net loss
from operations to $(3.8) million, (5.8)% of revenue in 1999 compared to the
restated $(5.7) million, (6.9)% of revenue in 1998.
The acquisitions of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates were
financed by the issuance of Common Stock of the Company, 8% Senior Debentures in
the aggregate amount of $39.9 million and 10% Subordinated Debentures in the
aggregate amount of $18.6 million. These debentures accrued interest from July
1, 1996 for Michiana, Stoll, Read-Mor and Scherer Affiliates and from August 24,
1996 for Klein. During 1998 the Company increased the subordinated debentures by
issuing $4.5 million in new debentures in exchange for existing debt and made
payments and other reductions of $8.4 million on senior and subordinated
debentures. Charges for debenture interest expense for the third quarter of 1999
was approximately $1.2 million compared to approximately $1.3 million in the
third quarter of 1998. Other interest charges in both periods are for accreted
interest on the Puts and interest on bank and other loans.
The sale of the airplane and the eight retail locations and the closing of nine
retail locations resulted in a $1.3 million loss during the quarter.
Because of the loss for the quarter and because of loss carryforwards, UNIMAG
had no federal income tax expense for the third quarter of 1999 and 1998. The
Company has NOL of approximately $70.4 million at July 3, 1999; however, the
Company has not recognized any benefits from that NOL through July 3, 1999.
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- --------------------------------------------------------------------------------
Results of Operations of UNIMAG for the nine months ended
July 3, 1999 and July 4, 1998
- --------------------------------------------------------------------------------
REVIEW OF OPERATIONS
The results of operations for the nine months ended July 3, 1999 are not
indicative of results from prior periods, nor are the results for the period
indicative of the future. The following table provides comparative financial
information for the first nine-month periods of 1999 and 1998.
<TABLE>
July 3, 1999 July 3, 1998
------------ -------------
(As Restated)
<S> <C> <C>
Results of Operations ($ millions):
Revenue $207.9 $236.7
Gross Margin 47.9 46.8
Selling, General and Administrative 57.4 55.3
EBITDA (9.5) (8.5)
Net Income (Loss) (24.5) (13.2)
As a Percent of Revenue:
Gross Margin 23.0% 19.8%
Selling, General and Administrative 27.6% 23.4%
EBITDA (4.6)% (3.6)%
Net Income (Loss) (11.8)% (5.6)%
</TABLE>
The revenue for the Company for the nine months ended July 3, 1999 was $207.9
million, a decrease of $28.8 million (or 12.2%) from revenue for the nine months
ended July 4, 1998. The decline in revenue for the nine months ended July 3,
1999 compared with the nine months ended July 4, 1998 was due to the reduction
in the units of magazine and book product allocated to the Company for resale to
its customers. The Company distributed $453.9 million of magazine products in
the first nine months of fiscal 1999 versus $487.7 million of product in the
first nine months of fiscal 1998. Magazine product returns from customers were
$286.8 million in the three fiscal quarters of 1999 versus $291.9 million in
1998. This is a net $28.7 million reduction in revenue.
During fiscal 1997 and 1998, the Company and the industry experienced reductions
in gross margins from existing chain customers because of new discounts, rebates
and amortization of up-front signing bonuses. The 1999 gross margin per cent
increased over 1998, as restated, by 3.6 percentage points to 23.2%, primarily
as a result of additional margin recovery for the Company in the first three
quarters of fiscal 1999 compared to the first three fiscal quarters of 1998. The
gross margin increased by $1.1 million due to the application of a higher gross
margin per cent to a lower revenue base.
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<PAGE> 14
Selling, general and administrative expenses increased by $2.1 million due to
increased payroll and related benefits, vehicle repairs and professional fees.
As a percent of revenue, selling, general and administrative expenses increased
by 4.2 percentage points to 27.6 % in 1999 versus a restated 23.4% in 1998, with
the revenue decline in 1999 causing most of the per cent increase. The increase
in professional fees was due to consulting studies to assist the Company's
turnaround efforts and to additional litigation costs in the second fiscal
quarter of 1999.
The acquisitions of Michiana, Stoll, Klein, Read-Mor, Scherer Affiliates, KS,
Penn and Central were accounted for using purchase price accounting.
Accordingly, goodwill was created in the approximate amount of $165 million.
During 1998 the Company determined that the 1998 operating losses and future
cash flow projections caused an impairment in the goodwill. The Company has
written down goodwill by $70 million in 1998. This will reduce 1999 charges for
goodwill amortization by approximately $.4 million per quarter.
The increase in selling, general and administrative expenses per cent, net of
the increase in gross margin per cent, resulted in an increase in the net loss
from operations to (7.8)% of revenue in 1999 compared to the restated (6.5)% in
1998.
The acquisitions of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates were
financed by the issuance of Common Stock of the Company, 8% Senior Debentures in
the aggregate amount of $39.9 million and 10% Subordinated Debentures in the
aggregate amount of $18.6 million. These debentures accrued interest from July
1, 1996 for Michiana, Stoll, Read-Mor and Scherer Affiliates and from August 24,
1996 for Klein. During 1998 the Company increased the subordinated debentures by
issuing $4.5 million in new debentures in exchange for existing debt and made
payments and other reductions of $8.4 million on senior and subordinated
debentures. Charges for debenture interest expense for the first nine months of
1999 was approximately $3.6 million compared to approximately $3.9 million in
the first nine months of 1998. Other interest charges in both periods are for
accreted interest on the Puts and interest on bank and other loans.
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). A gain of $7.8
million was recognized in the second quarter from the sale. Revenue for Yankee
in the quarter ended January 3, 1998 was $8.2 million.
The $8.2 million of other income in 1998 compared with the $1.3 million other
expense in 1999 for the sale of the airplane and the sale and the closing of the
seventeen retail locations enabled the Company to report a pre-tax loss for the
nine-month period of $13.2 million in 1998 versus $24.5 million in 1999. Without
the other income in 1998 and the other expense in 1999, the comparable losses
for 1998 and 1999 would be $21.4 million in 1998 and $23.2 million in 1999.
Because of the loss for the nine months and because of loss carryforwards,
UNIMAG had no federal income tax expense for the first nine months of 1999 and
1998. The Company has NOL of approximately $70.4 million at July 3, 1999;
however, the Company has not recognized any benefits from that NOL through July
3, 1999.
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- --------------------------------------------------------------------------------
LIQUIDITY
- --------------------------------------------------------------------------------
EBITDA
- ------
The Company measures its liquidity primarily in Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA). However, EBITDA should not be considered
as an alternative to net income or as an indicator of cash flows generated by
operating, investing or financing activities.
EBITDA for the first nine months of 1999 was $(9.5) million versus $(8.5)
million for 1998, as restated, a decline of $(1.0) million. The decline in
EBITDA was attributable to an increase of $2.1 million in selling, general and
administrative expenses offset by an increase of $1.1 million in gross margin.
The gross margin increase was limited to $2.8 million because the $28.8 million
revenue decline offset the benefits of the improvement in the gross margin per
cent.
During the third fiscal quarter of 1999, the EBITDA was $(1.5) million compared
to $(4.0) million in both the first and the second quarters. This $2.5 million
improvement in EBITDA during the third fiscal quarter was the result of a
reduction in selling, general and administrative expenses to $16.4 million, a
$4.1 million improvement from the average of the first two quarters. The revenue
shortfall during the third quarter prevented the improvement from being greater.
During the second quarter of 1998, the Company made acquisitions of the
operations of two contiguous businesses with combined annual sales of
approximately $60 million.
At July 3, 1999, the Company had current liabilities of $203.0 million and
current assets of $76.3 million for a working capital deficit of $126.7 million,
a decline of $2.5 million from the April 3, 1999 levels. Of this $126.7 million,
$35.0 million is due to classifying bank debt as current due to debt covenant
violations.
The Company anticipates improvement in EBITDA during the remainder of the fiscal
year through a combination of continued margin improvement and additional
expense reductions. Margin improvement opportunities include a continuation of
current margin improvement programs started in 1998 and new margin improvement
programs. Expense reduction opportunities include elimination of the Company's
book processing warehouse, the sale or closure of all remaining retail stores,
reduction of rent from affiliates, and reduction of levels of spending for
professional fees.
CASH FLOWS - OPERATING ACTIVITIES
- ---------------------------------
During the first nine months of 1999, the Company generated $2.2 million in net
cash from operations, a $18.0 million improvement over the 1998 amount used of
$15.8 million. The improvement was primarily attributable to reductions in
accounts receivable and inventory of $39.0 million, offset by $13.5 million in
decreases in accounts payable. During the second quarter of 1998, the Company
used $15.7 million of cash in operations, with approximately $10.5 million used
to reduce accounts payable and accrued expenses, net of the impact of the SKS,
Yankee, Central and Penn transactions. An additional $1.4 million was used
during that quarter to reduce federal income taxes payable for an acquired
subsidiary.
14
<PAGE> 16
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
The Company spent $.9 million in the first nine months of 1999 for capital
expenditures and $1.6 million for display fixtures, versus $.7 million and $1.4
million, respectively, for 1998. During the third fiscal quarter, the Company
received $1.5 million in cash in connection with the sale of the airplane and
the sale of eight of its retail locations.
During the first nine months of 1998, the Company spent a net of $5.5 million on
investing activities, with the SKS, Central and Penn transactions requiring $6.6
million. The Company generated $3.2 million from the Yankee transaction and from
the sale of stock.
CASH FLOWS - FINANCING ACTIVITIES
- ---------------------------------
During the first nine months of 1999, the Company made payments on debt
obligations of $1.7 million versus $19.2 million in 1998. During the second
quarter of 1998, the Company obtained new borrowings of $38.8 million and paid
$18.1 million of debt with the proceeds. The Company also used $1.7 million of
cash for fees associated with the financing and redeemed treasury stock under
put agreements for cash.
CAPITAL RESOURCES
- -----------------
During the first quarter of 1998, the Company negotiated new financing with two
banks. Note 4 describes the $38,000,000 loan arrangement obtained by the
Company.
CAPITAL REQUIREMENTS
- --------------------
During 1999, as in 1998, the Company expects that its requirements for capital
expenditures will not be significant. Through route consolidations and greater
use of in-store service personnel, the Company anticipates minimal increases in
its delivery fleet. The Company does anticipate continued expenditures for store
fixtures; however, these fixture increases have historically generated enough
additional revenue and gross margin to pay for the fixture costs within one
year.
OPERATIONAL MEASURES
- --------------------
The Company has converted all locations to its computer system, and receivables
are being managed on a more consistent, company-wide basis. The Company
continues to be engaged in collection efforts to reduce the average days
outstanding, with excess cash proceeds earmarked for reductions in vendor
payables.
15
<PAGE> 17
OPERATING SYNERGIES
- -------------------
Management expects the Company to achieve additional cost savings and operating
efficiencies through plans developed in the 1999 budget process. Duplicate
administrative, distribution and in-store service functions continue to be
eliminated. In additional, all of the remaining retail locations will be closed
by the end of calendar 1999, and a significant portion of the book distribution
business will be discontinued.
MARGIN RECOVERY EFFORTS
- -----------------------
The magazine industry has recognized that the loss of margin sustained by
wholesalers in 1996, 1997 and 1998 has created a problem that needed an
industry-wide resolution. Wholesalers, national distributors and publishers have
been working on a variety of plans to provide margin recovery to wholesalers.
Some of these plans began in the third fiscal quarter of 1998, and others began
during the first three fiscal quarters of 1999.
COMMITMENTS AND CONTINGENCIES
- -----------------------------
During the second fiscal quarter of 1999, the company initiated a plan to sell
or close all of its retail locations. By the end of the third fiscal quarter,
seventeen retail locations had been sold or closed, and only six remained open.
Retail revenue is less than 10% of total revenue.
The Company has entered into long-term contracts (generally three years) with
its most important customers. These contracts resulted in gross margin
reductions from 1996 onward through the present.
The Company previously was named as a defendant in various litigation matters.
During 1998, most of the claims were settled. The Company believes it has an
adequate accrual for these claims, and that any current pending or threatened
litigation matters will not have a material adverse impact on the Company's
future results of operations or financial conditions.
FINANCING ARRANGEMENTS
- ----------------------
Each of the Acquisition Agreements with Stoll, Michiana, Klein and the Scherer
Affiliates contemplated that stock or assets of the various Acquisition Parties
would be contributed to the Company in exchange for Common Stock of the Company,
valued at $15.00 per share, and for Senior and Subordinated Debentures. In
addition, the Company issued a $4,500,000 Subordinated Debenture, (the "KDR
Debenture") and made a cash payment of $500,000 in exchange for a $5,000,000
note owed to KDR Limited, an Ohio limited liability company whose owners include
R. David Thomas, a principal shareholder of the Company, and R. L. Richards, a
director of the Company. KDR also received warrants to purchase 187,657 shares
of Common Stock of the Company at $12.00 per share in connection with the
exchange. These warrants were subsequently distributed to KDR members. 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.
16
<PAGE> 18
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
sixteen-month period. During 1999, several of these payments have been deferred.
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, except for KDR, subsequently
agreed in February of 1998 to accept Company stock for 2/3 of the accrued
interest due at December 31, 1997, and to receive the balance of the accrued
interest due over a sixteen-month period. During 1999, several of these payments
have been deferred.
The KDR Debenture contains terms similar to the Subordinated Debentures. The
holder of the KDR Debenture is not a party to any of the modifications described
above.
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. During 1998 the
commitment was increased to $33 million.
Subsequently, the debenture holders entered into subordination agreements that
prohibit the Company from making principal payments on the senior and
subordinated debentures through the majority of the term loan.
The Company has loans outstanding to related parties representing accrued
interest or debentures that were converted to notes and $1.1 million loaned to
UNIMAG from an entity owned by two shareholders. These interest notes ($1.4
million) are due in 1999, while the $1.1 million is due in 2003. Interest
accrues at 6.0%.
The Company's debt obligations under the credit agreement are collateralized by
substantially all of the Company's assets. Additionally, certain assets held in
escrow, of which $2.7 million was funded by a related entity, serve as
collateral for such obligations.
17
<PAGE> 19
The Company is reviewing other opportunities for additional debt and/or equity
financing for the Company. At present, the Company has not entered into any
agreements for any new debt and/or equity placements.
INFLATION
- ---------
The impact of inflation on wholesale and retail operations is difficult to
measure. The Company cannot easily pass magazine costs on to customers unless
the publisher increases the cover price of the periodical, so it must control
inflation at the point of purchase. The Company is engaged in activities to
control these costs. As a result, the Company believes that the effect of
inflation, if any, on the results of operations and financial condition has been
minor and is expected to remain so in the future.
SEASONALITY
- -----------
The sale of magazines, books, and newspapers is subject to minimal seasonality.
YEAR 2000 ISSUES
- ----------------
The Company has been actively engaged in the process of addressing the Year 2000
("Y2K") Issue. Actions by the Company included the hiring of two additional
programmers to free up the internal resources needed to update its in-house
software. The Company has completed its review and is correcting and testing its
in-house software. The Company believes it will have made all changes necessary
to be Y2K compliant within an acceptable timeframe. In addition, the Company has
purchased new software for payroll and employee benefits and uses new external
software for fixed asset management. The costs to date, which include the costs
of the two new programmers and the new software, have not been material, and
appropriate costs have been expensed when incurred. The total cost, upon
completion of all tasks, is expected to be less than $1.0 million.
The Company has focused on information technology. The basic nature of the
Company's wholesaling business does not make it highly dependent on embedded
technology. The Company has reviewed its product scanning equipment and believes
it will be Y2K compliant.
The Company has reviewed the impact to the Company if significant suppliers and
significant customers are not Y2K complaint. The Company and the industry
control information flow through the use of UPC codes and bar codes. The Company
believes that its equipment and that of its primary suppliers and customers will
continue to be able to transfer this data accurately and timely.
The risks to the Company if Y2K issues develop is that data transfer would be
slowed, and manual systems would temporarily replace computer driven systems
until improvements were complete. Although the industry had operated for several
years without heavy dependence on sophisticated computer systems, the advent of
these systems has reduced the costs associated with information management.
The Company does not have a specific contingency plan to address these risks,
since the risks appear to be minimal. The Company does have internal MIS
personnel available to address any issues that may develop, and they would begin
their reprogramming efforts immediately if a Y2K issue were to occur.
18
<PAGE> 20
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 1999; the Company's plans for
operational cost reductions; the Company's plans for future consolidations and
changes in properties; 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 of the Company 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 Company's ability to continue as a going
concern; 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.
19
<PAGE> 21
PART II. OTHER INFORMATION AND SIGNATURES
--------------------------------
ITEM 1. LEGAL PROCEEDINGS
Except as set forth below, there have been no material developments in legal
proceedings involving either the Company or its subsidiaries since the filing of
the Company's Form 10-Q for the Fiscal Quarter Ended April 3, 1999. None
ITEM 2. CHANGE IN SECURITIES: None
ITEM 3. DEFAULT UPON SENIOR SECURITIES: None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: None
ITEM 5. OTHER INFORMATION
The Company delayed filing its Form 10-K for the fiscal year ended October 3,
1998 and its Form 10-Qs for the quarters ended January 2, 1999, April 3, 1999
and July 3, 1999 until completion of its financial statements. In August of 1999
the Company filed its Form 10-K without the accountant's opinion.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
None
ITEM 7. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED MAGAZINE COMPANY
Registrant
/s/ Ronald E. Scherer
-------------------------------------
Ronald E. Scherer
President and Chief Executive Officer
/s/ John B. Calfee, Jr.
-------------------------------------
John B. Calfee, Jr.
Chief Financial Officer
20
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