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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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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 October 3, 1998
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
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-K or any
amendment to this Form 10-K. ______
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of October 3, 1998 is unknown due to the fact that there is
no active trading market in the Registrant's shares.
The Registrant's revenues for the fiscal year ended October 3, 1998
were $324,100,000.
The Registrant's number of common shares, without par value,
outstanding as of April 30, 1999 was 7,482,614.
DOCUMENTS INCORPORATED BY REFERENCE
None
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UNITED MAGAZINE COMPANY
FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 3, 1998
INDEX
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PART I PAGE NUMBER
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ITEM 1. BUSINESS 1-8
ITEM 2. PROPERTIES 8-9
ITEM 3. LEGAL PROCEEDINGS 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 10
ITEM 6. SELECTED FINANCIAL DATA 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23-48
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 49
PART III
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ITEM 10. DIRECTORS 50-52
ITEM 11. EXECUTIVE COMPENSATION 53-54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 55-58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 59-64
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 65-70
SIGNATURES 71
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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 October 3, 1998 were conducted
through its consolidated subsidiaries and through companies merged into the
Company during the year. The results for the year include the operations of
Service News Company (of Waterbury, Connecticut), a Connecticut corporation,
doing business as Yankee News Company, ("Yankee") for three months, the
operations of business acquired from SKS Enterprises, Limited, an Ohio limited
liability company, ("SKS") for eight months, the operations of business acquired
through the purchase of stock of Central Wholesale, Inc., a Pennsylvania
corporation, ("Central") and Penn News Company, Inc., a Pennsylvania
corporation, ("Penn") for seven months, and the operations of all other
subsidiaries for an entire year.
The operations for the year ended September 27, 1997 were conducted
through its consolidated subsidiaries and also include the full-year impact of
the 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: 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. The non-operating
portion of Yankee was merged into the Company on March 6, 1998.
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.
On March 2, 1998, the Company acquired the stock of Central and Penn.
Both of these companies were merged into the Company on March 6, 1998.
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.
During the fourth fiscal quarter of 1996, the 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.,
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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).
During the fourth fiscal quarter of 1996, 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, MacGregor News
Services, Inc., a Michigan corporation ("MacGregor"). The Company also acquired
the stock of Read-Mor Bookstores, Inc., an Ohio corporation ("Read-Mor"), a
company managed by Scherer Companies. Read-Mor owned six retail bookstore
locations and was an insignificant acquisition. These transactions were
accounted for as a purchase as of July, 1996.
Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates are
collectively known as the "Acquisition Parties". The defined terms "UNIMAG" and
the "Company" also include the Acquisition Parties in combination with the other
entities of UNIMAG.
Each of these transactions was closed into escrow pending a favorable
vote of the shareholders of the Company on each of these transactions at the
Annual Meeting of Shareholders held on September 3, 1997. At the Annual Meeting
of Shareholders, the shareholders voted in favor of the acquisitions. Closing
documents were released from escrow in February of 1998, and the transactions
were consummated.
Shareholders who were entitled to vote more than 50% of the stock of
the Company had agreed to vote their shares in favor of the transactions. Since
approval of the transactions was assured and UNIMAG had effective control over
the operations of the companies, the Acquisition Parties were included in the
1996 consolidated financial statements of UNIMAG as discussed in the footnotes
to the financial statements.
UNIMAG also owns two inactive subsidiaries.
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. The Company is a dominant
regional periodical wholesaler in Ohio, Michigan, Indiana and western
Pennsylvania, with an estimated market share of greater than fifty percent
(50%). The Company also provides similar services from its Wilmington, North
Carolina location, selling to customers primarily in eastern North Carolina.
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REVENUES
The acquisition activities of the Company have transformed it to an
entity which generated annualized pro forma net sales for fiscal year 1996 of
approximately $281 million for all entities, with combined net sales for fiscal
1997 of approximately $298 million, and with combined net sales for fiscal 1998
of approximately $324 million.
EMPLOYEES
At October 3, 1998, the Company employed approximately 2,800 employees,
including 1,200 full-time employees, of which 215 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. The Company distributes over 3,500 different
magazine titles which focus on a diverse range of consumer
interest topics. Sales of magazines currently represent
approximately 87% of total Company revenue.
o Books. The Company's book business currently represents
approximately 11% of total Company revenue. Approximately 60%
of book revenue is derived from the sale of paperbacks, at an
approximate average retail price of $6.55 per paperback, and
approximately 16% is derived from the sale of hardcover books,
at an approximate average retail price of $22.00 per hardcover
book. The balance comes from the sale of children's books and
bargain books.
o Newspapers. In selected Ohio markets, the Company distributes
over 50 local and national newspapers including daily, weekly
and Sunday only titles. Sales of newspapers currently
represent approximately 1% of total Company revenues.
o Other. The Company also distributes 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.
o Included in the Company's revenues are retail sales of $12.5
million. The Company's wholesale sales of $4.1 million to its
retail stores were eliminated in consolidation.
SUPPLIERS AND PRICING
The Company purchases approximately 84% 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 72% of
accounts payable. The retail prices of the periodicals that the Company
distributes are established by publishers such as Time Warner, Hearst and
Hachette.
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
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retailers, such as The Kroger Company, Giant Eagle, Meijers, CVS, Rite Aid, Food
Lion and Big Bear Stores 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
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 magazine
issue, 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, but the Company bears no material risk due to
paper pricing.
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, Findlay, Ohio 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 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 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 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 and is
maintained by internal management information systems professionals at UNIMAG.
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 gathered by
the US Census Bureau and provided to UNIMAG pursuant to
contracts with CACI and Claritas, 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.
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.
All locations have been converted to the Company's computer
system, and the SMARTS System is being 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 10% 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 ten 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, CVS, Rite Aid, Food Lion
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 News, The News Group,
Hudson News and the Chas. Levy Circulating Co., 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
believes that geographic barriers to competition are
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. Similarly,
the Company would have difficulty competing in geographic
areas dominated by other wholesalers.
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:
-- The accuracy of packaging and accounting systems and
the timeliness of delivery service;
-- The effectiveness of its product allocation and
display systems to the retailer;
-- Technological capabilities and the resulting cost
saving afforded to the retailer;
-- Competitive pricing and terms;
-- The wholesaler's reputation as a "direct store
delivery" vendor and success as an overall category
manager to the retailer; and
-- The wholesaler's ability to generate and communicate
new specific customer knowledge to the retailer.
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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.
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 used
principally 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 used by the Company
in all of its businesses, the demographic and psychographic
information used 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 50% of the population now has
access to the Internet, this service has not had any
quantifiable effect on retail periodical sales.
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 uses 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 6 Month Lease
o 17,500 sq. ft. Wilmington, NC 3 Year Lease
o 65,000 sq. ft. Columbus, OH* 18 Month Lease
o 35,000 sq. ft. Cincinnati, OH Owned (Subject to Mortgage)
o 17,000 sq. ft. Petoskey, MI* 18 Month Lease
o 17,000 sq. ft. Mt. Pleasant, MI* 7 Year Lease
o 84,000 sq. ft. Jackson, MI* 4 Year Lease (Renewal)
o 25,500 sq. ft. Madison Heights, MI* 4 Year Lease
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o 78,000 sq. ft. Indianapolis, IN* 1 Year Lease
o 46,800 sq. ft. Niles, MI* 18 Month 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 4 Year Lease
o 10,000 sq. ft. Cleveland, OH* 1 Year Lease
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COMPANY'S RETAIL FACILITIES:
The Company maintains lease agreements with respect to approximately
84,000 sq. ft. for 23 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 for its corporate offices
approximately 17,400 square feet of space at 5131 Post Road, Dublin, Ohio. The
lease is with an affiliate of Ronald E. Scherer, was acquired as part of the
business combinations in 1996, and has a remaining term through October 31,
2005. 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.
ITEM 3. LEGAL PROCEEDINGS
See Note 12 of the United Magazine Company consolidated financial
statements as of October 3, 1998 included in Item 8 of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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. The common shares of UNIMAG were not quoted in
each of the four quarters of 1998, 1997 and 1996.
In January of 1998, the Company received shares of its Common Stock,
valued at $15.00 per share, from MDI as part of the sale of Yankee's operating
assets. The Company also 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 Company also used this value of $15.00 per share in
connection with other transactions.
During the fiscal years 1998 and 1997, shares were redeemed from the
Marshall family, in connection with the Wilmington Put Agreement, at a value of
$15.00 per share.
During the fiscal year 1996, the Company had transactions at the
following prices. 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.
In September, 1998, the Company's Board of Directors authorized a
one-time Employee Stock Reward Program. In December, 1998, approximately 108,000
shares were issued. The shares were awarded in the first quarter of fiscal 1999.
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 October 3, 1998, UNIMAG had 2,811 shareholders of record.
DIVIDENDS
There were no dividends declared or paid by UNIMAG during fiscal years
1998, 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.
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<PAGE> 13
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).
<TABLE>
<CAPTION>
UNIMAG FISCAL YEAR ENDED
[IN MILLIONS EXCEPT EARNINGS (LOSS) PER
SHARE] 1998 (1) 1997 (2) 1996 (3) 1995 (4) 1994 (5)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated income statement
data:
Net sales $324.1 $298.3 $80.2 $24.6 $24.7
Income (loss) from $(91.7) $(24.5) $(6.4) $1.9 $(.9)
continuing operations
before taxes and extra-
ordinary items
Weighted average shares 7.3 7.1 3.2 2.4 2.2
outstanding
Earnings (loss) per share $(12.56) $(3.47) $(1.98) $.78 $(.41)
from continuing operations
before extra-ordinary items
Consolidated balance sheet data:
Total assets $244.8 $271.6 $251.4 $12.3 $8.5
Long-term debt obligations $59.5 $80.9 $64.4 $.1 $.7
</TABLE>
(1) Includes Yankee for three (3) months, SKS for eight (8) months, Central
and Penn for seven (7) months, and Wilmington, Triangle, Michiana,
Stoll, Read-Mor, Scherer Affiliates and Klein for a full year. The loss
from continuing operations includes a $70.0 million charge for
impairment loss on goodwill.
(2) Includes Yankee, Wilmington, Triangle, Michiana, Stoll, Read-Mor,
Scherer Affiliates and Klein for a full year.
(3) 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.
(4) 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.
(5) Includes all then-existing subsidiaries for a full year.
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<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS OF UNIMAG FOR THE YEARS ENDED OCTOBER 3, 1998, SEPTEMBER
27, 1997 AND SEPTEMBER 28, 1996
INTRODUCTION
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. The Company is a dominant regional periodical
wholesaler in Ohio, Michigan, Indiana and western Pennsylvania, with an
estimated market share of greater than fifty percent (50%). The Company also
provides similar services from its Wilmington, North Carolina location, selling
to customers primarily in eastern North Carolina.
INDUSTRY BACKGROUND
The periodical wholesale distribution industry has undergone
significant consolidation during the past three years. Prior to this period of
consolidation, wholesale periodical distributors historically operated in
defined geographic territories where product availability was substantially
controlled by suppliers. Three years ago, a power shift occurred within the
industry. The underlying economic power shifted from suppliers to retailers.
Large retailers began to consolidate their vendor relationships with large
wholesalers. These large retailers began to acquire periodicals for all of their
retail locations from one or a few larger wholesalers rather than from separate
wholesalers in each geographic area where a retail location was based. Gross
margins decreased significantly for the industry as more price competition
occurred. A number of small and medium sized wholesalers addressed this
evolution by affiliating or by consolidating their operations to reduce
duplicative operating expenses to be able to compete effectively for large
retail accounts while providing the additional value-added services required by
the retailers. Consequences of this evolution included a smaller number of
wholesalers distributing within many more geographic locations, larger
wholesalers engaging in direct competition for retail business, and many small
wholesalers becoming unable to remain in business. As a further consequence, the
industry now is beginning to evolve from a supplier based push distribution
system to a consumer based pull allocation system.
The $4.3 billion wholesale periodical distribution industry in North
America currently is comprised of approximately 60 regional and local
wholesalers operating out of approximately 200 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. It is
estimated that the five largest wholesaler groups in the country account for
approximately 80% of magazine sales, and the ten largest account for
approximately 90% of magazine sales. 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.
During 1998 the industry saw a significant consolidation occur when The
Anderson News Group acquired the periodical wholesale operations of ARAMARK.
This provided The Anderson News Group with a revenue base estimated at
approximately $1.3 billion, or 30% of the total North American market. The
wholesale periodical distribution industry is positioned for some additional
significant consolidations over the next year as larger wholesalers look to
strengthen their combined market share. 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 five companies across the United States. As smaller local
wholesalers continue consolidating with larger and
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<PAGE> 15
financially stronger regional wholesalers, management believes that some
additional acquisitions within the industry will occur over the next 12 months.
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 for optimum sales; and
o Maintenance of 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
exclusive territories 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 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 retail profitability.
This trend began to eliminate the traditional geographical
barriers that had existed in the industry for decades and
shifted the emphasis of the wholesaler/retailer relationship
from the local level to the corporate or regional level.
Although a regional wholesaler can 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 previously servicing those
far reaching locations, either through joint ventures or
through consolidations in order to optimize delivery
efficiency and long term profitability.
o Industry Consolidation. The industry has undergone
considerable consolidation for several reasons. Because
wholesalers must operate under the constraints of a price
ceiling dictated by a periodical's cover price as established
by the publishers, successful wholesalers are required to
concentrate on cost cutting measures in order to remain
competitive. Through mergers and through 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,
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<PAGE> 16
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 the sales and the
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 and 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 to
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 loss of margin sustained by wholesalers in 1996, 1997, and 1998
caused wholesalers to have poor operating results and a weakened balance sheet.
Management believes that wholesalers, national distributors and publishers are
all aware of the need to provide some margin recovery to wholesalers so that all
facets of the distribution channel can be solid. During 1998 some national
distributors and publishers developed plans to provide additional margin
recovery for wholesalers. Several of these plans were implemented in the third
fiscal quarter of 1998.
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 ("KDR") 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's
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.
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<PAGE> 17
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 scheduled to be paid 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 in a note due over a fifteen-month period. Since December 31,
1997, all new Senior Debenture interest has been accrued.
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 scheduled to be paid 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 in a note due over a fifteen-month period. Since December 31, 1997, all
new Subordinated Debenture interest has been accrued.
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 Corporate 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 book 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 maturity of the term loan.
The Company has loans outstanding to related parties related to 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 (see Note 12 of the United
Magazine Company Consolidated Financial Statements as of October 3, 1998
included in Item 8 of this report).
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<PAGE> 18
REVIEW OF OPERATIONS
The results of operations for 1998 are somewhat comparable to results
from 1997; however, the results for 1998 are not necessarily indicative of the
future. During 1998 the Company sold the operations of Yankee in January of
1998, acquired the operations of SKS in February of 1998, and acquired the
operations of Penn and Central in March of 1998. Since March of 1998 the Company
has operated with its current mix of operations.
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, 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
except those acquired in 1998.
During 1998 the revenue from operations for the Company was $324.1
million, a $25.8 million (8.6%) increase over 1997. The increase was
attributable to a combination of factors including new business acquired, net of
the disposition of the Yankee business, industry growth, and changes in the mix
and volume of customers.
During 1997, the revenue from operations for the Combined Company, as
reclassified to conform to the 1998 presentation, was $298.3 million, an
increase of $218.1 million (272%) over 1996 revenue. The increase was primarily
attributable to the inclusion of revenues from all locations for the entire
twelve months of 1997. The 1997 increase of $17.6 million over 1996 pro forma
revenue of $280.7 million, an increase of 6.3%, was attributable to the
Company's marketing efforts coupled with normal industry growth.
The most significant development during 1996 was the reduction in
revenue from existing chain customers. New discounts, rebates and the
amortization of signing bonuses caused an approximate 5% reduction in Company
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.
The cost of goods sold, as a percentage of net sales, increased from
75.2% in 1996 to 78.3% in 1997 and to 80.1% in 1998. The increase from 1996 to
1997 was the result of the full year impact of discounts, rebates and
amortization of signing bonus programs (which the Company accounts for as a
reduction of revenue). The increase in 1998 over 1997 was caused by the change
in the mix and the volume of business between Yankee, SKS, Penn and Central and
by higher sales increases in the lower margin customers. The Company has
historically estimated its gross margin during interim financial reporting
periods. With the changes within the periodical wholesale distribution industry,
the calculation of gross margin has become more complex. The Company has
undergone a comprehensive review of its estimating process and has implemented
changes for fiscal 1999. As a result of these gross margin changes, the Company
has restated its quarterly financial information for the first three fiscal
quarters of 1998.
During 1998 selling general and administrative expenses increased by
$2.8 million over 1997; however, as a percent of revenue, the expenses declined
from 24.2% to 23.1%. The increase in 1998 was primarily attributable to the
change in the mix of expenses of SKS and Penn and Central versus Yankee. The
1998 and 1997 selling, general and administrative expenses included
approximately $.6 million (.2%) and $2.9 million (1.0%) in non-recurring legal
and accounting fees and litigation settlement expenses. The reduction in
selling, general and administrative expenses, as a percent of revenue, from
27.8% in 1996 to 24.2% in 1997 was due to the Company's cost cutting efforts and
the consolidation of operations
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<PAGE> 19
during a time of pro forma revenue increases of approximately 6.3%. 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.
During 1998 depreciation and amortization increased by approximately
$1.0 million. This was primarily attributable to the additional amortization of
goodwill and the additional depreciation of fixed assets from the acquisition of
the SKS net assets and the Penn and Central net assets. During 1997 depreciation
and amortization expense increased due to the depreciation of fixed assets
acquired and to the amortization of goodwill related 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 one
purchase method of accounting. Accordingly, goodwill was created in the amount
of $17.1 million for Michiana, $50.2 million for Stoll, $33.3 million for Klein,
$.8 million for Read-Mor, $39.6 million for Scherer Affiliates and $24.2 million
for SKS, Penn and Central. 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 1998, 1997 and
1996 depreciation and amortization remained relatively unchanged.
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 $1.8 million.
The loss from operations in 1998, excluding the charge to goodwill of
$70 million, was $4.0 million more than in 1997 (-6.4% versus -5.6%) with the
improvement in selling, general and administrative being offset by the decline
in gross margin. The margin decline of 3.1% in 1997, net of the 3.6% reduction
in selling, general and administrative expenses resulted in a .5% decline in the
1997 loss from operations.
During February of 1998 the Company restructured existing bank and
third party debt, including the payment of $5.0 million of Senior Debentures,
and consolidated banking relationships with both Key Corporate 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, as amended, of $33 million a term loan of $5 million and a capital
expenditure loan of $3 million. Other debt transactions during 1998 resulted in
an increase in interest bearing debt from $82.7 million in 1997 to $101.7
million in 1998. The increase in debt was offset to some extent by lower
interest rates; however, the interest expense for the Company in 1998 versus
1997 increased by $1.4 million (3.0% versus 2.7%).
In 1996 the acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer
Affiliates was financed by the issuance of $72.8 million 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. This increased interest
expense for 1997 by $5.0 million versus $.7 million in 1996. In addition, the
Company assumed debt in the acquisitions, which accrued interest for the entire
year of 1997.
Cash paid for interest was $3.4 million in 1998 versus $2.2 million in
1997 and $.5 million in 1996 Included in the non-cash interest was $.6 million
in 1998 and 1997 and $.5 million in 1996 for the accretion of shares subject to
put agreements. In addition, during 1998, the majority of the interest on the
debentures was deferred by the debenture holders.
Because of the historical losses for the years, any tax benefit has
been fully reserved for 1998, 1997 and 1996. The Company has a net operating
loss (NOL) carryforward of approximately $47.4
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<PAGE> 20
million at October 3, 1998. Of this NOL, approximately $29.4 million has annual
limits due to the change of control related to the shares issued at closing in
February of 1998. The Company has not recognized any benefits from the NOL
through 1998.
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 1998 was $(10.4) million, or (3.2%) of sales, versus $(7.4)
million, or (2.5%) of sales in 1997. During 1998 the Company did not achieve all
of its anticipated savings from facility consolidations and was unable to reduce
selling, general and administrative expenses to planned levels.
EBITDA for 1997 was $(7.4) million, or (2.5)% of sales, versus $(2.4)
million, or (3.0)% of sales, in 1996. The 1997 EBITDA was impacted negatively by
the 3.1% decline in gross margin, and the $2.8 million 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.
At October 3, 1998, the Company had current liabilities of $222.0
million and current assets of $115.8 million for a working capital deficit of
$106.2 million. Of this $106.2 million, $35.3 million is due to classifying bank
debt as current due to debt covenant violations. Management's plans to improve
this position in 1999 are included in Note 2 in the United Magazine Company's
consolidated financial statements as of October 3, 1998.
At September 27, 1997, the Company had current liabilities of $144.1
million and current assets of $97.9 million, for a working capital deficit of
$46.2 million. Included in the $46.2 million deficit was $2.0 million in accrued
interest which was converted to term debt and $4.1 million of accrued interest
which was converted to equity, both in February of 1998.
The Company anticipates improvements in EBITDA in fiscal 1999 versus
1998 through a combination of margin improvement and substantial expense
reductions. In addition, the Company has retained the services of a national
"turnaround" consulting firm to assist the Company's management in implementing
these improvements. Margin improvement opportunities include a continuation of
current margin improvement programs started in 1998 and new margin improvement
programs. Expense reduction opportunities include substantial reductions in
corporate overhead through personnel reductions, though executive salary
reductions and through reductions in delivery and in-store service costs by
rerouting of customers and by targeted reductions in certain service areas.
CASH FLOWS - OPERATING ACTIVITIES
During 1998, the Company used $9.3 million in cash for operations, a
decrease in operating cash flow of $13.8 million from 1997. This decrease was
caused by additional cash flow operating losses that were financed through
increases in negative working capital, primarily publisher payables.
During 1997, the Company improved its net cash provided from operations
to $4.5 million, a $5.4 million improvement over 1996. The increase was due
primarily to an increase in negative working capital net of cash flow operating
losses.
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<PAGE> 21
CASH FLOWS - INVESTING ACTIVITIES
In 1998, investing activities used $3.7 million of cash. Additions to
property and equipment were $1.5 million, and $2.3 million was used for
additional acquisition costs.
In 1997, investing activities used $1.6 million of cash, with the sale
of an asset generating $1.2 million. Additions to property and equipment were
$.7 million, and $2.1 million was used for additional acquisition costs.
CASH FLOWS - FINANCING ACTIVITIES
During 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. The Company borrowed $42.0 million under debt
obligations and made payments of $26.4 million for a net debt increase of $15.6
million. Stock transactions increased the net cash provided by financing
activities to $15.9 million.
During 1997, the Company borrowed $3.4 million under debt obligations.
The Company made payments of $6.7 million under debt obligations for a net debt
decrease of $3.3 million. Stock transactions increased the net cash used in
financing activities to $3.4 million.
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 1999, as in 1998 and 1997, the Company expects that its
requirements for capital expenditures will not be significant. Through
additional route consolidations, 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. The Company also plans to acquire automation equipment that will
improve productivity and accuracy in order fulfillment.
OPERATIONAL MEASURES
The trade receivables of the Company increased by $31.3 million, net of
the effect of acquisitions and dispositions, during the two year period ended
October 3, 1998. This increase was due primarily to an increase in payment time
periods by certain large retailers and secondarily to increases in revenue. The
Company has recently increased its internal collection efforts to reduce the
number of days outstanding of receivables and has made changes in its receivable
information systems.
Vendor payables increased by $76.8 million, net of the effect of
acquisitions and dispositions, during the two year period ended October 3, 1998.
This increase was due primarily to increases in the cost of sales associated
with the revenue levels. The Company anticipates using 1999 accounts receivable
collection efforts and 1999 improvements in cash flow from operations to reduce
vendor payables.
OPERATING SYNERGIES
The 1996 acquisition transactions enabled the Company to begin to
leverage its investment in its sophisticated and proprietary SMARTS System,
acquired from the Scherer Affiliates, for more efficient
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<PAGE> 22
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, during 1999, the SMARTS System, which
provides a unique competitive advantage, will improve same store revenue as it
is introduced to additional new retail locations and will provide a critical
competitive advantage over other regional wholesalers in obtaining important new
accounts and retaining existing accounts.
In addition to the proprietary SMARTS System, the Company's 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 continued application of the
Impact Marketing programs 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 initial cost savings and operating efficiencies through
the elimination of redundant overhead and the consolidation of overlapping
facilities. During 1997 and 1998, the Company converted several warehouse
locations in the states of Michigan, Ohio, Pennsylvania and Indiana to delivery
depots by consolidating the majority of office and warehouse functions into four
locations. During 1998 the Company also consolidated the operations acquired
from SKS, Penn and Central into existing distribution warehouses. The cost to
eliminate this redundant overhead and to consolidate operations was reflected in
the periods in which the changes were made. The Company anticipates further
reductions in leased square footage during 1999.
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.
During 1998 the Company, and portions of the industry, began the process of
margin recovery, which included new negotiations with suppliers regarding
pricing and discounts and consolidation of book purchases for volume incentives.
The Company anticipates a significant recovery over time; however, the ultimate
amount and timing currently are not quantifiable. The Company anticipates that
the margin recovery in 1999 will exceed that in 1998.
The decline in the gross margin percent was partially offset by
reductions in selling, general and administrative expenses as a percent of
sales. The reduction in selling, general and administrative percentage in 1997
and 1998 was achieved by increasing the revenue base without a corresponding
increase in the related fixed and semi-variable expenses. For 1999 the Company
plans additional cost-cutting and operational efficiencies while growing
revenue.
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, 1997, and 1998. Several of these contracts expire in
1999, and the success of the Company in retaining existing customers and
acquiring new customers, and the costs associated with such customer contracts,
cannot be determined at this point in time. The Company does enjoy long-term
relationships with most of their customers and is currently in the process of
developing new programs with their customers.
20
<PAGE> 23
The Company was named as a defendant in various litigation matters. 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 has been actively engaged in the process of addressing the
Year 2000 ("Y2K") Issue since 1997. 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 and believes that 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 compliant. 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.
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.
21
<PAGE> 24
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 (as discussed in "Operating
Synergies" 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 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
22
<PAGE> 25
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
UNITED MAGAZINE COMPANY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
23
<PAGE> 26
UNITED MAGAZINE COMPANY
INSERT TO FORM 10-K
The following financial statements meet the requirements of Regulation
S-X, except that the accountants' reports on the audit of the financial
statements required under Rule 2-02 and Article 3 of Regulation S-X are not
reasonably available to UNIMAG. Arthur Andersen, LLP cannot provide its reports
based on the fact that UNIMAG owes Arthur Andersen, LLP, a remaining balance
totaling $1,624,120 in audit, tax and consulting fees incurred by UNIMAG since
August of 1998. UNIMAG is presently unable to pay in full the indebtedness owed
to Arthur Andersen, LLP.
On August 11, 1999, UNIMAG requested that Arthur Andersen, LLP provide
its reports and offered to pay to Arthur Andersen, LLP a total of $740,000 over
time in full settlement of all remaining fees owed by UNIMAG. On August 20,
1999, Arthur Andersen, LLP rejected this settlement proposal.
Under Exchange Act Rule 12b-21, the information required in the
accountants' reports may be omitted because the obtaining thereof would involve
unreasonable effort and expense and because the reports rest peculiarly within
the knowledge of another person not affiliated with UNIMAG, namely Arthur
Andersen, LLP.
UNIMAG believes that any accountants' reports on the financial statements
for the fiscal year ended October 3, 1998 would contain a going concern
qualification. The accountant's reports issued by Arthur Andersen, LLP on the
financial statements for the fiscal year ended September 27, 1997 did contain a
going concern qualification. The following financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
24
<PAGE> 27
UNITED MAGAZINE COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(in millions)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash $ 5.0 $ 2.1
Trade accounts receivable, net of allowance for doubtful accounts of
$6.6 million in 1998 and $4.5 million in 1997 66.6 44.9
Inventories 40.2 40.5
Prepaids and other 4.0 10.4
-------- --------
Total current assets 115.8 97.9
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Land .2 .3
Building and improvements 1.3 2.1
Furniture and equipment 8.5 6.2
Vehicles 3.7 3.9
Leasehold improvements 1.6 1.0
-------- --------
15.3 13.5
Less - accumulated depreciation and amortization (5.9) (3.6)
-------- --------
Total property and equipment, net 9.4 9.9
-------- --------
OTHER ASSETS:
Costs in excess of net assets acquired, net of accumulated amortization of
$9.6 million in 1998 and $4.9 million in 1997 103.4 152.6
Prepaid signing bonuses 3.4 3.6
Other assets, net 12.8 7.6
-------- --------
Total other assets 119.6 163.8
-------- --------
Total assets $ 244.8 $ 271.6
======== ========
</TABLE>
(Continued on next page)
25
<PAGE> 28
UNITED MAGAZINE COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(in millions)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) 1998 1997
---------------------------------------------- ---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of debt obligations $ 42.2 $ 1.8
Accounts payable 157.5 113.4
Accrued expenses 12.0 20.6
Reserve for gross profit on sales returns 10.3 8.3
-------- --------
Total current liabilities 222.0 144.1
LONG-TERM DEBT OBLIGATIONS 4.9 22.4
DEBENTURES HELD BY SHAREHOLDERS:
- Senior 33.2 39.9
- Subordinated 21.4 18.6
BENEFIT PLAN OBLIGATIONS 4.2 4.3
OTHER LONG-TERM LIABILITIES 3.7 .1
-------- --------
Total liabilities 289.4 229.4
-------- --------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO PUT AGREEMENTS, .5 million shares in 1998 and 1997 5.2 4.9
-------- --------
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, no par value, 53.3 million shares authorized, 9.2 and 4.3
million issued, 7.4 and 2.7 outstanding (including shares subject to Put
Agreements), in 1998 and 1997, respectively -- --
Paid-in capital 117.6 43.7
Obligation to issue shares -- 65.2
Treasury stock, at cost (4.0) (.1)
Minimum pension liability adjustment (.2) --
Retained deficit (163.2) (71.5)
-------- --------
Total shareholders' equity (deficit) (49.8) 37.3
-------- --------
Total liabilities and shareholders' equity $ 244.8 $ 271.6
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
26
<PAGE> 29
UNITED MAGAZINE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 3, 1998, SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
(in millions except for loss per share)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES $ 324.1 $ 298.3 $ 80.2
COST OF SALES (259.5) (233.5) (60.3)
--------- --------- --------
Gross profit 64.6 64.8 19.9
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (75.0) (72.2) (22.3)
DEPRECIATION AND AMORTIZATION (10.2) (9.2) (2.5)
IMPAIRMENT LOSS ON GOODWILL (70.0) -- --
--------- --------- --------
Loss from operations (90.6) (16.6) (4.9)
--------- --------- --------
OTHER INCOME (EXPENSES), net:
Interest expense (9.6) (8.2) (1.8)
Interest income 0.6 .2 .2
Gain on sale of Yankee 7.8 -- --
Other, net .1 .1 .1
--------- --------- --------
Total other income (expenses), net (1.1) (7.9) (1.5)
--------- --------- --------
Loss before taxes (91.7) (24.5) (6.4)
TAX PROVISION -- -- --
--------- --------- --------
Net loss $ (91.7) $ (24.5) $ (6.4)
========= ========= ========
WEIGHTED AVERAGE SHARES OUTSTANDING 7.3 7.1 3.2
========= ========= ========
LOSS PER SHARE (Basic and Diluted) $ (12.56) $ (3.47) $ (1.98)
========= ========= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
27
<PAGE> 30
UNITED MAGAZINE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED OCTOBER 3, 1998, SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
(in millions)
<TABLE>
<CAPTION>
Obligation Minimum
Number of to Issue Pension
Shares Treasury Paid-in Common Treasury Liability
Outstanding Shares Capital Stock Stock Adjustment
-------------- ----------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 30, 1995 2.2 1.6 $ 42.7 $ -- $ -- $ --
Issuance of common stock -- -- .4 -- -- --
Obligation to issue 4.3 million shares
of common stock -- -- -- 65.2 -- --
Minimum pension liability adjustment -- -- -- -- -- (.1)
Net loss -- -- -- -- -- --
---------- ----------- ---------- ------------ ---------- ----------
BALANCE, September 28, 1996 2.2 1.6 43.1 65.2 -- (.1)
Issuance of warrants -- -- .1 -- -- --
Issuance of shares -- -- .4 -- -- --
Redemption of putable shares -- -- .1 -- (.1) --
Minimum pension liability adjustment -- -- -- -- -- .1
Net loss -- -- -- -- -- --
---------- ----------- ---------- ------------ ---------- ----------
BALANCE, September 27, 1997 2.2 1.6 43.7 65.2 (.1) --
</TABLE>
<TABLE>
<CAPTION>
Retained
Deficit Total
------------ ----------
<S> <C> <C>
BALANCE, September 30, 1995 $ (40.6) $ 2.1
Issuance of common stock -- .4
Obligation to issue 4.3 million shares
of common stock -- 65.2
Minimum pension liability adjustment -- (.1)
Net loss (6.4) (6.4)
------------ ----------
BALANCE, September 28, 1996 (47.0) 61.2
Issuance of warrants -- .1
Issuance of shares -- .4
Redemption of putable shares -- --
Minimum pension liability adjustment -- .1
Net loss (24.5) (24.5)
------------ ----------
BALANCE, September 27, 1997 (71.5) 37.3
</TABLE>
(Continued on next page)
28
<PAGE> 31
UNITED MAGAZINE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED OCTOBER 3, 1998, SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
(in millions)
<TABLE>
<CAPTION>
Obligation Minimum
Number of to Issue Pension
Shares Treasury Paid-in Common Treasury Liability
Outstanding Shares Capital Stock Stock Adjustment
-------------- ----------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, September 27, 1997 2.2 1.6 $ 43.7 $ 65.2 $ (.1) $ --
Issuance of shares 4.9 -- 73.6 (65.2) -- --
Redemption of shares:
Puts -- -- .3 -- (.3) --
Other (.2) .2 -- -- (3.6) --
Minimum pension liability adjustment -- -- -- -- -- (.2)
Net loss -- -- -- -- -- --
---------- ----------- ---------- ------------ ---------- ----------
BALANCE, October 3, 1998 6.9 1.8 $ 117.6 $ -- $ (4.0) $ (.2)
========== =========== ========== ============ ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Retained
Deficit Total
------------ ----------
<S> <C> <C>
BALANCE, September 27, 1997 $ (71.5) $ 37.3
Issuance of shares -- 8.4
Redemption of shares:
Puts -- --
Other -- (3.6)
Minimum pension liability adjustment -- (.2)
Net loss (91.7) (91.7)
------------ ----------
BALANCE, October 3, 1998 $ (163.2) $ (49.8)
============ ==========
</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 OCTOBER 3, 1998, SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
INCREASE (DECREASE) IN CASH
(in millions)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (91.7) $ (24.5) $ (6.4)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities -
Loss on investment in Wilmington -- -- .2
Gain on sale of Yankee (7.8) -- --
Consulting fee paid with common stock -- .5 .3
Accretion of interest on common stock subject to put
agreements .6 .6 .5
Depreciation and amortization 10.2 9.2 2.5
Impairment loss on goodwill 70.0 -- --
Changes in certain assets and liabilities, net of the effect of
acquisitions and dispositions in 1996 and 1998-
(Increase) decrease in certain assets:
Trade accounts receivable (17.1) (14.2) (2.0)
Inventories 5.8 (4.8) (.5)
Prepaids and other (2.7) (.4) .5
Other assets (4.1) (10.0) .2
Prepaid signing bonuses 1.2 2.0 (2.0)
Increase (decrease) in certain liabilities:
Accounts payable 33.8 43.0 2.1
Accrued expenses (2.5) 6.4 2.9
Reserve for gross profit on sales returns (2.3) (2.1) .9
Other liabilities (2.4) (.7) --
Benefit plan obligation (.3) (.5) (.1)
------- ------- ------
Net cash provided by (used in) operating activities (9.3) 4.5 (0.9)
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (1.5) (.7) (1.1)
Proceeds from sale of asset .1 1.2 --
Cash used for acquisitions, net of cash acquired (2.3) (2.1) 1.2
------- ------- ------
Net cash provided by (used in) investing activities (3.7) (1.6) .1
------- ------- ------
</TABLE>
(Continued on next page)
30
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 3, 1998, SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
INCREASE (DECREASE) IN CASH
(in millions)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt obligations $ 42.0 $ 3.4 $ 4.3
Payments on debt obligations (26.4) (6.7) (1.7)
Redemption of putable shares of common stock (.3) (.1) --
Issuance of common stock .6 -- --
------- ------ ------
Net cash provided by (used in) financing activities 15.9 (3.4) 2.6
------- ------ ------
NET INCREASE (DECREASE) IN CASH 2.9 (.5) 1.8
CASH, beginning of year 2.1 2.6 .8
------- ------ ------
CASH, end of year $ 5.0 $ 2.1 $ 2.6
======= ====== ======
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for interest $ 3.4 $ 2.2 $ .5
Cash paid during the year for taxes $ .3 $ -- $ --
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities
- -------------------------------------------------------------------
1998
- ----
The Company acquired two companies and disposed of its Connecticut subsidiary.
See Note 4 for additional discussion. The Company converted accrued debenture
interest of $7.4 million to debt and equity (see Note 5). The Company took-back
shares and debentures as consideration for related party notes and advances of
$3.7 million (see Note 11).
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 OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
(1) ORGANIZATION
------------
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. UNIMAG also has two 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 3,500 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 23 retail
bookstores.
UNIMAG grew significantly during 1996 by the acquisition of six
wholesalers (two in the second quarter and four in the fourth quarter).
(2) MANAGEMENT PLAN (UNAUDITED)
---------------------------
The recurring loss from operations for 1998 has had an adverse effect on
the Company's short-term liquidity. At October 3, 1998 the Company had
current liabilities in excess of current assets of approximately $106.2
million versus $46.2 million at September 27, 1997. Of the $106.2
million, $35.3 million relates to debt scheduled for long-term payments
that has been classified as current since waivers were not obtained
through fiscal 1999. The Company has obtained forbearance agreements from
its banks on certain areas of default, but only through August 31, 1999.
During 1996 and 1997, due to increased levels of competition and to
fundamental changes within the entire periodical distribution industry,
the Company entered into long-term contracts with many of its customers
as a means of retaining market share within its primary geographic areas
of operations. During this period the Company and the industry
experienced significant reductions in profitability due to margin
reduction and to increased payroll costs caused by providing higher
levels of customer service.
During 1998 the revenue of the Company increased by 8.6%, with much of
that growth coming from lower gross margin business. The Company also
incurred some additional charges to gross margin in connection with the
absorption of acquired business into the Company's operations.
The Company anticipated that there would be margin recovery within the
industry during 1998 as publishers, national distributors and wholesalers
all recognized the need to add margin back into the system. Some members
of the industry developed programs for margin recovery starting primarily
in the Company's third fiscal quarter. However, several others failed to
do so within the 1998 fiscal year.
During 1998 the Company anticipated a substantial reduction in operating
costs through consolidations and through improving the consistency of
operations. While the Company did reduce selling, general and
administrative costs as a percent of revenue from 24.2% to 23.1%, the
Company was unable to achieve all of its targeted savings.
During 1998, the Company's lower margin business, the failure to obtain
margin recovery from publishers, and the inability to achieve all
targeted selling, general and administrative cost savings were the
principal contributors to a negative EBITDA of 3.2%.
32
<PAGE> 35
In fiscal 1999, the Company is planning for revenues to decline from the
level achieved in fiscal 1998. The Company has examined its operations
and has decided to exit from the retail bookstore business and to reduce
its book distribution business. The Company expects that these decisions
will increase its cash flow and reduce its working capital requirements.
Additionally, the Company is looking at the contribution margins from
some of its retail customers and may choose to stop servicing ones whose
margins do not cover the cost of servicing those accounts.
The Company's primary focus in fiscal 1999 is on obtaining additional
margin recovery programs from the publishers and on substantially
reducing its selling, general and administrative costs. In connection
with this effort, the Company has retained the services of a national
"turnaround" consulting firm to assist the Company's management in profit
improvement.
Plans for increased margin recovery include achieving a full year of
margin recovery from existing publisher relationships and aggressively
seeking additional margin recovery from those publishers who have failed
to provide adequate programs during 1998. In connection with this, one
publisher has announced a new margin recovery program effective in the
Company's second fiscal quarter of 1999. In addition, as existing
contracts expire, the Company anticipates opportunities for margin
improvement from the negotiation of new long-term programs under more
favorable terms to the Company. These programs will be designed to create
long-term revenue growth and gross margin increases for customers while
increasing gross margins to the Company.
The Company has initiated actions that will reduce administrative costs
during 1999. Certain senior executives and directors have agreed to no
compensation in 1999, while other senior executives have agreed to a
substantial reduction and deferral in their compensation until certain
financial results are achieved. The headcount at the corporate offices
has been reduced in several areas. Changes are being made in the process
of providing in-store service to reduce the labor costs associated with
that process. Drivers' routes are being reviewed to provide greater
revenue per driver ratios. Office functions are being centralized for
greater control and reduced labor costs. These actions will result in a
substantial reduction in payroll, payroll taxes, and related employee
benefits.
Other operating costs are being reviewed by the Company's management and
by the outside consulting firm. In addition to expense reductions
associated with exiting the retail bookstore business and associated with
reducing its book distribution business, the company is looking at all of
its facilities in light of the Company's focus on margin profitability of
its customers. It is anticipated that additional fleet, facility,
computer and communication expenses will be reduced.
The Company has taken a charge of $70 million for impairment of goodwill
in 1998. This will reduce the 1999 charge for goodwill amortization by
$1.8 million.
The Company continues to defer payment of interest on the debentures
associated with the 1996 acquisitions. The Company continues to review
opportunities to restructure the debentures.
Through its rerouting efforts and its fleet management policies, the
Company expects to keep 1999 capital additions to a minimal amount.
The Company anticipates that these and other related efforts may be able
to generate a positive EBITDA by the fourth fiscal quarter in 1999 and
thereafter. There can be no assurances that the Company's plans will
succeed. The financial statements do not include any further adjustments,
other than the $70 million impairment charge in 1998, 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.
(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.
33
<PAGE> 36
(e) 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 or sold 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.
(f) 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.
(g) 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 based upon
cash flow projections. The Company determined based on such cash
flow projections that there was an impairment of goodwill. The
result of such projections on a discounted basis supported an
impairment loss on goodwill in the amount of $70 million at
December 31, 1998.
(h) 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.
(i) 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.
(j) Income Taxes - The Company follows SFAS No. 109 "Accounting for
Income Taxes" (SFAS 109). (See Note 8).
(k) 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.
34
<PAGE> 37
(l) 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 1997 weighted
average shares outstanding from the respective acquisition dates
as discussed in Note 4.c. Warrants that are anti-dilutive have
been excluded.
(m) 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.
(n) Reclassifications - Certain reclassifications have been made to
the consolidated financial statements for 1997 to conform with the
1998 presentation.
(o) 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 (fiscal 1999 for UNIMAG).
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 a minimum
pension liability adjustment that would qualify.
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 does not
have any segments meeting the disclosure requirements.
(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.
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.
35
<PAGE> 38
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.
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. It is
based on historical information and does not necessarily reflect
the actual results that would have occurred, nor is it necessarily
indicative of the future results of operations of the combined
enterprise.
In millions, except Loss
Per Share 1996
-------------------------- ----------
Net Revenue $280.8
Net Loss (21.5)
Loss Per Share $(3.09)
d. During 1998, the Company made two acquisitions of certain assets
and liabilities. The consideration for these acquisitions was cash
of $2.4 million. These acquisitions were not considered
significant for financial reporting purposes.
e. In January of 1998, the Company entered into an agreement to sell
certain operating assets and liabilities of Yankee (a subsidiary)
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. A gain of approximately $7.8
million has been recognized on the sale. This disposition was not
considered significant for financial reporting purposes.
36
<PAGE> 39
(5) DEBT OBLIGATIONS
----------------
The components of the Company's debt obligations at October 3, 1998 and
September 27, 1997 are as follows (in millions):
Long term Debt Obligations
--------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
a) New Line of Credit $ 32.9 $ --
a) New Term and Capital Expenditure Loans 6.5 --
b) Seller Financing 4.5 8.6
c) Loans from Related Parties 2.5 6.1
d) Acquired Lines of Credit 0.6 8.5
e) Term Loans with financial institutions 0.1 .7
f) Notes with Publishers -- .3
--------- ---------
Total 47.1 24.2
Less: normally scheduled current portion (6.9) (1.8)
--------- ---------
Long-term portion of debt obligations $ 40.2 $ 22.4
========= =========
</TABLE>
(a) Financing Arrangements
On February 6, 1998, the Company entered into a Credit Agreement
(the Agreement) with two banks that provided a Revolving Credit
Commitment of $30.0 million, a Term Loan of $5.0 million and a
Capital Expenditure Loan of $2.4 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 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 default interest
rate became effective. This rate is prime plus 2.0% for debt under
the Credit Agreement. The average interest rate was 8.3% for 1998.
The Capital Expenditure Loan and Revolving Credit Commitment
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.
The Agreement is collateralized by substantially all of the
Company's assets. Additionally, the Company's debt obligations
under the Credit Agreement are collateralized by assets held in
escrow of which $2.7 million was funded by a related party (see
Note 12). The Agreement contains financial and non-financial
covenants, including, among other restrictions, minimum income
before interest, taxes, depreciation and amortization (EBITDA), a
minimum cash flow ratio, minimum net worth and a maximum debt to
EBITDA ratio. The Company was not in compliance with these
covenants and others and has not obtained waivers through 1999 for
expected continual noncompliance.
37
<PAGE> 40
(b) 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 mature at various times during 1999 through
February 2011. Approximately $2.4 million of the balance was
paid-down as part of the refinancing in February 1998 discussed in
(a) above.
(c) The loans from related parties relate to accrued interest or
debentures that were converted to notes and $1.1 million loaned to
UNIMAG from an entity owned by two shareholders. The interest
notes ($1.4 million) are due in 1999 while the $1.1 million is due
in 2003. Interest accrues at 6.0%.
(d) At September 27, 1997, the Company had five lines of credit with
banks. The lines of credit bear interest at rates ranging from
prime to 9.25%. The lines were substantially paid off in February
1998 as part of the refinancing discussed in (a) above. The
weighted average interest rates on the outstanding borrowings
under the lines of credit as of September 27, 1997, were
approximately 8.6%.
(e) 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 through April 1999. $600,000 of the balance was
paid-down as part of the refinancing in February 1998, discussed
in (a) above.
(f) 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 were 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 (a) above do not
have any significant covenants.
Shareholder Debentures
----------------------
The components of shareholder debentures are as follows (in millions):
<TABLE>
<CAPTION>
1998 1997
Shareholder Group Senior Subordinated Total Total
------------------------------------------ -------- ----------------- -------- --------
<S> <C> <C> <C> <C>
KDR Limited $-- $ 4.5 $ 4.5 $--
Stoll Company 11.8 9.1 20.9 25.9
Michiana 2.1 1.4 3.5 5.9
Scherer Affiliates 9.1 1.0 10.1 10.7
Klein 10.0 5.3 15.3 15.7
Read-Mor 0.2 0.1 0.3 0.3
-------- -------- -------- --------
Total 33.2 21.4 54.6 58.5
Less: current portion -- -- -- --
-------- -------- -------- --------
Long-term portion of debentures $33.2 $21.4 $54.6 $58.5
======== ======== ======== ========
</TABLE>
38
<PAGE> 41
The senior debentures began to accrue interest 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 of
the payment in a short-term note and 2/3 in common stock. In
connection with the refinancing in February 1998, 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 subordinated debentures through the
maturity of the Term Loan discussed in (a), which is currently
scheduled for expiration in February 2001. 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 $11.8 million of
Stoll senior debentures must be paid before any other debentures
may be paid.
The subordinated debentures began to accrue interest at 10%
payable quarterly commencing on the closing date of the
acquisitions. Quarterly payments of interest were not paid during
1997. Quarterly principal payments were scheduled from April 1,
1999 through January 1, 2004; however, no payments on subordinated
debentures are allowed until all senior debentures have been paid.
These payments cannot be made until the bank is paid, which is
scheduled for February 2001. Furthermore, no payments on
debentures are permitted until the maturity of the Term Loan
discussed in (a), which is currently scheduled for expiration in
February 2001. Interest on the subordinated debentures and all
senior debentures since December 31, 1997 has not been paid. The
subordinated debentures are secured by all the assets of the
Company, however, these subordinated debentures are subordinated
to the senior debentures.
In 1998, a $5.0 million note from KDR was exchanged for $.5
million in cash and $4.5 million in subordinated debentures with
terms similar to the subordinated debentures discussed above.
Interest on these debentures has been paid.
In 1998 $1.7 million of senior and $1.6 million of subordinated
debentures were reduced by advances due from related parties.
Scheduled maturities of all debt obligations at October 3, 1998 are as
follows (in millions); however, the Company is not in compliance with its
financial covenants. Therefore $35.3 million of the long-term debt
obligation has been classified as current on the consolidated balance
sheet:
<TABLE>
<CAPTION>
Long-Term
Debt
Fiscal Year Obligations Debentures Total
---------------- -------------- -------------- --------
<S> <C> <C> <C>
1999 $ 6.9 $ -- $ 6.9
2000 3.3 -- 3.3
2001 2.4 7.6 10.0
2002 1.2 9.2 10.4
2003 31.6 12.9 44.5
Thereafter 1.7 24.9 26.6
-------- --------- --------
Total $47.1 $54.6 $101.7
======== ========= ========
</TABLE>
39
<PAGE> 42
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 and the significant portion that 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 (in millions):
<TABLE>
<CAPTION>
Fiscal Year Related Party Other Total
-------------------- ---------------- ---------- ---------
<S> <C> <C> <C>
1998 $ 2.0 $ 2.1 $ 4.1
1997 1.7 1.4 3.1
1996 .2 1.2 1.4
</TABLE>
As of October 3, 1998, the future minimum annual rental commitments of
lease agreements are as follows (in millions):
<TABLE>
<CAPTION>
Fiscal Year Related Party Other Total
-------------------- ---------------- ---------- ---------
<S> <C> <C> <C>
1999 $ 1.4 $ 1.8 $ 3.2
2000 0.5 1.2 1.7
2001 0.1 1.1 1.2
2002 0.1 0.8 0.9
2003 0.1 0.2 0.3
Thereafter 0.1 0.2 0.3
---------- ---------- ---------
Total $ 2.3 $ 5.3 $ 7.6
========== ========== =========
</TABLE>
(7) COMMON STOCK
------------
The Company was obligated to issue 4.3 million shares previously 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 has 192,657 warrants outstanding to purchase Company stock at
$12 per share.
(8) INCOME TAXES
------------
The provision (benefit) for income taxes for the years ended 1998, 1997
and 1996 is as follows (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Current tax provision (benefit):
Federal $ -- $ -- $ --
State -- -- --
Net increase in deferred tax assets (6.1) (7.2) (1.8)
Increase in valuation allowance 6.1 7.2 1.8
---------- --------- ---------
Income tax provision (benefit) $ -- $ -- $ --
========== ========= =========
</TABLE>
40
<PAGE> 43
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 benefit of the net operating losses generated
that may not be realized in the future. The effective income tax rate
varies from the federal statutory rate for the years ended October 3,
1998, September 27, 1997 and September 28, 1996, as follows (dollars in
millions):
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax provision
(benefit) at federal
statutory rate $(31.2) (34%) $ (8.3) (34%) $ (2.2) (34%)
Effect of:
State income tax provision
(benefit) (5.5) (6%) (1.5) (6%) (0.4) (6%)
Non-deductible goodwill 29.6 33% 1.5 6% 0.5 7%
Non-deductible interest 1.0 1% 1.1 4% 0.3 3%
Change in valuation
allowance 6.1 6% 7.2 30% 1.8 30%
-------- ------- -------- ------- -------- -------
Income tax provision (benefit) $ -- --% $ -- --% $ -- --%
======== ======= ======== ======= ======== =======
</TABLE>
The significant items giving rise to the deferred tax assets and
liabilities as of October 3, 1998 and September 27, 1997 are as follows
(in millions):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Short-term deferred tax assets:
Accrued expenses and reserves $ 4.1 $ 4.0
--------- ---------
Total short-term deferred tax assets 4.1 4.0
--------- ---------
Long-term deferred tax assets (liabilities):
Net operating losses 18.1 10.9
Property and equipment (0.9) (0.9)
Other 3.2 3.7
--------- ---------
Total deferred tax assets, net 20.4 13.7
--------- ---------
Total deferred tax assets, net 24.5 17.7
Less: valuation allowance (24.5) (17.7)
--------- ---------
Total deferred tax assets, net $ -- $ --
========= =========
</TABLE>
The Company's net deferred tax assets have been fully reserved due to the
uncertainty of future realization.
41
<PAGE> 44
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
$18.0 million were generated from February 8, 1998 to October 3, 1998
that have no restriction on their use. The $18.0 million NOL also expires
in 2013.
(9) BENEFIT PLANS
-------------
Benefit plan obligations for the Company as of October 3, 1998 and
September 27, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Deferred compensation plan $ 1.0 $ 1.1
Accrued pension obligation 1.8 1.6
Post-retirement obligation 1.4 1.6
--------- ----------
Total $ 4.2 $ 4.3
========= ==========
</TABLE>
Multi-Employer Plans
--------------------
The Company's Michigan subsidiary participates in a multi-employer
defined benefit pension plan which provides benefits to certain union
employees of the Company. Proportionate share information on any unfunded
benefit obligation is not readily available. However, the Company has no
current intention to withdraw from the plan. The Company made
contributions of approximately $39,000, $62,000 and $19,000 in fiscal
year 1998, 1997 and 1996, respectively.
Union Pension Plan
------------------
As a result of the acquisition of Triangle in 1996, 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.
42
<PAGE> 45
The following table sets forth the plan's funding status and amounts
recognized in the Company's financial statements (in millions):
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations $ 3.8 $ 3.5
Non-vested benefit obligations .2 .2
--------- ----------
Accumulated benefit obligation (ABO) $ 4.0 $ 3.7
========= ==========
Projected benefit obligation (PBO) $ 3.9 $ 3.7
Plan assets at fair value (2.1) (2.1)
--------- ----------
Projected benefit obligation in excess of plan assets 1.8 1.6
Unrecognized net loss (.2) --
--------- ----------
Accrued pension cost 1.6 1.6
Additional minimum pension liability .2 --
--------- ----------
Accrued pension and minimum liability $ 1.8 $ 1.6
========= ==========
The key assumption used in determining the projected benefit obligation
for 1998 and 1997 were as follows:
Discount rate 7%
Expected long-term rate of return on
assets 8%
</TABLE>
Net pension cost included the following components:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Asset loss $ -- $ -- $ (.1)
Service cost .1 .1 --
Interest cost on projected benefit obligation .2 .2 .2
Actual return on plan assets (.1) (.1) --
--------- --------- ---------
Net pension cost $ .2 $ .2 $ .1
========= ========= =========
</TABLE>
Funding of the plan was approximately $.1, $.3 and $.2 million in 1998,
1997 and 1996, respectively.
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 provide 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.
43
<PAGE> 46
The following table presents the plan's funded status reconciled with
amounts recognized in the Company's balance sheets (in millions):
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligations:
Current retirees $ .6 $ .7
Other fully eligible participants .2 .2
Other active plan participants .4 .7
--------- ----------
Accumulated postretirement benefit obligations in excess of
plan assets 1.2 1.6
Unrecognized net gain .2 --
--------- ----------
Accrued postretirement benefit cost $ 1.4 $ 1.6
========= ==========
</TABLE>
Net periodic postretirement benefit cost includes the following
components (in millions):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Service cost $ -- $ .1 $ --
Interest cost .1 .1 .1
Amortization of gain and loss -- -- --
--------- --------- ---------
Net periodic postretirement benefit cost $ .1 $ .2 $ .1
========= ========= =========
</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 1998,
1997 and 1996 are 9%, 10% and 11%, respectively, for participants less
than age 65 and 7.5%, 8.0% and 8.5%, respectively, for participants 65
and older. The rate is assumed to decrease over 7 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
October 3, 1998, September 27, 1997 and September 28, 1996 by
approximately $.1, $.2 and $.2 million, respectively, and the aggregate
of the service and interest cost components of net periodic
postretirement benefit cost for 1998, 1997 and 1996 by approximately
$15,000, $26,000 and $15,000, respectively.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0%, 7.0% and 7.5% at October 3,
1998, 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.
Through fiscal 1998, the Company has not made any significant
contributions to the plan. Subsequent to year-end, the Company
contributed approximately 108,000 shares to the retirement savings plan.
44
<PAGE> 47
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 $1.0 million and $1.1 million at October 3, 1998 and
September 27, 1997, respectively.
(10) SIGNIFICANT VENDORS
-------------------
The Company purchased greater than 84% of its product from five
publishers in 1998 and 1997, respectively. These publishers represent
approximately 72% and 64% of accounts payable in 1998 and 1997,
respectively.
(11) RELATED PARTY TRANSACTIONS
--------------------------
The Company had advances and notes to related parties of $0.5 and $11.8
million at October 3, 1998 and September 27, 1997, respectively,
including $7.4 million that was an advance to an affiliated company that
was purchased by the Company in 1998. During 1998 the Company took back
shares and subordinated debentures as consideration for notes and
advances of $3.7 million.
The Company had sales to a retail chain owned by a significant
shareholder of $0.9, $2.3, and $3.3 million for 1998, 1997 and 1996,
respectively, and accounts receivable of $2.9 and $1.6 million at October
3, 1998 and September 27, 1997.
The Company purchased display racks from a company owned by a significant
shareholder of $2.2 million for the years ended October 3, 1998, and
September 27, 1997.
See Note 6 for a discussion on related party leases and see Notes 5 and
12 for a discussion on related party debt and related transactions.
(12) CONTINGENCIES AND COMMITMENTS
-----------------------------
(a) Common Stock Subject to Put Agreements
In conjunction with the Company's acquisition of Wilmington in
1996, 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 $3,767,450,
$335,831, $335,831, $335,839 and $335,832 in 1999, 2000, 2001,
2002 and 2003, respectively and $2,489,716 in total over the next
succeeding 10 years.
On February 8, 1998, the Company and a related party entered into
an Escrow Agreement with the Company's principal bank by which the
Company and the related party contributed approximately $.5
million and $2.7 million, respectively, to an escrow account. This
escrow account was established primarily for funding future put
obligations, as permitted by the Escrow Agreement. The Company's
principal banks have a lien, pledge and security interest in the
escrow funds.
45
<PAGE> 48
(b) Other Legal Matters
The Company has been named as a defendant in various 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 position or results of
operations.
See Note 13 for litigation matters subsequent to year-end.
(13) SUBSEQUENT EVENT
----------------
PROPOSED SALE OF WHOLESALE BUSINESS SEGMENT
-------------------------------------------
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.
During the second fiscal quarter of fiscal 1999 the Company initiated a
plan to sell or close substantially all of its retail locations. Retail
revenue is less than 10% of total revenue.
46
<PAGE> 49
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
-------------------------------------------
The following is a tabulation of the unaudited quarterly results of
operations for the two years ended October 3, 1998 and September 27,
1997:
<TABLE>
<CAPTION>
(in millions, except earnings (loss)
per common share) 1998
----------------------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
NET SALES $77.3 $76.7 $82.7 $87.4 $324.1
Cost of sales (62.0) (61.9) (66.0) (69.6) (259.5)
-------- -------- -------- -------- ---------
Gross profit 15.3 14.8 16.7 17.8 64.6
Selling, general and administrative
expenses (17.6) (18.0) (19.7) (19.7) (75.0)
Depreciation and amortization (2.1) (2.1) (2.7) (3.3) (10.2)
Impairment loss on goodwill -- -- -- (70.0) (70.0)
-------- -------- -------- -------- ---------
LOSS FROM OPERATIONS (4.4) (5.3) (5.7) (75.2) (90.6)
Interest expense (1.8) (1.8) (2.3) (3.7) (9.6)
Other, net -- 8.5 (0.3) 0.3 8.5
-------- -------- -------- -------- ---------
Net income (loss) before tax (6.2) 1.4 (8.3) (78.6) (91.7)
Income tax -- -- -- -- --
-------- -------- -------- -------- ---------
NET INCOME (LOSS) $(6.2) $ 1.4 $(8.3) $(78.6) $(91.7)
======== ======== ======== ======== =========
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per share - basic and
diluted $(0.88) $0.20 $(1.12) $(10.62) $(12.56)
Weighted average shares outstanding 7.1 7.2 7.4 7.4 7.3
(in millions, except earnings per common
share) 1997
---------------------------------------------------------
First Second Third Fourth Total
-------- -------- -------- -------- --------
NET SALES $74.4 $75.7 $79.6 $68.6 $298.3
Cost of sales (58.0) (59.1) (62.1) (54.3) (233.5)
-------- -------- -------- -------- --------
Gross profit 16.4 16.6 17.5 14.3 64.8
Selling, general and administrative
expenses (17.3) (16.5) (16.1) (22.3) (72.2)
Depreciation and amortization (2.1) (2.2) (2.1) (2.8) (9.2)
-------- -------- -------- -------- --------
LOSS FROM OPERATIONS (3.0) (2.1) (0.7) (10.8) (16.6)
Interest expense (1.8) (1.8) (1.6) (3.0) (8.2)
Other, net (0.1) 0.1 -- 0.3 0.3
-------- -------- -------- -------- --------
Net income (loss) before tax (4.9) (3.8) (2.3) (13.5) (24.5)
Income tax -- -- -- -- --
-------- -------- -------- -------- --------
NET INCOME (LOSS) $(4.9) $(3.8) $(2.3) $(13.5) $(24.5)
======== ======== ======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per share $(0.69) $(0.53) $(0.32) $(1.93) $(3.47)
Weighted average shares outstanding 7.1 7.1 7.1 7.1 7.1
</TABLE>
47
<PAGE> 50
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
48
<PAGE> 51
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:
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD WITH THE COMPANY
- ---- --- -------------------------------
<S> <C> <C>
Ronald E. Scherer 49 Chairman of the Board of Directors
David B. Thompson 59 Vice Chairman/Treasurer
Robert H. Monnaville 54 Chief Executive Officer, President
Eugene J. Alfonsi 61 Senior Vice-President
George R. Klein 57 Vice-Chairman
Thaddeus A. Majerek 48 Assistant to the Chairman
Richard Stoll, Sr. 66 None
Nancy Stoll Lyman 38 None
R.L. Richards 50 None
William D. Parker 62 None
o Executive Officer Not Named Above.
John B. Calfee, Jr. 53 Chief Financial Officer
</TABLE>
RONALD E. SCHERER, age 49, has been a member of the Board of Directors
of the Company since 1989. He was appointed Chief Executive Officer and
President of the Company in August 1989, and became Chairman of the Board of
Directors in February 1992. In September 1997, Mr. Scherer resigned as President
of the Company, and in December 1998, he resigned as Chief Executive Officer. He
continues to serve as the Chairman of the Company's Board of Directors.
Additionally, Mr. Scherer served as Chairman of the Board of Directors of
Scherer Companies from 1982 to 1993, at which time he was appointed Senior
Chairman of its Board. Other companies under Mr. Scherer's ownership, control or
management have engaged in such businesses as real estate, manufacturing,
pharmaceutical distribution, and data processing.
DAVID B. THOMPSON, age 59, has been a member of the Board of Directors of
the Company since 1988. He was appointed Vice Chairman in November 1996 and
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 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.
49
<PAGE> 52
ROBERT H. MONNAVILLE, JR., age 54, has been a member of the Board of
Directors of the Company since March of 1995. He has served as President of the
Company since September of 1997 and Chief Executive Officer since December of
1998. Mr. Monnaville was President of Service News Company, d/b/a Yankee News
Company, one of the Company's subsidiaries, from March of 1995 until March of
1998. 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 of
the Company since 1992 and is currently serving as a Senior Vice-President. 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 57, has been a member of the Board of Directors of
the Company since September 1997 and Vice-Chairman since October 1997.
Additionally, he has served as President of the Cleveland, Ohio Division of the
Company since September 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, he has served as President and Chairman of the Executive
Committee for East Texas Distributing Co., a magazine wholesaler located in
Houston, Texas. Mr. Klein has ownership interests in other magazine wholesale
companies and in other entities, including companies that provide real estate
and management services to Klein. Mr. Klein is a 1964 graduate of Colorado
College with a Bachelor of Science degree and earned 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, he has served as Assistant to the Chairman 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 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 66, 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 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 50, 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
50
<PAGE> 53
owned by R. David Thomas, a principal shareholder of the Company. 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 62, 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:
JOHN B. CALFEE, JR., age 53, has served as Chief Financial Officer of the
Company since July 1998. Mr. Calfee is a graduate of Yale University with a
Masters degree from Harvard University Graduate School. Additionally, Mr. Calfee
was a certified public accountant from 1975 to 1988. He started his career at
Ernst & Whinney (now Ernst & Young). Mr. Calfee was Vice President and Chief
Financial Officer of the Essef Corporation from 1989 to 1994. Prior to joining
United Magazine Company, Mr. Calfee was Senior Vice-President and Chief
Financial Officer of TBN Holdings, Inc. Mr. Calfee also served as a lieutenant
in the U.S. Navy.
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 October 3, 1998.
51
<PAGE> 54
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>
Annual Compensation
------------------- ----------- -------------
(a) (b) (c) (d) (e)
Other
Annual
Compen-
Name and Fiscal Salary Bonus sation
Position(s) Year ($) ($) ($)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ronald E. Scherer, 1998 $492,000 None None
Chairman of the Board of 1997 $491,000 None $235,000
Directors(1) 1996 $50,000 None None
David B. Thompson, 1998 $225,000 None None
Treasurer(1) 1997 $224,000 None $75,000
1996 $37,000 None None
Robert H. Monnaville, 1998 $200,000 None None
Chief Executive Officer, 1997 $164,000 None None
President 1996 $130,000 None None
Eugene J. Alfonsi, 1998 $196,000 None None
Senior Vice President(1) 1997 $180,000 None None
1996 $32,500 None None
George R. Klein, 1998 None None None
Vice-Chairman, Division 1997 None None None
President(2) 1996 None None None
</TABLE>
<TABLE>
<CAPTION>
Long Term Compensation
----------------------------- -------------
Awards Payouts
--------------- ------------- -------------
(f) (g) (h) (i)
Securities
Restricted Under- All Other
Stock lying LTIP Compen-
Name and Award(s) Options/ Payouts sation
Position(s) ($) SAR's(#) ($) ($)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ronald E. Scherer, None None None None
Chairman of the Board of None None None None
Directors(1) None None None None
David B. Thompson, None None None None
Treasurer(1) None None None None
None None None None
Robert H. Monnaville, None None None None
Chief Executive Officer, None None None None
President None None None None
Eugene J. Alfonsi, None None None None
Senior Vice President(1) None None None None
None None None None
George R. Klein, None None None $181,000
Vice-Chairman, Division None None None $527,000
President(2) 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.
52
<PAGE> 55
(2) 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 expenses. During
fiscal 1998 and 1997, Klein Management Company received management fees
of $181,000 and $527,000, respectively.
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, the Company 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. Director R. L. Richards has waived his director fees. The
Company does pay reasonable out-of-pocket expenses incurred in the attendance of
meetings of the Board of Directors for all directors.
53
<PAGE> 56
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 October 3, 1998 and by each
executive officer and director of the Company.
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 1,731,641(3)(4)(5) 22.98%
Chairman of the Board
of Directors
5131 Post Road
Dublin, OH 43017
Linda (Hayner) Scherer Talbott 1,266,591(5) 16.81%
5131 Post Road
Dublin, OH 43017
Roger L. Scherer Trust 1,059,077(5) 14.05%
F/B/O Ronald E. Scherer,
Dated June 14, 1979
5131 Post Road
Dublin, OH 43017
Roger L. Scherer Trust 1,059,077(5) 14.05%
F/B/O Linda Hayner (Scherer)
Talbott, Dated June 14, 1979
5131 Post Road
Dublin, OH 43017
R. David Thomas 427,162(2) 5.67%
One Bay Colony
Ft. Lauderdale, FL 33308
Richard H. Stoll, Sr. 421,750(4)(7)(8) 5.60%
Director
6477 Mill Ridge Road
Maumee, OH 43537
George R. Klein 1,169,502(4) 15.52%
Director
1771 East 30th Street
Cleveland, OH 44114
Total 3,750,055 49.76%
</TABLE>
54
<PAGE> 57
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 1,731,641(3)(4)(5) 22.98%
Chairman of the Board
of Directors
5131 Post Road
Dublin, OH 43017
David B. Thompson 2,264(3) .03%
Vice-Chairman, Treasurer,
Director
5131 Post Road
Dublin, OH 43017
Eugene J. Alfonsi 5,000 .07%
Senior Vice President, Director
5131 Post Road
Dublin, OH 43017
Thaddeus A. Majerek 279,212(4)(6) 3.71%
Assistant to the Chairman,
Director
2232 S. 11th Street
Niles, MI 49120
Robert H. Monnaville, Jr. 39,925 .53%
Chief Executive Officer,
President, Director
5131 Post Road
Dublin, OH 43017
John B. Calfee, Jr. 0 0
Chief Financial Officer
5131 Post Road
Dublin, OH 43017
Nancy Stoll Lyman 153,350(4)(7)(8) 2.03%
Director
203 N. Wabash, Suite 1504
Chicago, IL 60601
</TABLE>
55
<PAGE> 58
<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>
William D. Parker 0 0
Director
5131 Post Road
Dublin, OH 43017
Richard H. Stoll, Sr. 421,750(4)(7)(8) 5.60%
Director
6477 Mill Ridge Road
Maumee, OH 43537
R.L. Richards 48,164(2) .64%
Director
5131 Post Road
Dublin, OH 43017
George R. Klein 1,169,502(4) 15.52%
Vice-Chairman, Director
1771 E. 30th Street
Cleveland, OH 44114
All Directors and Executive 3,850,808 51.10%
Officers as a Group
(5 persons before the September,
1997 Annual Meeting, 11 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 October 3, 1998 is 7,348,186 shares. The total number of beneficial
shares of common stock of the Company outstanding in October 3, 1998 is
7,535,843 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. These warrants were subsequently
distributed to the members of KDR Accordingly, these distributed
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.
56
<PAGE> 59
The table includes 144,476 (1.92%) shares of Common Stock of the
Company received by Northern in the Exchange Transactions and 52,488
(0.70%) 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.
(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 (3.71%) 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 (3.86%) 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 (25.95%) 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 (22.39%) 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.
57
<PAGE> 60
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Note 11 of the United Magazine Company consolidated financial
statements as of October 3, 1998, 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 1998 was $60,000.
YANKEE AGREEMENTS WITH MDI, LP
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 4 of the United Magazine
Company Consolidated Financial Statements as of October 3, 1998 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.
58
<PAGE> 61
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 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. For the
fiscal year ended October 3, 1998, the Company paid $181,000 for management
services.
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.
59
<PAGE> 62
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 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
60
<PAGE> 63
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,
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. This subordinated debenture is not subject
to the same terms and restrictions on subordinated debentures issued to the
acquisition parties. 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, commencing January 1, 1997, 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
61
<PAGE> 64
facility contains 84,000 square feet and is leased for $300,000 per year. The
lease has approximately four years remaining.
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. At
September 27, 1997 HOCAB was indebted to the Company in the amount of
$2,012,618. The Company also had other small balances owed to and owed by
affiliates of HOCAB as a result of the Michiana acquisition. During June of
1998, the HOCAB notes receivable, affiliated balances, and related interest were
all cancelled in exchange for the cancellation of $1,400,000 of senior
debentures and $934,256 of subordinated debentures. The Company had net sales to
HOCAB of $0.9, $2.3 and $3.3 million for 1998, 1997 and 1996, respectively, and
had trade accounts receivable of $2.9 and $1.8 million at October 3, 1998 and
September 27, 1997.
PURCHASE OF DISPLAY RACKS
During the years ended October 3, 1998 and September 27, 1997, the
Company purchased approximately $2.2 million of display racks from a company
owned by Ronald E. Scherer.
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 $111,734 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> 65
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.
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<PAGE> 66
PART IV
INDEX
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Page
----
Exhibits 66
Financial Statement Schedules 69
Reports on Form 8K 70
64
<PAGE> 67
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).
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).
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<PAGE> 68
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).
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<PAGE> 69
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>
Michiana News Service, Inc. Michigan Michiana
- ---------------------------------------------------------------------------------------------------------------------------
MacGregor News Service, Inc. Michigan MacGregor
- ---------------------------------------------------------------------------------------------------------------------------
The Stoll Companies Ohio Stoll
- ---------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------
Imperial News Co., Inc. (Inactive) Delaware Imperial News
- ---------------------------------------------------------------------------------------------------------------------------
Team Logos Sportstuff, Inc. (Inactive) Ohio Team Logos and Sportstuff
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Name of Subsidiary Jurisdiction of Name in which
(merged during 1998) Incorporation or Organization Business is Conducted
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ohio Periodical Distributors, Inc. Ohio OPD
(Merged)
- ---------------------------------------------------------------------------------------------------------------------------
Service News Company* Connecticut Yankee News Company
- ---------------------------------------------------------------------------------------------------------------------------
Sportstuff Marketing, Inc.* (Inactive) Ohio Sportstuff Marketing
- ---------------------------------------------------------------------------------------------------------------------------
UNIMAG I, Inc.* (Inactive) 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
- ---------------------------------------------------------------------------------------------------------------------------
Central Wholesale, Inc. Pennsylvania Central
- ---------------------------------------------------------------------------------------------------------------------------
Penn News Company, Inc. Pennsylvania Penn
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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 companies were merged into the
Company on March 6, 1998.
27.0 Financial Data Schedules - EDGAR Filing.
67
<PAGE> 70
UNITED MAGAZINE COMPANY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED OCTOBER 3, 1998, SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
<TABLE>
<CAPTION>
Charged to
Balance at Charges to other accounts Balance at
beginning costs and - Additions Deductions end of
of period expenses thru acquisition (1) period
------------- ------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts
1996 $ 63,000 $ 774,024 $2,147,976 $ -- $ 2,985,000
1997 2,985,000 1,556,566 -- -- 4,541,566
1998 4,541,566 1,776,419 282,763 -- 6,600,748
Reserve for gross profit
on sales returns
1996 541,499 892,598 9,040,312 -- 10,474,409
1997 10,474,409 -- -- (2,123,375) 8,351,034
1998 8,351,034 -- 4,255,509 (2,331,733) 10,274,810
</TABLE>
(1) Charges to this account are for the purposes for which the reserves
were created.
68
<PAGE> 71
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 1998 through August 23, 1999:
On January 25, 1999 the Company filed Form 8-K disclosing a delay in
the filing of Form 10-K due to pending resolution of open accounting and banking
issues.
On April 5, 1999 the Company filed Form 8-K disclosing the agreement
with Chas. Levy Circulating Co. whereby the Company will sell substantially all
of its wholesale operating assets to Levy in return for cash and for the
assumption by Levy of substantially all of the wholesale operating liabilities
of the Company.
On July 2, 1999, the Company filed Form 8-K disclosing the termination
of the Asset Purchase Agreement by and among Chas. Levy Circulating Co., United
Magazine Company and its subsidiaries.
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 was filed under regular status.
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 August 23, 1999 By /s/ Ronald E. Scherer
--------------- -------------------------------------
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>
/s/ Ronald E. Scherer Director, Chairman August 23, 1999
- ------------------------------------------
Ronald E. Scherer
/s/ David B. Thompson Director, Vice August 23, 1999
- ------------------------------------------ Chairman and Treasurer
David B. Thompson
/s/ Robert H. Monnaville Director, Chief Executive August 23, 1999
- ------------------------------------------ Officer and President
Robert H. Monnaville
/s/ Eugene J. Alfonsi Director, August 23, 1999
- ------------------------------------------ Senior Vice President
Eugene J. Alfonsi
/s/ George R. Klein Director, August 23, 1999
- ------------------------------------------ Vice-Chairman
George R. Klein
/s/ Thaddeus A. Majerek Director, Assistant to the August 23, 1999
- ------------------------------------------ Chairman
Thaddeus A. Majerek
/s/ John B. Calfee, Jr. Chief Financial Officer August 23, 1999
- ------------------------------------------
John B. Calfee, Jr.
</TABLE>
70
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000020469
<NAME> UNITED MAGAZINE COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-START> SEP-23-1997
<PERIOD-END> OCT-03-1998
<CASH> 5,000
<SECURITIES> 0
<RECEIVABLES> 73,200
<ALLOWANCES> 6,600
<INVENTORY> 40,200
<CURRENT-ASSETS> 125,800
<PP&E> 15,300
<DEPRECIATION> 5,900
<TOTAL-ASSETS> 244,800
<CURRENT-LIABILITIES> 222,000
<BONDS> 59,500
0
0
<COMMON> 0
<OTHER-SE> (49,800)
<TOTAL-LIABILITY-AND-EQUITY> 244,800
<SALES> 324,100
<TOTAL-REVENUES> 324,100
<CGS> 259,500
<TOTAL-COSTS> 259,500
<OTHER-EXPENSES> 85,200
<LOSS-PROVISION> 70,000
<INTEREST-EXPENSE> 9,600
<INCOME-PRETAX> (91,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (91,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (91,700)
<EPS-BASIC> (12.5)
<EPS-DILUTED> (12.5)
</TABLE>
