<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 212,679
<SECURITIES> 0
<RECEIVABLES> 4,005,776
<ALLOWANCES> 393,000
<INVENTORY> 16,339,963
<CURRENT-ASSETS> 22,014,673
<PP&E> 8,651,225
<DEPRECIATION> 2,258,571
<TOTAL-ASSETS> 35,271,061
<CURRENT-LIABILITIES> 21,341,391
<BONDS> 1,177,900
0
0
<COMMON> 57,609
<OTHER-SE> 12,694,161
<TOTAL-LIABILITY-AND-EQUITY> 35,271,061
<SALES> 26,035,362
<TOTAL-REVENUES> 26,035,062
<CGS> 15,636,717
<TOTAL-COSTS> 15,636,717
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 553,478
<INCOME-PRETAX> 1,423,745
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,423,745
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,423,745
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10475
PAGES, INC.
Incorporated - Delaware I.R.S. Identification No. 34-1297143
801 94th Avenue North, St. Petersburg, Florida 33702
Registrant's Telephone Number (813) 578-3300
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 12 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 90 days.
YES X NO
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of latest practicable date: 5,462,153 common shares
outstanding, each with par value $0.01, as of August 9, 1996.
<PAGE>
PAGES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
-------------------------------------
ASSETS 1996 1995
------------ -------------
Current assets:
Cash $ 212,679 $ 532,855
Accounts receivable, net of allowance
for doubtful accounts of $393,000 and
$457,000, respectively 3,612,776 9,931,548
Inventory 16,339,963 27,840,561
Prepaid expenses 1,849,255 2,229,829
----------- -----------
Total current assets 22,014,673 40,534,793
----------- -----------
Property and equipment:
Buildings 4,256,881 4,256,881
Equipment 3,762,876 5,810,714
----------- -----------
8,019,757 10,067,595
Less accumulated depreciation (2,258,571) (3,442,661)
----------- -----------
5,761,186 6,624,934
Land 631,468 631,468
----------- -----------
Total property and equipment, net 6,392,654 7,256,402
----------- -----------
Other assets:
Cost in excess of net assets acquired, net
of accumulated amortization of $561,986
and $479,075, respectively 5,911,668 5,994,579
Other 952,066 1,063,701
----------- -----------
6,863,734 7,058,280
----------- -----------
TOTAL ASSETS $35,271,061 $54,849,475
=========== ===========
See accompanying notes
<PAGE>
PAGES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
----------- -----------
Current liabilities:
Accounts payable $ 1,728,542 $ 8,394,054
Short-term debt obligations 7,713,582 5,478,407
Accrued liabilities 2,163,795 2,417,940
Accrued tax liabilities 3,151,945 3,216,088
Deferred revenue 6,360,812 6,970,220
Current maturities on long-term debt 158,676 157,145
obligations
Current maturities on capitalized lease 64,039 168,619
obligations
----------- -----------
Total current liabilities 21,341,391 26,802,473
----------- -----------
Long-term obligations 1,177,900 17,373,403
----------- -----------
Stockholders' Equity:
Preferred shares: $.01 par value; authorized
300,000 shares; none issued and outstanding
Common shares: $.01 par value; authorized
20,000,000 shares; issued 5,760,866 and
5,474,556 shares, respectively 57,609 54 ,746
Capital in excess of stated value 23,037,103 22,760,194
Foreign currency translation, net of tax --- (374,654)
Accumulated deficit (10,101,819) (11,525,564)
----------- -----------
12,992,893 10,914,722
Less 298,713 shares of common stock in
treasury, at cost (241,123) (241,123)
----------- -----------
Total stockholders' equity 12,751,770 10,673,599
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $35,271,061 $54,849,475
=========== ===========
See accompanying notes.
<PAGE>
PAGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months and the six months ended June 30, 1996
-----------------------------------------------------------
and the three months and the six months ended June 30, 1995
-----------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Six Months
------------------------- -------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $10,813,377 $16,571,657 $26,035,362 $35,485,534
----------- ----------- ----------- -----------
Costs and expenses:
Cost of goods sold 6,534,097 9,876,028 15,636,717 21,088,887
Selling, general and administrative 4,954,320 6,693,521 11,125,100 14,354,033
Interest 185,332 504,949 553,478 1,060,423
Depreciation and amortization 235,846 389,720 551,659 770,822
Foreign exchange --- (30) --- (30)
Gain on sale of distribution channel --- --- (3,255,337) ---
----------- ----------- ----------- -----------
11,909,595 17,464,188 24,611,617 37,274,135
----------- ----------- ----------- -----------
Income/(loss) from continuing
operations before income taxes (1,096,218) (892,531) 1,423,745 (1,788,601)
Benefit for income taxes --- 150,000 --- 500,000
----------- ----------- ----------- -----------
Income/(loss) from continuing
operations (1,096,218) (742,531) 1,423,745 (1,288,601)
Discontinued operations --- 43,398 --- (132,096)
----------- ----------- ----------- -----------
NET INCOME/(LOSS) $(1,096,218) $ (699,133) $ 1,423,745 $(1,420,697)
=========== =========== =========== ===========
Income/(loss) per common share:
Income/(loss) from continuing
operations $ (0.20) $ (0.16) $ 0.25 $ (0.27)
Discontinued operations --- 0.01 --- (0.03)
----------- ----------- ----------- -----------
Income/(loss) per common share $ (0.20) $ (0.15) $ 0.25 $ (0.30)
============= =========== =========== ===========
Weighted average common and common
equivalent shares outstanding 5,436,000 4,806,000 5,786,000 4,797,000
============= =========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
PAGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1996 and 1995
-----------------------------------------------
1996 1995
----------- -----------
Cash flows from operating activities:
Net income/(loss) $ 1,423,745 $ (1,420,697)
----------- -----------
Adjustments to reconcile net income/(loss)
to cash provided by operating activities:
Depreciation and amortization 551,659 770,822
Deferred income taxes --- (500,000)
Gain on sale of distribution channel (3,255,337) ---
Foreign exchange --- (30)
Changes in assets and liabilities, net of effect
of disposition in 1996 and acquisition in 1995
by the children's literature segment::
(Increase) decrease in assets:
Accounts receivable 5,592,615 7,926,179
Inventory 5,031,801 4,047,148
Prepaid expenses and other assets (281,031) (165,479)
Decrease in liabilities:
Accounts payable and accrued liabilities (6,060,080) (7,139,264)
Deferred revenue (609,408) (574,501)
----------- -----------
Total adjustments 970,219 4,364,875
----------- -----------
Net cash provided by operating activities 2,393,964 2,944,178
----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment 8,031 300
Payments for purchases of property and equipment (338,827) (258,288)
Proceeds from disposition in children's
literature segment 11,287,500 ---
Payment for acquisition by children's
literature segment --- (733,000)
----------- -----------
Cash provided by (used in) investing activities 10,956,704 (990,988)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock 279,772 49,016
Proceeds from debt and lease obligations 29,151,543 33,408,254
Principal payments on debt and lease
obligations (43,087,616) (35,709,120)
----------- -----------
Cash used in financing activities (13,656,301) (2,251,850)
----------- -----------
Effect of exchange rate changes on cash (14,543) (6,982)
----------- -----------
Decrease in cash (320,176) (305,642)
Cash, beginning of period 532,855 671,602
----------- -----------
Cash, end of period $ 212,679 $ 365,960
============ =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 616,350 $ 1,055,524
Cash paid for taxes $ 0 $ 0
See accompanying notes.
<PAGE>
PAGES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements have not been audited,
but reflect all adjustments which, in the opinion of management, are necessary
for a fair presentation of financial position, results of operations and cash
flows for the periods presented after elimination of all material intercompany
accounts and transactions. All adjustments are of a normal and recurring
nature. These consolidated financial statements should be read in conjunction
with the Company's audited financial statements and notes thereto for the fiscal
year ended December 31, 1995. The consolidated group will be collectively
referred to as "the Company". The operations of PAGES Book Fairs, Inc. and
affiliates, ("PBF") are the Company's children's literature business segment
and the operations of Clyde A. Short Company, Inc. ("CAS") are the Company's
incentive/recognition awards business segment. The Company changed its
children's literature business segment name from School Book Fairs, Inc. to
PAGES Book Fairs, Inc. in May 1996.
The Company's business segments are highly seasonal with the children's
literature business cycle closely correlating the school year and the
incentive/recognition awards business skewed toward the end of a calendar year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
--------------------------------------------------------------------------
OPERATIONS
----------
Internal Revenue Service Assessment
During the Spring of 1993, the Company was advised that the Internal
Revenue Service ("IRS") may assess additional income taxes in connection with
the examination of the tax returns of PAGES Book Fairs (formerly School Book
Fairs) and its affiliates for the fiscal years ending July 31, 1989, 1990 and
1991. In June 1993, the Company recorded a $2 million adjustment to its
purchase price allocation of PBF assets, which increased the cost in excess of
assets acquired (i.e. - goodwill) and recorded a corresponding increase in
accrued tax liabilities and related costs.
In October of 1995, the Company received four Notices of Deficiency from
the IRS relating to this examination. The Notices of Deficiency assessed
additional income taxes of $4,693,681 and penalties of $1,358,630. Using a
constant annual interest rate of 9%, interest payable as of June 30, 1996, on
the aforementioned asserted deficiencies would approximate $4.2 million. The
asserted deficiencies are attributable primarily to a restructuring of PBF and
related entities that occurred on August 31, 1988, in which, along with other
events, certain assets were transferred between related companies. The IRS has
challenged, among other things, the values assigned to those assets by the
parties to the transaction, contending that the assets were undervalued and that
PBF recognized a substantial taxable gain in the transaction. The Company
intends to vigorously contest the various assertions made by the IRS in the
notices of deficiency and believes the IRS's position regarding the adjustments
to taxable income is substantially overstated. The Company has retained the law
firm of Akin, Gump, Strauss, Hauer & Feld as counsel, and in January 1996, filed
petitions with the Tax Court disputing the IRS valuation of the assets
transferred, and other points in the IRS assessment.
On March 7, 1996, the IRS filed answers to each of the four petitions,
generally denying the allegations set forth therein. As of June 30, 1996, the
Company is in negotiations with the IRS Appeals Division in an attempt to reach
a fair settlement prior to the currently scheduled trial of the Company's Appeal
on October 28, 1996 before the U.S. Tax Court. The Company is unable to
determine the ultimate outcome of this uncertainty and accordingly, has not
provided for any additional amounts in excess of the $2 million relating to this
assessment in its June 30, 1996 financial statements. A resolution of these
matters in favor of the IRS could adversely affect the liquidity of the Company
and, if greater than $2 million, would affect earnings in the year any such
assessment is sustained.
Discontinued Operations
In 1995, the Company adopted plans to discontinue the operations of it's Read
Aloud Book Club division (the "Club"). The operations of the Club ceased during
the second quarter of 1996. The Club is accounted for as a discontinued
operation in the accompanying consolidated statements of operations. Losses
anticipated to be incurred between the measurement date (December 31, 1995) and
the date on which operations ceased, as well as phase out costs on the Club,
were provided for in the December 31, 1995 consolidated financial statements.
Disposition of United Kingdom and Discontinuance of Canadian Distribution
Channels
On March 6, 1996, the Company sold to Scholastic Limited, a United Kingdom
subsidiary of Scholastic, Inc. and its affiliates ("Scholastic") all the capital
stock of School Book Fairs, Limited ("Limited"), the Company's United Kingdom
subsidiary for $4,764,781 cash. Additionally, as part of the transaction, (i)
Scholastic paid in full (1) the outstanding balance of $2,129,846 due by Limited
to Lloyds Bank and (2) an intercompany payable due from Limited to the Company
in the amount of $2,317,873 and (ii) the Company signed a Non-Competition
Agreement pursuant to which, in return for the payment of $1,500,000 in cash,
the Company agreed for a five-year period not to compete with the book fair
business of Scholastic and its affiliates in the following countries: Canada,
the United Kingdom, Ireland, Germany, Italy, Greece, Eastern Europe, including
without limitation, the Commonwealth of Independent States, Turkey, the
countries of the Middle East and Africa.
On March 6, 1996, the Company closed its distribution channel in Canada and
on March 13, 1996, the Company sold a portion of its inventory in Canada to
Scholastic Canada, Ltd., a corporation organized under the laws of Canada for
$575,000 cash.
The net proceeds of the above-described transactions of $8,950,000 after
the repayment of the Lloyds Bank debt and estimated transaction costs were used
to reduce the Company's domestic bank indebtedness. Included in the
accompanying June 30, 1996 consolidated financial statements is a $3,255,337
gain on the transaction.
New Bank Agreement
On March 27, 1996, the Company negotiated a new $16 million revolving
credit facility to replace the previous $25 million of domestic bank credit
line. The credit facility consists of the following: a $5 million long-
term credit loan for use in the incentive/recognition awards business (the
"CA Short Line") and an $11 million long-term credit loan for use in the
children's literature business (the "PAGES Book Fairs Line"). The interest
rate on the facility is prime plus 1%. The facility is due in full by
June 1, 1997, subject to annual renewals.
<PAGE>
Quarter and Six Months Ended June 30, 1996 Compared to Quarter and Six Months
- --------------------------------------------------------------------------------
Ended June 30, 1995:
- --------------------
Information about the Company's operations by business segments:
<TABLE>
<CAPTION>
Incentive/ Children's
Recognition Awards Literature Corporate Consolidated
-------------------- -------------------- --------- --------------------
Millions Percentage Millions Percentage Millions Millions Percentage
-------- ---------- -------- ---------- -------- -------- ----------
Quarter Ended June 30, 1996:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $4.2 100.0 $6.6 100.0 $10.8 100.0
Gross Profit 1.6 38.7 2.7 40.1 4.3 39.6
Selling, general & admin. 1.8 44.4 2.7 40.4 0.4 4.9 45.8
Depreciation & amort. 0.1 2.0 0.1 2.3 0.2 2.2
Operating Loss (0.3) (7.6) (0.2) (2.6) (0.4) (0.9) (8.4)
Interest expense 0.2 1.7
Loss before income taxes (1.1) (10.1)
Quarter Ended June 30, 1995:
Revenues $4.4 100.0 $12.2 100.0 $16.6 100.0
Gross Profit 1.7 40.0 5.0 40.5 6.7 40.4
Selling, general & amort. 1.8 41.2 4.7 38.1 0.2 6.7 40.4
Depreciation & amort. 0.1 1.8 0.3 2.6 0.4 2.4
Operating Loss (0.1) (3.0) (0.1) (0.1) (0.2) (0.4) (2.6)
Interest expense 0.5 3.0
Loss from continuing operations,
before income taxes (0.9) (5.4)
Discontinued operations 0.0 0.3
Loss before income taxes (0.8) (5.1)
Six Months Ended June 30, 1996:
Revenues $9.9 100.0 $16.1 100.0 $26.0 100.0
Gross Profit 4.0 40.0 6.4 39.9 10.4 39.9
Selling, general & admin. 3.8 38.2 6.7 42.0 0.6 11.1 42.7
Depreciation & amort. 0.2 1.7 0.4 2.4 0.6 2.1
Gain on sale of distribution
channel 3.3 20.2 3.3 12.5
Operating Profit/(Loss) 0.0 0.2 2.5 15.7 (0.6) 2.0 7.6
Interest expense 0.6 2.1
Income before income taxes 1.4 5.5
Six Months Ended June 30, 1995:
Revenues $9.2 100.0 $26.3 100.0 $35.5 100.0
Gross Profit 3.7 40.7 10.7 40.5 14.4 40.6
Selling, general & admin. 3.8 41.4 10.1 38.5 0.4 14.3 40.5
Depreciation & amort. 0.2 1.7 0.6 2.4 0.8 2.2
Operating Loss (0.2) (2.4) (0.0) (0.3) (0.4) (0.6) (1.7)
Interest expense 1.1 3.0
Loss from continuing operations,
before income taxes (1.8) (5.0)
Discontinued operations (0.1) (0.4)
Loss before income taxes (1.9) (5.4)
</TABLE>
<PAGE>
Consolidated revenues for the three months ended June 30, 1996,
approximated $10.8 million compared to approximately $16.6 million for the three
months ended June 30, 1995, a decrease of 35% or approximately $5.8 million.
The Company's children's literature business segment accounted for approximately
$6.6 million of revenues for the three months ended June 30, 1996, compared to
$12.2 million of revenues for the three months ended June 30, 1995, a decrease
of 46% or approximately $5.6 million. The decrease in revenues for the
children's literature business segment is principally attributable to the
following: the sale of the United Kingdom operations in early March 1996; the
discontinuance of the Canadian distribution channel in early March 1996; an
approximate 16% reduction in the number of domestic book fair events held in the
current quarter compared to the same period in 1995; and the disposal and phase
out of certain children's literature business segment distribution channels in
the third and fourth quarters of 1995.
The Company's incentive/recognition awards business segment accounted for
$4.2 million in revenues for the three months ended June 30, 1996, compared to
$4.4 million in revenues for the three months ended June 30, 1995, a decrease of
4% or approximately $200,000. The decline in revenues is principally due to
both a decline in volume and delayed redemption on certain existing customers in
the three months ended June 30, 1996 compared to the same period in 1995. The
majority of the revenues generated by the incentive/recognition awards business
segment are from the sale of products, and revenues from services are
insignificant.
Consolidated revenues for the six months ended June 30, 1996 approximated
$26 million, compared to $35.5 million, for the six months ended June 30, 1995,
a decrease of 27% or approximately $9.5 million. The Company's children's
literature business segment accounted for approximately $16.1 million of
revenues for the six months ended June 30, 1996, compared to $26.3 million for
the six months ended June 30, 1995, a decrease of 39% or approximately $10.2
million. The decrease in revenues for the children's literature business segment
for the six months ended June 30, 1996 over the same period in 1995 is
principally attributable to the following: the sale of the United Kingdom
operations in early March 1996; the discontinuance of the Canadian distribution
channel in early March 1996; an approximate 16% reduction in the number of
domestic book fair events held in the six months ended June 30, 1996 compared to
the same period in 1995; and the disposal and phase out of certain children's
literature business segment distribution channels in the third and fourth
quarters of 1995.
The Company's incentive/recognition awards business segment accounted for
approximately $9.9 million in revenues for the six months ended June 30, 1996,
compared to $9.2 million in revenues for the six months ended June 30, 1995, an
increase of 8% or approximately $700,000. The increase in revenues is
principally attributable to maintaining volume on certain existing customers
coupled with increasing volume from new accounts.
Consolidated cost of goods sold was approximately $6.5 million for the
three months ended June 30, 1996, compared to approximately $9.9 million for the
three months ended June 30, 1995, a decrease of 34% or approximately $3.4
million. The Company's children's literature business segment accounted for
approximately $3.9 million of consolidated cost of goods sold for the three
months ended June 30, 1996, compared to $7.2 million for the three months ended
June 30, 1995, a decrease of 45% or approximately $3.3. million. The decrease
in cost of goods sold is due to the reduction in revenues in the children's
literature business segment. As a percentage of revenues from the children's
literature business segment, cost of goods sold increased by 0.4% to 59.9%
during the three months ended June 30, 1996, compared to 59.5% for the same
period in 1995. This increase is due to the change in product mix sold.
The Company's incentive/recognition awards business segment accounted for
approximately $2.6 million of consolidated cost of goods sold for the three
months ended June 30, 1996 and 1995. As a percentage of revenues, cost of goods
sold from the incentive/recognition awards business segment increased 1.3% from
60% in 1995 to 61.3% in 1996. This increase is due to the change in product mix
sold.
Consolidated cost of goods sold for the six months ended June 30, 1996 was
approximately $15.6 million, compared to $21.1 million for the six months ended
June 30, 1995, a decrease of approximately 26%, or approximately $5.5 million.
Cost of goods sold associated with the Company's children's literature business
segment was approximately $9.7 million for the six months ended June 30, 1996,
compared to $15.6 million for the six months ended June 30, 1995, a decrease of
38%, or approximately $5.9 million. The decrease in cost of goods sold is
consistent with the decrease in revenues in the children's literature business
segment.
The Company's incentive/recognition awards business segment accounted for
approximately $5.9 million of consolidated cost of goods sold for the six months
ended June 30, 1996, compared to approximately $5.4 million for the six months
ended June 30, 1995, an increase of 9%, or approximately $500,000. The increase
in cost of goods sold is consistent with the increase in revenues in the
incentive/recognition awards business segment.
Consolidated selling, general and administrative expense was approximately
$4.9 million for the three months ended June 30, 1996, compared to $6.7 million
for the three months ended June 30, 1995, a decrease of 26%, or approximately
$1.8 million. Selling, general and administrative expense associated with the
Company's children's literature business segment was approximately $2.7 million
for the three months ended June 30, 1996, compared to $4.7 million for the three
months ended June 30, 1995, a decrease of 42%, or approximately $2 million. The
decrease in selling, general and administrative expense is attributable to the
sale of the United Kingdom subsidiary in early March 1996, the discontinuance of
the Canadian distribution channel in March 1996, and the disposal and phase out
of certain children's literature business segment distribution channels in the
third and fourth quarters of 1995.
Selling, general and administrative expense associated with the Company's
incentive/recognition awards business segment was approximately $1.8 million for
the three months ended June 30, 1996 and 1995. As a percentage of revenues,
selling, general and administrative expense increased approximately 3.2% for the
three months ended June 30, 1996 compared to the same period in 1995, primarily
as a result of the business segment's expansion and increased focus in the sales
and marketing arena.
Consolidated selling, general and administrative expense was approximately
$11.1 million for the six months ended June 30, 1996, compared to $14.3 million
for the six months ended June 30, 1995, a decrease of 22%, or approximately $3.2
million. Selling, general and administrative expense associated with the
Company's children's literature business segment was approximately $6.7 million
for the six months ended June 30, 1996, compared to $10.1 million for the six
months ended June 30, 1995, a decrease of 33%, or approximately $3.4 million.
The reasons for the decrease in selling, general and administrative expense for
the six months ended June 30, 1996 are consistent with the items mentioned above
for the decrease in the three months ended June 30, 1996 selling, general and
administrative expense.
Selling, general and administrative expense associated with the Company's
incentive/recognition awards business segment was approximately $3.8 million for
the six months ended June 30, 1996 and 1995. As a percentage of revenues for
the six months ended June 30, 1996, selling, general and administrative
expense decreased approximately 3% primarily as a result of numerous cost
reduction efforts implemented by the Company during mid 1995.
Consolidated general corporate and administrative expense was approximately
$418,000 and $573,000 for the three and six months ended June 30, 1996,
respectively, compared to $246,000 and $434,000 for the three and six months
ended June 30, 1995, respectively. The increase in general corporate and
administrative expense for the three and six months ended June 30, 1996 is
principally due to charges incurred for a severance agreement with a former
officer and director of the Company.
Consolidated interest expense was approximately $185,000 for the three
months ended June 30, 1996, compared to approximately $505,000 for three months
ended June 30, 1995, a decrease of 63%, or approximately $320,000. For the six
months ended June 30, 1996, consolidated interest expense approximated $500,000,
compared to approximately $1 million for the six months ended June 30, 1995, a
decrease of 48%, or approximately $500,000. In connection with the sale of the
United Kingdom distribution channel in March 1996, a portion of the proceeds was
used to pay down outstanding debt. The average outstanding debt for the three
and six months ended June 30, 1996, approximated $9.7 million and $14 million,
respectively, compared to approximately $23.2 million and $24.6 million for the
three and six months ended June 30, 1995, respectively. The average interest
rate for the three and six months ended June 30, 1996, approximated 8.25% and
8.55%, respectively, compared to approximately 9.5% and 9.41% for the three and
six months ended June 30, 1995, respectively.
Consolidated depreciation and amortization expense was approximately
$236,000 for the three months ended June 30, 1996, compared to approximately
$390,000 for the three months ended June 30, 1995, a decrease of 39%, or
approximately $154,000. Consolidated depreciation and amortization expense was
approximately $552,000 and $771,000 for the six months ended June 30, 1996 and
1995, respectively, a decrease of 28%, or approximately $219,000. The decrease
for both the three and six months ended June 30, 1996 is principally
attributable to the disposal of the United Kingdom distribution channel in early
March 1996 and its related fixed assets.
The income tax provision for the three and six months ended June 30, 1996
was $0. The current period and year to date provisions are based on the
Company's anticipated annual effective tax rate.
Liquidity and Capital Resources:
The Company's primary sources of liquidity have been cash generated from
operating activities from both of its business segments, and amounts available
under its existing credit facilities. The Company's primary uses of funds
consist of financing inventory and receivables for both business segments, with
the funding of acquisitions as a secondary use.
The following table presents a summary of the Company's cash flows (in
thousands) for the six months ended June 30, 1996 and 1995:
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
---------------- ----------------
Cash provided by operating activities $ 2,394 $ 2,944
Capital expenditures, net (331) (258)
Net repayments on debt obligations (13,936) (2,301)
Payment for business acquisitions --- (733)
Proceeds from sale of distribution channel 11,288 ---
Other 265 42
---------------- ----------------
Net decrease in cash $ (320) $ (306)
================ ================
The Company has a $16 million revolving credit facility which consists of
the following: a $5 million short-term credit line ($3,901,918 unused at June
30, 1996) for use in the incentive/recognition awards business (the "CA Short
Line") and an $11 million short-term credit line ($4,384,499 unused at June 30,
1996) for use in the children's literature business (the "PAGES Book Fairs
Line") . The CA Short Line and PAGES Book Fairs Line are due in full on June 1,
1997, subject to annual renewal.
The Company anticipates that operating cash flows during the next twelve
months will cover operating expenditures and meet the current maturities on
long-term obligations. The Company does not anticipate any material
expenditures for property, plant and equipment during the next twelve months.
Should the Internal Revenue Service prevail in a potential tax assessment, it
would place additional demands on the Company's cash and lines of credit.
During 1995, Gruner + Jahr Printing and Publishing Company ("G + J") filed
an action against the Company seeking in excess of $900,000 in damages which has
been stayed by the court pending the resolution of an action filed by the
Company in federal court against G + J and Gareth Stevens, Inc., seeking
compensation arising out of Company's purchase from G + J of the Read Aloud Book
Club. Gareth Stevens, Inc. filed a counterclaim in the action seeking an
unspecified amount of damages. The Company and Gareth Stevens, Inc. have
reached a settlement. The federal court action against G + J is in the pleading
and discovery stage and it is not possible at this time to predict the outcome.
However, if the Company is unsuccessful in its action and G + J is successful,
the Company's liquidity may be adversely affected.
Seasonality:
Both of the Company's business segments are highly seasonal with the
children's literature business cycle closely correlating the school year and the
incentive/recognition awards business skewed towards the end of a calendar year.
Due to the seasonality of its businesses, the Company experiences negative cash
flow during the summer months. Further, in order to build its inventory for its
fall sales, the Company's borrowings increase over the summer and generally peak
during late fall. As a result of the Company's seasonality, inventory and
receivables reach peak levels during the months of October through December.
<PAGE>
PART II
ITEM 1: LEGAL PROCEEDINGS
The description of the legal proceedings included in Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Part I of
this report is incorporated herein by reference.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Number 11
Computation of Earnings Per Share
(b) A report on Form 8-K was dated and filed on April 17, 1996, under Item 5,
announcing the resignation of Richard A. Stimmel, the Company's President,
Treasurer and Director, and an officer of the Company's subsidiaries, PAGES Book
Fairs, Inc. and Clyde A. Short Company, Inc.
A report on Form 8-K was dated and filed on May 3, 1996, under Item 5,
announcing the appointment of William L. Clarke as President and Chief Executive
Officer of PAGES Book Fairs, Inc., a wholly owned subsidiary of the Company.
A report on Form 8-K was dated and filed on May 8, 1996, under Item 5,
announcing the appointment of William L. Clarke as Senior Vice President of
PAGES, Inc. Additionally, Tamara L. Zeph was appointed Chief Financial Officer
and Treasurer of PAGES, Inc. and Vice President of Finance of PAGES Book Fairs,
Inc., a wholly owned subsidiary.
ITEM 10: MATERIAL CONTRACTS
(a) Exhibit Number 10
First Amendment to PAGES, Inc. 1993 Incentive Stock Option Plan
<PAGE>
Signature
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAGES, INC.
Registrant
Date: August 13, 1996 By: /s/ Tamara L. Zeph
--------------- -------------------
Tamara L. Zeph
Principal Financial and Accounting Officer
<PAGE>
EXHIBIT 10
FIRST AMENDMENT TO
PAGES, INC.
1993 INCENTIVE STOCK OPTION PLAN
Pursuant to the authority granted to the Board of Directors under
Section 7 of the Pages, Inc. 1993 Incentive Stock Option Plan (the "Plan")
the Plan is hereby amended by direction of the Board of Directors of the
Company as follows:
1. Paragraph 5(b)(ii)(A) is amended to read in its entirety as
follows:
"If an optionee shall die (i) while an employee of the
Corporation or a Subsidiary Corporation, or (ii) within three
months after termination of his employment with the
Corporation or a Subsidiary Corporation because of his
disability, all options which are exercisable at the time of
his death and during the three month period after his death,
may be exercised by the person or persons to whom the
optionee's right under the option pass by will or applicable
law, or if no such person has such right, by his executors or
administrators, at any time, or from time to time, but not
later than the expiration date specified in Section 5(a) or
three months after the optionee's death, whichever date is
earlier. All other options shall terminate."
2. Paragraph 5(b)(ii)(B) is amended to read in its entirety as
follows:
"If an optionee's employment by the Corporation or a
Subsidiary Corporation shall terminate because of his
disability and such optionee remains living for at least
three months following termination, he may exercise all
options which are exercisable on the date of termination and
during the three month period after his termination at any
time or from time to time, but not later than the expiration
date specified in Section 5(a) or three months after
termination of employment, whichever date is earlier. All
other options shall terminate."
3. Paragraph 5(b)(ii)(C) is amended to read in its entirety as
follows:
"If an optionee's employment shall terminate by reason of his
retirement in accordance with the terms of the Corporation's
tax-qualified retirement plans, if any, or with the consent
of the committee or involuntarily other than "for cause," he
may exercise all options which are exercisable on the date of
such termination and during the three month period after this
termination at any time or from time to time, but not later
than the expiration date specified in Section 5(a) or three
months after termination of employment, whichever date is
earlier. For this purpose, termination "for cause" shall
mean termination of employment by reason of the optionee's
commission of a felony, fraud, or willful misconduct which
had resulted, or is likely to result, in substantial and
material damage to the Corporation or a Subsidiary
Corporation, all as the Committee, in its sole discretion,
may determine."
<PAGE>
EXHIBIT II
PAGES, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
------------------ ----------------
Primary:
Weighted average number of common shares 5,436,000 5,308,000
outstanding
Adjustment for stock options which have
a dilutive effect based upon the average
market price per common stock:
Add dilutive stock options --- 1,082,000
Deduct shares that could be repurchased
from the proceeds of dilutive options --- (604,000)
------------- ------------
Weighed average common and common
equivalent shares 5,436,000 5,786,000
============= ============
Net income/(loss) $ (1,096,218) $ 1,423,745
Earnings adjustment (20% rule) --- ---
------------- ------------
Net income/(loss) for computation purposes $ (1,096,218) $ 1,423,745
============= ============
Earnings/(loss) per common and common
equivalent share $ (0.202) $ 0.246
============= ============
Fully diluted:
Weighted average number of common shares
outstanding 5,436,000 5,308,000
Adjustment for stock options which have a
dilutive effect based upon the market
price for common stock at end of period:
Add dilutive stock options --- 1,082,000
Deduct shares that could be repurchased
from the proceeds of dilutive options --- (505,000)
------------- ------------
Fully diluted shares 5,436,000 5,885,000
============= ============
Net income/(loss) $(1,096,218) $ 1,423,745
Earnings adjustment (20% rule) --- ---
------------- ------------
Net income/(loss) for computation purposes $(1,096,218) $ 1,423,745
============= ============
Earnings/(loss) per common and common
equivalent share assuming full dilution $ (0.202) $ 0.242
============= ============
<PAGE>
