UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 1998
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: 6,564,009 common shares
outstanding, each $0.01 par value, as of April 30, 1998.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31
1998 1997
------------ ------------
Revenues $ 6,388,865 $ 7,144,194
Costs of goods sold 4,036,433 4,136,552
------------ ------------
Gross profit 2,352,432 3,007,642
Operating expenses:
Selling, general and administrative 2,887,153 2,786,870
Depreciation and amortization 154,279 271,068
------------ ------------
Income (loss) from operations (689,000) (50,296)
Other expense:
Interest, net 306,706 189,330
------------ ------------
Income(loss) before income taxes (995,706) (239,626)
Provision for income taxes -- --
------------ ------------
NET INCOME (LOSS) $ (995,706) $ (239,626)
============ ============
Basic and diluted earnings (loss) per common share $ (0.15) $ (0.04)
============ ============
Basic and diluted weighted average number of
common shares outstanding 6,564,990 6,199,000
============ ============
See accompanying notes
<PAGE>
PAGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 1998 1997
------------ ------------
(Unaudited)
Current Assets:
Cash $ 10,398 $ 412,060
Accounts receivable, net of allowance for
doubtful accounts of $165,000 and $356,000,
respectively 3,906,282 2,662,140
Inventory 11,881,526 12,991,795
Prepaid expenses 1,516,850 1,429,726
Note receivable from CASCO INTERNATIONAL, INC. -- 3,500,000
------------ ------------
Total current assets 17,315,056 20,995,721
Property and equipment:
Buildings 1,070,201 1,070,201
Equipment 1,991,813 1,988,863
------------ ------------
3,062,014 3,059,064
Less accumulated depreciation (1,198,826) (1,100,657)
------------ ------------
1,863,188 1,958,407
Land 420,000 420,000
------------ ------------
Total property and equipment, net 2,283,188 2,378,407
------------ ------------
Other assets:
Cost in excess of net assets acquired, net of
accumulated amortization of $941,000 and
$899,000, respectively 4,399,524 4,441,484
Other 454,062 267,654
------------ ------------
4,853,586 4,709,138
------------ ------------
TOTAL ASSETS $24,451,830 $28,083,266
============ ============
See accompanying notes
<PAGE>
PAGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------ ------------
(Unaudited)
Current Liabilities:
Accounts payable $ 4,908,832 $ 6,173,483
Short-term debt obligations 7,268,427 11,082,227
Accrued liabilities 595,571 880,693
Accrued tax liabilities 876,071 1,103,501
Deferred revenue 1,265,764 1,265,366
Current portion of long-term debt obligations 256,488 256,488
Current portion of capital lease obligations 70,372 74,872
------------ ------------
Total current liabilities 15,241,525 20.836,630
------------ ------------
Long-term debt and capital lease obligations 5,003,827 2,044,452
------------ ------------
Total liabilities 20,245,352 22,881,082
------------ ------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock: $.01 par value; authorized
300,000 shares; none issued and outstanding
Common stock: $.01 par value; authorized
20,000,000 shares; issued 6,862,722 shares 68,627 68,627
Capital in excess of stated value 21,908,833 21,908,833
Notes receivable from stock sales (902,373) (902,373)
Accumulated deficit (16,627,486) (15,631,780)
------------ ------------
4,447,601 5,443,307
Less 298,713 shares of common stock in
treasury, at cost (241,123) (241,123)
------------ ------------
Total stockholders' equity 4,206,478 5,202,184
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,451,830 $28,083,266
============ ============
See accompanying notes
<PAGE>
PAGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1998 1997
------------ ------------
Cash Flow From (Used In) Operations:
Net income(loss) $ (995,706) $ (239,626)
------------ ------------
Reconciliation to net cash flow used in
continuing operations:
Depreciation and amortization 154,279 271,068
Changes in working capital items of
continuing operations:
Accounts receivable (1,244,142) (1,340,319)
Inventory 1,110,269 (654,590)
Prepaid expenses and other assets (287,682) (145,826)
Receipt of CASCO note receivable 3,500,000 --
Accounts payable and accrued liabilities (1,777,203) 1,667,409
Deferred revenue 398 (106,524)
------------ ------------
Net cash from (used in) continuing operations 460,213 (548,408)
------------ ------------
Net cash from (used in) discontinued operations -- (152,787)
------------ ------------
Net cash from (used in) operations 460,213 (701,195)
------------ ------------
Cash Flow Used In Investing Activities:
Payments for purchases of property and equipment (2,950) (41,764)
------------ ------------
Cash Flow From (Used In) Financing Activities:
Proceeds from debt obligations 11,701,038 5,574,406
Proceeds from subordinated debt issued 3,000,000 --
Payments on debt and lease obligations (15,559,963) (4,945,170)
------------ ------------
Net cash flow from (used in) financing activities (858,925) 629,236
------------ ------------
Decrease in cash (401,662) (113,723)
Cash, beginning of period 412,060 317,911
------------ ------------
Cash, end of period $ 10,398 $ 204,188
============ ============
See accompanying notes
<PAGE>
PAGES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed 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. All adjustments are of a normal and recurring nature.
Pages, Inc. is a publisher and distributor of children's books. The
Company markets most of its products directly to children in elementary and
secondary schools and as a result its business cycle correlates closely to the
school year. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year.
The interim consolidated condensed financial statements and notes thereto
are presented as permitted by the Securities and Exchange Commission and do not
contain certain information included in the Company's annual financial
statements and notes thereto. These financial statements should be read in
conjunction with the Company's audited financial statements and notes thereto
for the fiscal year ended December 31, 1997.
Note 2. Debt Obligations
The Company has an $8.0 million Revolving Note Agreement bearing interest
at the lender's prime rate plus 1%, due January 1, 2000. $732,000 was unused
at March 31, 1998.
In January, 1998, the Company borrowed $3.0 million of 12.5% convertible
debt due January 21, 2004, from Provident Bank. Warrants to purchase shares of
the Company's common stock were issued in connection with this subordinated
debt financing. Interest is payable monthly.
Note 3. Supplemental Cash Flow Information
Cash payments during the three months ended March 31, 1998 and 1997,
included interest of $256,000 and $192,000, respectively, and income taxes of
$165,000 and $150,000, respectively.
Note 4. Stock Appreciation Rights
Included in the results of operations for the three months ended March 31,
1997, is a reduction in administrative compensation expense of $431,287
associated with the Company's Stock Appreciation Rights issued under the
executive incentive compensation plan in October, 1996. Effective April 1,
1997, the Stock Appreciation Rights program dated November 1, 1996, was
canceled.
Note 5. Income Taxes
There was no income tax provision for the three months ended March 31,
1998, due to the Company's net operating loss position and the full valuation
of any resulting deferred tax benefit. Estimated income tax rates based on
annualized income were taken into consideration.
<PAGE>
Note 6. Earnings Per Share
The following table represents the computation of basic and diluted
earnings per share:
Three Months Ended
March 31,
1998 1997
------------ ------------
Basic Earnings Per Share:
Weighted average number of common shares
outstanding 6,564,990 6,199,000
------------ ------------
Net income/(loss) available to common
stockholders $ (995,706) $ (239,626)
============ ============
Basic earnings/(loss) per share $ (.15) $ (.04)
============ ============
Diluted Earnings Per Share:
Weighted average number of common
shares outstanding - basic 6,564,990 6,199,000
Effect of Dilutive Securities:
Add dilutive stock options -- --
Deduct shares that could be repurchased
from the proceeds of the dilutive options -- --
------------ ------------
Diluted potential common shares 6,564,990 6,199,000
============ ============
Net income/(loss) available to common
stockholders and assumed conversions $ (995,706) $ (239,626)
============ ============
Diluted earnings/(loss) per share $ (0.15) $ ( .04)
============ ============
At March 31, 1998 and 1997, options and warrants were outstanding during
the periods but were not included in the computation of dilutive EPS because
the potential common stock would be antidilutive.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain statements contained in this Form 10-Q under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding matters that are not historical facts are "forward looking
statements" (as such term is defined in the Private Securities Litigation
Reform Act of 1995) and because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Those statements include remarks
regarding the intent, belief, or current expectations of the Company, its
directors, or its officers with respect to, among other things: (i) the
Company's ability to raise additional capital; (ii) future operating cash
flows; (iii) trends affecting the Company's financial condition or results of
operations, and (iv) seeking a waiver of the senior and subordinated debt
covenants. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those
projected, anticipated or expected in the forward-looking statements as a
result of various factors, many of which, such as the Company's ability to
raise additional capital, are beyond the control of the Company. The
accompanying information contained in this Form 10-Q, including, without
limitation, the information set forth under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
identifies important factors that could cause such differences.
First Quarter 1998 Compared with First Quarter 1997
Revenues for the three months ended March 31, 1998, approximated $6.4
million compared to approximately $7.1 million for the three months ended March
31, 1997, a decrease of 11% or approximately $700,000. The decrease in
revenues is principally attributable to approximately 200 less domestic book
fair events held in the current quarter compared to the same period in 1997 and
an approximately $300,000 reduction in library services revenues due to a
change in marketing strategy.
Cost of goods sold was approximately $4.0 million for the three months
ended March 31, 1998, compared to approximately $4.1 million for the three
months ended March 31, 1997, a decrease of 2% or approximately $100,000. As a
percentage of revenues, cost of goods sold was 63.2% during the first quarter
of 1998, compared to 57.9% for the same period in 1997. The increase in costs
of goods sold is due to a change in product mix of fair merchandise.
Selling, general, and administrative expense was approximately $2.9
million for the three months ended March 31, 1998, compared to approximately
$2.8 million for the three months ended March 31, 1997, an increase of 4% or
approximately $100,000. Included in 1997 expenses is a reduction of $400,000
associated with the Company's Stock Appreciation Rights executive incentive
plan cancelled in 1997. Without this reduction, selling, general, and
administrative expenses for the three months ended March 31, 1997, approximated
$3.2 million. When compared to $3.2 million in 1997, selling, general, and
administrative expenses for the three months ended March 31, 1998, decreased
10% or approximately $300,000 over 1997 levels.
Depreciation and amortization expense was approximately $154,000 for the
three months ended March 31, 1998, compared to $271,000 for the three months
ended March 31, 1997, a decrease of 43% or approximately $117,000. Included in
1997's expense was $90,000 of additional amortization to reflect a change in
estimate of a remaining useful life of an intangible asset.
Interest expense was approximately $307,000 for the three months ended
March 31, 1998, compared to $189,000 for the three months ended March 31, 1997,
an increase of 62% or $117,000. The average outstanding debt for the three
months ended March 31, 1998, approximated $11.8 million compared to $11.7
million for the three months ended March 31, 1997. Additionally, the average
interest rate for the three months ended March 31, 1998, approximated 10.5%
compared to approximately 9.25% for the three months ended March 31, 1997.
Netted in interest expense for the three months ended March 31, 1997, is
approximately $90,000 of interest income earned on the $5.0 million note
receivable from the former subsidiary, CASCO INTERNATIONAL, INC.
There was no income tax provision for the three months ended March 31,
1998, due to the Company's net operating loss position and the full valuation
of any resulting deferred tax benefit. Estimated income tax rates based on
annualized income were taken into consideration.
The first quarter ended March 31, 1998, resulted in an operating loss of
$689,000 compared to an operating loss of $50,000 in the first quarter ended
March 31, 1997. The increased loss over 1997 was due to less revenue and
higher cost of sales.
The first quarter ended March 31, 1998, resulted in a net loss of $996,000
versus a net loss of $240,000 in the first quarter ended March 31, 1997.
Current quarter basic and diluted loss per share was $.15 versus $.04 in the
comparable quarter last year. The weighted average common and common
equivalent shares for the first quarter 1998 increased to 6,564,009, from
6,199,000 in first quarter 1997.
Liquidity and Capital Resources
The Company had a net decrease in cash for the three months ended March
31, 1998, of $402,000, compared to a net decrease for the comparable period in
the prior year of $114,000. Cash provided by operating activities, principally
the $3.5 million proceeds from receipt of the CASCO note receivable, funded
the net cash used in financing and investing activities during the three months
ended March 31, 1998. Cash on hand was $10,000 and $204,000 at March 31, 1998
and 1997, respectively.
For the three months ended March 31, 1998, continuing operations provided
$460,000 in cash as compared to $548,000 used during the three months ended
March 31, 1997. Primary increases in cash flow from operations were from $3.5
million in proceeds from receipt of the CASCO note receivable and a $1.1
million reduction in inventory levels. Primary decreases in cash flow from
operations were a $1.2 million increase in accounts receivable and a $1.8
million reduction in accounts payable and accrued liabilities. At March 31,
1998, $2.9 million in trade accounts payable were 84 days past their agreed
upon due date.
Cash used in investing activities was $3,000 for the three months ended
March 31, 1998, representing payments for capital expenditures. The Company
does not anticipate any material expenditures for property and equipment during
the next twelve months.
For the three months ended March 31, 1998, net cash used in financing
activities was $860,000. This compares to net cash provided by financing
activities of $629,000 for the three months ended March 31, 1997. Financing
activities in 1998 consisted primarily of $3.0 million in subordinated debt,
with warrants, borrowed from Provident Bank, bearing interest at 12.5% and due
January 21, 2004. The $3.5 million in proceeds from the CASCO note receivable
was used to pay down the Company's existing line of credit and payoff a $1.0
million time note. A revolving credit facility was simultaneously executed,
replacing all prior credit facilities, for $8.0 million. In the comparable
period in 1997, net borrowings on the line of credit increased. The Company's
primary source of liquidity has been amounts available under its existing
credit facilities. The Company has an $8.0 million revolving credit
facility ($732,000 unused at March 31, 1998) bearing interest at the lender's
prime rate plus 1%, due January 1, 2000.
The Company estimates that during the next twelve months, to cover
operating expenditures, bring trade payables current, and meet the current
maturities on debt obligations, its operating cash flow, coupled with the
revolving credit facility, must be supplemented by raising additional capital
(in the form of debt or equity financing). Management has been actively
seeking and obtaining ($3.0 million in subordinated debt to date in 1998)
capital and will endeavor to raise additional capital. No assurance can be
given that this will occur. If the Company is unable to raise the needed
capital, product line expansion will be curtailed, an operating division
possibly sold, purchase commitments canceled, existing vendor payments
restructured, and the Company will endeavor to obtain extensions on due dates
of debt facilities, so that operating expenditures and debt obligations may be
covered by operating cash flow and the existing debt facilities. Management
has instituted major expense reductions intended to reduce the Company's loss
and return the Company to profitability, given current revenue levels.
The Company is not in compliance with its senior and $3.0 subordinated
debt covenants related to its tangible capital base, but has not received a
notice of default from its lenders. The capital base is $3.6 million and
was required to be $4.25 million at March 31, 1998. The Company is actively
seeking additional capital and has sought waivers of these covenants from its
senior and subordinated lenders. The Company has no reason to believe that
waivers will not be granted, however, no assurance can be given that this will
occur.
Seasonality
The children's literature business is highly seasonal and correlated
closely to the school year. As a result, most of the Company's income is
generated between the months of September and May. Due to the seasonality, 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. Inventory and
receivables reach peak levels during the months of October through December.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998, Issue of Unregistered Securities
-------------------------------------------------------------------
Offering Price/ Registration Terms of
Name of Nature of Exemption Conversion or
Date Title Amount Purchaser Transaction Claimed Exercise
--------------------------------------------------------------------------------------------------
<C> <S> <S> <S> <S> <S> <C>
1-21-98 Warrant 391,514 sh. The Provident 10 year warrant Securities Act of 10 year warrant
Bank exercisable at 1933 section 4(2) exercisable at
$2.25 per share Exemption $2.25 per share
</TABLE>
ITEM 3: DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description of Document
------- -----------------------
27 Financial Data Schedule (filed only electronically
with the SEC)
(b) Reports on 8-K:
None.
Footnotes:
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, File Number 0-10475, filed in
Washington, D.C.
<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)
Dated: May 15, 1998 By: /s/ Steven L. Canan
---------------------- -------------------------------
Steven L. Canan
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer
of the Registrant)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 10,398
<SECURITIES> 0
<RECEIVABLES> 4,071,282
<ALLOWANCES> 165,000
<INVENTORY> 11,881,526
<CURRENT-ASSETS> 17,315,056
<PP&E> 3,482,014
<DEPRECIATION> 1,198,826
<TOTAL-ASSETS> 24,451,830
<CURRENT-LIABILITIES> 15,241,525
<BONDS> 5,003,827
0
0
<COMMON> 68,627
<OTHER-SE> 4,137,851
<TOTAL-LIABILITY-AND-EQUITY> 24,451,830
<SALES> 6,388,865
<TOTAL-REVENUES> 6,388,865
<CGS> 4,036,433
<TOTAL-COSTS> 4,036,433
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 306,706
<INCOME-PRETAX> (995,706)
<INCOME-TAX> 0
<INCOME-CONTINUING> (995,706)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (995,706)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
