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UNTIED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended April 30, 2003
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number 1-13437
--------------------------------------------------
SOURCE INTERLINK COMPANIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
MISSOURI 43-1710906
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
27500 RIVERVIEW CENTER BLVD., SUITE 400
BONITA SPRINGS, FLORIDA 34134
- ----------------------------------------------- --------------------------
(Address of Principal Executive Offices) (Zip Code)
(239) 949-4450
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date.
Class Outstanding on May 23, 2003
----- ---------------------------
Common Stock, $.01 Par Value 18,282,231
SOURCE INTERLINK COMPANIES, INC.
INDEX
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of
April 30, 2003 and January 31, 2003 4
Consolidated Statements of Income for the three months
ended April 30, 2003 and 2002 5
Consolidated Statement of Stockholders'
Equity for the three months ended April 30, 2003 6
Consolidated Statements of Cash Flows for the
three months ended April 30, 2003 and 2002 7
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 23
ITEM 4. CONTROLS AND PROCEDURES 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 25
ITEM 2. CHANGES IN SECURITIES 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
SOURCE INTERLINK COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited) (in thousands)
April 30, January 31,
2003 2003
- -------------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash $ 6,717 $ 5,570
Trade receivables (Note 2) 64,575 51,869
Inventories (Note 2) 15,477 15,912
Income taxes receivable 7,806 6,883
Deferred tax asset 1,545 1,471
Other current assets 2,471 2,051
- -------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 98,591 83,756
- -------------------------------------------------------------------------------------------------------
Property, Plants and Equipment 28,099 27,671
Less accumulated depreciation and amortization (8,268) (7,532)
- -------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANTS AND EQUIPMENT 19,831 20,139
- -------------------------------------------------------------------------------------------------------
OTHER ASSETS
Intangibles, net 52,504 46,797
Deferred tax asset 930 947
Other 4,750 4,729
- -------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 58,184 52,473
- -------------------------------------------------------------------------------------------------------
$ 176,606 $ 156,368
- -------------------------------------------------------------------------------------------------------
SOURCE INTERLINK COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
April 30, January 31,
2003 2003
- -------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Checks issued against future advances on revolving credit
facility $ 5,696 $ 6,611
Accounts payable and accrued expenses, net of allowance for
returns of $38,399 and $31,543 at April 30 and January 31, 2003
respectively 57,230 50,119
Current maturities of long-term debt (Note 3) 36,405 29,215
Other current liabilities 24 24
- -------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 99,355 85,969
Debt, less current maturities (Note 3) 23,235 17,026
Other long-term liabilities 572 1,148
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 123,162 104,143
- -------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Contributed Capital:
Preferred Stock, $.01 par (2,000 shares authorized; none
issued) - -
Common Stock, $.01 par (40,000 shares authorized; 18,363
shares issued) 184 184
Additional paid-in-capital 97,338 97,338
- -------------------------------------------------------------------------------------------------------
Total contributed capital 97,522 97,522
Accumulated deficit (43,878) (44,520)
Accumulated other comprehensive income (loss):
Foreign currency translation 367 (210)
- -------------------------------------------------------------------------------------------------------
57,011 52,792
Less: Treasury Stock (100 at cost) (567) (567)
- -------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 53,444 52,225
- -------------------------------------------------------------------------------------------------------
$ 176,606 $ 156,368
- -------------------------------------------------------------------------------------------------------
4 See accompanying notes to
Consolidated Financial Statements
SOURCE INTERLINK COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
April 30, 2003 2002
- -------------------------------------------------------------------------------------------------------
Revenues $ 81,015 $ 66,755
Costs of Revenues 60,234 48,071
- -------------------------------------------------------------------------------------------------------
Gross Profit 20,781 18,684
Selling, General and Administrative Expense 17,414 14,873
Relocation Expenses 1,730 296
- -------------------------------------------------------------------------------------------------------
Operating Income 1,637 3,515
- -------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest expense, net (906) (806)
Other 152 77
- -------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (754) (729)
- -------------------------------------------------------------------------------------------------------
Income Before Income Taxes 883 2,786
Income Tax Expense 241 1,188
- -------------------------------------------------------------------------------------------------------
Net Income $ 642 $ 1,598
- -------------------------------------------------------------------------------------------------------
Earnings per Share - Basic $ 0.04 $ 0.09
Weighted Average of Shares Outstanding - Basic (Note 5) 18,262 18,255
Earnings per Share - Diluted $ 0.04 $ 0.09
Weighted Average of Shares Outstanding - Diluted (Note 5) 18,470 18,431
- -------------------------------------------------------------------------------------------------------
5 See accompanying notes to
Consolidated Financial Statements
SOURCE INTERLINK COMPANIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
(in thousands)
Total
Other Stockholders'
Common Stock Additional Comprehensive Treasury Stock Equity
----------------- Paid - in Accumulate Income -----------------
Shares Amount Capital Deficit (Loss) Shares Amount
- --------------------------------------------------------------------------------------------------------------------
Balance, January 31, 2003 18,363 $ 184 $ 97,338 $ (44,520) $ (210) (100) $ (567) $ 52,225
Net income - - - 642 - - - 642
Foreign Currency
Translation - - - - 577 - - 577
-----------
Comprehensive income 1,219
-----------
- --------------------------------------------------------------------------------------------------------------------
Balance, April 30, 2003 18,363 $ 184 $ 97,338 $ (43,878) $ 367 (100) $ (567) $ 53,444
====================================================================================================================
6 See accompanying notes to
Consolidated Financial Statements
SOURCE INTERLINK COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Years ended April 30, 2003 2002
- -------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 642 $ 1,598
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,079 658
Provision for losses on accounts receivable 404 264
Deferred income taxes (57) 366
Other 238 (4)
Changes in assets and liabilities (excluding business
acquisitions):
(Increase) decrease in accounts receivable (13,110) 10,289
Decrease in inventories 434 2,860
(Increase) decrease in other assets (1,364) 884
Increase (decrease) in accounts payable and accrued
expenses 6,534 (12,544)
- -------------------------------------------------------------------------------------------------------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (5,200) 4,371
- -------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Capital expenditures (522) (751)
Payments under export agreement (1,400) -
Other - 24
- -------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (1,922) (727)
- -------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Increase) Decrease in checks issued against revolving credit
facilities (914) 4,236
Borrowings (repayments) under credit facilities 9,409 (7,349)
Purchase of treasury stock - (499)
Payments of notes payable (226) -
---------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,269 (3,612)
- -------------------------------------------------------------------------------------------------------
INCREASE IN CASH 1,147 32
CASH, beginning of period 5,570 2,943
- -------------------------------------------------------------------------------------------------------
CASH, end of period $ 6,717 $ 2,975
- -------------------------------------------------------------------------------------------------------
7 See accompanying notes to
Consolidated Financial Statements
SOURCE INTERLINK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The consolidated financial statements as of April 30, 2003 and 2002, include, in
the opinion of management, all adjustments (consisting of normal recurring
adjustments and reclassifications) necessary to present fairly the financial
position, results of operations and cash flows at April 30, 2003 and for all
periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-K for the year
ended January 31, 2003. The results of operations for the three month period
ended April 30, 2003 are not necessarily indicative of the operating results to
be expected for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. BALANCE SHEET ACCOUNTS
Accounts receivable consist of the following (in thousands):
April 30, 2003 January 31, 2003
-------------------------------------------------------------------------------
Accounts Receivable $ 115,848 $ 96,083
Allowance:
Sales returns and other 45,364 38,289
Doubtful accounts 5,909 5,925
-------------------------------------------------------------------------------
51,273 44,214
-------------------------------------------------------------------------------
$ 64,575 $ 51,869
-------------------------------------------------------------------------------
Inventories consist of the following (in thousands):
April 30, 2003 January 31, 2003
---------------------------------------------------------------------------------
Raw materials $ 2,386 $ 2,413
Work-in-process 2,022 1,752
Finished goods:
Fixtures 1,340 1,174
Magazine 9,729 10,573
---------------------------------------------------------------------------------
$ 15,477 $ 15,912
---------------------------------------------------------------------------------
The Company receives full-credit from the publisher for all undistributed and
returned magazines.
8
SOURCE INTERLINK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. DEBT AND REVOLVING CREDIT FACILITY
Debt consists of (in thousands):
April 30, January 31,
2003 2003
-----------------------------------------------------------------------------------
Revolving Credit Facility - Bank of America $ 33,303 $ 26,611
Revolving Credit Facilities - Congress Financial
Corporation 15,575 12,857
Guaranteed payments under magazine
export agreement (Note 4) 4,200 -
Industrial Revenue Bonds 4,000 4,000
Notes payable to former owners of acquired
company, currently being disputed by Company 1,886 1,886
Note payable to former owner of acquired company - 200
Other 676 687
-----------------------------------------------------------------------------------
Total Long-term Debt 59,640 46,241
Less current maturities 36,405 29,215
-----------------------------------------------------------------------------------
Long-term Debt $ 23,235 $ 17,026
-----------------------------------------------------------------------------------
Bank Of America Credit Facility
On December 22, 1999, the Company entered into a credit agreement with Bank of
America, N.A., which was amended on August 30, 2002 to extend the termination
date to August 1, 2003 and to grant Bank of America, N.A. a first-priority
perfected security interest in all real and personal property of the Company
excluding the capital stock and assets of The Interlink Companies, Inc.,
International Periodical Distributors, Inc. and David E. Young, Inc. The
agreement was further amended on May 1, 2003 to waive and amend certain
financial covenants and provide the Company with two options to extend the
agreement (if both options were exercised) through February 1, 2004.
The credit agreement enables the Company to borrow up to $46.0 million under a
revolving credit facility. Borrowings under the credit facility bear interest at
a rate equal to the 90-day LIBOR rate (1.26% at April 30, 2003) plus 4.85% and
carries a facility fee of 1/4 % per annum on the difference between $25 million
and the average principal amount outstanding under the loan (if less than $25
million) plus 3/8% per annum of the difference between the maximum amount of the
loan and the greater of (i) $25 million or (ii) the average principal amount
outstanding under this loan.
Under the credit agreement, the Company is limited in its ability to declare
dividends or other distributions on capital stock or make payments in connection
with the purchase, redemption, retirement or acquisition of capital stock. There
are also limitations on capital expenditures and the Company is required to
maintain certain financial ratios. The Company was in compliance with such
ratios at April 30, 2003.
9
SOURCE INTERLINK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Availability under the facility is limited by the Company's borrowing base
calculation, as defined in the agreement, resulted in excess availability of
$12.3 million at April 30, 2003.
Congress Financial Credit Facilities
In connection with the acquisition of Interlink, the Company assumed IPD and
Deyco's secured credit facilities with Congress Financial Corporation
("Congress"). On February 22, 2002, IPD and Deyco entered into the credit
facility with Congress which expires on February 21, 2005.
The agreements provide for maximum combined borrowings of $25 million subject to
limits set by periodic borrowing base calculations. Borrowings under the
revolving credit portion of the facility bear interest at a rate equal to 0.25%
in excess of the prime rate (2.25% at April 30, 2003). The credit facility is
secured by IPD and Deyco's accounts receivable and limited cross guarantees
between the two divisions. Under the credit agreement, IPD and Deyco are
required to maintain certain financial ratios. IPD and Deyco were in compliance
with all such ratios at April 30, 2003.
In connection with the acquisition of Interlink, the Company assumed debt to the
former owners of IPD. The Company is currently disputing the remaining amounts
owed and has commenced legal action requesting the court release the Company of
any further obligation under these arrangements.
Availability under the facility is limited by the Company's borrowing base
calculation, as defined in the agreement, resulted in excess availability of
$2.7 million at April 30, 2003.
4. BUSINESS COMBINATIONS
Innovative Metal Fixtures, Inc.
In May, 2002, the Company, through its Source Canada, Inc. (f/k/a Aaron Wire and
Metal Products, Ltd.) subsidiary, acquired all of the assets of Innovative Metal
Fixtures, Inc. for $2.6 million ($2.0 million in cash and $0.6 million in a note
payable to the former owner). Innovative Metal Fixtures, Inc. manufactures wire
and metal fixture displays from manufacturing facilities in Vancouver, British
Columbia.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired by approximately
$2.0 million. The fair value of the assets acquired was allocated primarily to
goodwill. Pro-forma results have not been shown due to the insignificance of the
acquisition.
Foreign Title Customer List
In May, 2002, the Company acquired a customer (publisher) list giving the
Company the right to distribute domestically a group of foreign magazine titles.
The agreement calls for an initial payment of $2.0 million and additional
contingent payments up to $3.5 million spread over the next three years based on
the overall gross profit generated from the sale of these titles. Payments under
this agreement are included in intangible assets and are being amortized over
ten years.
Magazine Export Agreement
In March, 2003, the Company entered into an agreement with a leading exporter of
domestic titles. The agreement calls for an initial payment of $1.4 million,
guaranteed payments totaling $4.2 million spread over the next four fiscal
10
SOURCE INTERLINK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
years, and additional contingent payments up to $5.6 million based on the
overall gross profit generated from sales to these customers. Guaranteed
payments under this agreement are included in intangible assets and are being
amortized over fifteen years, the term of the agreement.
5. EARNINGS PER SHARE
A reconciliation of the denominators of the basic and diluted earnings per share
computations are as follows (in thousands):
Three Months Ended
April 30,
2003 2002
-----------------------------------------------------------------------------------
Basic weighted average number of common shares
outstanding 18,262 18,255
Effect of dilutive securities:
Stock options and warrants 208 176
-----------------------------------------------------------------------------------
Diluted weighted average number of common shares
outstanding 18,470 18,431
-----------------------------------------------------------------------------------
For the quarter ended April 30, 2003, stock options to purchase 3,455 shares and
warrants convertible into 234 shares were excluded from the calculation of
diluted income per share because their exercise/ conversion price exceeded the
average market price of the common shares during the period.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental information on interest and income taxes paid is as follows (in
thousands):
Three Months Ended April 30, 2003 2002
-----------------------------------------------------------------------------------
Interest $ 839 $ 848
Income Taxes $ 837 $ 689
-----------------------------------------------------------------------------------
In connection with the magazine export agreement discussed in Note 4, a
liability of $4.2 million was recognized for guaranteed payments owed under the
agreement.
11
SOURCE INTERLINK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. STOCK OPTION PLANS
FAS No. 123, "Accounting for Stock-Based Compensation" defined a fair value
method of accounting for stock options and other equity instruments. Under the
fair value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which is
usually the vesting period. As provided in FAS No. 123, the Company elected to
apply Accounting Principles Board ("APB") Opinion No. 25 and related
interpretations in accounting for its stock-based compensation plans. No stock
based compensation was reflected in the period ended April 30, 2003 and 2002 as
all options granted in those years had an exercise price equal to or greater
than the market value of the underlying stock on the date of grant.
The following is a reconciliation of net income per weighted average share had
the Company adopted FAS No. 123 (table in thousands except per share amounts):
Three Months Ended April 30, 2003 2002
---------------------------------------------------------------------------
Net income $ 642 $ 1,598
Stock compensation costs, net of tax (320) (548)
------------ ------------
Adjusted net income $ 322 $ 1,050
------------ ------------
Weighted average shares, basic 18,262 18,255
Weighted average shares, diluted 18,470 18,431
Basic earnings per share - as reported $ 0.04 $ 0.09
------------ ------------
Diluted earnings per share - as reported $ 0.04 $ 0.09
------------ ------------
Basic earnings per share - pro-forma $ 0.02 $ 0.06
------------ ------------
Diluted earnings per share - pro-forma $ 0.02 $ 0.06
---------------------------------------------------------------------------
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option pricing model with the following assumptions:
Year Ended January 31, 2003 2002
---------------------------------------------------------------------
Dividend yield 0% 0%
Expected volatility 0.50 0.60
Risk-free interest rate 2.16% 3.27% - 4.78%
---------------------------------------------------------------------
8. SEGMENT FINANCIAL INFORMATION
The Company's segment reporting is based on the reporting of senior management
to the Chief Executive Officer. This reporting combines the Company's business
units in a logical way that identifies business concentrations and synergies.
Presentation has been modified from the prior year from pre-tax income to
operating income to conform to how financial results are presented to the Chief
Executive Officer.
The reportable segments of the Company are Magazine Distribution, In-Store
Services, Wood Manufacturing and Shared Services.
The Magazine Distribution segment derives revenues from (1) selling and
distributing magazines to major specialty retail book chains, independent
retailers, and secondary wholesalers throughout North America, (2) the export of
12
SOURCE INTERLINK COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
domestic titles internationally to foreign wholesalers or through domestic
brokers (3) serving as secondary national distributor, (4) providing return
processing services for major specialty retail book chains and (5) providing
fulfillment services to other wholesalers.
The In-Store Services segment derives revenues from (1) providing information
and management services relating to retail magazine sales to U.S. and Canadian
retailers and magazine publishers, (2) providing claim filing services related
to rebates owed retailers from publishers or their designated agent, (3)
designing, manufacturing, and invoicing participants in front-end fixture
programs, and (4) shipping, installation and removal of front-end fixtures.
The Wood Manufacturing segment derives revenues from designing, manufacturing
and installing high-end wood store fixtures.
Shared Services consists of overhead functions not allocated to individual
operating segments. Previously, the majority of these expenses were included in
the In-Store Services segment. Comparable information is not available and not
presented for the prior fiscal year.
Segment results follow (in thousands):
Other
Magazine In-Store Wood (Shared
Three Months Ended April 30, 2003 Distribution Services Manufacturing Services) Consolidated
-----------------------------------------------------------------------------------------------------------
Revenue $ 64,066 $ 13,092 $ 3,857 $ - $ 81,015
Cost of Revenue 49,500 7,433 3,301 - 60,234
-------------------------------------------------------------------
Gross Profit 14,566 5,659 556 - 20,781
Selling, General &
Administrative 11,210 2,270 381 3,553 17,414
Relocation Expense 1,654 - - 76 1,730
-------------------------------------------------------------------
Operating Income (Loss) $ 1,702 $ 3,389 175 $ (3,629) $ 1,637
-------------------------------------------------------------------
Total Assets $ 53,078 $ 82,849 16,939 $ 23,740 $ 176,606
-------------------------------------------------------------------
Magazine In-Store Wood
Three Months Ended April 30, 2003 Distribution Services Manufacturing Consolidated
---------------------------------------------------------------------------------------------
Revenue $ 64,066 $ 13,092 $ 3,857 $ 81,015
Cost of Revenue 49,500 7,433 3,301 60,234
---------------------------------------------------------
Gross Profit 14,566 5,659 556 20,781
Selling, General & Administrative 11,210 5,823 381 17,414
Relocation Expense 1,654 76 - 1,730
---------------------------------------------------------
Operating Income $ 1,702 $ 3,389 $ 175 $ 1,637
---------------------------------------------------------
Magazine In-Store Wood
Three Months Ended April 30, 2002 Distribution Services Manufacturing Consolidated
---------------------------------------------------------------------------------------------
Revenue $ 47,544 $ 13,364 $ 5,847 $ 66,755
Cost of Revenue 37,205 6,517 4,349 48,071
---------------------------------------------------------
Gross Profit 10,339 6,847 1,498 18,684
Selling, General & Administrative 9,628 4,760 485 14,873
Relocation Expense - 296 - 296
---------------------------------------------------------
Operating Income $ 711 $ 1,791 $ 1,013 $ 3,515
---------------------------------------------------------
Total Assets $ 98,836 $ 20,404 $ 33,037 $ 152,277
---------------------------------------------------------
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
SOME OF THE INFORMATION CONTAINED IN THIS FORM 10-Q CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. WHEN USED IN THIS
REPORT, THE WORDS "MAY," "WILL," "BELIEVES," "ANTICIPATES," "INTENDS,"
"EXPECTS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. BECAUSE SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES, OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO: (i) OUR DEPENDENCE ON THE
MARKETING AND DISTRIBUTION STRATEGIES OF PUBLISHERS AND OTHER VENDORS; (ii) OUR
ABILITY TO ACCESS CHECKOUT AREA INFORMATION; (iii) RISKS ASSOCIATED WITH OUR
ADVANCE PAY PROGRAM, INCLUDING PROBLEMS COLLECTING INCENTIVE PAYMENTS FROM
PUBLISHERS; (iv) DEMAND FOR OUR DISPLAY RACKS AND STORE FIXTURES; (v) OUR
ABILITY TO SUCCESSFULLY IMPLEMENT OUR GROWTH STRATEGY; (vi) COMPETITION; (vii)
OUR ABILITY TO EFFECTIVELY MANAGE OUR EXPANSION; (viii) GENERAL ECONOMIC AND
BUSINESS CONDITIONS NATIONALLY, IN OUR MARKETS AND IN OUR INDUSTRY; (ix) OUR
ABILITY TO MAINTAIN ADEQUATE FINANCING ON ACCEPTABLE TERMS SUFFICIENT TO ACHIEVE
OUR BUSINESS PLANS (x) OUR ABILITY TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES
WITH AND INTO OUR CORPORATE ORGANIZATION, AND (xi) OUR ABILITY TO ATTRACT AND/OR
RETAIN SKILLED MANAGEMENT. INVESTORS ARE ALSO DIRECTED TO CONSIDER OTHER RISKS
AND UNCERTAINTIES DISCUSSED IN OTHER REPORTS PREVIOUSLY AND SUBSEQUENTLY FILED
BY US WITH THE SECURITIES AND EXCHANGE COMMISSION. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE
DATE HEREOF. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS, WHICH MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
OVERVIEW
Our company is a leading provider of marketing services to producers,
distributors and retailers of magazines, confections and general merchandise,
and the largest direct-to-retail magazine distributor servicing specialty
retailers in North America. We are also a leading marketer of magazines,
confections and general merchandise sold at the front-end of retail stores.
Our business has been built on three complementary operating units. The Magazine
Distribution group distributes magazines to specialty retailers utilizing
proprietary information systems to assist retailers with magazine selection and
procurement. In addition, we provide fulfillment services to third parties for a
fee. Our fulfillment services consist of us providing shipping and handling
services to other wholesalers for either a per-unit or per-pound fee. Our
In-Store Service group combines display fixture design and production
capabilities, supported by standard-setting information services, to offer our
clients, both retailers and vendors, more efficient, profitable merchandising.
In addition, we provide critical sales information on more than 10,000 magazine
titles to assist our clients in making strategic marketing, distribution and
advertising decisions affecting some of the most valuable space in any retail
store, its checkout area. In-Store Services also assists retailers in claiming
rebates earned on the placement and sale of magazines. Our Wood Manufacturing
group designs and manufactures custom wood displays and store fixtures to
complement the wire and metal displays and store fixtures offered by our
In-Store Services group.
Our segment reporting is structured based on the reporting of senior management
to the Chief Executive Officer.
Our reportable segments are Magazine Distribution, In-Store Services, Wood
Manufacturing and Shared Services. Shared Services consists of corporate
administrative services such as Corporate Finance, Human Resources, MIS and
Executive Offices that are not allocated to the operating divisions. Previously,
these expenses were included under the In-Store Services segment.
14
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, information relating
to our operations expressed by segment (all discussion of results is in
thousands):
APRIL 30, 2003 2002
--------------------------------------
Revenues $ 81,015 $ 66,755
Cost of Revenues 60,234 48,071
------------ --------------
Gross Profit 20,781 18,684
Selling, General and Administrative Expense 17,414 14,873
Relocation Expenses 1,730 296
------------ --------------
Operating Income 1,637 3,515
Interest Expense (906) (806)
Other Expense (Income) 152 77
------------ --------------
Income before taxes 883 2,786
Income Tax Expense (Benefit) 241 1,188
------------ --------------
Net Income $ 622 $ 1,598
--------------------------------------------------------------------------------------------
Gross Profit Margin 25.7% 28.0%
Selling, General and Administrative Expense (% of 21.5% 22.3%
Revenue)
Revenues
2003 2002 CHANGE %
-------------- ----------- ---------- -----------
81,015 66,755 14,260 21.4%
-------------- ----------- ---------- -----------
The increase in revenues from the prior quarter is primarily due to the increase
in revenues from magazine distribution ($16,522) partially offset by a decrease
in revenues from wood manufacturing ($1,990).
The increase in magazine distribution revenues is attributable to both organic
growth in our domestic operations ($10,330) and the expansion of our
distribution network to include foreign distribution ($6,192).
The increases in our domestic operations relate to an increase in our share of
the total magazines distributed to our existing customers, new customers, and an
increase in distribution of weekly news magazines in the first quarter due to
world events. We have also experienced significant growth in revenue from the
domestic sales of foreign titles.
Gross Profit
2003 2002 CHANGE %
-------------- ----------- ---------- -----------
20,781 18,684 2,097 11.2%
-------------- ----------- ---------- -----------
The increase in gross profit from the prior quarter is attributable to the
increase in revenues described above partially offset by a 2.3% decrease in
gross profit margins. The decrease in the gross profit margin relates to a
higher percentage of revenues derived from magazine distribution, which
generally has a lower gross profit margin than our In-Store Services segment.
In addition, lower volume at our wire and wood manufacturing plants resulted in
lower gross profit and gross profit margins in the In-Store Services and Wood
Manufacturing segments.
15
Selling, General and Administrative Expense ("SG&A")
2003 2002 CHANGE %
-------------- ----------- ---------- -----------
17,414 14,873 2,541 17.1%
The increase in selling, general and administrative expenses relate primarily to
the overall growth in our business both organically and through the acquisition
of new businesses. Approximately $860 of the increase related to higher freight
costs due to the overall increase in distribution levels. SG&A as a percent of
revenues decreased as we were able to leverage our existing infrastructure to
manage increased distribution without significant increase in fixed costs.
Relocation Expenses
In the first quarter of 2004, we completed the relocation of the administrative
operations of our Magazine Distribution business from San Diego, California to
our new Corporate Headquarters in Bonita Springs, Florida.
During 2003, we relocated our claim submission and fixture billing center in
High Point, North Carolina and our Corporate Headquarters in St. Louis, Missouri
to our new Corporate Headquarters in Bonita Springs, Florida. This relocation
was completed in the fourth quarter of 2003.
Income before taxes
2003 2002 CHANGE %
-------------- ----------- ---------- -----------
883 2,786 (1,903) (68.3)%
Income before taxes decreased due to the factors described above. Profit margins
decreased from 4.2% to 1.1%. The decrease in profit margin related to the higher
relocation costs in the current quarter versus the comparable quarter of the
prior fiscal year and a higher concentration of revenues in the Magazine
Distribution business, which generally has lower operating margins than either
In-Store Services or Wood Manufacturing. The Magazine Distribution business has
a significant variable cost component to its SG&A related to shipping and
handling of product that has increased as revenues increased. The In-Store
Services and Wood Manufacturing businesses have a more fixed SG&A component that
allows gross profit after a certain point to directly impact operating and
profit margins.
Interest Expense
Interest and related expenses relate primarily to our significant debt
instruments, which consist of our revolving line-of-credit with Bank of America,
our credit facilities with Congress Financial, our IRB related to our Rockford,
IL manufacturing facility and debt to prior owners of Interlink.
Interest expense increased from the prior year due to higher average borrowings
consistent with the overall growth of the Company.
Other Expense (Income)
16
Other expense (income), consists of items outside of the normal course of
operations. Due to its nature, comparability between periods is not generally
meaningful. Neither reported period included a significant other expense
(income) item.
Income Tax Expense
The effective income tax rates were 27.3% and 42.6% for the period ended April
30, 2003 and 2002, respectively.
The difference between the effective tax rates relates to the realization of a
portion of the NOL acquired with our acquisition of Interlink that was reserved
at the end of fiscal 2003.
17
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements for the Magazine Distribution segment are the cost
of the periodicals and the cost of freight, labor and overhead associated with
our distribution centers.
Our primary cash requirements for the In-Store Services segment are the cost of
raw materials, labor, and factory overhead incurred in the production of
front-end displays, the cost of labor incurred in providing our claiming, design
and information services and cash advances funding our Advance Pay program. Our
Advance Pay program allows retailers to receive a cash advance on future
collections of their rebate claims, which is repaid when those claims are paid
by publishers.
Our primary cash requirements for the Wood Manufacturing segment are for
purchasing materials, the cost of labor, and factory overhead incurred in the
manufacturing process.
Historically, we have financed our business activities through cash flows from
operations, borrowings under available lines of credit and through the issuance
of equity securities.
Net cash (used in) provided by operating activities was $(5,200) and $4,371 for
the quarter-ended April 30, 2003 and 2002, respectively.
Operating cash flows in the first quarter of fiscal year 2004 were primarily
from net income ($642), adding back non-cash charges such as depreciation and
amortization ($1,079) and provisions for losses on accounts receivable ($404),
and a significant increase in accounts payable ($6,534). These cash providing
activities were offset by a significant increase in accounts receivable
($13,110).
The increase in accounts receivable related primarily to the magazine export
agreement and the inception of that business, which caused an increase in
accounts receivable of $6,175. The first quarter included two months of
operations from this business and no cash collection due to standard payment
terms of 90 days, which is typical for this segment of the industry. In
addition, a large portion of the collections on the current quarter's rebate
claims, which are generally collected in the last week of the fiscal quarter,
fell into the first week of the second quarter. Finally, magazine distribution
for the fiscal quarter ended April 30, 2003, increased significantly over the
prior quarter.
The increase in accounts payable related primarily to the acquisition of a
customer list and the inception of that business, which caused an increase in
accounts payable of $5,764.
Operating cash flows in the first quarter of fiscal year 2003 were primarily
from net income ($1,598), adding back non-cash charges such as depreciation and
amortization ($658) and provisions for losses on accounts receivable ($264), a
significant decrease in accounts receivable ($10,289), and a decrease in
inventories ($2,860). The decrease in accounts receivable related primarily to
an unusually high level of accounts receivable as of the beginning of the
quarter returning to more normal levels.
Net cash used in investing activities was $(1,922) and $(727) for the
quarter-ended April 30, 2003 and 2002, respectively.
Investing activities in the first quarter of fiscal year 2004 consisted
primarily of the initial payment on the acquisition of a customer list.
Investing activities in the first quarter of fiscal year 2003 consisted entirely
of capital expenditures.
Our borrowing agreements limit the amount we can expend on capital expenditures
in any fiscal year.
18
Net cash provided by (used in) financing activities was $8,269 and $(3,612) for
the quarter-ended April 30, 2003 and 2002, respectively.
Financing activities in the first quarter of fiscal year 2004 consisted
primarily of borrowings on our credit facilities ($9,409) to pay for the
acquisition of a customer list and working capital needs.
Financing activities in the first quarter of fiscal year 2003 consisted of a
decrease in outstanding balances on our credit facility partially due to a large
amount of checks issued that had not cleared against our facility. Due to the
nature of our Advance Pay program, it is not uncommon to have significant checks
issued that have not cleared against our credit facility at the end of our
fiscal quarters.
At April 30, 2003, our total debt obligations were $59,640, excluding
outstanding letters of credit. Debt consists of our revolving credit facility
with Bank of America that we use to fund our In-Store Services and Wood
Manufacturing segments, our revolving credit facilities with Congress Financial
Corporation that we use to fund our Magazine Distribution segment, and an
Industrial Revenue Bond connected to our manufacturing facility in Illinois,
amounts owed related to the magazine export agreement, and a note payable to the
former owners of an acquired company.
On December 22, 1999, the Company entered into a credit agreement with Bank of
America, N.A., which was amended on August 30, 2002 to extend the termination
date to August 1, 2003 and to grant Bank of America, N.A. a first-priority
perfected security interest in all real and personal property of the Company
excluding the capital stock and assets of The Interlink Companies, Inc.,
International Periodical Distributors, Inc. and David E. Young, Inc. The
agreement was further amended on May 1, 2003 to waive and amend certain
financial covenants and provide the Company with two options to extend the
agreement (if both options were exercised) through February 1, 2004.
The credit agreement enables the Company to borrow up to $46.0 million under a
revolving credit facility. Borrowings under the credit facility bear interest at
a rate equal to the 90-day LIBOR rate (1.26% at April 30, 2003) plus 4.85% and
carries a facility fee of 1/4 % per annum on the difference between $25 million
and the average principal amount outstanding under the loan (if less than $25
million) plus 3/8% per annum of the difference between the maximum amount of the
loan and the greater of (i) $25 million or (ii) the average principal amount
outstanding under this loan.
Under the credit agreement, the Company is limited in its ability to declare
dividends or other distributions on capital stock or make payments in connection
with the purchase, redemption, retirement or acquisition of capital stock. There
are also limitations on capital expenditures and the Company is required to
maintain certain financial ratios. The Company was in compliance with such
ratios at April 30, 2003.
Availability under the facility is limited by the Company's borrowing base
calculation as defined in the agreement resulted in excess availability of $12.3
million at April 30, 2003.
In connection with the acquisition of Interlink, the Company assumed IPD and
Deyco's secured credit facilities with Congress Financial Corporation
("Congress"). On February 22, 2002, IPD and Deyco entered into the credit
facility with Congress which expires on February 21, 2005.
The agreements provide for maximum combined borrowings of $25 million subject to
limits set by periodic borrowing base calculations. Borrowings under the
revolving credit portion of the facility bear interest at a rate equal 0.25% in
excess of the prime rate (2.25% at April 30, 2003). The credit facility is
secured by IPD and Deyco's accounts receivable and limited cross guarantees
between the two divisions. Under the credit agreement, IPD and Deyco are
required to maintain certain financial ratios. IPD and Deyco were in compliance
with all such ratios at April 30, 2003.
19
Availability under the facility is limited by the Company's borrowing base
calculation as defined in the agreement resulted in excess availability of $2.7
million at April 30, 2003.
On January 30, 1995, the City of Rockford, Illinois issued $4,000 of its
Industrial Project Revenue Bonds, Series 1995, and the proceeds were deposited
with the Amalgamated Bank of Chicago, as trustee. The proceeds of the issuance
were utilized to construct our manufacturing facility in Rockford, Illinois.
Bank of America ("the Bank") has issued an unsecured letter of credit for $4,100
in connection with the IRB. The bonds are secured by the trustee's indenture and
the letter of credit. The bonds bear interest at a variable weekly rate
(approximately 80% of the Treasury Rate) not to exceed 15% per annum. The bonds
mature on January 1, 2030. Fees related to the letter of credit are .75% per
annum of the outstanding bond principal plus accrued interest.
Amounts owed related to the magazine export agreement consist of quarterly
payments of 12 quarterly payments of $350 beginning in January 2004.
The note payable to the previous owner of an acquired company is past due and is
being disputed under the conditions of the acquisition agreement.
We believe that our cash flow from operations together with our revolving credit
facilities will be sufficient to fund our working capital needs and capital
expenditures for the foreseeable future. We have identified and executed a term
sheet with a lender to replace the Bank of America credit facility. The lender
is currently in the process of finalizing due diligence related to this new
facility. We anticipate this new agreement will be sufficient to fund our
working capital needs and will be finalized before the existing facility expires
on August 1, 2003. If necessary, we can avail ourselves of the offer to extend
the facility for two additional three month periods.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
General
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent
liabilities. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Senior Management has discussed the development, selection and
disclosure of these estimates with the Audit Committee of the Board of
Directors. Actual results may differ from these estimates under different
assumptions and conditions.
Management believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Revenue Recognition
20
The Company records a reduction in revenue for estimated magazine sales returns
and a reduction in cost of sales for estimated magazine purchase returns.
Estimated sales returns are based on historical sales returns and daily point-of
sale data from significant customers. The purchase return estimate calculated
from the sales return reserve is based on historical gross profit. If the
historical data the Company uses to calculate these estimates does not properly
reflect future results, revenue and/or cost of sales may be misstated.
21
Allowance for Doubtful Accounts
The Company provides for potential uncollectible accounts receivable based on
customer specific information and historical collection experience. If market
conditions decline, actual collection experience may not meet expectations and
may result in increased bad debt expenses.
Taxes on Earnings
The carrying value of the Company's net deferred tax assets assumes that the
Company will be able to generate sufficient future taxable income in certain tax
jurisdictions, based on estimates and assumptions. If these estimates and
assumptions change in the future, the Company may be required to increase or
decrease valuation allowances against its deferred tax assets resulting in
additional income tax expenses or benefits.
Valuation of Long-Lived Assets Including Goodwill and Purchased Intangible
Assets
We review property, plant and equipment, goodwill and purchased intangible
assets for impairment whenever events or changes in circumstances indicate the
carrying value of an asset may not be recoverable. Our asset impairment review
assesses the fair value of the assets based on the future cash flows the assets
are expected to generate. An impairment loss is recognized when estimated
undiscounted future cash flows expected to result from the use of the asset plus
net proceeds expected from the disposition of the asset (if any) are less than
the carrying value of the asset. This approach uses our estimates of future
market growth, forecasted revenue and costs, expected periods the asset will be
utilized and appropriate discount rates. Such evaluations of impairment of
long-lived assets including goodwill and purchased intangible assets are an
integral part of, but not limited to, our strategic reviews of our business and
operations. Deterioration of our business overall or within a business segment
in the future could also lead to impairment adjustments as such issues are
identified.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risks include fluctuations in interest rates and exchange
rate variability.
Our debt relates primarily to credit facilities with Bank of America, N.A. and
credit facilities with Congress Financial Corporation.
The credit facility with Bank of America has an outstanding principal balance of
approximately $33.3 million as of April 30, 2003. Interest on the outstanding
balance is charged based on a variable interest rate related to LIBOR plus a
margin specified in the credit agreement.
In order to minimize our exposure to interest rate risk, our lender required us
to enter into an interest rate swap agreement. The swap agreement, with a
notional amount of $15.0 million converts the floating interest rate on the Bank
of America credit facility to a fixed rate. At April 30, 2003 the fair value of
the swap is recorded in accrued expenses. The change in the fair value of the
swap is recorded in other income (expense).
The two credit facilities with Congress are secured by IPD and Deyco's accounts
receivable, inventories, equipment and other intangibles. The revolving credit
facilities had a combined outstanding principal balance of approximately $15.6
million at April 30, 2003. Borrowings under the revolving credit portion of the
facility bear interest at a rate equal to 0.25% in excess of the prime rate.
Interest on the outstanding balances is subject to market risk in the form of
fluctuations in interest rates.
We do not perform any interest rate hedging activities related to these two
facilities.
We have exposure to foreign currency fluctuations through our operations in
Canada. These operations accounted for approximately 2.0% or our first quarter
revenues. In addition, we generally pay operating expenses in the corresponding
local currency and will be subject to increased risk for exchange rate
fluctuations between such local currency and the dollar.
Additionally, we have exposure to foreign currency fluctuation through our
purchase of magazines from foreign publishers and sale of domestic magazine
titles to foreign wholesalers. Foreign magazines are purchased in foreign
currency (primarily Euros) and sold domestically in US$. Domestic magazines are
purchased in US$ and in some instances sold internationally in local currency. A
significant change in the relative strength of the US$ could have a significant
impact on the sales of these magazines at retail.
We do not conduct any significant hedging activities related to foreign
currency.
23
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the
securities Exchange Act of 1934, within 90 days of the filing date of this
report (the "Evaluation Date"). Based on this evaluation, our principal
executive officer and principal financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective such that the
material information required to be included in our Securities and Exchange
Commission ("SEC") reports is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms relating to our
company, including our consolidated subsidiaries, and was made known to them by
others within those entities, particularly during the period when this report
was being prepared.
In addition, there were no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
Evaluation Date. We have not identified any significant deficiencies or material
weaknesses in our internal controls, and therefore there were no corrective
actions taken.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to routine legal proceedings arising out of the normal
course of business. Although it is not possible to predict with certainty the
outcome of these unresolved legal actions or the range of possible loss, the
Company believes that none of these actions, individually or in the aggregate,
will have a material adverse affect on the financial condition or results of
operations of the Company.
ITEM 2. CHANGES IN SECURITIES
As of February 1, 2003, the Company issued to S. Leslie Flegel, its Chairman and
Chief Executive Officer, an option to acquire 150,000 shares of the Company's
common stock for a purchase price of $4.56 per share, the prevailing market
price of the Company's common stock on the date the option was issued. The
option provides that it may be exercised as to 50,000 shares immediately, as to
an additional 50,000 shares after February 1, 2004 and as to the remaining
50,000 shares after February 1, 2005. The option expires on February 1, 2013.
The option was issued as additional compensation for Mr. Flegel's service to the
Company in reliance on Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index
(b) Reports on Form 8-K.
On April 8, 2003, the Company filed a Current Report on Form
8-K under Item 5 thereof disclosing reporting a change in the
date of the Company's 2003 Annual Meeting of Shareholders and
the deadline for shareholders to submit proposals for inclusion
in the Company's 2003 Proxy Statement.
On May 1, 2003, the Company filed a Current Report on Form 8-K
under Item 9 thereof disclosing the Company's public
announcement of the results of operation for the fiscal quarter
ended January 31, 2003 and the fiscal year then ended.
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SOURCE INTERLINK COMPANIES, INC.
Date: June 16, 2003 /s/ MARC FIERMAN
---------------------------
Marc Fierman
Chief Financial Officer
26
I, S. Leslie Flegel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Source-Interlink
Companies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were any significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: June 16, 2003
/s/ S. Leslie Flegel
----------------------------
S. Leslie Flegel
Chairman and Chief Executive Officer
27
I, Marc Fierman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Source-Interlink
Companies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were any significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: June 16, 2003
/s/ Marc Fierman
----------------------------
Marc Fierman
Chief Financial Officer
28
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.21 Employment and Non-Competition Agreement dated May 21, 2003 between S. Leslie Flegel and
Source Interlink Companies, Inc.
10.40 Agreement of Lease dated as of October 24, 2000 by and between Joseph P. Day Realty Corp., as
agent for owner Ron Bet 40th Street LLC, and Brand Manufacturing Corp.
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
29