CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
(unaudited)
|
|
Three months ended October
31,
|
|
|
Nine months ended October
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
462,954
|
|
|
$
|
500,974
|
|
|
$
|
1,393,482
|
|
|
$
|
1,380,619
|
|
Advertising
|
|
|
56,297
|
|
|
|
67,471
|
|
|
|
180,933
|
|
|
|
67,471
|
|
Circulation
|
|
|
29,102
|
|
|
|
32,132
|
|
|
|
90,492
|
|
|
|
32,132
|
|
Manufacturing
|
|
|
10,601
|
|
|
|
8,315
|
|
|
|
30,365
|
|
|
|
22,325
|
|
Claiming
and information
|
|
|
2,428
|
|
|
|
3,429
|
|
|
|
9,127
|
|
|
|
10,542
|
|
Other
|
|
|
30,350
|
|
|
|
26,828
|
|
|
|
78,368
|
|
|
|
35,612
|
|
Total
revenues, net
|
|
|
591,732
|
|
|
|
639,149
|
|
|
|
1,782,767
|
|
|
|
1,548,701
|
|
Cost
of goods sold
|
|
|
407,027
|
|
|
|
436,034
|
|
|
|
1,218,540
|
|
|
|
1,152,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
184,705
|
|
|
|
203,115
|
|
|
|
564,227
|
|
|
|
396,099
|
|
Distribution,
circulation and fulfillment
|
|
|
54,828
|
|
|
|
55,801
|
|
|
|
164,709
|
|
|
|
138,832
|
|
Selling,
general and administrative expenses
|
|
|
84,142
|
|
|
|
96,194
|
|
|
|
272,834
|
|
|
|
176,755
|
|
Depreciation
and amortization
|
|
|
18,088
|
|
|
|
20,354
|
|
|
|
54,190
|
|
|
|
34,176
|
|
Integration,
consolidation and relocation expense
|
|
|
23,919
|
|
|
|
1,185
|
|
|
|
27,966
|
|
|
|
1,269
|
|
Provision
for customer bankruptcy
|
|
|
10,208
|
|
|
|
-
|
|
|
|
10,208
|
|
|
|
-
|
|
Write
off of acquisition-related assets
|
|
|
-
|
|
|
|
-
|
|
|
|
6,503
|
|
|
|
-
|
|
Disposal
of land, building and equipment, net
|
|
|
-
|
|
|
|
94
|
|
|
|
-
|
|
|
|
174
|
|
Impairment
of goodwill and intangible assets
|
|
|
-
|
|
|
|
-
|
|
|
|
270,847
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
|
(6,480
|
)
|
|
|
29,487
|
|
|
|
(243,030
|
)
|
|
|
44,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(30,204
|
)
|
|
|
(36,079
|
)
|
|
|
(88,184
|
)
|
|
|
(42,539
|
)
|
Interest
income
|
|
|
131
|
|
|
|
519
|
|
|
|
403
|
|
|
|
797
|
|
Write
off of deferred financing fees
|
|
|
-
|
|
|
|
(1,313
|
)
|
|
|
(1,048
|
)
|
|
|
(1,313
|
)
|
Other
(expense) income
|
|
|
(61
|
)
|
|
|
(49
|
)
|
|
|
(450
|
)
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other expense
|
|
|
(30,134
|
)
|
|
|
(36,922
|
)
|
|
|
(89,279
|
)
|
|
|
(42,905
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations, before income taxes
|
|
|
(36,614
|
)
|
|
|
(7,435
|
)
|
|
|
(332,309
|
)
|
|
|
1,988
|
|
Income
tax (benefit) expense
|
|
|
(16
|
)
|
|
|
(2,974
|
)
|
|
|
-
|
|
|
|
795
|
|
Minority
interest in income of subsidiary
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,035
|
)
|
|
|
-
|
|
(Loss)
income from continuing operations
|
|
|
(36,598
|
)
|
|
|
(4,461
|
)
|
|
|
(333,344
|
)
|
|
|
1,193
|
|
Loss
from discontinued operations, net of taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,608
|
)
|
Net
loss
|
|
$
|
(36,598
|
)
|
|
$
|
(4,461
|
)
|
|
$
|
(333,344
|
)
|
|
$
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
earnings per share – Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.70
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(6.37
|
)
|
|
$
|
0.02
|
|
Discontinued
operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.03
|
)
|
Total
|
|
$
|
(0.70
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(6.37
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – Basic and diluted
|
|
|
52,321
|
|
|
|
52,321
|
|
|
|
52,321
|
|
|
|
52,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to Consolidated Financial Statements
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
(in
thousands)
(unaudited)
|
|
Common Stock
|
|
|
Additional
Paid-In Capital
|
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other Comprehensive Income
|
|
|
Total
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 31, 2008
|
|
|
52,321
|
|
|
$
|
523
|
|
|
$
|
476,099
|
|
|
$
|
(65,659
|
)
|
|
$
|
3,560
|
|
|
$
|
414,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(333,344
|
)
|
|
|
-
|
|
|
|
(333,344
|
)
|
Foreign
currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,602
|
)
|
|
|
(2,602
|
)
|
Unrealized
gain on interest rate swaps
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,233
|
|
|
|
1,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(333,344
|
)
|
|
|
(1,369
|
)
|
|
|
(334,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
188
|
|
|
|
-
|
|
|
|
-
|
|
|
|
188
|
|
Excess
tax benefit from exercise of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
options
|
|
|
-
|
|
|
|
-
|
|
|
|
745
|
|
|
|
-
|
|
|
|
-
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 31, 2008
|
|
|
52,321
|
|
|
$
|
523
|
|
|
$
|
477,032
|
|
|
$
|
(399,003
|
)
|
|
$
|
2,191
|
|
|
$
|
80,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to Consolidated Financial Statements
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
Nine
months ended October 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(333,344
|
)
|
|
$
|
(415
|
)
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
57,671
|
|
|
|
38,566
|
|
Amortization
of deferred financing costs
|
|
|
6,886
|
|
|
|
1,313
|
|
Provision
for losses on accounts receivable
|
|
|
14,570
|
|
|
|
2,035
|
|
Stock
compensation expense
|
|
|
188
|
|
|
|
179
|
|
Loss
on sale of discontinued operation
|
|
|
-
|
|
|
|
730
|
|
Impairment
of goodwill and intangible assets
|
|
|
270,847
|
|
|
|
-
|
|
Other
|
|
|
8,687
|
|
|
|
(2,699
|
)
|
Changes
in assets and liabilities (excluding business
acquisitions):
|
|
|
|
|
|
|
|
|
Increase
in accounts receivable
|
|
|
(18,357
|
)
|
|
|
(26,171
|
)
|
Increase
in inventories
|
|
|
(92,262
|
)
|
|
|
(104,429
|
)
|
Increase
in other current and non-current assets
|
|
|
(7,843
|
)
|
|
|
(1,991
|
)
|
Increase
in deferred revenue
|
|
|
2,067
|
|
|
|
1,164
|
|
Increase
in accounts payable and other liabilities
|
|
|
110,740
|
|
|
|
148,731
|
|
Cash
provided by operating activities
|
|
|
19,850
|
|
|
|
57,013
|
|
|
|
|
|
|
|
|
|
|
Investment
Activities
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(25,033
|
)
|
|
|
(20,486
|
)
|
Purchase
of claims
|
|
|
(71,010
|
)
|
|
|
(76,752
|
)
|
Payments
received on purchased claims
|
|
|
67,795
|
|
|
|
82,584
|
|
Proceeds
from sale of Wood Manufacturing division, net of cash
transferred
|
|
|
-
|
|
|
|
9,828
|
|
Acquisition
of the remainder of Automotive.com, Inc.
|
|
|
(42,000
|
)
|
|
|
-
|
|
Acquisition
of Primedia Enthusiast Media, Inc., net of cash acquired
|
|
|
4,355
|
|
|
|
(1,195,017
|
)
|
Other
|
|
|
(1,953
|
)
|
|
|
170
|
|
Cash
used for investing activities
|
|
|
(67,846
|
)
|
|
|
(1,199,673
|
)
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Decrease
in checks issued against revolving credit facility
|
|
|
-
|
|
|
|
(11,952
|
)
|
Borrowings
under credit facilities
|
|
|
50,300
|
|
|
|
1,228,541
|
|
Payment
of deferred purchase price liabilities
|
|
|
(7,319
|
)
|
|
|
(2,662
|
)
|
Deferred
financing costs
|
|
|
(12,430
|
)
|
|
|
(33,581
|
)
|
Payments
on notes payable and capital leases
|
|
|
(12,667
|
)
|
|
|
(5,092
|
)
|
Proceeds
from the issuance of common stock
|
|
|
-
|
|
|
|
716
|
|
Excess
tax benefit from exercise of stock options
|
|
|
745
|
|
|
|
389
|
|
Other
|
|
|
(501
|
)
|
|
|
(651
|
)
|
Cash
provided by financing activities
|
|
|
18,128
|
|
|
|
1,175,708
|
|
|
|
|
|
|
|
|
|
|
(Decrease)
increase in cash
|
|
|
(29,868
|
)
|
|
|
33,048
|
|
Cash,
beginning of period
|
|
|
35,650
|
|
|
|
-
|
|
Cash,
end of period
|
|
$
|
5,782
|
|
|
$
|
33,048
|
|
See
accompanying notes to Consolidated Financial Statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
1. Nature
of Business and Basis of Presentation
Source
Interlink Companies, Inc (“the Company”) is a premier publishing, marketing,
merchandising and fulfillment company of entertainment products including
magazines, DVDs, music CDs, books and related items, serving over 100,000 retail
locations throughout North America. The Company produces print and digital
content for consumers in North America through its media division, Source
Interlink Media (“SIM”), which was acquired on August 1, 2007. The
Company also sells and distributes entertainment products to leading mass
merchandise retailers, grocery stores, bookstore chains, music stores, drug
stores and other specialty retailers, as well as e-commerce retailers. It offers
customers an array of value-added content and services including enthusiast
media publications and online content, category management, product procurement,
fulfillment services, claims submission, information services and in-store
display fixturing.
The
Company directly produces and delivers magazine, Internet and home entertainment
content to consumers. With the addition of SIM, it transformed from a leading
home entertainment distributor into a significant content owner. This
array of products and services, in combination with our value added services and
geographic reach, positions us to service the needs of America’s leading
retailers and to capitalize on the rapidly changing distribution and fulfillment
landscape.
The
Company is one of the largest independent wholesalers of DVDs and CDs in North
America. It effectively operates as an extension of its customers’ operations.
Between its fulfillment, category management and e-commerce solutions, it
provides our customers with a complete solution to maximize the sales and
profitability of their home entertainment content products.
The
consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to and in conformity with the instructions to
Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange
Commission (“SEC”). Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States (“GAAP”). In the opinion of the Company’s
management, these unaudited consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments and
reclassifications) necessary to present fairly our results of operations and
cash flows for the three and nine months ended October 31, 2008 and 2007 and our
financial position as of October 31, 2008. All significant
intercompany accounts and transactions have been eliminated from these
statements. The preparation of unaudited consolidated financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Because of this and the seasonality of the
Company’s business, the results of operations for such interim periods will not
necessarily be indicative of the results of operations and cash flows for the
full fiscal year or subsequent quarters.
Certain
information and disclosures normally included in the notes to the annual
consolidated financial statements have been condensed or omitted from these
interim consolidated financial statements. Accordingly, these interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K (the “Annual Report”) for the fiscal year ended
January 31, 2008, as filed with the SEC on April 15, 2008, as amended May
30, 2008.
The
Company’s segment reporting combines the Company’s business units in a logical
way that identifies business concentrations and
synergies. Accordingly, beginning in fiscal 2009, management has
restructured the presentation of the Company’s segments to better reflect the
change in management and financial reporting of the applicable
units. The Company’s segments are heretofore presented as follows:
Media, Periodical Fulfillment Services, DVD and CD Fulfillment and Shared
Services. Prior reporting periods have been reclassified to conform
to current presentation to make prior period comparisons
meaningful.
Other
revenue includes online revenues, licensing revenues and event revenues within
the Media segment and wastepaper and other ancillary income within the
Periodical Fulfillment Services segment.
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
Derivative
Financial Instruments
As part
of our risk management strategy, we enter into derivative transactions to
mitigate loss exposures. Our derivative instruments are currently
limited to an interest rate swap which is not exchange-traded and is an
over-the-counter customized transaction. Our derivative exposure is
with a counterparty that has long and short-term credit ratings of AA- and A-1,
respectively. These ratings were affirmed as of October 10, 2008 by
two of the major three rating agencies.
Derivatives
that are designated as hedges are documented and evaluated for effectiveness in
accordance with Statement of Financial Accounting Standards No. 133,
Accounting for Derivative
Instruments and Hedging Activities
(“FAS 133”). The effective portion of
changes in the fair value of cash flow hedges is deferred in accumulated other
comprehensive income. In the event hedge accounting no longer
applies, the Company recognizes all changes in fair value of derivative
instruments in the other income (expense) section of its Consolidated Statement
of Operations. The Company ceases hedge accounting treatment if its
evaluation of effectiveness no longer justifies deferral of changes in fair
value in accumulated other comprehensive income. At that time, a
reclassification from accumulated other comprehensive income to earnings would
occur.
On April
11, 2008, the Company entered into an interest rate swap agreement with Wachovia
Bank, N.A. to hedge the Company’s exposure to fluctuations in LIBOR on $210.0
million of 1-month LIBOR-based debt through April 29, 2011. This swap
agreement qualifies for hedge accounting treatment in accordance with FAS
133.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of cost over the fair value of net assets acquired in
connection with business acquisitions. In accordance with Statement of Financial
Accounting Standards No. 142,
Goodwill and Other Intangible
Assets (“FAS 142”), goodwill is evaluated at the reporting unit level,
which is defined as an operating segment or a component of an operating segment
that constitutes a business for which financial information is available and is
regularly reviewed by management. The Company assesses goodwill for impairment
at least annually in the absence of an indicator of possible impairment and
immediately upon an indicator of possible impairment. The annual impairment
review is completed in the first quarter of the fiscal year.
In
assessing goodwill and intangible assets for impairment, we make estimates of
fair value which are based on our projection of revenues, operating costs, and
cash flows of each reporting unit considering historical and anticipated future
results, general economic and market conditions as well as the impact of planned
strategies. The Company combines the discounted cash flow fair value with
publicly traded company multiples (market comparison approach) and acquisition
multiples of comparable businesses (industry acquisition approach) to determine
fair value. Generally, we engage third party specialists to assist us
with our valuations. Changes in our judgments and projections could result in a
significantly different estimate of the fair value of the reporting units and
could result in an impairment of goodwill or other intangible
assets.
If the
carrying amount of a reporting unit exceeds its fair value, the Company measures
the possible goodwill impairment based upon an allocation of the estimate of
fair value to the underlying assets and liabilities of the reporting unit,
including any previously unrecognized intangible assets, based upon known facts
and circumstances as if the acquisition occurred currently. The excess of the
fair value of the reporting unit over the amounts assigned to its assets and
liabilities is the implied fair value of goodwill. An impairment loss
would be recognized to the extent the carrying value of goodwill exceeds the
implied fair value of the goodwill. This test, performed in the first
quarter of fiscal year 2009, indicated that goodwill and indefinite-lived
intangible assets related to the Media reportable segment were
impaired.
Impairment
losses are reflected in operating income or loss in the Consolidated Statements
of Operations.
As a
result of our fiscal year 2009 FAS 142 first quarter impairment
analysis, we determined that certain tradenames of our Media reportable
segment were impaired and consequently recorded a charge of approximately $74.3
million during the first quarter. This determination was based largely on
management’s projections regarding the revenues from and profitability of
tradenames acquired on August 1, 2007.The combination of the analysis and other
factors discussed below, had an adverse impact on the anticipated future cash
flows used in the impairment analysis performed during the first quarter of
fiscal year 2009.The net carrying amount of the tradenames was $280.6 million at
the end of the first quarter of fiscal year 2009, after the impairment charge
was recorded.
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
As a
result of our fiscal year 2009 FAS 142 annual first quarter impairment analysis,
we determined that the goodwill of our Media reportable segment was impaired and
consequently recorded an impairment charge of $196.5 million. This determination
was based largely on management’s projections regarding the revenues and
profitability of the Media reportable segment as well as the effects of the
recent credit market changes, the continued economic downturn and the related
effects on customer discretionary spending and print advertising. The charge was
measured on the basis of comparison of estimated fair values with corresponding
book values and relates primarily to goodwill recorded in connection with our
acquisition of SIM. These fair values were determined in accordance with Company
policy discussed above as well as FAS 142 and other relevant
guidance.
Due to
uncertain market conditions and potential changes in our strategy and product
portfolio, it is possible that forecasts used to support our goodwill and
intangible assets may change in the future, which could result in additional
non-cash charges that would adversely affect our results of operations and
financial condition.
Income
Taxes
Statement
of Financial Accounting Standards No. 109 "
Accounting for Income Taxes
"
("FAS 109") requires that a valuation allowance be established
when it is more likely
than not that all or a portion of deferred tax assets
will not be realized. A
review of all available positive and negative evidence
needs to be considered,
including a company's performance, the market
environment in which
the company operates, the utilization of past tax credits,
length of carryback and
carryforward periods, existing contracts or sales
backlog that will
result in future profits, etc.
It further states that
forming a conclusion that a valuation allowance is not
needed is difficult
when there is negative evidence such as cumulative losses in
recent years.
Therefore, cumulative losses weigh heavily in the overall assessment. We
identified several significant developments which we considered in determining
the need to record a full valuation allowance in the first quarter of fiscal
2009, including the continuing economic downturn and our projections regarding
the near-term revenues and profitability of our segments. As a result of our
assessment, we recorded a valuation allowance on deferred tax assets of
approximately $133.3 million for the nine months ended October 31,
2008.
Recently
Issued Accounting Pronouncements
FSP No.
157-3
In
October 2008, the FASB issued FASB Staff Position No. 157-3, “
Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active
”
(“FSP 157-3”) which provides guidance clarifying certain aspects of
FAS 157 with respect to the fair value measurements of a security when the
market for that security is inactive. Adoption of this guidance in the third
quarter of 2008 has had no effect on the Company’s consolidated financial
condition and results of operations.
FAS
No. 162
In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 162,
The Hierarchy of Generally Accepted
Accounting Principles,
(“FAS 162”) which is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing US GAAP financial
statements. Prior to issuance of FAS 162, the GAAP hierarchy was
defined in the AICPA’s SAS 69,
The Meaning of Present Fairly in
Conformity with GAAP.
The main change is that FAS 162 is
directed to the entity, whereas SAS 69 was directed to the
auditor. FAS 162 becomes effective 60 days following the SEC’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411,
The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles.
We do not expect the adoption of FAS 162 to impact
our future operations or financial position.
FSP
No. 1
42-3
In April
2008, the FASB issued Staff Position No. FAS 142-3,
Determination of the Useful Life of
Intangible Assets,
(“FAS 142-3”), which amends the factors that must be
considered in developing renewal or extension assumptions used to determine the
useful life over which to amortize the cost of a recognized intangible asset
under FAS 142. FSP 142-3 must be adopted prospectively for intangible
assets acquired on or after January 1, 2009; intangible assets acquired prior to
this date are not affected by this FSP.
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
FAS
No. 161
In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative
Instruments and Hedging Activities,
(“FAS 161”)
–
an amendment of FAS
133
.
FAS 161
requires enhanced disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedge items are accounted
for under FAS 133 and its interpretations and how they affect an entity’s
financial position, financial performance and cash flows. FAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. Since FAS
161 impacts disclosures and not the accounting treatment for derivative
instruments and hedged items, adoption will not impact our results of operations
or financial condition.
FAS
No. 157
On
February 1, 2008, the Company adopted Statement of Financial Accounting
Standards No. 157,
Fair
Value Measurements
(“FAS 157”). In conjunction with the
guidance in FAS 133, the Company records its derivative instruments on its
Consolidated Balance Sheets. As of October 31, 2008, its derivative
instruments were valued at $2.4 million and are recorded in other
assets. This value is based upon significant observable Level II
inputs in the form of publicly available interest rate
information. FAS 157 has not yet been fully adopted by the Company in
accordance with FASB Staff Position 157-2 which defers FAS 157 for nonfinancial
assets and liabilities, to fiscal years beginning after November 15,
2008.
2.
Business Combinations
In July
2008, the Company purchased the remaining 19.9% of Automotive.com, Inc. for
$42.0 million in cash. The Company expects to realize numerous
benefits as a result of attaining total management control of the Autodigital
business, including operating synergies, cross-selling opportunities, improved
customer management and cost savings through rationalization and integration
strategies. This acquisition resulted in the retirement of $40.7
million of obligations, including minority interests and a $0.7 million increase
in amortizable intangible assets. The purchase price was funded by
additional borrowings under the Company’s Revolving Credit
Facility.
During
the three months ended October 31, 2008, the Company settled certain portions of
its working capital adjustment pertaining to the acquisition of Primedia
Enthusiast Media, Inc. (“PEM”). As a result, the Company received a
$4.4 million refund from Primedia, Inc., PEM’s former parent
company.
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
3.
Trade Receivables
Trade
receivables consist of the following:
(in thousands)
|
|
October
31,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Trade
receivables
|
|
$
|
432,572
|
|
|
$
|
411,968
|
|
Less
allowances for:
|
|
|
|
|
|
|
|
|
Sales
returns and other
|
|
|
217,167
|
|
|
|
202,569
|
|
Doubtful
accounts
|
|
|
30,997
|
|
|
|
25,924
|
|
|
|
|
|
|
|
|
|
|
Total
allowances
|
|
|
248,164
|
|
|
|
228,493
|
|
|
|
|
|
|
|
|
|
|
Trade
receivables, net
|
|
$
|
184,408
|
|
|
$
|
183,475
|
|
|
|
|
|
|
|
|
|
|
4.
Inventories
Inventories
consist of the following:
(in thousands)
|
|
October
31,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
9,581
|
|
|
$
|
8,854
|
|
Work-in-process
|
|
|
2,257
|
|
|
|
1,322
|
|
Finished
goods:
|
|
|
|
|
|
|
|
|
Pre-recorded
music and video
|
|
|
218,394
|
|
|
|
149,765
|
|
Magazines
and books
|
|
|
151,614
|
|
|
|
127,067
|
|
Display
fixtures
|
|
|
865
|
|
|
|
3,499
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
382,711
|
|
|
$
|
290,507
|
|
|
|
|
|
|
|
|
|
|
In the
event pre-recorded music and video or magazines and books are not sold, the vast
majority are returnable for credit from our vendors.
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
5.
Goodwill and intangibles
The
Company’s intangible assets consist of the following:
(in thousands)
|
|
October
31,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
Amortized
intangible assets
|
|
|
|
|
|
|
Customer
lists and relationships
|
|
$
|
285,889
|
|
|
$
|
285,345
|
|
Trade
names
|
|
|
2,000
|
|
|
|
2,400
|
|
Content
|
|
|
20,373
|
|
|
|
20,382
|
|
Non-compete
agreements
|
|
|
4,577
|
|
|
|
4,350
|
|
Software
|
|
|
16,340
|
|
|
|
16,340
|
|
Total
amortized intangibles
|
|
|
329,179
|
|
|
|
328,817
|
|
Accumulated
amortization
|
|
|
|
|
|
|
|
|
Customer
lists and relationships
|
|
|
(63,676
|
)
|
|
|
(31,986
|
)
|
Trade
names
|
|
|
(952
|
)
|
|
|
(250
|
)
|
Content
|
|
|
(2,548
|
)
|
|
|
(1,019
|
)
|
Non-compete
agreements
|
|
|
(3,076
|
)
|
|
|
(2,518
|
)
|
Software
|
|
|
(9,843
|
)
|
|
|
(8,317
|
)
|
Total
accumulated amortization
|
|
|
(80,095
|
)
|
|
|
(44,090
|
)
|
Net
amortized intangible assets
|
|
|
249,084
|
|
|
|
284,727
|
|
Indefinite
lived trade names
|
|
|
279,161
|
|
|
|
352,355
|
|
Intangibles,
net
|
|
$
|
528,245
|
|
|
$
|
637,082
|
|
|
|
|
|
|
|
|
|
|
As
discussed above, our fiscal year 2009 FAS 142 annual first quarter impairment
analysis determined that certain of our tradenames were impaired and
consequently we recorded a charge of approximately $74.3 million during the
first quarter. See Note 1 – Nature of Business and Basis of
Presentation.
As a
result of our first quarter fiscal 2009 impairment test, we reassessed the
estimated remaining useful lives of our indefinite-lived tradenames and
shortened such as lives as required. As a result of our fourth fiscal
2008 quarter impairment test, we reassessed the estimate remaining useful lives
of our customer lists within our DVD and CD Fulfillment group and shortened such
lives as required.
Amortization
of intangible assets was $11.6 million and $14.2 million for the three months
ended October 31, 2008 and 2007, respectively. Amortization of
intangible assets was $36.0 million and $21.4 million for the nine months ended
October 31, 2008 and 2007, respectively.
Changes
in the carrying amount of goodwill for the nine months ended October 31, 2008
are as follows:
(in
thousands)
|
|
Media
|
|
|
Periodical
Fulfillment Services
|
|
|
DVD
and CD Fulfillment
|
|
|
Consolidated
|
|
Balance,
January 31, 2008
|
|
$
|
673,654
|
|
|
$
|
194,649
|
|
|
$
|
201,532
|
|
|
$
|
1,069,835
|
|
Additions
|
|
|
5,109
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,109
|
|
Deletions
|
|
|
(4,355
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,355
|
)
|
Foreign
currency translation adjustments
|
|
|
—
|
|
|
|
(423
|
)
|
|
|
—
|
|
|
|
(423
|
)
|
Impairment
|
|
|
(196,547
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(196,547
|
)
|
Balance,
October 31, 2008
|
|
$
|
477,861
|
|
|
$
|
194,226
|
|
|
$
|
201,532
|
|
|
$
|
873,619
|
|
As
discussed above, our fiscal year 2009 FAS 142 annual first quarter impairment
analysis determined that the goodwill attributable to four reporting units
within our Media reportable segment was impaired and consequently we recorded a
charge of approximately $196.5 million. See Note 1 – Nature of Business and
Basis of Presentation.
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
6.
Debt and Revolving Credit Facility
Debt
consists of:
(in thousands)
|
|
October
31,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
credit facility – Citicorp North America
|
|
$
|
50,300
|
|
|
$
|
-
|
|
Term
Loan B – Citicorp North America
|
|
|
869,000
|
|
|
|
875,600
|
|
Bridge
Facility – Citicorp North America
|
|
|
-
|
|
|
|
465,000
|
|
11.25%
Senior Unsecured Notes due 2015
|
|
|
465,000
|
|
|
|
-
|
|
Note
payable – Magazine import and export
|
|
|
-
|
|
|
|
708
|
|
Note
payable – Arrangements with suppliers
|
|
|
6,895
|
|
|
|
8,461
|
|
Mortgage
loan – Wachovia Bank
|
|
|
18,000
|
|
|
|
18,750
|
|
Equipment
loans
|
|
|
3,766
|
|
|
|
6,060
|
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
|
1,412,961
|
|
|
|
1,374,579
|
|
Less
current maturities
|
|
|
13,568
|
|
|
|
15,369
|
|
|
|
|
|
|
|
|
|
|
Debt,
less current maturities
|
|
$
|
1,399,393
|
|
|
$
|
1,359,210
|
|
|
|
|
|
|
|
|
|
|
Citicorp
North America Credit Facilities
Revolving Credit
Facility
On August
1, 2007, the Company entered into a $300.0 million asset-based revolving credit
facility as a result of its acquisition of SIM. Citicorp North America, Inc., as
administrative agent for each of the parties that may become a participant in
such arrangement and their successors (“Lenders”) will make revolving loans to
the Company and its subsidiaries of up to $300.0 million including the issuance
of letters of credit. The terms and conditions of the arrangement are governed
primarily by the Revolving Credit Agreement dated August 1, 2007 by and among
the Company, its subsidiaries, and Citigroup Global Markets, Inc. and J.P.
Morgan Securities, Inc. as Joint Lead Arrangers and Joint Book Runners, Citicorp
North America, Inc. as Administrative Agent and Collateral Agent, JPMorgan Chase
Bank, N.A. as Syndication Agent, and Wachovia Bank, National Association and
Wells Fargo Foothill, LLC as Co-Documentation Agents.
Outstanding
borrowings bear interest at a variable annual rate equal to the prime rate
announced by Citicorp North America, Inc., plus a margin of 0.50%. At October
31, 2008, the prime rate was 4.00%. The Company also has the option of selecting
up to five tranches of at least $1.0 million each to bear interest at LIBOR plus
a margin of 1.50%. The Company had no LIBOR contracts outstanding at October 31,
2008. To secure repayment of the borrowings and other obligations of ours to the
Lenders, the Company and its subsidiaries granted a security interest in all of
the personal property assets to Citicorp North America, Inc., for the benefit of
the Lenders. These loans mature on August 1, 2013. As of October 31, 2008 and
January 31, 2008, the Company had borrowings of $50.3 million and $0,
respectively, under this facility.
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. The
Company is and has been in compliance with this provision over the life of the
facility.
Availability
under the facility is limited by the Company’s borrowing base calculation, as
defined in the agreement. The calculation resulted in excess availability, after
consideration of outstanding letters of credit, of $202.1 million at October 31,
2008.
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
Term Loan
B
On August
1, 2007, the Company entered into an $880.0 million Term Loan B as a result of
its acquisition of SIM. Citicorp North America, Inc., as administrative agent
for each of the parties that may become a participant in such arrangement and
their successors (“Lenders”) made loans to the Company and its subsidiaries of
$880.0 million. The terms and conditions of the arrangement are governed
primarily by the Term Loan Agreement dated August 1, 2007 by and among the
Company, its subsidiaries, and Citigroup Global Markets, Inc. and J.P. Morgan
Securities, Inc. as Joint Lead Arrangers and Joint Book Runners, Citicorp North
America, Inc. as Administrative Agent and Collateral Agent and J.P. Morgan Chase
Bank, N.A. as Syndication Agent.
Outstanding
borrowings bear interest at a variable annual rate equal to the prime rate
announced by Citicorp North America, Inc., plus a margin of 2.25%. At October
31, 2008, the prime rate was 4.00%. The Company also has the option of selecting
up to five tranches of at least $1.0 million each to bear interest at LIBOR plus
a margin of 3.25%. The Company had one LIBOR contract outstanding at October 31,
2008 in the amount of $869.0 million, maturing in November 2008 and bearing
interest at a rate of 6.469%. The Term Loan B requires the Company to
make principal payments of $2.2 million on the last day of each fiscal
quarter. The Company made principal payments totaling $6.6 million
during the nine months ended October 31, 2008. To secure repayment of the
borrowings and other obligations of ours to the Lenders, the Company and its
subsidiaries granted a security interest in all of the personal property assets
to Citicorp North America, Inc., for the benefit of the Lenders. These loans
mature on August 1, 2014. At that time, a final principal payment of
$820.6 million is due.
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. The Company is
also required to maintain a certain financial ratio. The Company was in
compliance with this requirement at October 31, 2008.
Refinancing of Bridge
Facility
On
June 26, 2008, the Company consummated the refinancing and permanent
retirement of all of its indebtedness under the certain Senior Subordinated
Bridge Loan Agreement (the “Bridge Facility”), dated as of August 1,
2007. This refinancing and permanent retirement was effected through the
exchange of the Company’s 11.25% Senior Unsecured Notes due 2015 (the “Senior
Notes”) for the termination of the Company’s indebtedness under the Bridge
Facility. The Senior Notes were issued to the former Bridge Facility
lenders and were offered in conformance with the exemptions for non-public
offerings provided by Rule 506 and Section 4(2) of the Securities Act of
1933. These notes constitute “restricted securities” under Rule 144A of
the aforementioned Act. Furthermore, in connection therewith,
the Company entered into
a Registration Rights Agreement, dated as of June 26, 2008 by and between
the Company, certain subsidiaries of the Company as guarantors and the Senior
Note holders, Citigroup Global Markets Inc., JPMorgan Securities Inc., Citigroup
North America Inc. and JPMorgan Chase Bank N.A. The Senior Notes were
issued under an Indenture, dated as of June 23, 2008, by and between the
Company, certain of the Company’s subsidiaries and HSBC Bank USA, National
Association, as Trustee.
As part
of the aforementioned refinancing, the Company paid a conversion fee of $11.6
million and other deferred financing fees of approximately $0.8 million, which
will be amortized over the term of the Senior Notes. As a result of
the refinancing, the Company wrote off the remaining $1.0 million of deferred
financing fees related to the Bridge Facility.
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
The
aggregate amount of debt maturing in each of the next five fiscal years is as
follows:
(in thousands)
|
|
Amount
|
|
|
|
|
|
Fiscal
Year:
|
|
|
|
Remainder
of 2009
|
|
$
|
3,451
|
|
2010
|
|
|
12,944
|
|
2011
|
|
|
11,402
|
|
2012
|
|
|
11,315
|
|
2013
|
|
|
61,239
|
|
Thereafter
|
|
|
1,312,610
|
|
|
|
|
|
|
Total
|
|
$
|
1,412,961
|
|
|
|
|
|
|
At
October 31, 2008 and January 31, 2008, unamortized deferred financing fees,
which are included in “Other long-term assets”, were approximately $33.8 million
and $29.0 million, respectively.
7.
Earnings per Share
A
reconciliation of the denominators of the basic and diluted earnings per share
computations is shown below:
|
|
Three months ended October
31,
|
|
Nine months ended October
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic
|
|
|
52,321
|
|
|
|
52,321
|
|
|
|
52,321
|
|
|
|
52,261
|
|
Dilutive
effect of stock options and warrants outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – diluted
|
|
|
52,321
|
|
|
|
52,321
|
|
|
|
52,321
|
|
|
|
52,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following were not included in weighted average common shares outstanding
because they are antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested
restricted stock units
|
|
|
183
|
|
|
|
-
|
|
|
|
220
|
|
|
|
-
|
|
Stock
options
|
|
|
2,461
|
|
|
|
2,830
|
|
|
|
2,528
|
|
|
|
2,108
|
|
Warrants
|
|
|
101
|
|
|
|
101
|
|
|
|
101
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,745
|
|
|
|
2,931
|
|
|
|
2,849
|
|
|
|
2,211
|
|
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
8.
Discontinued Operation
On July
31, 2007, the Company disposed of substantially all of the assets and
liabilities of its Wood Manufacturing division. The Company sold the
assets and liabilities of its Wood Manufacturing division to a purchaser in
which the Company’s former Chairman of the Board and Chief Executive Officer,
has an interest. The Wood Manufacturing division was formerly
reported as part of our Periodical Fulfillment Services segment. The
book value of the net assets sold on the closing date was $11.6
million. The assets and liabilities of the Wood Manufacturing
division were sold for $10.0 million in cash, and the issuance of a note payable
to the Company in the face amount of $3.5 million, which bears interest at the
3-month LIBOR plus a margin of 2.00%.The Company has determined that the note
does not bear an interest rate equivalent to a market rate for the
borrower. Therefore, the Company has discounted the note to fair
value using its estimation of a market rate for the note. This
discount was approximately $1.0 million. Based upon the final
determination of working capital, the Company refunded to the buyer $1.9 million
in cash during the third quarter of fiscal 2008. For the three and
nine months ended October 31, 2007, the summary results for the Wood
Manufacturing division are as follows:
|
|
Three
months ended October 31,
|
|
|
Nine
months ended October 31,
|
|
(in thousands)
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
2,551
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operation, before income taxes
|
|
$
|
-
|
|
|
$
|
(1,463
|
)
|
Income
tax benefit
|
|
|
-
|
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operation
|
|
|
-
|
|
|
|
(878
|
)
|
|
|
|
|
|
|
|
|
|
Loss
on sale of discontinued operation, before income taxes
|
|
|
-
|
|
|
|
(1,217
|
)
|
Income
tax benefit
|
|
|
-
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
Loss
on sale of discontinued operation
|
|
|
-
|
|
|
|
(730
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued
operation, net
|
|
$
|
-
|
|
|
$
|
(1,608
|
)
|
|
|
|
|
|
|
|
|
|
9.
Supplemental Cash Flow Information
Supplemental
information on interest and income taxes paid (received) is as
follows:
|
|
Nine months ended October
31,
|
|
(in thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
87,344
|
|
|
$
|
32,903
|
|
Income
taxes (net of receipts of $368 in 2009)
|
|
$
|
272
|
|
|
$
|
(9,331
|
)
|
As
discussed in Note 8, the Company disposed of its Wood Manufacturing division on
April 30, 2007 for the total consideration of $13.5 million, including $3.5
million in the form of a note receivable, of which the Company refunded $1.9
million to the buyer during the third quarter of fiscal 2008, based on a working
capital adjustment.
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
10.
Stock-Based Compensation
On
February 1, 2008, the Company authorized the issuance of 243,472 restricted
stock units (“the units”) to its Board of Directors as compensation for services
rendered (or 30,434 per Director).The units vest in one-third increments,
annually beginning one year from the grant date. At issuance, the
value of the units was $0.6 million. For the nine months ended
October 31, 2008 and 2007, stock compensation expense was $0.2 million and $0.2
million, respectively.
11.
Derivative Financial Instruments and Hedging Activities
The
aggregate fair value of derivative instruments in asset positions on October 31,
2008, is $1.2 million, and represents the maximum loss that would be recognized
at the reporting date if the counterparty failed to perform as
contracted.
We have
applied hedge accounting to the interest rate swap and designated it as a cash
flow hedge in accordance with the provisions of FAS 133. The Company
uses this derivative to reduce the risk of changes in cash interest payments
related to its long-term debt. The notional balance for this interest
rate swap is $210.0 million at October 31, 2008. The agreement was
perfectly effective since its inception in April 2008 through October 31, 2008
and is expected to be effective throughout its life.
12.
Integration, Consolidation and Relocation
In fiscal
2009, the Company developed a restructuring and integration plan to streamline
its businesses, address post-acquisition redundancies and lower overhead
costs. The implementation of these strategies to streamline acquired
businesses with existing operations involves the integration of seven
distribution centers into three for the Periodical Fulfillment Services segment,
the relocation of the Coral Springs, FL distribution facility to Shepherdsville,
KY for the DVD and CD Fulfillment segment and a significant reduction in
workforce.
The
Company is accounting for certain of these activities in accordance with the
provisions of Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated with
Exit or Disposal Activities
, (“FAS 146”) which addresses the recognition,
measurement and reporting of costs that are associated with exit and disposal
activities, including restructuring activities. FAS 146 prohibits the
recognition of liabilities associated with exit or disposal activities on the
date that an entity commits to a plan, mandating that such liabilities and costs
be recorded only when actually incurred. Therefore, the Company has recognized
costs associated with exit and disposal activities in the amount of $23.9 and
$28.0 million for the three and nine months ended October 31, 2008,
respectively. These amounts are aggregated on the Consolidated
Statements of Operations under Integration, consolidation and relocation
expense.
The
following table details the activity of the integration, consolidation and
relocation costs incurred through October 31, 2008:
(in
thousands)
|
|
Media
|
|
|
Periodical
Fulfillment
|
|
|
DVD
and CD Fulfillment
|
|
|
Shared
Services
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
benefits
|
|
$
|
887
|
|
|
$
|
1,503
|
|
|
$
|
632
|
|
|
$
|
377
|
|
|
$
|
3,399
|
|
Lease
costs
|
|
|
203
|
|
|
|
8,612
|
|
|
|
1,177
|
|
|
|
1,167
|
|
|
|
11,159
|
|
Integration
costs
|
|
|
1,338
|
|
|
|
11,212
|
|
|
|
654
|
|
|
|
204
|
|
|
|
13,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
integration, consolidation and relocation
|
|
$
|
2,428
|
|
|
$
|
21,327
|
|
|
$
|
2,463
|
|
|
$
|
1,748
|
|
|
$
|
27,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table details changes in the balances of the integration,
consolidation and relocation accruals:
(in
thousands)
|
|
Termination
Benefits
|
|
|
Lease
Costs
|
|
|
Integration
Costs
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 31, 2008
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Expensed
|
|
|
3,399
|
|
|
|
11,159
|
|
|
|
13,408
|
|
|
|
27,966
|
|
Non-cash
write-offs
|
|
|
-
|
|
|
|
(1,167
|
)
|
|
|
(7,198
|
)
|
|
|
(8,365
|
)
|
Cash
payments
|
|
|
(2,523
|
)
|
|
|
(1,929
|
)
|
|
|
(3,009
|
)
|
|
|
(7,461
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 31, 2008
|
|
$
|
876
|
|
|
$
|
8,063
|
|
|
$
|
3,201
|
|
|
$
|
12,140
|
|
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
13.
Segment Financial Reporting
The
Company’s segment reporting is based on the reporting of senior management to
the chief operating decision maker. This reporting combines the Company’s
business units in a logical way that identifies business concentrations and
synergies. Accordingly, beginning in fiscal 2009, management has
restructured the presentation of the Company’s segments to better reflect the
change in management and financial reporting of the applicable
units. The Company’s segments are heretofore presented as follows:
Media, Periodical Fulfillment Services, DVD and CD Fulfillment and Shared
Services. Prior reporting periods have been reclassified to conform
to current presentation to make prior period comparisons
meaningful. On August 1, 2007, we acquired SIM, which created our
Media operating segment. Therefore, the segment results for the nine
months ended October 31, 2007 include only three months of results for Media and
are not comparable.
The
Company conducts business through four reportable segments; Media, Periodical
Fulfillment Services, DVD and CD Fulfillment and Shared Services. The accounting
policies of the segments are materially the same as those described in the
Summary of Accounting Policies found in our Annual Report on Form 10-K for the
year ended January 31, 2008 filed with the SEC on April 15, 2008, as amended on
May 30, 2008.
The Media
segment derives revenues primarily from (1) selling print advertising space in
its enthusiast publications, (2) selling enthusiast publications via newsstand
and subscription, (3) selling online advertising and lead generation services,
and (4) other revenues including licensing, barter and events.
The
Periodical Fulfillment Services segment derives revenues from (1) selling and
distributing magazines, including domestic and foreign titles, to major
specialty and mainstream retailers and wholesalers throughout the United States
and Canada, (2) exporting domestic titles internationally to foreign wholesalers
or through domestic brokers, (3) providing return processing services for major
specialty retailers, (4) providing claim filing services related to rebates owed
retailers from publishers or their designated agent, and (5) designing,
manufacturing, shipping, installation and removal of front-end display
fixtures.
The DVD
and CD Fulfillment segment derives revenues from (1) selling and distributing
pre-recorded music, videos, video games and related products to retailers, (2)
providing product and commerce solutions to “brick-and-mortar” and e-commerce
retailers, and (3) providing consumer-direct fulfillment and vendor managed
inventory services to its customers.
Shared
Services consist of overhead functions not allocable to the individual operating
segments.
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
The
segment results are as follows:
Three
months ended October 31, 2008
(in
thousands)
|
|
Media
|
|
|
Periodical
Fulfillment
|
|
|
DVD
and CD Fulfillment
|
|
|
Shared
Services
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
2,207
|
|
|
$
|
221,627
|
|
|
$
|
239,120
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
462,954
|
|
Advertising
|
|
|
56,297
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
56,297
|
|
Circulation
|
|
|
36,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,998
|
)
|
|
|
29,102
|
|
Manufacturing
|
|
|
-
|
|
|
|
10,601
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,601
|
|
Claiming
and information
|
|
|
-
|
|
|
|
2,428
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,428
|
|
Other
|
|
|
20,549
|
|
|
|
9,801
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,350
|
|
Total
revenues, net
|
|
|
115,153
|
|
|
|
244,457
|
|
|
|
239,120
|
|
|
|
-
|
|
|
|
(6,998
|
)
|
|
|
591,732
|
|
Cost
of goods sold
|
|
|
31,870
|
|
|
|
185,075
|
|
|
|
197,080
|
|
|
|
-
|
|
|
|
(6,998
|
)
|
|
|
407,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
83,283
|
|
|
|
59,382
|
|
|
|
42,040
|
|
|
|
-
|
|
|
|
-
|
|
|
|
184,705
|
|
Distribution,
circulation and fulfillment
|
|
|
11,016
|
|
|
|
28,004
|
|
|
|
15,808
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54,828
|
|
Selling,
general and administrative expenses
|
|
|
48,398
|
|
|
|
21,047
|
|
|
|
11,854
|
|
|
|
2,843
|
|
|
|
-
|
|
|
|
84,142
|
|
Depreciation
and amortization
|
|
|
12,006
|
|
|
|
2,359
|
|
|
|
2,890
|
|
|
|
833
|
|
|
|
-
|
|
|
|
18,088
|
|
Integration,
consolidation and relocation
|
|
|
409
|
|
|
|
20,840
|
|
|
|
1,070
|
|
|
|
1,600
|
|
|
|
-
|
|
|
|
23,919
|
|
Provision
for customer bankruptcy
|
|
|
872
|
|
|
|
-
|
|
|
|
9,336
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
10,582
|
|
|
$
|
(12,868
|
)
|
|
$
|
1,082
|
|
|
$
|
(5,276
|
)
|
|
$
|
-
|
|
|
$
|
(6,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of October 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,080,165
|
|
|
$
|
350,412
|
|
|
$
|
583,245
|
|
|
$
|
1,420,291
|
|
|
$
|
(1,231,006
|
)
|
|
$
|
2,203,107
|
|
Goodwill
|
|
$
|
477,861
|
|
|
$
|
194,226
|
|
|
$
|
201,532
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
873,619
|
|
Intangibles,
net
|
|
$
|
461,423
|
|
|
$
|
32,739
|
|
|
$
|
34,083
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
528,245
|
|
Three
months ended October 31, 2007 (in thousands)
|
|
Media
|
|
|
Periodical
Fulfillment
|
|
|
DVD
and CD Fulfillment
|
|
|
Shared
Services
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
2,268
|
|
|
$
|
237,620
|
|
|
$
|
261,086
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
500,974
|
|
Advertising
|
|
|
67,471
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67,471
|
|
Circulation
|
|
|
40,142
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,010
|
)
|
|
|
32,132
|
|
Manufacturing
|
|
|
-
|
|
|
|
8,315
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,315
|
|
Claiming
and information
|
|
|
-
|
|
|
|
3,429
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,429
|
|
Other
|
|
|
23,017
|
|
|
|
3,811
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
26,828
|
|
Total
revenues, net
|
|
|
132,898
|
|
|
|
253,175
|
|
|
|
261,086
|
|
|
|
-
|
|
|
|
(8,010
|
)
|
|
|
639,149
|
|
Cost
of goods sold
|
|
|
35,559
|
|
|
|
192,157
|
|
|
|
216,328
|
|
|
|
-
|
|
|
|
(8,010
|
)
|
|
|
436,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
97,339
|
|
|
|
61,018
|
|
|
|
44,758
|
|
|
|
-
|
|
|
|
-
|
|
|
|
203,115
|
|
Distribution,
circulation and fulfillment
|
|
|
11,813
|
|
|
|
28,039
|
|
|
|
15,949
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,801
|
|
Selling,
general and administrative expenses
|
|
|
56,562
|
|
|
|
20,408
|
|
|
|
15,357
|
|
|
|
3,867
|
|
|
|
-
|
|
|
|
96,194
|
|
Depreciation
and amortization
|
|
|
13,261
|
|
|
|
2,315
|
|
|
|
4,270
|
|
|
|
508
|
|
|
|
-
|
|
|
|
20,354
|
|
Integration,
consolidation and relocation
|
|
|
152
|
|
|
|
590
|
|
|
|
-
|
|
|
|
443
|
|
|
|
-
|
|
|
|
1,185
|
|
Disposal
of land, building and equipment, net
|
|
|
-
|
|
|
|
94
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
15,551
|
|
|
$
|
9,572
|
|
|
$
|
9,182
|
|
|
$
|
(4,818
|
)
|
|
$
|
-
|
|
|
$
|
29,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of January 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,378,489
|
|
|
$
|
433,508
|
|
|
$
|
538,867
|
|
|
$
|
89,208
|
|
|
$
|
(4,067
|
)
|
|
$
|
2,436,005
|
|
Goodwill
|
|
$
|
673,654
|
|
|
$
|
194,649
|
|
|
$
|
201,532
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,069,835
|
|
Intangibles,
net
|
|
$
|
561,808
|
|
|
$
|
37,868
|
|
|
$
|
37,406
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
637,082
|
|
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
(unaudited)
Nine
months ended October 31, 2008 (in thousands)
|
|
Media
|
|
|
Periodical
Fulfillment
|
|
|
DVD
and CD Fulfillment
|
|
|
Shared
Services
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
6,533
|
|
|
$
|
711,449
|
|
|
$
|
675,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,393,482
|
|
Advertising
|
|
|
180,933
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
180,933
|
|
Circulation
|
|
|
111,932
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(21,440
|
)
|
|
|
90,492
|
|
Manufacturing
|
|
|
-
|
|
|
|
30,365
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
30,365
|
|
Claiming
and information
|
|
|
-
|
|
|
|
9,127
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,127
|
|
Other
|
|
|
63,611
|
|
|
|
14,757
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78,368
|
|
Total
revenues, net
|
|
|
363,009
|
|
|
|
765,698
|
|
|
|
675,500
|
|
|
|
-
|
|
|
|
(21,440
|
)
|
|
|
1,782,767
|
|
Cost
of goods sold
|
|
|
99,521
|
|
|
|
582,094
|
|
|
|
558,365
|
|
|
|
-
|
|
|
|
(21,440
|
)
|
|
|
1,218,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
263,488
|
|
|
|
183,604
|
|
|
|
117,135
|
|
|
|
-
|
|
|
|
-
|
|
|
|
564,227
|
|
Distribution,
circulation and fulfillment
|
|
|
34,367
|
|
|
|
84,756
|
|
|
|
45,586
|
|
|
|
-
|
|
|
|
-
|
|
|
|
164,709
|
|
Selling,
general and administrative expenses
|
|
|
153,236
|
|
|
|
67,094
|
|
|
|
41,776
|
|
|
|
10,728
|
|
|
|
-
|
|
|
|
272,834
|
|
Depreciation
and amortization
|
|
|
36,213
|
|
|
|
6,717
|
|
|
|
8,705
|
|
|
|
2,555
|
|
|
|
-
|
|
|
|
54,190
|
|
Integration,
consolidation and relocation
|
|
|
2,428
|
|
|
|
21,327
|
|
|
|
2,463
|
|
|
|
1,748
|
|
|
|
-
|
|
|
|
27,966
|
|
Impairment
of goodwill and intangible assets
|
|
|
270,847
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
270,847
|
|
Write
off of acquisition related assets
|
|
|
-
|
|
|
|
4,603
|
|
|
|
-
|
|
|
|
1,900
|
|
|
|
-
|
|
|
|
6,503
|
|
Provision
for customer bankruptcy
|
|
|
872
|
|
|
|
-
|
|
|
|
9,336
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
$
|
(234,475
|
)
|
|
$
|
(893
|
)
|
|
$
|
9,269
|
|
|
$
|
(16,931
|
)
|
|
$
|
-
|
|
|
$
|
(243,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
$
|
3,738
|
|
|
$
|
9,953
|
|
|
$
|
7,919
|
|
|
$
|
3,423
|
|
|
$
|
-
|
|
|
$
|
25,033
|
|
Nine
months ended October 31, 2007 (in thousands)
|
|
Media
|
|
|
Periodical
Fulfillment
|
|
|
DVD
and CD Fulfillment
|
|
|
Shared
Services
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
2,268
|
|
|
$
|
691,248
|
|
|
$
|
687,103
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,380,619
|
|
Advertising
|
|
|
67,471
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
67,471
|
|
Circulation
|
|
|
40,142
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,010
|
)
|
|
|
32,132
|
|
Manufacturing
|
|
|
-
|
|
|
|
22,325
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,325
|
|
Claiming
and information
|
|
|
-
|
|
|
|
10,542
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,542
|
|
Other
|
|
|
23,017
|
|
|
|
12,595
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,612
|
|
Total
revenues, net
|
|
|
132,898
|
|
|
|
736,710
|
|
|
|
687,103
|
|
|
|
-
|
|
|
|
(8,010
|
)
|
|
|
1,548,701
|
|
Cost
of goods sold
|
|
|
35,559
|
|
|
|
559,204
|
|
|
|
565,849
|
|
|
|
-
|
|
|
|
(8,010
|
)
|
|
|
1,152,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
97,339
|
|
|
|
177,506
|
|
|
|
121,254
|
|
|
|
-
|
|
|
|
-
|
|
|
|
396,099
|
|
Distribution,
circulation and fulfillment
|
|
|
11,813
|
|
|
|
84,053
|
|
|
|
42,966
|
|
|
|
-
|
|
|
|
-
|
|
|
|
138,832
|
|
Selling,
general and administrative expenses
|
|
|
56,562
|
|
|
|
62,375
|
|
|
|
46,169
|
|
|
|
11,649
|
|
|
|
-
|
|
|
|
176,755
|
|
Depreciation
and amortization
|
|
|
13,261
|
|
|
|
6,797
|
|
|
|
12,485
|
|
|
|
1,633
|
|
|
|
-
|
|
|
|
34,176
|
|
Integration,
consolidation and relocation
|
|
|
152
|
|
|
|
674
|
|
|
|
-
|
|
|
|
443
|
|
|
|
|
|
|
|
1,269
|
|
Disposal
of land, building and equipment, net
|
|
|
-
|
|
|
|
174
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
$
|
15,551
|
|
|
$
|
23,433
|
|
|
$
|
19,634
|
|
|
$
|
(13,725
|
)
|
|
$
|
-
|
|
|
$
|
44,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
$
|
1,825
|
|
|
$
|
7,458
|
|
|
$
|
7,139
|
|
|
$
|
4,064
|
|
|
$
|
-
|
|
|
$
|
20,486
|
|
14.
Subsequent Event
On
November 10, 2008, one of the trading partners of our Media and DVD and CD
Fulfillment segments, Circuit City Stores, Inc., filed for protection under
Chapter 11 of the US Bankruptcy Code. Accordingly, the Company has
booked a reserve in the amount of $10.2 million against the related trade
receivables.
SOURCE
INTERLINK COMPANIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
(unaudited)
CAUTIONARY
STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Some of
the information contained in this Quarterly Report on Form 10-Q including, but
not limited to, those contained in Item 2 of Part I “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” along with
statements in other reports filed with the Securities and Exchange Commission
(the “SEC”), external documents and oral presentations, which are not historical
facts are considered to be “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The words “believe,” “expect,”
“anticipate,” “estimate,” “project,” and similar expressions often characterize
forward-looking statements. These statements may include, but are not limited
to, projections of collections, revenues, income or loss, cash flow, estimates
of capital expenditures, plans for future operations, products or services, and
financing needs or plans, as well as assumptions relating to these matters.
These statements are only predictions and you should not unduly rely on them.
Our actual results will differ, perhaps materially, from those anticipated in
these forward-looking statements as a result of a number of factors, including
the risks and uncertainties faced by us described below and those set forth
below under “Risk Factors” in our Annual Report for the fiscal year ended
January 31, 2008 on Form 10-K filed with the SEC on April 15, 2008, as amended
on May 30, 2008:
·
changes
in the retail market for CDs and DVDs;
·
changes
in the retail market for magazines, books and other publications;
·
changes
in the market for advertising expenditures;
·
changes
in the availability of credit;
·
adverse
effects to our customer base, upon whom our business depends;
·
disruptions
in the operations of our key shipper and/or increased costs for shipping
services;
·
the
departure from the Company of key personnel;
·
actions
by foreign governments that affect the ability to continue business with any of
our foreign tradingpartners;
·
changes
in print, ink, paper and fuel costs;
·
changes
in consumer discretionary spending; and
·
a
continued and prolonged economic downturn.
The
factors listed above should not be construed as exhaustive. We
believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to predict
accurately or over which we have no control. The factors listed above provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you make an investment decision relating to our common stock,
you should be aware that the occurrence of the events described in these risk
factors and those set forth under “Risk Factors” in our Annual Report for the
fiscal year ended January 31, 2008 filed with the SEC on April 15, 2008, as
amended on May 30, 2008 could have a material adverse effect on our business,
operating results and financial condition. You should read and interpret any
forward-looking statement in conjunction with our consolidated financial
statements, the notes to our consolidated financial statements and Item 2 of
Part I “Management’s Discussion and Analysis of Financial Condition and Results
of Operation.” Any forward-looking statement speaks only as of the date on which
that statement is made. Unless required by U.S. federal securities laws, we
undertake no obligation to release publicly the results of any future revisions
we may make to forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated
events.
We are a
premier publishing, marketing, merchandising and fulfillment company of
entertainment products including magazines, DVDs, music CDs, books and related
items, serving over 100,000 retail locations throughout North America. We
produce print and digital content for consumers in North America through our
enthusiast media division, Source Interlink Media (“SIM”), which was acquired on
August 1, 2007.We also sell and distribute entertainment products to leading
mass merchandise retailers, grocery stores, bookstore chains, music stores, drug
stores and other specialty retailers, as well as e-commerce retailers. We offer
customers an array of value-added content and services including enthusiast
media publications and online content, category management, product procurement,
fulfillment services, claims submission, information services and in-store
fixturing. We believe no other competitor can provide this scope of
content and services across this range of home entertainment
products.
We
directly produce and deliver magazine, Internet and home entertainment content
to consumers. With the addition of SIM, we transformed from a leading home
entertainment distributor into a significant content owner. This array of
products and services, in combination with our value added services and
geographic reach, positions us to service the needs of America’s leading
retailers and to capitalize on the rapidly changing distribution and fulfillment
landscape.
We are
one of the largest independent wholesalers of DVDs and CDs in North America. We
effectively operate as an extension of our customers’ operations. Between our
fulfillment, category management and e-commerce solutions, we provide our
customers with a complete solution to maximize the sales and profitability of
their home entertainment content products.
We are a
dynamic organization composed of three synergistic operating divisions. Together
they form a leading integrated media company with distinguished content and a
national distribution and merchandising platform.
On
October 20, 2008, Michael R. Duckworth resigned as Chairman of the Board,
director of the Company and all other positions he held with respect to the
Company and its subsidiaries. Effective October 21, 2008, the Board
of Directors of the Company appointed Mr. Gregory Mays as the Company’s Chairman
of the Board and Chief Executive Officer. For more information, refer
to our Form 8-K filed with the SEC on October 24, 2008.
Our
Divisions
Source
Interlink Media
Our SIM
division is one of the largest providers of enthusiast print and digital content
in North America. SIM sells print advertising space in its publications, sells
publications through newsstands and subscriptions, sells online advertising and
lead generation services, and sells sponsorships and tickets for events. Its
properties consist of approximately 80 publications, 94 websites and over 100
events as of October 31, 2008. Well known print titles include
Motor Trend, Hot Rod, Lowrider,
Power & Motoryacht, Surfer, Home Theater, Motorcyclist, 4 Wheel &
Offroad,
and
Soap Opera
Digest
. SIM’s web properties include Automotive.com, Motortrend.com and
Equine.com as well as corresponding properties for most of its print
publications. SIM’s magazines have a combined circulation of approximately 9.0
million print copies per month, and its websites reach a total of over 19
million unique users who generate over 145 million page views per month. The
estimated total reach of our audience is over 75 million consumers each month.
Additionally, the reader base of our automotive portfolio is approximately 90%
male, and approximately 81% are between 18 and 54 years old.
SIM is a
leading provider of content to enthusiast communities interested in automotive,
action sports, marine, equine and home technology. SIM has the largest portfolio
of magazines in the automotive category, including six of the top ten titles by
paid circulation. These print publications are supplemented by branded websites,
consumer events, and licensed products. Automotive.com has proven expertise in
car sales lead generation, search engine marketing and search engine
optimization. This expertise coupled with a technology platform that is
increasing traffic can be monetized through advertising and lead generation. As
automakers divert marketing dollars to the Internet and as auto dealers seek
increased car sale leads, the combination of Automotive.com and our portfolio of
branded Internet sites provides a platform for strong growth in online
advertising and lead generation revenues.
SIM’s
strategy of differentiated, specialized and authoritative content has
effectively positioned it to take advantage of the industry shift towards more
targeted advertising. SIM is an important source of information for readers on
their avocations. Given its niche content, SIM is less exposed to the pressures
faced by sports, news and other general interest magazines. SIM’s readers tend
to spend a significant amount of time and money on their avocations, therefore
these titles are less reliant on rate base guarantees than general interest
publications. Only six of SIM’s 80 titles have rate base guarantees. SIM’s
15,000+ endemic advertisers rely on its titles as virtual storefronts to
directly connect with buyers and generate sales. Endemic sources comprise
approximately 85% of SIM’s print advertising revenue and provide a highly
desirable and, historically, a relatively less volatile revenue stream that
differentiates it from other content providers.
Periodical
Fulfillment Services
Our
Periodical Fulfillment Services division provides an array of value-added
services including category management, product procurement, fulfillment and
returns processing services to approximately 18,600 mainstream retail locations
and 3,100 specialty retail locations. Its customers include most of the nation’s
leading magazine retailers including Barnes & Noble, Borders, Wal-Mart,
Target, Kroger, Safeway, Costco, Walgreens and Rite Aid, many of which have been
customers for more than 10 years. The division has approximately 30% share of
the single-copy magazine distribution market and is the leading distributor in
five of the nation’s top ten advertising markets. The division also imports and
exports periodicals sold in more than 100 markets worldwide and designs,
manufactures and implements display fixture programs, manages rebates and other
incentive payments and accumulates data from more than 100,000 retail locations.
These services are critical to both mainstream and specialty retailers alike as
they enable clients to make more informed decisions regarding product placement
and marketing strategies.
DVD
/ CD Fulfillment
Our DVD /
CD Fulfillment division is the leading independent distributor of DVDs and CDs
in the home entertainment products marketplace, offering the most extensive
selection of products in the United States. It provides category management
(vendor managed inventory), procurement, fulfillment and e-commerce services to
leading DVD and CD retailers and Internet retailers, including Barnes &
Noble, Amazon.com, Meijer, K Mart, Toys “R” Us and Walgreens. The DVD / CD
Fulfillment division utilizes its industry leading Stock Keeping Unit (“SKU”)
availability of approximately 360,000 CD titles and approximately 100,000 DVD
titles, approximately two-thirds of which are physically in stock in our
warehouses, as well as video games and other related products to supply a
tailored merchandise offering for its customers. Through its Consumer Direct
Fulfillment segment, the division also provides fulfillment for the majority of
domestic e-commerce sites that sell music or videos.
Operating
Environment
Our
business is affected by economic factors that impact the level of consumer
disposable income. The continuing economic downturn has affected the level
of consumer spending on discretionary items such as magazines, DVDs and
CDs. This reduction in discretionary spending has had a related effect on
the amount of advertising spend in our publications. Advertising is a
significant source of revenue for us and is traditionally negatively affected by
economic downturns in any of our segment’s markets. This adverse
market environment intensified during this quarter, and was characterized by
increased illiquidity in the credit markets, wider credit spreads, lower
business and consumer confidence, and concerns about corporate earnings and the
solvency of financial institutions and trading partners, the combination of
which contributed to negative effects on our financial position, operating
results and cash flow.
In light
of the above factors, we have engaged in significant cost cutting
initiatives. These initiatives include widespread head-count
reductions, integration of our two fulfillment segments and administration
rationalization. The cost-cutting initiatives already implemented are
expected to have run-rate impact of $38.0 million. We also reduced
capital expenditures in the third quarter to help preserve capital. In light of
these actions, we believe we will have sufficient liquidity to finance our
operations and debt service for at least the next twelve months.
Our
business relies on its credit facilities to finance normal daily
operations. Our Term Loan B and Senior Notes require compliance with
a financial covenant measured on the relative levels of Senior Secured Debt and
Consolidated Adjusted EBITDA, as defined. Despite the unfavorable
macro-economic conditions, we have maintained compliance with this
measure. However, as a result of unprecedented volatility in the
economy, no assurance can be made as to future compliance.
In
accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible
Assets
(“FAS
142”), we conduct annual impairment testing of goodwill in February of each
year, or more frequently if events occur or circumstances change that would
indicate our goodwill is impaired. The recent adverse market and business
conditions noted above are not interim impairment indicators of our goodwill.
However, further declines in our operating results, our projected operating
results and prolonged deterioration of economic conditions could result in
future impairments of our long-lived assets including goodwill.
On
November 10, 2008, Circuit City Stores, Inc. filed for Chapter 11 bankruptcy
protection. As a result of the filing, we recorded a $10.2 million
reserve against our accounts receivable from Circuit City, as of October
31, 2008. Subsequent to this bankruptcy filing, we have continued to
provide fulfillment services to Circuit City on a cash-in-advance
basis.
Overview
Significant
events that occurred during the nine months ended October 31, 2008 and 2007
include:
Restructuring
In fiscal
2009, we developed a restructuring and integration plan to streamline our
businesses, address post-acquisition redundancies and lower overhead
costs. The implementation of these strategies to streamline our
acquired businesses with existing operations involves the integration of seven
distribution centers into three for our Periodical Fulfillment Services segment,
the relocation of our Coral Springs, FL distribution facility to Shepherdsville,
KY for our DVD and CD Fulfillment segment and a significant reduction in
workforce.
We are
accounting for certain of these activities in accordance with the provisions of
Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated with
Exit or Disposal Activities
, (“FAS 146”) which addresses the recognition,
measurement and reporting of costs that are associated with exit and disposal
activities, including restructuring activities. FAS 146 prohibits the
recognition of liabilities associated with exit or disposal activities on the
date that an entity commits to a plan, mandating that such liabilities and costs
be recorded only when actually incurred. Therefore, we have recognized costs
associated with our exit and disposal activities in the amount of $23.9 and
$28.0 million for the three and nine months ended October 31, 2008,
respectively. These amounts are aggregated on the consolidated
statements of operations under Integration, consolidation and relocation expense
and at October 31, 2008, a balance of $12.1 million is recorded in Accrued
expenses related to these activities.
Refinancing
of Bridge Facility and Issuance of Senior Notes
On
June 26, 2008, the Company consummated the refinancing and permanent
retirement of all of its indebtedness under the certain Senior Subordinated
Bridge Loan Agreement (the “Bridge Facility”), dated as of August 1,
2007. This refinancing and permanent retirement was effected through the
exchange of the Company’s 11.25% Senior Unsecured Notes due 2015 (the “Senior
Notes”) for the termination of the Company’s indebtedness under the Bridge
Facility. The Senior Notes were issued to the former Bridge Facility
lenders and were offered in conformance with the exemptions for non-public
offerings provided by Rule 506 and Section 4(2) of the Securities Act of
1933. These notes constitute “restricted securities” under Rule 144A of
the aforementioned Act. Furthermore, in connection therewith,
the Company entered into
a Registration Rights Agreement, dated as of June 26, 2008 by and between
the Company, certain subsidiaries of the Company as guarantors and the Senior
Note holders, Citigroup Global Markets Inc., JPMorgan Securities Inc., Citigroup
North America Inc. and JPMorgan Chase Bank N.A. The Senior Notes were
issued under an Indenture, dated as of June 23, 2008, by and between the
Company, certain of the Company’s subsidiaries and HSBC Bank USA, National
Association, as Trustee.
As part
of the aforementioned refinancing, the Company paid a conversion fee of $11.6
million and other deferred financing fees of approximately $0.8 million, which
will be amortized over the term of the Senior Notes. As a result of
the refinancing, the Company wrote off the remaining $1.0 million of deferred
financing fees related to the Bridge Facility.
Business
Combinations
In July
2008, the Company purchased the remaining 19.9% of Automotive.com, Inc. for
$42.0 million in cash. The Company expects to realize numerous
benefits as a result of attaining total management control of the Autodigital
business, including operating synergies, cross-selling opportunities, improved
customer management and cost savings through rationalization and integration
strategies. This acquisition resulted in the retirement of $40.7
million of obligations, including minority interests and a $0.7 million increase
in amortizable intangible assets. The purchase price was funded by
additional borrowings under the Company’s Revolving Credit
Facility.
During
the three months ended October 31, 2008, the Company settled certain portions of
its working capital adjustment pertaining to the acquisition of Primedia
Enthusiast Media, Inc. (“PEM”). As a result, the Company received a
$4.4 million refund from Primedia, Inc., PEM’s former parent
company.
Impairment
Charge
As a
result of our fiscal year 2009 FAS 142 first quarter impairment analysis,
we determined that certain tradenames of our Media reportable segment were
impaired and consequently recorded a charge of approximately $74.3 million
during the first quarter. This determination was based largely on management’s
projections regarding the revenues from and profitability of tradenames acquired
on August 1, 2007. The combination of the analysis and other factors
discussed below, had an adverse impact on the anticipated future cash flows used
in the impairment analysis performed during the first quarter of fiscal year
2009.The net carrying amount of the tradenames was $280.6 million at the end of
the first quarter of fiscal year 2009, after the impairment charge was
recorded.
As a
result of our fiscal year 2009 FAS 142 annual first quarter impairment analysis,
we determined that the goodwill of four of our reporting units of our Media
reportable segment was impaired and consequently recorded an impairment charge
of $196.5 million during the first quarter. However, the results of the Phase I
analysis indicated significant clearance on three of the reporting units within
our Media reportable segment. This determination was based largely on
management’s projections regarding the revenues and profitability of the Media
reportable segment as well as the effects of the recent credit market changes,
the continued economic downturn and the related effects on customer
discretionary spending and print advertising. The charge was measured on the
basis of comparison of estimated fair values with corresponding book values and
relates primarily to goodwill recorded in connection with our acquisition of EM.
These fair values were determined in accordance with Company policy discussed
above as well as FAS 142 and other relevant guidance.
Valuation
Allowance
Statement
of Financial Accounting Standards No. 109 "
Accounting for Income Taxes
"
("FAS 109") requires that a valuation allowance be established
when it is more likely
than not that all or a portion of deferred tax assets
will not be realized. A
review of all available positive and negative evidence
needs to be considered,
including a company's performance, the market
environment in which
the company operates, the utilization of past tax credits,
length of carryback and
carryforward periods, existing contracts or sales
backlog that will
result in future profits, etc.
It further states that
forming a conclusion that a valuation allowance is not
needed is difficult
when there is negative evidence such as cumulative losses in
recent years.
Therefore, cumulative losses weigh heavily in the overall assessment. We
identified several significant developments which we considered in determining
the need to record a full valuation allowance in the first quarter of fiscal
2009, including the continuing economic downturn and our projections regarding
the near-term revenues and profitability of our segments. As a result of our
assessment, we recorded a valuation allowance on deferred tax assets of
approximately $133.3 million for the nine months ended October 31,
2008.
Sale
of Wood Manufacturing Division
On July
31, 2007, we sold substantially all of the assets of our Wood Manufacturing
Division. This discontinued operation has been excluded from current
and prior year results as presented herein. See Note 8 –
Discontinued
Operation
.
Results
of operations
Please
see our Annual Report on Form 10-K for the fiscal year ended January 31, 2008
and filed with the SEC on April 15, 2008, as amended on May 30, 2008, for more
information on the types of revenues and expenses included within the specific
line-items in our financial statements.
The
Company’s segment reporting is based on the reporting of senior management to
the chief operating decision maker. This reporting combines the Company’s
business units in a logical way that identifies business concentrations and
synergies. Accordingly, beginning in fiscal 2009, management has
restructured the presentation of the Company’s segments to better reflect the
change in management and financial reporting of the applicable
units. The Company’s segments are heretofore presented as follows:
Media, Periodical Fulfillment Services, DVD and CD Fulfillment and Shared
Services. Prior reporting periods have been reclassified to conform
to current presentation to make prior period comparisons
meaningful.
THREE
MONTHS ENDED OCTOBER 31, 2008 AND 2007
Media
The
following table sets forth, for the periods presented, information relating to
our Media segment:
|
|
Three
months ended October 31,
|
|
|
Change
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
2,207
|
|
|
$
|
2,268
|
|
|
$
|
(61
|
)
|
|
|
(2.7
|
%)
|
Advertising
|
|
|
56,297
|
|
|
|
67,471
|
|
|
|
(11,174
|
)
|
|
|
(16.6
|
%)
|
Circulation
|
|
|
36,100
|
|
|
|
40,142
|
|
|
|
(4,042
|
)
|
|
|
(10.1
|
%)
|
Other
|
|
|
20,549
|
|
|
|
23,017
|
|
|
|
(2,468
|
)
|
|
|
(10.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues, net
|
|
|
115,153
|
|
|
|
132,898
|
|
|
|
(17,745
|
)
|
|
|
(13.4
|
%)
|
Cost
of goods sold
|
|
|
31,870
|
|
|
|
35,559
|
|
|
|
(3,689
|
)
|
|
|
(10.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
83,283
|
|
|
|
97,339
|
|
|
|
(14,056
|
)
|
|
|
(14.4
|
%)
|
Distribution,
circulation and fulfillment
|
|
|
11,016
|
|
|
|
11,813
|
|
|
|
(797
|
)
|
|
|
(6.7
|
%)
|
Selling,
general and administrative expenses
|
|
|
48,398
|
|
|
|
56,562
|
|
|
|
(8,164
|
)
|
|
|
(14.4
|
%)
|
Depreciation
and amortization
|
|
|
12,006
|
|
|
|
13,261
|
|
|
|
(1,255
|
)
|
|
|
(9.5
|
%)
|
Integration,
consolidation and relocation
|
|
|
409
|
|
|
|
152
|
|
|
|
257
|
|
|
|
169.1
|
%
|
Provision
for customer bankruptcy
|
|
|
872
|
|
|
|
-
|
|
|
|
872
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
10,582
|
|
|
$
|
15,551
|
|
|
$
|
(4,969
|
)
|
|
|
(32.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
operating measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
72.3
|
%
|
|
|
73.2
|
%
|
|
|
(0.9
|
%)
|
|
|
|
|
Operating
income margin
|
|
|
9.2
|
%
|
|
|
11.7
|
%
|
|
|
(2.5
|
%)
|
|
|
|
|
Distribution,
circulation and fulfillment as a percent of revenues
|
|
|
9.6
|
%
|
|
|
8.9
|
%
|
|
|
0.7
|
%
|
|
|
|
|
Selling,
general and administrative expenses as a percent of
revenues
|
|
|
42.0
|
%
|
|
|
42.6
|
%
|
|
|
-0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
- percentage change not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
August 1, 2007, we acquired SIM, which created our Media operating
segment. Since acquiring SIM, the media industry has faced
competitive challenges with advertisers migrating to other platforms and
increases in raw materials and other operating costs. The continued
weakening of the economy has exacerbated these conditions with all lines of
revenues experiencing volume declines, especially advertising. Our
largest advertising revenue source, the automotive industry, has significantly
reduced its advertising spend and the extent to which these negative trends will
persist remains unclear at present. Circulation and other revenues
are dependent on the level of discretionary income available to our customers
and, therefore, have been negatively affected by the continued economic
downturn. Accordingly, we have implemented cost cutting measures and
reduced headcount which has reduced our operating expenses this
quarter. The combination of the above factors has reduced operating
income for the quarter. The provision for bankruptcy charge relates entirely to
Circuit City receivables.
Periodical
Fulfillment Services
The
following table sets forth, for the periods presented, information relating to
our Periodical Fulfillment Services segment:
|
|
Three
months ended October 31,
|
|
|
Change
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
221,627
|
|
|
$
|
237,620
|
|
|
$
|
(15,993
|
)
|
|
|
(6.7
|
%)
|
Manufacturing
|
|
|
10,601
|
|
|
|
8,315
|
|
|
|
2,286
|
|
|
|
27.5
|
%
|
Claiming
and information
|
|
|
2,428
|
|
|
|
3,429
|
|
|
|
(1,001
|
)
|
|
|
(29.2
|
%)
|
Other
|
|
|
9,801
|
|
|
|
3,811
|
|
|
|
5,990
|
|
|
|
157.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues, net
|
|
|
244,457
|
|
|
|
253,175
|
|
|
|
(8,718
|
)
|
|
|
(3.4
|
%)
|
Cost
of goods sold
|
|
|
185,075
|
|
|
|
192,157
|
|
|
|
(7,082
|
)
|
|
|
(3.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
59,382
|
|
|
|
61,018
|
|
|
|
(1,636
|
)
|
|
|
(2.7
|
%)
|
Distribution,
circulation and fulfillment
|
|
|
28,004
|
|
|
|
28,039
|
|
|
|
(35
|
)
|
|
|
(0.1
|
%)
|
Selling,
general and administrative expenses
|
|
|
21,047
|
|
|
|
20,408
|
|
|
|
639
|
|
|
|
3.1
|
%
|
Depreciation
and amortization
|
|
|
2,359
|
|
|
|
2,315
|
|
|
|
44
|
|
|
|
1.9
|
%
|
Integration,
consolidation and relocation
|
|
|
20,840
|
|
|
|
590
|
|
|
|
20,250
|
|
|
NM
|
|
Disposal
of land, building and equipment, net
|
|
|
-
|
|
|
|
94
|
|
|
|
(94
|
)
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
$
|
(12,868
|
)
|
|
$
|
9,572
|
|
|
$
|
(22,440
|
)
|
|
|
(234.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
operating measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
24.3
|
%
|
|
|
24.1
|
%
|
|
|
0.2
|
%
|
|
|
|
|
Operating
income margin
|
|
|
(5.3
|
%)
|
|
|
3.8
|
%
|
|
|
(9.1
|
%)
|
|
|
|
|
Distribution,
circulation and fulfillment as a percent of revenues
|
|
|
11.5
|
%
|
|
|
11.1
|
%
|
|
|
0.4
|
%
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
a percent of revenues
|
|
|
8.6
|
%
|
|
|
8.1
|
%
|
|
|
0.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
- percentage change not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Economic
conditions continue to reduce the amount of discretionary income available to
our trading partners’ customers, leading to an overall reduction in net revenues
compared with the same quarter last year. Declining distribution
revenues due to economic conditions have been partially offset by higher volume
in the manufacturing lines and increased wastepaper revenue which is recorded as
“other revenues”. We continue to experience customer attrition in the
rebate/information business.
Selling,
general and administrative expenses have increased over the same period last
year due in part to additional Information Technology expense associated with
our continued integration of the operating platforms of our prior
acquisitions.
Integration,
consolidation and relocation expense relates to costs associated with the
consolidation of seven of our distribution centers into three – see Note 12 for
more information.
Operating
margin is significantly lower due to integration, consolidation and relocation
expenses incurred during the quarter.
DVD
and CD Fulfillment
The
following table sets forth, for the periods presented, information relating to
our DVD and CD Fulfillment segment:
|
|
Three
months ended October 31,
|
|
|
Change
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
239,120
|
|
|
$
|
261,086
|
|
|
$
|
(21,966
|
)
|
|
|
(8.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues, net
|
|
|
239,120
|
|
|
|
261,086
|
|
|
|
(21,966
|
)
|
|
|
(8.4
|
%)
|
Cost
of goods sold
|
|
|
197,080
|
|
|
|
216,328
|
|
|
|
(19,248
|
)
|
|
|
(8.9
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
42,040
|
|
|
|
44,758
|
|
|
|
(2,718
|
)
|
|
|
(6.1
|
%)
|
Distribution,
circulation and fulfillment
|
|
|
15,808
|
|
|
|
15,949
|
|
|
|
(141
|
)
|
|
|
(0.9
|
%)
|
Selling,
general and administrative expenses
|
|
|
11,854
|
|
|
|
15,357
|
|
|
|
(3,503
|
)
|
|
|
(22.8
|
%)
|
Depreciation
and amortization
|
|
|
2,890
|
|
|
|
4,270
|
|
|
|
(1,380
|
)
|
|
|
(32.3
|
%)
|
Integration,
consolidation and relocation
|
|
|
1,070
|
|
|
|
-
|
|
|
|
1,070
|
|
|
NM
|
|
Provision
for customer bankruptcy
|
|
|
9,336
|
|
|
|
-
|
|
|
|
9,336
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
1,082
|
|
|
$
|
9,182
|
|
|
$
|
(8,100
|
)
|
|
|
(88.2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
operating measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
17.6
|
%
|
|
|
17.1
|
%
|
|
|
0.5
|
%
|
|
|
|
|
Operating
income margin
|
|
|
0.5
|
%
|
|
|
3.5
|
%
|
|
|
(3.0
|
%)
|
|
|
|
|
Distribution,
circulation and fulfillment as a percent of revenues
|
|
|
6.6
|
%
|
|
|
6.1
|
%
|
|
|
0.5
|
%
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
a percent of revenues
|
|
|
5.0
|
%
|
|
|
5.9
|
%
|
|
|
(0.9
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
- percentage change not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from sales of DVDs and CDs have been affected by the reduced consumer demand
prevalent throughout the country for discretionary items which accounts for the
8.4% decline versus the same quarter last year.
Distribution,
circulation and fulfillment as a percent of revenues increased due to increased
fuel surcharges in the current year period compared to the prior year
period.
Selling,
general and administrative expenses in total and as a percent of revenues
decreased due to reduced headcount and the successful implementation of cost
reduction strategies.
Depreciation
and amortization decreased primarily due to decreased intangible assets as a
result of the fourth quarter prior year impairment.
Integration,
consolidation and relocation expense relates to costs incurred this quarter are
due to the relocation of our Coral Springs, FL distribution facility to
Shepherdsville, KY.
Operating
income and margin are significantly lower due to the integration, consolidation
and relocation expense and the provision for bankruptcy charge in the amount of
$9.3 million related to Circuit City receivables.
Shared
Services
The
following table sets forth, for the periods presented, information relating to
our Shared Services segment:
|
|
Three
months ended October 31,
|
|
|
Change
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
$
|
2,843
|
|
|
$
|
3,867
|
|
|
$
|
(1,024
|
)
|
|
|
(26.5
|
%)
|
Depreciation
and amortization
|
|
|
833
|
|
|
|
508
|
|
|
|
325
|
|
|
|
64.0
|
%
|
Integration,
consolidation and relocation
|
|
|
1,600
|
|
|
|
443
|
|
|
|
1,157
|
|
|
|
261.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$
|
(5,276
|
)
|
|
$
|
(4,818
|
)
|
|
$
|
(458
|
)
|
|
|
(9.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
operating measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
a percent of total company revenues
|
|
|
0.5
|
%
|
|
|
0.6
|
%
|
|
|
(0.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
- percentage change not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses are considerably less than last year due in
part to the effects of cost cutting initiatives and the achievement of
integration synergies.
Integration,
consolidation and relocation expenses include the costs attributable to the exit
of certain leased facilities.
Interest
Expense
Interest
expense includes the interest and fees on our significant debt instruments and
outstanding letters of credit. Net interest expense was $30.1 million
and $35.6 million for the three months ended October 31, 2008 and 2007,
respectively.
Other
Income (Expense)
Other
income (expense) consists of items outside the normal course of
operations. Due to its nature, comparability between periods is not
generally meaningful.
Income
Tax Expense
The
effective tax rate for the current quarter was 0% versus an effective tax rate
of 40.0% in the same period of the prior year. The change in effective tax rates
is due to the establishment of a valuation allowance. Our effective
tax rate differs from that disclosed in our Annual Report on Form 10-K due to
the full valuation of current period tax benefits.
NINE
MONTHS ENDED OCTOBER 31, 2008 AND 2007
Media
The
following table sets forth, for the periods presented, information relating to
our Media segment:
|
|
Nine
months ended October 31,
|
|
|
Change
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
6,533
|
|
|
$
|
2,268
|
|
|
$
|
4,265
|
|
|
|
188.1
|
%
|
Advertising
|
|
|
180,933
|
|
|
|
67,471
|
|
|
|
113,462
|
|
|
|
168.2
|
%
|
Circulation
|
|
|
111,932
|
|
|
|
40,142
|
|
|
|
71,790
|
|
|
|
178.8
|
%
|
Other
|
|
|
63,611
|
|
|
|
23,017
|
|
|
|
40,594
|
|
|
|
176.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues, net
|
|
|
363,009
|
|
|
|
132,898
|
|
|
|
230,111
|
|
|
|
173.1
|
%
|
Cost
of goods sold
|
|
|
99,521
|
|
|
|
35,559
|
|
|
|
63,962
|
|
|
|
179.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
263,488
|
|
|
|
97,339
|
|
|
|
166,149
|
|
|
|
170.7
|
%
|
Distribution,
circulation and fulfillment
|
|
|
34,367
|
|
|
|
11,813
|
|
|
|
22,554
|
|
|
|
190.9
|
%
|
Selling,
general and administrative expenses
|
|
|
153,236
|
|
|
|
56,562
|
|
|
|
96,674
|
|
|
|
170.9
|
%
|
Depreciation
and amortization
|
|
|
36,213
|
|
|
|
13,261
|
|
|
|
22,952
|
|
|
|
173.1
|
%
|
Integration,
consolidation and relocation
|
|
|
2,428
|
|
|
|
152
|
|
|
|
2,276
|
|
|
NM
|
|
Impairment
of goodwill and intangible assets
|
|
|
270,847
|
|
|
|
-
|
|
|
|
270,847
|
|
|
NM
|
|
Provision
for customer bankruptcy
|
|
|
872
|
|
|
|
-
|
|
|
|
872
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
$
|
(234,475
|
)
|
|
$
|
15,551
|
|
|
$
|
(250,026
|
)
|
|
|
(1,607.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
- percentage change not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On August
1, 2007, we acquired SIM, which created our Media operating
segment. Therefore, the results above include nine months for fiscal
2009 and only three months at October 31, 2007 and are not
comparable.
Periodical
Fulfillment Services
The
following table sets forth, for the periods presented, information relating to
our Periodical Fulfillment Services segment:
|
|
Nine
months ended October 31,
|
|
|
Change
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
711,449
|
|
|
$
|
691,248
|
|
|
$
|
20,201
|
|
|
|
2.9
|
%
|
Manufacturing
|
|
|
30,365
|
|
|
|
22,325
|
|
|
|
8,040
|
|
|
|
36.0
|
%
|
Rebate/information
|
|
|
9,127
|
|
|
|
10,542
|
|
|
|
(1,415
|
)
|
|
|
(13.4
|
%)
|
Other
|
|
|
14,757
|
|
|
|
12,595
|
|
|
|
2,162
|
|
|
|
17.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues, net
|
|
|
765,698
|
|
|
|
736,710
|
|
|
|
28,988
|
|
|
|
3.9
|
%
|
Cost
of goods sold
|
|
|
582,094
|
|
|
|
559,204
|
|
|
|
22,890
|
|
|
|
4.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
183,604
|
|
|
|
177,506
|
|
|
|
6,098
|
|
|
|
3.4
|
%
|
Distribution,
circulation and fulfillment
|
|
|
84,756
|
|
|
|
84,053
|
|
|
|
703
|
|
|
|
0.8
|
%
|
Selling,
general and administrative expenses
|
|
|
67,094
|
|
|
|
62,375
|
|
|
|
4,719
|
|
|
|
7.6
|
%
|
Depreciation
and amortization
|
|
|
6,717
|
|
|
|
6,797
|
|
|
|
(80
|
)
|
|
|
(1.2
|
%)
|
Write
off of acquisition related assets
|
|
|
4,603
|
|
|
|
-
|
|
|
|
4,603
|
|
|
NM
|
|
Integration,
consolidation and relocation
|
|
|
21,327
|
|
|
|
674
|
|
|
|
20,653
|
|
|
NM
|
|
Disposal
of land, building and equipment, net
|
|
|
-
|
|
|
|
174
|
|
|
|
(174
|
)
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
(loss) income
|
|
$
|
(893
|
)
|
|
$
|
23,433
|
|
|
$
|
(24,326
|
)
|
|
|
(103.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
operating measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
24.0
|
%
|
|
|
24.1
|
%
|
|
|
(0.1
|
%)
|
|
|
|
|
Operating
income margin
|
|
|
(0.1
|
%)
|
|
|
3.2
|
%
|
|
|
(3.3
|
%)
|
|
|
|
|
Distribution,
circulation and fulfillment as a percent of revenues
|
|
|
11.1
|
%
|
|
|
11.4
|
%
|
|
|
(0.3
|
%)
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
a percent of revenues
|
|
|
8.8
|
%
|
|
|
8.5
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
- percentage change not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
have increased due to the impact of a new exclusive contract with a major
bookstore, new business to traditional retailers and higher volume in the
manufacturing lines and increased wastepaper revenue which is recorded as “other
revenues”. This has been offset by some customer attrition in the
rebate/information business.
Gross
margin is slightly lower than the prior year period due to a higher
concentration of sales from low margin titles.
Distribution,
circulation and fulfillment as a percent of revenues decreased due to the
combination of our operational initiatives and increased international business
that does not carry freight costs.
Selling,
general and administrative expenses have increased over the same period last
year due in part to additional Information Technology expense associated with
our continued integration of the operating platforms of our prior
acquisitions.
Integration,
consolidation and relocation expense relates to costs associated with the
consolidation of seven of our distribution centers into three – see Note 12 for
more information.
Operating
margin is significantly lower due to the one-off non cash purchase price
adjustment of $4.6 million and the integration, consolidation and relocation
expenses incurred during the period.
DVD
and CD Fulfillment
The
following table sets forth, for the periods presented, information relating to
our DVD and CD Fulfillment segment:
|
|
Nine
months ended October 31,
|
|
|
Change
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution
|
|
$
|
675,500
|
|
|
$
|
687,103
|
|
|
$
|
(11,603
|
)
|
|
|
(1.7
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues, net
|
|
|
675,500
|
|
|
|
687,103
|
|
|
|
(11,603
|
)
|
|
|
(1.7
|
%)
|
Cost
of goods sold
|
|
|
558,365
|
|
|
|
565,849
|
|
|
|
(7,484
|
)
|
|
|
(1.3
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
117,135
|
|
|
|
121,254
|
|
|
|
(4,119
|
)
|
|
|
(3.4
|
%)
|
Distribution,
circulation and fulfillment
|
|
|
45,586
|
|
|
|
42,966
|
|
|
|
2,620
|
|
|
|
6.1
|
%
|
Selling,
general and administrative expenses
|
|
|
41,776
|
|
|
|
46,169
|
|
|
|
(4,393
|
)
|
|
|
(9.5
|
%)
|
Depreciation
and amortization
|
|
|
8,705
|
|
|
|
12,485
|
|
|
|
(3,780
|
)
|
|
|
(30.3
|
%)
|
Integration,
consolidation and relocation
|
|
|
2,463
|
|
|
|
-
|
|
|
|
2,463
|
|
|
NM
|
|
Provision
for customer bankruptcy
|
|
|
9,336
|
|
|
|
-
|
|
|
|
9,336
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
9,269
|
|
|
$
|
19,634
|
|
|
$
|
(10,365
|
)
|
|
|
(52.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
operating measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit margin
|
|
|
17.3
|
%
|
|
|
17.6
|
%
|
|
|
(0.3
|
%)
|
|
|
|
|
Operating
income margin
|
|
|
1.4
|
%
|
|
|
2.9
|
%
|
|
|
(1.5
|
%)
|
|
|
|
|
Distribution,
circulation and fulfillment as a percent of revenues
|
|
|
6.7
|
%
|
|
|
6.3
|
%
|
|
|
0.4
|
%
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
a percent of revenues
|
|
|
6.2
|
%
|
|
|
6.7
|
%
|
|
|
(0.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
- percentage change not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from sales of DVDs and CDs have been affected by the reduced consumer demand
prevalent throughout the country for discretionary items and this has led to the
1.7% decline versus the same nine month period last year.
Gross
profit margin decreased slightly as a significant new customer, gained in the
third quarter of the prior year carries lower gross margins, the penalties for
vendor returns increased and advertising and rebate income
decreased.
Distribution,
circulation and fulfillment as a percent of revenues increased due to increased
fuel surcharges in the current year period compared to the prior year
period.
Selling,
general and administrative expenses in total and as a percent of revenues
decreased due to reduced headcount and successful implementation of cost
reductions.
Depreciation
and amortization decreased primarily due to decreased intangible assets as a
result of the fourth quarter prior year impairment.
Integration,
consolidation and relocation expense relates to costs incurred due to the
relocation of our Coral Springs, FL distribution facility to Shepherdsville,
KY.
Operating
margin and income are significantly lower due to the integration, consolidation
and relocation expense and the provision for bankruptcy charge in the amount of
$9.3 million related to Circuit City receivables.
Shared
Services
The
following table sets forth, for the periods presented, information relating to
our Shared Services segment:
|
|
Nine
months ended October 31,
|
|
|
Change
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
$
|
10,728
|
|
|
$
|
11,649
|
|
|
$
|
(921
|
)
|
|
|
(7.9
|
%)
|
Depreciation
and amortization
|
|
|
2,555
|
|
|
|
1,633
|
|
|
|
922
|
|
|
|
56.5
|
%
|
Integration,
consolidation and relocation
|
|
|
1,748
|
|
|
|
443
|
|
|
|
1,305
|
|
|
NM
|
|
Write
off of acquisition related assets
|
|
|
1,900
|
|
|
|
-
|
|
|
|
1,900
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
$
|
(16,931
|
)
|
|
$
|
(13,725
|
)
|
|
$
|
(3,206
|
)
|
|
|
(23.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key
operating measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as
a percent of total company revenues
|
|
|
0.6
|
%
|
|
|
0.8
|
%
|
|
|
(0.2
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM
- percentage change not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Integration,
consolidation and relocation expenses include the costs attributable to the exit
of certain leased facilities.
During
the nine months ended October 31, 2008, we wrote off $1.9 million in previously
capitalized acquisition related costs. The write-off occurred as a
direct result of management’s determination that continued capitalization of
these costs was no longer appropriate given the status of the potential
acquisition.
Interest
Expense
Interest
expense includes the interest and fees on our significant debt instruments and
outstanding letters of credit. Net interest expense increased to
$87.8 million from $41.7 million for the nine months ended October 31, 2008 and
2007, respectively. The increase relates to the significant
borrowings detailed in Note 6, as a result of our acquisition of SIM and the
issuance of the Senior Notes.
Other
Income (Expense)
Other
income (expense) consists of items outside the normal course of
operations. Due to its nature, comparability between periods is not
generally meaningful.
Income
Tax Expense
The
effective tax rate for the nine months ended October 31, 2008 was 0% versus an
effective tax rate of 40.0% in the same period of the prior year. The change in
effective tax rates is due to the establishment of a valuation
allowance. Our effective tax rate differs from that disclosed in our
Annual Report on Form 10-K due to the full valuation of current period tax
benefits.
Liquidity
and Capital Resources
The
primary sources of the Company’s cash are receipts from customers and borrowings
under our credit facilities.
Our
primary cash requirements for the Media group consist of raw materials and
salaries. Our primary cash requirements for the Periodical
Fulfillment Services group consist of the cost of home entertainment products,
the cost of freight and facility expense associated with our distribution
centers and the cost of raw materials, labor, and factory overhead incurred in
the production of front-end wire 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 accelerate collections of their rebate claims through payments from
us in exchange for the transfer to us of the right to collect the
claim. We then collect the claims when paid by publishers for our own
account. Our primary cash requirements for the DVD and CD Fulfillment
group consist of the cost of home entertainment products and the cost of
freight, labor and facility expense associated with our distribution
centers. Our primary cash requirements for the Shared Services group
consist of salaries and professional fees not allocated to the operating groups,
repayments of principal on our term loan and interest payments on our
debt.
The
Company has a $300.0 million revolving credit facility dated as of
August 1, 2007. Availability under the facility is limited by the Company’s
borrowing base calculation, as defined in the agreement. The calculation
resulted in excess availability, after consideration of outstanding letters of
credit, of $202.1 million at October 31, 2008 and borrowings at this date amount
to $50.3 million compared with $0 at January 31, 2008. Proceeds from
the revolving credit facility are used for general corporate purposes, including
seasonal working capital needs, for the acquisition of the minority interest of
our Media reportable segment’s Autodigital reporting unit on July 18, 2008 and
payment of the related financing fees of $12.4 million.
The
Company has an $880.0 million term loan dated as of August 1, 2007 under
which it had one LIBOR contract outstanding at October 31, 2008 in the amount of
$869.00 million, maturing in August 2008 bearing interest at
6.469%. During the nine months ended October 31, 2008, the Company
made principal repayments totaling $6.6 million on this loan.
In
addition, on June 26, 2008, the Company retired the Bridge Facility of $465.0
million by issuing the Senior Notes in the same principal amount. As
noted above, the payment of $12.4 million in fees is included in the Company’s
financing activities for the period.
The
Company had $1,413.0 million in outstanding borrowings on October 31,
2008. The Company had $1,378.5 million in outstanding debt at October
31, 2007.
Operating
Cash Flow
Net cash
provided by operating activities was $19.9 million for the nine months ended
October 31, 2008 compared with cash provided by operating activities of $57.0
million for the nine months ended October 31, 2007.
Operating
cash flows for the nine months ended October 31, 2008 were comprised
of:
|
·
|
Net
loss of $333.3 million,
|
|
·
|
Plus
non-cash charges and positive changes in operating assets and liabilities
including:
|
·
impairment
of goodwill and intangibles of $270.8 million,
·
depreciation
and amortization of $64.6 million
·
provisions
for losses on accounts receivable of $14.6 million
·
increases
in deferred revenue of $2.1 million and
|
·
|
increases
in accounts payable and other liabilities of $110.7
million
|
|
·
|
increases
in other assets of $7.8 million
|
·
increases
in accounts receivable of $18.4 million and
·
increases
in inventories of $92.3 million.
The
increase in accounts receivable of $18.4 million relates primarily to increases
of $9.1 million in our DVD and CD Fulfillment segment and $10.5 million in
Periodical Fulfillment Services.
The
increase in inventories of $92.3 million is made up of increases in all our
segments with $68.6 million in our DVD and CD Fulfillment as is customary at
this time of year due to the seasonality of its products and an increase in
inventories of $23.2 million within our Periodical Fulfillment Services group
related primarily to the timing of shipments and increased consignment
inventory.
The
increase in accounts payable and other liabilities of $110.7 million relates
primarily to an increase in accounts payable within our DVD and CD Fulfillment
group of $61.3 million related to increased purchases of inventories in
anticipation of shipments required for the holiday shopping season and extended
payment terms associated with the holiday shopping season related to the timing
of vendor payments. Also contributing to the increase in accounts
payable and other liabilities was our Periodical Fulfillment Services group
which experienced an increase of $61.5 million due primarily to the timing of
vendor payments.
Operating
cash flows for the nine months ended October 31, 2007 were comprised
of:
|
·
|
Net
loss of $0.4 million,
|
|
·
|
Plus
non-cash charges and positive changes in operating assets and liabilities
including:
|
|
·
|
depreciation
and amortization of $38.6 million,
|
|
·
|
provisions
for losses on accounts receivable of $2.0
million
|
·
write
off of deferred financing fees of $1.3 million
·
increases
in deferred revenue of $1.2 million
|
·
|
loss
on sale of discontinued operations of $0.7 million,
and
|
|
·
|
increases
in accounts payable and other liabilities of $148.7
million.
|
|
·
|
increases
in accounts receivable of $26.2
million
|
·
|
increases
in inventories of $104.4 million,
and
|
|
·
|
increases
in other current and non current assets of $2.0
million.
|
The
increase in accounts payable and other liabilities relates primarily to an
increase in accounts payable within our DVD and CD Fulfillment group of $90.8
million primarily related to increased purchases of inventories in anticipation
of shipments required for the holiday shopping season and extended payment terms
associated with the holiday shopping season, an increase in accounts payable
within our Periodical Fulfillment Services group of $59.2 million related to
newly established payables terms with a major supplier and the timing of
payments to other major suppliers.
The
increase in accounts receivable relates primarily to a increase in accounts
receivable within our DVD and CD Fulfillment group of $49.5 million related to
the increased shipments in anticipation of the holiday shopping season and the
buildup of receivables from a recently obtained significant new customer,
partially offset by a decrease of $24.3 million within our Periodical
Fulfillment Services group related primarily to the timing of customer payments
as a result of our improved customer collections processes.
The
increase in inventories relates primarily to an increase in inventories within
our DVD and CD Fulfillment group of $76.1 million related primarily to the build
up of inventories in anticipation of the holiday shopping season, an increase in
inventories of $27.8 million within our Periodical Fulfillment Services group
related primarily to the timing of shipments and increased consignment
inventory.
The
increase in other current and non-current assets relates primarily to increases
within our Shared Services, DVD and CD Fulfillment, Periodical Fulfillment
Services and Media segments of $3.3 million, $3.5 million, $1.4 million and $1.7
million, respectively. These increases were partially offset by a
decrease in income taxes receivable due to $10.0 million in income tax refunds
received during the nine months ended October 31, 2007.
Investing
Cash Flow
Net cash
used by investing activities was $67.8 million for the nine months ended October
31, 2008 compared with cash used by investing activities of $1.2 billion for
same period last year.
For the
nine months ended October 31, 2008, cash used by investing activities consisted
primarily of the $42.0 million in cash paid to purchase the remaining minority
interest in Automotive.com, Inc. Capital expenditures of $25.0
million made up the majority of the remaining net cash used.
For the
nine months ended October 31, 2007, cash used by investing activities consisted
primarily of $20.5 million in capital expenditures and $1.2 billion paid for the
acquisition of SIM, partially offset by $9.8 million received from the sale of
our Wood Manufacturing division and $5.8 million received from net claiming
activity.
Financing
Cash Flow
Outstanding
balances on our credit facility fluctuate partially due to the timing of the
retailer rebate claiming process and our Advance Pay program, the seasonality of
our front end wire and services business and the payment cycles of the DVD and
CD and Periodical Fulfillment businesses. Because the magazine distribution
business and Advance Pay program cash requirement usually peaks during the
middle of the fiscal quarter, the reported bank debt levels usually are the
minimum level outstanding during that time. Our DVD and CD Fulfillment group has
historically generated approximately 33% of its total net sales in the fourth
calendar quarter coinciding with the holiday shopping season and therefore
requires greater borrowings in the third quarter to finance the buildup of
inventory.
Payments
under our Advance Pay program generally occur just prior to our fiscal quarter
end. The related claims are not generally collected by us until 30-60 days after
the advance is made. As a result, our funding requirements peak at the time of
the initial advances and decrease over this period as the cash is collected on
the related claims.
The front
end display fixture manufacturing and services business is seasonal because most
retailers prefer initiating new programs before the holiday shopping season
begins, which concentrates revenues in our second and third fiscal quarters.
Receivables from these programs are generally collected from all participants
within 180 days. We are usually required to tender payment on the costs of these
programs (raw material and labor) within a shorter period. As a result, our
funding requirements peak in the second and third fiscal quarters when we
manufacture the fixtures, and decrease significantly in the fourth and first
fiscal quarters as the related receivable are collected and significantly less
manufacturing activity is occurring.
Net cash
provided by financing activities was $18.1 million for the nine months ended
October 31, 2008 versus cash provided by financing activities of $1.2 billion
for the same period last year.
Financing
activities in the nine months ended October 31, 2008 consisted primarily of
$50.3 million in borrowings on our revolving credit facility. This
amount was offset by payments of financing fees, notes payable and capital
leases, and deferred purchase price liabilities of $12.4 million, $12.7 million
and $7.3 million, respectively.
Financing
activities in the nine months ended October 31, 2007 consisted primarily of a
$12.0 million decrease in checks issued against future advances under our
revolving credit facility, $116.5 million in repayments under our WFF Credit
Facility, $2.7 million in payments of deferred purchase price liabilities and
$5.1 million in net payments on notes payable and capital leases, more than
offset by $1.3 billion in cash received at closing of our Citicorp North America
credit facilities.
Debt
For a
detailed description of the terms of our significant debt instruments, please
refer to Note 6 of our Consolidated Financial Statements.
In
connection with our acquisition of SIM, we issued three new credit facilities on
August 1, 2007.These facilities consist of a $300.0 million asset-based
revolving facility that had a balance of $50.3 million at October 31, 2008, an
$880.0 million term loan facility that amortizes 1.0% per year, and a $465.0
million bridge loan which we refinanced on June 26, 2008 by issuing $465.0
million 11.25% Senior Unsecured Notes due 2015. We expect to pay
interest and repay principal on these facilities with cash flow generated
from operations.
Off-Balance
Sheet Arrangements
We do not
engage in transactions or arrangements with unconsolidated or other special
purpose entities as defined by Item 303(a) (4) of Regulation
S-K.
Our
primary market risks include fluctuations in interest rates.
Our debt
primarily relates to credit facilities with Citicorp North America, Inc and
long-term financing in the form of Senior Notes. See Note 6 to our
Consolidated Financial Statements.
The
revolving credit facility with Citicorp North America had an outstanding
principal balance of $50.3 million at October 31, 2008. There were outstanding
balances of $869.0 million and $465.0 million as of October 31, 2008 on our Term
Loan B and Senior Notes, respectively. Interest on the outstanding
balance of the revolver is charged at Prime plus a margin of
0.50%. Interest on the outstanding balance of the Term Loan B is
charged based on LIBOR (3.21875% at October 31, 2008) plus a margin of
3.25%. Interest on the Senior Notes is charged at 11.25%,
fixed.
As a
result of the above, our primary market risks relate to fluctuations in interest
rates. On April 11, 2008, the Company entered into an interest rate
swap agreement with Wachovia Bank, N.A. to hedge the Company’s exposure to
fluctuations in LIBOR. The notional amount of this swap is $210.0
million. A 1.0% increase in the prevailing interest rate on our debt
at October 31, 2008 is estimated to cause an increase of $2.2 million in
interest expense for the remainder of the year ending January 31, 2009.The swap
would provide protection against approximately $1.1 million of the above
increase.
ITEM 4. CONTROLS AND PROCEDURES