<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                 FORM 10-KSB-A
    
                                 Amendment #2
------------------------------------------------------------------------------
    

  X  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 --  ACT OF 1934

                  For the fiscal year ended September 28, 1996

                                       or

     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
  -- EXCHANGE ACT OF 1934
------------------------------------------------------------------------------

                         Commission File Number: 0-2675

                            UNITED MAGAZINE COMPANY
                              An Ohio Corporation
                           I.R.S. Number: 31-0681050

                                 5131 Post Road
                               Dublin, Ohio 43017
                 Registrant's Telephone Number: (614) 792-0777

          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                      None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                        Common Stock, Without Par Value
                        -------------------------------

         Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past ninety days. Yes: X    No: 
                                                       ---       -----

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X

   
         The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of July 25, 1997, was $19,220,166. There is no active
trading market in the Registrant's shares, and this value is based upon an
agreed upon valuation for the Registrant's shares in a recent acquisition
agreement.
    

         The Registrant's revenues for the fiscal year ended September 28, 1996
are $80,232,472.

   
         The Registrant's number of common shares, without par value,
outstanding as of July 25, 1997 was 26,760,334. After adjustment for the
anticipated one for ten reverse split to be effective after the 1997 Annual
Meeting of Shareholders, the adjusted number of common shares is 2,676,034.
    

                      Documents Incorporated By Reference
                      -----------------------------------

         Portions of the Registrant's Preliminary Proxy Statement dated June
1997 for the 1997 Annual Meeting of Shareholders are filed as Exhibit 99 to
this Form 10K-SB-A, Amendment #1.


<PAGE>   2



                            UNITED MAGAZINE COMPANY

                                 FORM 10-KSB-A
                  FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 1996
                                     INDEX

<TABLE>
<CAPTION>
PART I.                                                            PAGE NUMBER
-------                                                            -----------
<S>                                                                    <C>
ITEM 1. - BUSINESS                                                      1

ITEM 2. - PROPERTIES                                                    5

ITEM 3. - LEGAL PROCEEDINGS                                             5

ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS           5

PART II
-------
ITEM 5. - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED             6
          STOCKHOLDER MATTERS

ITEM 6. - SELECTED FINANCIAL DATA                                       7

ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF                       8
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 8. - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                  19

ITEM 9. - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL                    42
          DISCLOSURE

PART III
--------
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT          43

ITEM 11. - EXECUTIVE COMPENSATION                                      43

ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL                    43
           OWNERS AND MANAGEMENT

ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS              49

PART IV
-------
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND                50
           REPORTS ON FORM 8-K

SIGNATURES                                                             54
</TABLE>


<PAGE>   3



                                     PART I

ITEM 1. BUSINESS

United Magazine Company ("UNIMAG" or the "Company") is an Ohio corporation
which was incorporated on April 8, 1964 under the name Citizens Holding
Company.  UNIMAG (the Parent) is a holding company. The operations for the year
ended September 28, 1996 were conducted through its consolidated subsidiaries
and also include the partial-year impact of the five business combinations in
the fourth quarter of 1996 more fully discussed below. The operations for the
year ended September 28, 1996 were conducted through its consolidated
subsidiaries as follows: Service News Company of Connecticut, doing business as
Yankee News Company ("Yankee") was owned for 12 months. Service News Company of
Wilmington, North Carolina ("Wilmington") was operated under a management
agreement for three months and was owned for nine months. Triangle News
Company, Inc., a Pennsylvania corporation, ("Triangle") was owned for nine
months. Reader's Choice ("RC") was owned for nine months and sold in July of
1996.

Service News Company of Connecticut, (Yankee), is engaged in wholesale
magazine, newspaper and book distribution and owns and operates four newsstands
and one bookstore.

Service News Company of Wilmington, North Carolina (Wilmington) is engaged in
wholesale magazine and book distribution.

Triangle News Company, Inc., (Triangle) is engaged in wholesale magazine,
newspaper and book distribution.

Reader's Choice (RC) was engaged in the business of managing and reporting
information on retail display allowances and collecting these allowances which
are paid by publishers to retailers.

United Magazine Company also is effecting business combinations with Michiana
News Service, Inc., a Michigan corporation ("Michiana"), The Stoll Companies,
an Ohio corporation ("Stoll"), and The George R. Klein News Co., Central News
Co., and Newspaper Sales, Inc., all Ohio corporations (collectively, "The Klein
Companies" or "Klein") , all independent magazine, book, and newspaper
("periodical") distributors.

The Company is also effecting business combinations with a number of companies
affiliated with Ronald E. Scherer ("Ronald E. Scherer"), the Company's
chairman, also engaged in wholesale periodical distribution (the "Scherer
Affiliates"): Ohio Periodical Distributors, Inc., an Ohio corporation ("OPD"),
Northern News Company, a Michigan corporation ("Northern"), Wholesalers
Leasing, Corp., a Delaware corporation ("Wholesalers"), Scherer Companies, a
Delaware corporation ("Scherer Companies") and, pursuant to the agreement with
Northern to acquire all of the stock of MacGregor News Services, Inc., a
Michigan corporation ("MacGregor"). The Company also is acquiring the stock of
Read-Mor Bookstores, Inc. ("Read-Mor"), a company managed by Scherer Companies.
Read-Mor owns six retail locations and is an insignificant acquisition.

Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates are collectively known
as the "Acquisition Parties". The Acquisition Parties in combination with the
other entities of UNIMAG are collectively known as the "Combined Company".

                                       1
<PAGE>   4



Effective July 29, 1996, the Company entered into an Asset Transfer and
Exchange Agreement with Northern, pursuant to which the Company is to acquire
such of the assets of that company as are related to the wholesale distribution
of periodicals (and, pursuant to the agreement with Northern, to acquire all of
the stock of MacGregor held by Northern) in exchange for Common Stock of the
Company and Senior and Subordinated Debentures of the Company. Effective July
30, 1996, the Company entered into a Stock Transfer and Exchange Agreement with
Michiana and the shareholders of Michiana (the "Michiana Shareholders"),
pursuant to which all of the Michiana Shareholders will contribute their shares
of stock of Michiana to the Company in exchange for Common Stock of the Company
and Senior and Subordinated Debentures of the Company. Effective July 31, 1996,
the Company entered into a Stock Transfer and Exchange Agreement with Stoll and
the shareholders of Stoll (the "Stoll Shareholders"), pursuant to which all of
the Stoll Shareholders will contribute their shares of stock of Stoll to the
Company in exchange for Common Stock of the Company and Senior and Subordinated
Debentures of the Company. Effective August 1, 1996, the Company entered into
an Asset Transfer and Exchange Agreement with OPD, subsequently modified to a
Stock Transfer and Exchange Agreement, pursuant to which all of the OPD
Shareholders will contribute their shares of stock of OPD to the Company in
exchange for Common Stock of the Company and Senior and Subordinated Debentures
of the Company. Effective August 2, 1996, the Company entered into an Asset
Transfer and Exchange Agreement with Wholesalers, pursuant to which the Company
is to acquire substantially all of the assets and assume substantially all of
the liabilities of that company that are related to the wholesale distribution
of periodicals in exchange for Common Stock of the Company and Senior and
Subordinated Debentures of the Company. Effective August 2, 1996, the Company
entered into a Stock Transfer and Exchange Agreement with Scherer Companies and
the shareholders of Scherer Companies (the "Scherer Shareholders"), pursuant to
which the Scherer Shareholders will contribute their shares of stock of Scherer
Companies to the Company in exchange for Common Stock of the Company and Senior
and Subordinated Debentures of the Company. Effective September 14, 1996, the
Company entered into a Stock Transfer and Exchange Agreement with Klein and the
sole shareholder of Klein (the "Klein Shareholder"), pursuant to which the
Klein Shareholder will contribute his shares of stock of Klein to the Company
in exchange for Common Stock of the Company and Senior and Subordinated
Debentures of the Company.

Each of these transactions has been or is expected to be closed into escrow
pending a favorable vote of the shareholders of the Company on each of these
transactions. If the shareholders vote in favor of the acquisitions at the
Annual Meeting of Shareholders, then closing documents will be released from
escrow and the transactions will be consummated. Ronald E. Scherer, chairman of
the Company, OPD, which is controlled by Ronald E. Scherer, and R. David
Thomas, another significant shareholder of the Company, have each agreed to
vote their shares in favor of the transactions with Stoll, Michiana, Klein and
the Scherer Affiliates. Together these shareholders are entitled to vote more
than 50% of the stock of the Company. Since approval of the transactions is
assured and the Company had effective control over the operations of the
Acquisition Parties, their financial information has been included in the
consolidated financial statements of the Company beginning on July 31, 1996
(September 14, 1996 for Klein).

UNIMAG also owns three inactive subsidiaries. Sportstuff Marketing, Inc. (SSM)
was a wholesale distributor of sports apparel products and operated one sports
apparel retail outlet. Team Logos Sportstuff, Inc. (TLSI) previously owned and
operated sports apparel retail stores. UNIMAG I, Inc. (UNIMAG I), a
wholly-owned subsidiary of TLSI, previously held certain intangible assets
related to the franchise operations of TLSI. Imperial News Co., Inc.
(Imperial), previously engaged in the wholesale magazine and book distribution
business, has been in bankruptcy since 1991, and has no material assets.

                                       2
<PAGE>   5



1. BUSINESS OF SERVICE NEWS COMPANY OF CONNECTICUT (YANKEE)

UNIMAG's wholly-owned subsidiary, Service News Company of Connecticut (Yankee)
acquired the operating net assets of Yankee from MDI, L.P. on May 24, 1993.
Yankee is headquartered in a 34,000 square foot facility leased for
approximately $96,000 per year, located in Waterbury, Connecticut. From this
facility Yankee distributes magazines, books, newspapers and various sundry
items to retailers who sell to customers in the Connecticut market. Yankee also
operates four retail "Newsrack" outlets which sell magazines, newspapers, and
related products and operates one retail bookstore. During fiscal 1995 Yankee
generated approximately 99% of UNIMAG's net sales, and during fiscal 1996
Yankee generated approximately 33% of net sales during twelve months of
operations.

2. BUSINESS OF SERVICE NEWS COMPANY OF WILMINGTON

Service News Company of Wilmington (Wilmington), acquired on January 13, 1996,
is headquartered in a 20,000 square foot facility located in Wilmington, North
Carolina. From this location, Wilmington distributes magazines, books and
various sundry items to retailers who sell to customers primarily in eastern
North Carolina. During fiscal 1996 Wilmington generated approximately 7% of
UNIMAG's net sales during nine months of operations.

3. BUSINESS OF TRIANGLE NEWS COMPANY, INC.

Triangle News Company, Inc. (Triangle), acquired on January 23, 1996, is
headquartered in a 62,400 square foot facility located in Pittsburgh,
Pennsylvania. From this location, Triangle distributes magazines, newspapers,
books and various sundry items to retailers who sell to customers in western
Pennsylvania, West Virginia, and eastern Ohio. During fiscal 1996 Triangle
generated approximately 22% of UNIMAG's net sales during nine months of
operations.

4. BUSINESS OF MICHIANA, STOLL, KLEIN, READ-MOR AND SCHERER AFFILIATES

The business of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates is the
wholesale distribution of magazines, books, newspapers and various sundry items
and the operation of related retail locations throughout the Midwest and
predominately in Ohio, Michigan, and Indiana. This business is described in
greater detail in the Company's Proxy Statement for the 1997 Annual Meeting of
Shareholders. During fiscal 1996 these companies generated approximately 37% of
UNIMAG's net sales during the periods of their ownership.

5. BUSINESS OF READER'S CHOICE, INC. (RC)

Reader's Choice, Inc. (RC), established in October, 1984, was acquired on April
11, 1995 and sold during July of 1996 . RC was engaged in the business of
managing and reporting information on retail display allowances and collecting
these allowances which were paid by publishers to retailers. For these
management services RC received a percentage of the allowances collected on
behalf of the retailers. The operations of RC were not significant, and the
sale did not have a material effect on the Company.

6. BUSINESS OF SPORTSTUFF MARKETING, INC.

Sportstuff Marketing, Inc., established in March, 1993, was engaged in the
wholesale distribution of sports apparel merchandise and services, primarily to
major grocery and pharmaceutical chains. In March, 1995, SSM ceased all
wholesaling of sports apparel merchandise. SSM is currently inactive.

                                       3
<PAGE>   6

7. BUSINESS OF TEAM LOGOS SPORTSTUFF, INC. AND UNIMAG I

Team Logos Sportstuff, Inc. (TLSI) and its subsidiary UNIMAG I, both
established in July, 1992, were engaged in the business of owning and
franchising retail sports apparel stores throughout the country. During the
fiscal year ended October 2, 1993 TLSI closed all remaining retail locations,
and UNIMAG I deactivated its franchising operations. The closing of the
TLSI-owned retail stores resulted in TLSI owing vendors approximately
$1,400,000 in trade payables. Since that time, TLSI has reached settlement
terms with most vendors and is currently inactive except for the winding down
of final business activities.

8. ADDITIONAL INFORMATION

Additional information is incorporated by reference from the sections entitled
"The Company and the Combined Company -- Business, Combined Revenues,
Employees, Products, Suppliers and Pricing, Distribution Systems, Marketing and
Sales, the SMARTS System, Customers and Competition" contained in the Company's
Preliminary Proxy Statement filed in June 1997 for its 1997 Annual Meeting of
Shareholders which is filed as Exhibit 99 to this Form 10-KSB-A.

                                       4
<PAGE>   7



ITEM 2.  PROPERTIES

Additional information on the Company's properties is incorporated by reference
from the section entitled "The Company and the Combined Company -- Facilities"
contained in the Company's Preliminary Proxy Statement filed in June 1997 for
its 1997 Annual Meeting of Shareholders which is filed as Exhibit 99 to this
Form 10-KSB-A.

ITEM 3. LEGAL PROCEEDINGS

See Note 13 of the United Magazine Company consolidated financial statements as
of September 28, 1996 included in Item 8 of this report which is incorporated
herein by reference.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth
quarter of the 1996 fiscal year covered by this report.

                                       5
<PAGE>   8



                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

A.  PRICE RANGE OF COMMON SHARES OF UNIMAG

The common shares of UNIMAG were previously traded in a very limited local
over-the-counter market. However, there is currently no established public
trading market for this class of common equity, which is the only class of
equity securities of the Company. During the fiscal year 1996 the Company had
transactions at the following prices, all at values before the anticipated one
for ten reverse split to be effective after the 1997 Annual Meeting of
Shareholders. The 100,000 shares issued in connection with the Pittsburgh
(Triangle) transaction in January of 1996 were valued for accounting purposes
at $.91 per share. All of the shares to be issued in connection with the
acquisition of Michiana, Stoll, Scherer Affiliates and Klein were valued in the
acquisition agreements at $1.50 per share. The shares to be issued to MDI,
under terms of the Company's agreement were valued in the agreement at $1.00
per share through June 28, 1996 and were valued at $1.50 per share after June
28, 1996.  The foregoing should not be taken as an indication of the value of
the shares or the price at which the Company's shares may be purchased or sold
should a trading market develop or should a holder desire to sell shares
through other means.

B.  SHAREHOLDERS

As of May 30, 1997, UNIMAG had 2,886 shareholders of record.

C.  DIVIDENDS

There were no dividends declared or paid by UNIMAG during fiscal years 1996 or
1995. The Company does not anticipate declaring or paying a dividend in the
foreseeable future, and it expects to use future available funds for the growth
and development of the business.

                                       6
<PAGE>   9



ITEM 6.  SELECTED FINANCIAL DATA

The following selected historical financial data of UNIMAG should be read in
conjunction with UNIMAG's consolidated financial statements and notes thereto
(see Item 8). All per share data reflects the anticipated one for ten reverse
split effective at the Annual Meeting of Shareholders.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
                                       UNIMAG Fiscal Year Ended
(in 000's except gain 
(loss) per share)                   1996 (1)    1995 (2)   1994 (3)    1993 (4)  1992 (5)
-----------------------------------------------------------------------------------------
<S>                                 <C>         <C>        <C>         <C>       <C>
Consolidated income
statement data:
  Net sales                         $80,232     $24,562    $24,687     $10,857    $2,315
  Income(loss)from
   continuing operations
   before taxes and extra-
   ordinary items                   $(6,388)     $1,864      $(892)    $(6,511)  $(3,678)
  Weighted average
   shares outstanding                 3,226       2,390      2,151       2,064     1,738
  Net income (loss) per
   share from continuing
   operations before extra-
   ordinary items                    $(1.98)       $.78      $(.41)     $(3.15)   $(2.12)
Consolidated balance sheet data:
  Total assets                     $251,371     $12,334     $8,502      $9,753   $10,436
  Long-term debt
   obligations                      $64,401        $138       $688        $400    $1,211
Stockholder's Equity per share
including putable shares              $9.33       $2.25       $.02        $.19     $3.17
-----------------------------------------------------------------------------------------
</TABLE>

(1) Includes Yankee for a full year, Readers Choice from September 29, 1995
through June 30, 1996, UNIMAG's investment in Wilmington from September 29,
1995 through December 30, 1995, Wilmington's operations from December 31, 1995
through September 28, 1996, Pittsburgh's operations from December 31, 1995
through September 28, 1996, the operations of Michiana, Stoll, Read-Mor and
Scherer Affiliates from July 28, 1996 through September 28, 1996 and Klein
operations from September 14, 1996 through September 28, 1996.

(2) Includes Reader's Choice, Inc. from April 11, 1995 through September 30,
1995, UNIMAG's investment in Wilmington from April 5, 1995 through September
30, 1995, and other subsidiaries for a full year.

(3) Includes all then-existing subsidiaries for a full year.

(4) Includes TLSI for a full year; SNC doing business as Yankee News Company
from May 24, 1993 to October 2, 1993; SSM from March, 1993 to October 2, 1993;
CRI through March 12, 1993; and SNC's investment in MDI L.P. through May 24,
1993.

(5) Includes a full-year of CRI and SNC's Investment in MDI L.P. and two months
of TLSI.


                                       7
<PAGE>   10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS OF UNIMAG FOR THE YEARS ENDED SEPTEMBER 28, 1996 AND
SEPTEMBER 30, 1995

INTRODUCTION

         The Company, through its subsidiaries, currently operates wholesale
periodical distribution operations primarily in central Connecticut, eastern
North Carolina, and western Pennsylvania. Additionally, through the recent
pending Acquisitions, the Company has added to its current operations the
wholesale periodical distribution operations of Stoll, which distributes
primarily in central Indiana, northwestern Ohio and southern Michigan, the
wholesale periodical distribution operations of Michiana, which distributes
primarily in southern Michigan, northern Indiana and western Ohio, the
wholesale periodical distribution operations of Klein, which distributes
primarily in northern Ohio, and the wholesale periodical distribution
operations of OPD, MacGregor, Northern, Wholesalers and Scherer Companies,
which distribute in central and southern Ohio and northern Michigan. The
Company also acquired and operates retail bookstores in connection with these
operations.

         Following the proposed transactions, the Combined Company will emerge
as the dominant wholesale periodical distribution company in Ohio, Indiana,
Michigan and western Pennsylvania, with an estimated market share for that
region of greater than 50%. This market dominance is expected to strengthen the
Acquisition Parties' existing relationships with customers and suppliers and to
enable the Combined Company to successfully compete with other regional
wholesalers for major retail accounts.

BACKGROUND

         The periodical wholesale distribution industry has undergone
significant consolidation during the past year. Prior to this period of
consolidation, wholesale periodical distributors historically operated in
defined geographic territories without much competition from other wholesalers
due to the difficulty and cost of distributing in another wholesaler's
territory. Within the past year, large retailers have begun to consolidate
vendor relationships with larger suppliers so that the retailers are acquiring
periodicals from one or a few wholesalers for all of their retail locations
rather than from separate wholesalers in each geographic area where a retail
location is based. As a result, the industry has rapidly evolved from a
supplier based push distribution system to a consumer based pull allocation
system. This has resulted in a smaller number of wholesalers distributing
within many geographic locations and in more direct competition for retail
business. As a result, a number of small wholesalers have been unable to remain
in business.  Gross margins have decreased as more price competition has
occurred, and a number of wholesalers are affiliating or otherwise
consolidating their operations to reduce duplicative operating expenses to
compete effectively for large retail accounts while providing additional
value-added services to the retailers.

         The wholesale periodical distribution industry is poised for
additional significant consolidation over the next few years. Management
believes that the consolidation of the Company and the Acquisition Parties will
significantly reduce both fixed and variable costs once the consolidation of
operations is complete. It is anticipated that these cost reductions will act
to offset decreasing margins and greater pricing pressures and will increase
the ability of the enterprises comprising the Combined Company to compete more
effectively.

         Although there are currently approximately 60 wholesalers who are
marketing periodicals in the United States, management believes that, within
five years, the wholesale periodical distribution industry

                                       8
<PAGE>   11

may be dominated by fewer than ten companies across the United States as
smaller, local wholesalers continue consolidating with larger and financially
stronger regional wholesalers. As a result of these continued consolidation
trends, management believes that some additional acquisition opportunities will
become available over the next 12 to 24 months. Management believes that the
anticipated size of the Combined Company will permit it to take advantage of
these acquisition opportunities better than the Company alone would otherwise
be able to accomplish.

INDUSTRY OVERVIEW

         The $4 billion wholesale periodical distribution industry in North
America is comprised of approximately 60 regional and local wholesalers
operating out of approximately 300 distribution locations. Management believes
that these 60 wholesalers account for approximately 97.5% of all magazines
purchased by consumers in retail outlets such as newsstands, drug stores,
convenience stores, discount variety stores and grocery stores. The wholesale
periodical distribution industry is highly fragmented and regionalized.
However, there has been significant consolidation activity driven by major
retailers' desire to consolidate their vendor relationships and by the desire
of many local wholesalers to take advantage of the favorable economics
available to larger regional wholesale organizations by consolidating with
neighboring wholesalers.

         It is estimated that the five largest wholesaler groups in the country
account for approximately 60% of magazine sales and the ten largest account for
approximately 80%. In addition to these ten large wholesalers, there are
approximately 50 small and mid-size independent wholesalers making up the
balance of the markets served in the United States.

         Based upon industry information, management of the Company believes
that the wholesale periodical distribution industry has grown approximately
five percent (5%) per year for the last several years. Management believes that
the continued growth of the industry depends upon the following factors:

1.       The magazine publisher's ability to continue to provide newsworthy or
entertaining publications to consumers;

2.       The publishers' and wholesalers' ability to maintain a profit
structure appealing to the retailers;

3.       Improvement in the efficiency and accuracy of product allocation to
capitalize on the impulse nature of the purchase decision and to optimize
sales; and

INDUSTRY TRENDS

         Historically, the wholesale periodical distribution industry has not
been characterized by significant competition. Because publishers and retailers
have recognized the favorable economics of local distribution, they have
supported the exclusive territories that have evolved over time, minimizing
competition from neighboring local or regional wholesalers. Recently, however,
these barriers have begun to break down leading to a more competitive
environment as a result of the following trends:

o        Vendor Consolidation Efforts of Large Retailers. Many national
retailers such as Wal-Mart have begun consolidating the number of suppliers
from which they purchase in an effort to streamline their purchasing process.
This change in purchasing behavior has been driven, among other reasons, by the
retailers' demands for chain-wide or divisional billing to minimize their
administrative costs, by standardization of improved service levels, and by an
opportunity to improve profitability. This trend has begun to eliminate the
traditional regional barriers that have existed in the industry for decades and
has shifted the emphasis of the wholesaler/retailer relationship from the local
level to the corporate or regional level.

                                       9
<PAGE>   12

Although a regional wholesaler can, in the short run, increase sales by
establishing a relationship with a large retailer, it becomes more difficult
for that wholesaler to service far reaching locations of the large retailers in
a profitable manner. Consequently, the regional wholesaler must unite with the
local or other regional wholesalers serving those far reaching territories
either through joint ventures or consolidations in order to optimize delivery
efficiency and long term profitability.

o        Industry Consolidation. The industry recently has undergone
considerable consolidation for several reasons. Because they must operate under
the constraints of a price ceiling established by the publishers, successful
wholesalers have concentrated on cost cutting measures in order to remain
competitive. Through mergers and consolidations with competitors in neighboring
regions, local wholesalers have been able to achieve significant cost savings
and economies of scale in their distribution operations by consolidating
distribution plants and eliminating redundant overhead.

o        Marketing Initiatives with Retailers. As "direct store delivery"
vendors, periodical wholesalers are responsible for determining the most
effective way to market their products in a particular retail location.
Wholesalers' merchandising decisions typically rely upon information derived
from knowledge of buying habits of consumers, distribution and return records
by title and issue of each magazine, and other related information for each
retail location. This historical information is kept in a database known as
"Order & Regulation Records" which is owned and maintained by the wholesaler.
It enables the wholesaler to electronically monitor and evaluate the historic
distribution information for greater efficiency and profit.

o        Technology Initiatives with Retailers. In addition to maintaining
Order & Regulation Records, the most successful wholesalers, including the
Company, have used other tools to work with retailers to increase sales and
profitability of periodicals. These include "Electronic Data Interchange" and
"Efficient Consumer Response". Electronic Data Interchange uses bar codes and
UPC codes in conjunction with sophisticated scanning systems to track the
movement of periodicals between the wholesaler and retailer as well as control
the billing process throughout the distribution chain. Efficient Consumer
Response is a real time analysis tool that assists the wholesaler in tracking
the retailers' periodical sales within a given month. It enables the wholesaler
to manage the allocation of products within a given month and replenish or
re-deploy in store inventory where needed.

o        Process Automation. The periodical distribution process involves a
significant amount of labor for activities such as sorting, scanning, loading
and unloading trucks and shredding returned periodicals. Consistent with such a
business model, labor costs represent one of the largest operating expenses of
most wholesalers. In an effort to reduce overhead expenses, wholesalers have
increasingly sought to automate the handling of the magazines they distribute
through the acquisition and development of more sophisticated and integrated
machinery and equipment.

o        Department of Justice. There has been an investigation of the magazine
distribution industry by the Antitrust Division of the U.S. Department of
Justice. The investigation originated in the Northwest Office of the U.S.
Department of Justice in Cleveland, Ohio. The complete nature, target, and
focus of the investigation is unclear. To the knowledge of management, none of
the Acquisition Parties has been identified as a target of the investigation.
Each of the wholesaler Acquisition Parties has provided documents, and some of
them have provided deposition testimony. The current status of the
investigation is not known.

                                       10
<PAGE>   13



FINANCING ARRANGEMENTS

         Each of the Exchange Agreements contemplates that stock or assets of
the various Acquisition Parties will be contributed to the Company in exchange
for Common Stock of the Company, valued at $1.50 per share (pre-split), and for
Senior and Subordinated Debentures. The Company has entered into a Debenture
Agreement (the "Debenture Agreement") with the Stoll Shareholders, the Michiana
Shareholders, the Klein Shareholder, the OPD Shareholders, the Scherer
Shareholders and the Scherer Affiliates pursuant to which the Debentures are
being issued. In addition, the Company will issue a $4,500,000 Subordinated
Debenture and a cash payment of $500,000 in exchange for a $5,000,000 note
owned by OPD to KDR Limited, an Ohio limited liability company whose owners
include R. David Thomas, a principal shareholder of the Company, and R. L.
Richards, a director nominee. In connection with this transaction R. David
Thomas will purchase an additional $500,000 of common stock. The Company also
intends to issue $242,211 of Senior Debentures and $94,594 of Subordinated
Debentures in connection with the acquisition of Read-Mor.

         The Senior Debentures are designated as "8% Senior Debentures Due
2002", mature on January 1, 2002, and bear interest at the rate of 8% per annum
from July 1, 1996, provided, however, that Senior Debentures issued pursuant to
the Klein Exchange Agreement will begin to accrue interest from August 24,
1996.  Interest is payable quarterly on January 1, April 1, July 1 and October
1, commencing on the date of final closing of a particular acquisition.
Principal on the Senior Debentures will be paid quarterly on each interest
payment date in accordance with the schedule and priority set forth in the
Debenture Agreement, commencing on April 1, 1997.

         The Subordinated Debentures are designated as "10% Subordinated
Debentures Due 2004", mature on January 1, 2004 and bear interest at the rate
of 10% per annum from July 1, 1996, provided, however, that Subordinated
Debentures issued pursuant to the Klein Exchange Agreement will begin to accrue
interest from August 24, 1996. Interest is payable quarterly on January 1,
April 1, July 1 and October 1, commencing on the date of final closing of a
particular acquisition. Principal on the Subordinated Debentures is to be paid
quarterly on each interest payment date in accordance with the schedule and
priority set forth in the Debenture Agreement, commencing on April 1, 1999.

   
         The Debenture Agreement pursuant to which the Senior and Subordinated
Debentures are being issued to the Acquisition Parties requires the Company to
use its best efforts to refinance the Senior Debentures, which are expected to
aggregate approximately $39,920,000. In connection with such refinancing, the
Company has engaged Bank of Boston as financial advisor to the Company's Board
of Directors. Bank of Boston has been requested to provide fee based services in
connection with the development of a financing restructuring for the
transactions and with the related placement of debt and/or equity securities.
The Company has had discussions with several different entities, introduced to
the Company by Bank of Boston, interested in providing such financing; however,
the Company has not received a final financing commitment nor reached a final
agreement regarding such financing.
    

         The Company also plans to restructure existing Company and Acquisition
Parties bank and third party debt and to consolidate banking relationships. The
Company further plans to expand bank lines of credit to support working capital
and other requirements of the Combined Companies. The Company has had
discussions with several different entities interested in providing such
financing to the Combined Companies. At present, the Company has not entered
into any new debt and/or equity placements through the Bank of Boston or
through any other financial adviser in connection with the transactions.

                                       11
<PAGE>   14



REVIEW OF OPERATIONS

   

         The following table provides financial information for the year ended
September 28, 1996 and describes the operating results of the Company for the
UNIMAG entities prior to the acquisitions, for the Acquisition Parties
combined, and the related cost of goodwill amortization and debenture interest.

<TABLE>
<CAPTION>

                                                          Amortization of 
                                                            Acquisition
YEAR ENDED SEPTEMBER 28,         Prior    Acquisition      Goodwill and        Combined
1996:                           Unimag      Parties      Debenture Interest     Total
                               --------    -----------   ------------------    --------
<S>                            <C>           <C>          <C>                   <C>
Results of operations $(000): 
 Revenue                        $ 50,384    $ 29,848            $ -             $ 80,232
 Gross margin                     12,496       7,459              -               19,955
 Selling, general and
  Administrative                 (13,721)     (8,482)             -              (22,203)

Net Loss                          (3,686)     (1,572)           (1,130)           (6,388)

As a percent of revenue:
 Gross margin                     24.80%      24.99%             -                24.87%
 Selling, general and
  Administrative                (27.23%)    (28.42%)             -              (27.67%)

Net Loss                         (7.32%)     (5.27%)             -               (7.96&)
</TABLE>
    

         The results of operations for 1996 are not indicative of results from
prior years, nor are the results for 1996 indicative of the future. 1996 was a
unique transition year which featured industry wide consolidations, declines in
gross margin as a percent of revenue, and increases in payroll costs related to
increased levels of service. In addition, UNIMAG had only one operating entity,
Yankee, reporting for the entire 12 months of fiscal 1996. In addition, UNIMAG
reported operations for nine months for Wilmington, Pittsburgh and Readers
Choice, two months for Michiana, Stoll, Read-Mor and Scherer Affiliates, and
two weeks for Klein.

   
         The revenue for the Combined Company for the various periods of
operations reported for each of the entities in 1996 was $80,232,472, (with
approximately $50,384,000, or 63%, derived from prior UNIMAG operations), an
increase of 227% over 1995 revenue. Substantially all of the growth was
attributable to the acquisitions during 1996 for the periods included in the
preceding paragraph.

         In markets serviced by the Combined Company, including UNIMAG and the
Acquisition Parties, the business of certain large retail chains such as WalMart
and K Mart was lost early in calendar 1996. However, the Combined Company
obtained increases in new business from chains previously serviced by other
wholesalers not part of the Combined Company. Other increases in new business
came from the increased use of high impact marketing programs in large retail
customer locations. On a pro-forma basis the revenues of UNIMAG increased by
1.4% from 1995 to 1996.

         The most significant development during 1996 was the reduction in
revenue from existing chain customers of both UNIMAG and the Acquisition Parties
where new discounts, rebates and amortization of signing bonuses caused an
approximate 5% reduction in revenue without a corresponding reduction in the
related cost of the products for equivalent numbers of magazines sold. As a
result the Company realized less revenue per comparable magazine sold in 1996
versus 1995.

         As a result of these reductions in revenue, the gross margin, as a
percentage of revenue, declined from 27.0 % in 1995 to 24.9% in 1996. This trend
was not unique to UNIMAG or to the Acquisition Parties, as it was representative
of changes throughout the entire industry in 1996. The 2.1% decline in gross
margin was attributable almost totally to the discounting and rebating changes
during 1996. The cost of product to UNIMAG and the Acquisition Parties, as a
percentage of the retail price to the customer, remained relatively constant,
however due to volume of business the Acquisition Parties cost of product was
slightly less than the prior UNIMAG.

         Selling, general and administrative expenses, as a percent of revenue,
increased by 1.5% to 27.7% in 1996 versus 26.2% in 1995 with Prior UNIMAG at
27.2% and Acquisition Parties at 28.4%. Included in this increase was
administrative cost increases in 1996 over 1995 of $1,049,000 for legal and
accounting expenses. Payroll expenses for UNIMAG and the Acquisition Parties,
the largest operating expense component, increased in 1996 over 1995 as a result
of increased in-store service for the large retail customers. This increase in
in-store service cost, created by commitments under contract by the Company to
increase the levels of service to the retailers and to assume certain product
management functions previously performed by the retailer, also was
representative of changes occurring in the industry. The reduction in revenue
from discounts, rebates and amortization during 1996 reduced the comparative
revenue base. Without this reduction in revenue, the selling, general and
administrative percent would have been approximately 1% less.

         Depreciation and amortization expense increased due to the depreciation
of fixed assets acquired and to the amortization of goodwill relating to the
several business combinations in 1996. Depreciation and amortization as a
percentage of sales before purchase accounting was consistent between periods.
The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer Affiliates was
accounted for using purchase price accounting. Accordingly, goodwill was created
in the amount of $17,083,000 for Michiana, $50,173,000 for Stoll, $33,290,000
for Klein, $789,000 for Read-Mor and $39,631,000 for Scherer Affiliates. This
    

                                       12
<PAGE>   15

goodwill is being amortized over 40 years with 1996 amortization of two months
for Michiana, Stoll, Read-Mor and Scherer Affiliates and two weeks for Klein.

   
         All of these changes resulted in an increase in the net loss from
operations to $4,922,784 (6.1% of revenue) in 1996 compared to $830,582
(3.4% of revenue) in 1995. The 1996 net loss after taxes of $6,387,795 included
$1,781,161 of interest expense while the 1995 net income of $1,864,100 include
interest expense of $347,809 and a settlement gain of $2,352,170. The 1996 net
loss included approximately $3,686,000 from prior UNIMAG, $1,572,000 from
Acquisition Parties and $1,130,000 of acquisition amortization of goodwill
and interest.



         The acquisition of Michiana, Stoll, Klein, Read-Mor and Scherer
Affiliates is being financed by the issuance of Common Stock of the Company, 8%
Senior Debentures in the aggregate amount of $39,920,000 and 10% Subordinated
Debentures in the aggregate amount of $18,560,000. These debentures accrue
interest from July 1, 1996 for Michiana, Stoll, Read-Mor and Scherer Affiliates
and from August 24, 1996 for Klein. These debentures increased interest expense
for 1996 by approximately $664,000. In addition, Prior UNIMAG incurred a noncash
interest charge of $525,000 for the accretion of shares subject to put
agreements.

         Because of the loss for the year and because of loss carryforwards,
UNIMAG had no federal income tax expense for 1996. The Company has a net
operating loss (NOL) of approximately $47,000,000 at September 28, 1996;
however, the Company has not recognized any benefits from that NOL through
1996.

         As a result of the application of the Section 382 limitation, a
significant amount of pre-change net operating losses of the Combined Company
should expire unutilized. UNIMAG estimates that over $20 million of such net
operating losses should expire unutilized as a result of such limitation
(assuming that the limitation is not increased in respect of any built-in
gains).

         The operating results of Prior Unimag are more favorable currently
since the synergy plans had not been fully implemented by September 28, 1996.

         In addition, the net loss of the Acquisition Parties was more
favorable due to these entities being less leveraged than Prior Unimag along
with the additional amortization relating to the Wilmington and Pittsburgh
acquisitions.
    

         The calculation of earnings per common share and weighted average
number of shares outstanding includes the shares to be issued for Michiana,
Stoll, Klein, Read-Mor and Scherer Affiliates for the periods determined under
the respective agreements. In addition, the calculation of earnings per share
reflects the one for ten reverse split to be submitted to the Shareholders for
approval at the 1997 Annual Meeting of Shareholders. The effects of the one for
ten reverse stock split have been included as two shareholders holding more
than 50% of the shares of Common Stock of the Company have agreed to vote in
favor of the split.

LIQUIDITY

         The Company measures its liquidity primarily in Earnings Before
Interest, Taxes, Depreciation and Amortization (EBITDA). However, EBITDA should
not be considered as an alternative to net income or as an indicator of cash
flows generated by operating, investing or financing activities.

         EBITDA for 1996 was $(2,277,000) versus $2,741,000 for 1995. The 1996
EBITDA was impacted negatively by the gross margin and payroll pressures during
the period of ownership, and the Company delayed the implementation of expected
consolidation synergies with the acquisition companies during the initial
periods of ownership until final consolidation plans could be made.

         The 1995 EBITDA was increased by $3,017,000 for non recurring
favorable lawsuit settlements and for other favorable debt settlements related
to a now inactive subsidiary. On January 26, 1995 UNIMAG reached final
settlement of the lawsuit against Prudential Insurance Company of America and
two of its affiliates. As part of the settlement UNIMAG received $3,000,000,
less related professional fees of $648,000. The $2,352,000 net settlement was
included in the "other income" and increased the Company's liquidity by a
corresponding amount.  UNIMAG then used part of the settlement proceeds to
negotiate payments to vendors of Team Logos Sportstuff, Inc., an inactive,
wholly-owned subsidiary, in final settlement of liabilities to those vendors.
These settlements of vendor accounts payable resulted in $665,000 of other
income during 1995.

         At September 28, 1996 the Company had current liabilities of
$116,474,000 and current assets of $71,291,000 for a working capital deficit of
$45,183,000. Included in the $45,183,000 is $6,207,000 of related party debt,
and it is anticipated that $4,500,000 of that will be converted to long-term
debt. The

                                       13
<PAGE>   16

Company also has $4,470,000 in current debt and accrued interest related to
debentures issued to the Acquisition Parties. The Company is reviewing
refinancing alternatives for this debt. The Company also plans further
reductions in current liabilities by refinancing of current debt and an
infusion of additional working capital using longer term debt or new equity.

   
         The Company anticipates improvements in EBITDA in fiscal 1997 versus
1996 due to reductions in selling, general and administrative expenses through
consolidation synergies. It is anticipated that the major reductions in
selling, general and administrative expenses will come primarily from the
Acquisition Parties. The Combined Company does not anticipate any further
declines in gross margins and has identified some opportunities for recovery of
some of the lost margin in the latter part of fiscal 1997.
    

         The acquisition transactions of the Company since June 30, 1996 have
added $141 million of goodwill to the Company's assets and $58.5 million of
Senior and Subordinated Debentures to the Company's liabilities. On an annual
basis the Company anticipates future amortization of approximately $3,524,000
for this goodwill and initial annual interest of approximately $5,050,000
related to these transactions.

         Certain recent developments have had an adverse effect on the
Company's short-term liquidity. At September 28, 1996 the Company has current
liabilities in excess of current assets of approximately $45 million. Through
its acquisitions, the Company has banking relationships with several banks;
however, the Company is seeking to consolidate its borrowing and increase its
borrowing capacity with one or more large financial institutions following the
Annual Meeting of Shareholders. Because of the delays in the final closing of
the acquisition transactions, certain of the acquisition companies are in
default with their loans, and one of the acquisition companies has an
outstanding obligation to the Internal Revenue Service of approximately $1.2
million. It is anticipated that the bank defaults will not be cured until after
the expected refinancing following the Annual Meeting of Shareholders.
Obligations in default have been classified as current liabilities in the
accompanying financial statements.

         The Company is pursuing several alternative forms of additional
financing. This additional financing includes approximately $40 million to
refinance the Senior Debentures and an approximate $25 million line of credit
to consolidate present bank borrowings and to provide additional working
capital.  This financing alternative cannot be finalized until after the
Company's Annual Meeting of Shareholders and there is no assurance that the
Company will be able to secure this financing.

         The Company has a history of operating losses; however, the losses in
1992 through 1994 were from operations unrelated to the periodical wholesale
distribution industry. The Company's Connecticut wholesale operations have
operated profitably since 1993. The prior annual financial statements of
Michiana, Stoll, Scherer Affiliates and Klein (the fourth quarter acquisitions)
indicates profitable operations as family businesses through 1995. During 1996
with the increased levels of competition the entire industry experienced
reductions in profitability due to margin reduction and increased costs of
providing higher levels of customer service.

         The Company plans to return to historical industry profit levels by
the end of 1998. Through the consolidation of the geographically contiguous
acquisitions, management expects the combined company to achieve considerable
cost savings and operating efficiencies through the elimination of redundant
overhead and the consolidation of overlapping markets and facilities. Duplicate
administrative and distribution functions are being eliminated, and the costs
and benefits of technology are being spread over a larger customer base.
Additionally, management expects that the consolidation of the businesses of
the Company and the Acquisition Parties should increase purchasing power and
the ability to negotiate favorable quantity discounts with publishers and
national brokers. UNIMAG's pro

                                       14
<PAGE>   17

forma annual sales for 1996 are $281 million which management believes makes
UNIMAG the fifth largest periodical wholesaler in the country based on
published sales volumes.

         During the latter part of 1996 the Company began to consolidate its
distribution operations with a corresponding reduction in general and
administrative expenses. The Company will continue these consolidation efforts
in 1997 with further expense reductions from operating synergies. During 1997
the Company plans to increase revenue per customer by the implementation of
proven high impact marketing in all newly acquired locations and by utilization
of the Company's proprietary SMARTS system for more efficient and targeted
distribution of product. The Company also is engaged in negotiations with the
publisher for better pricing.

         During 1997 the Company anticipates improved cash flow. In 1996,
signing bonuses were paid to certain customers to secure multi-year contracts.
In many cases, these contracts covered a period of three years. Hence, cash
outflows will be substantially less in 1997. In addition, the Company expects
that its requirements for capital expenditures will not be significant. Through
route consolidations and greater use of in-store service personnel, the Company
anticipates minimal increases in its delivery fleet. The Company does
anticipate additional capital expenditures for store fixtures; however, these
increases in fixtures have historically generated enough additional revenue and
gross margin to pay for the fixtures cost within one year.

         The Company also is engaged in an effort to reduce the average days
outstanding of current accounts receivable and has negotiated with suppliers
for more favorable payment terms on vendor payables.

         In summary, the Company believes that its current strategic plan will
produce a new financial partner and positive cash flow. There can be no
assurance that this plan will succeed. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

CASH FLOWS - OPERATING ACTIVITIES

         During 1996 the Company experienced a decline in net cash provided
from operations of $(3,402,000) from $2,084,000 in 1995 to a deficit of
$(1,318,000) in 1996. The 1996 deficit is due primarily to the net loss of
$6,388,000 for 1996; however, the Company also paid $2,002,000 to retailers in
net long term prepaid signing bonuses still to be amortized over the lives of
the contracts.  Both accounts receivable and accounts payable increased by
approximately $2,000,000. Other significant increases in cash flow from
operations included depreciation and amortization of $2,513,000 and an increase
in accrued liabilities, primarily related to legal and accounting expenses, of
$3,034,000.  During 1995 the cash provided from operations was attributable
primarily to the Prudential settlement. As discussed above, the Company is
seeking financing to address its working capital deficiencies.

CASH FLOWS - INVESTING ACTIVITIES

         The Company spent $1,066,000 in 1996 for capital expenditures,
primarily for vehicles and retail display fixtures. The acquisition
transactions did not require the spending of any significant amounts for
additional capital expenditures since the acquired companies had adequate
investments in capital assets. During 1995 the Company spent $153,000 for
capital expenditures, purchased Readers Choice, Inc. for $495,000 and loaned
Wilmington $500,000 in connection with a purchase option.

                                       15
<PAGE>   18

CASH FLOWS - FINANCING ACTIVITIES

         During 1996 the Company borrowed $4,352,000 under debt obligations.
The Company made payments of $1,724,000 under debt obligations for a net cash
provided of $2,628,000. During 1995 the Company issued common stock subject to
put agreements for $482,000, borrowed $125,000 and repaid $1,393,000 of debt
obligations.

CAPITAL RESOURCES

         Through its acquisitions the Company has banking relationships with
several banks; however, the Company is seeking to consolidate its borrowing and
increase its borrowing capacity with one or more large financial institutions
following the Annual Meeting of Shareholders. See the discussions of "Financing
Arrangements" and "Liquidity" above.

CAPITAL REQUIREMENTS

         During 1997, the Company expects that its requirements for capital
expenditures will not be significant. Through route consolidations and greater
use of in-store service personnel, the Company anticipates minimal increases in
its delivery fleet. The Company does anticipate additional capital expenditures
for store fixtures; however, these fixture increases have historically
generated enough additional revenue and gross margin to pay for the fixture
costs with one year.

OPERATIONAL MEASURES

         The receivables of the Company and its Acquisition Parties increased
during 1996 due to an increase in payment time periods by certain large
retailers. This increase in receivables caused a corresponding increase in
trade payables. The Company is engaged in collection efforts to reduce the
number of days outstanding of receivables. In addition, through the Company's
SMARTS system and related inventory management and purchasing consolidation
efforts, the Company anticipates reducing the amount of inventory and the
related vendor payables for a given level of revenue.

OPERATING SYNERGIES

         The acquisition transactions will enable the Combined Company to
successfully leverage its investment in its sophisticated and proprietary
SMARTS System (which stands for Sales Magazine Analysis React Transmit System),
acquired from the Scherer Affiliates, for more efficient product allocation and
higher per store revenue. The SMARTS System develops a Distribution Rate Base
("DRB") which is used by publishers to reach targeted customer growth. The
Company charges for the use of the DRB information, and this offsets the cost
of higher levels of service and the use of improved technology. Management
believes that, as the Combined Company continues to expand, the SMARTS System,
which provides a unique competitive advantage, will improve same store revenue
as it is introduced to new retail locations and will provide a critical
competitive advantage over other regional wholesalers in obtaining important
new accounts.

         In addition to the proprietary SMARTS System, the Combined Company's
current and future high impact marketing programs provide an important
competitive advantage by customizing magazine displays to utilize otherwise
wasted space in retail stores. The implementation of these programs has
historically enabled the Company to improve sales levels by as much as 20-25%
when the programs are introduced into a given retail location. The Company
expects that the introduction of the high impact marketing program to
Acquisition Parties not currently using it will improve sales levels of the
Combined Company.

                                       16
<PAGE>   19

         The consolidation of the contiguous Acquisition Parties enables the
Company to achieve considerable cost savings and operating efficiencies through
the elimination of redundant overhead and the consolidation of overlapping
facilities. Subsequent to September 28, 1996 the Company converted nine
warehouse locations in the states of Michigan, Ohio and Indiana to delivery
depots by consolidating the majority of office and warehouse functions in three
locations. The cost to eliminate this redundant overhead and to consolidate was
insignificant and was reflected in the periods in which the changes were made.
Savings occurred from the elimination of duplicate administrative and
distribution functions, and additional savings result from spreading the costs
of technology over a larger customer base. Additionally, the consolidation of
the businesses of the Company and the Acquisition Parties will increase
purchasing power and the ability to negotiate future favorable quantity
discounts with publishers and national brokers.

         The Company anticipates that the gross margin pressure which occurred
in the latter half of 1996, will continue into 1997. The Company, and the
entire industry, has begun the process of margin recovery which includes new
negotiations with suppliers regarding pricing and discounts, changing the mix
of higher margin magazines versus lower margin magazines, and consolidating
book purchases for volume discounts. The Company anticipates a significant
recovery over time; however, the amount and timing are not quantifiable at this
point in time.

         The decline in the gross margin percent will be offset by reductions
in selling, general and administrative expenses to below 20% after the
consolidations are complete. The higher percentage of selling, general and
administrative in 1996 reflects the impact of absorbing most of the added
payroll related costs for increase in service-related product management
functions. The future reduction of this percentage will be supported by
opportunities to increase the revenue base without a corresponding increase in
the related fixed and semi-variable expenses.

         Although a definitive plan had not been adopted prior to September 28,
1996, subsequent to September 28, 1996 the Company anticipates being able
through facility consolidations to terminate approximately 15% of the total
full-time work force that was in place at September 28, 1996. During fiscal
1997 a plan was defined and has started to be implemented. The additional cost
of these terminations have not been significant and were reflected in the
period when the termination took place. The annual savings is estimated at
approximately $2.7 million, once the plan is fully implemented.

   
Financing Arrangements

          Each of the Exchange Agreements contemplates that stock or assets of
the various Acquisition Parties will be contributed to the Company in exchange
for Common Stock of the Company, valued at $1.50 per share (pre-split), and for
Senior and Subordinated Debentures. The Company has entered into a Debenture
Agreement (the "Debenture Agreement") with the Stoll Shareholders, the Michiana
Shareholders, the Klein Shareholder, the OPD Shareholders, the Scherer
Shareholders and the Scherer Affiliates pursuant to which the Debentures are
being issued. In addition, the Company will issue a $4,500,000 Subordinated
Debenture and a cash payment of $500,000 in exchange for a $5,000,000 note owned
by OPD to KDR Limited, an Ohio limited liability company whose owners include R.
David Thomas, a principal shareholder of the Company, and R. L. Richards, a
director nominee. In connection with this transaction R. David Thomas will
purchase an additional $500,000 of common stock. The Company also intends to
issue $242,211 of Senior Debentures and $94,594 of Subordinated Debentures in
connection with the acquisition of Read-Mor.

         The Senior Debentures are designated as "8% Senior Debentures Due
2002", mature on January 1, 2002, and bear interest at the rate of 8% per
annum from July 1, 1996, provided, however, that Senior Debentures issued
pursuant to the Klein Exchange Agreement will begin to accrue interest from
August 24, 1996. Interest is payable quarterly on January 1, April 1, July 1
and October 1, commencing on the date of final closing of a particular
acquisition. Principal on the Senior Debentures will be paid quarterly on each
interest payment date in accordance with the schedule and priority set forth in
the Debenture Agreement, commencing on April 1, 1997.

         The Subordinated Debentures are designated as "10% Subordinated
Debentures due 2004", mature on January 1, 2004 and bear interest at the rate
of 10% per annum from July 1, 1996, provided, however, that Subordinated
Debentures issued pursuant to the Klein Exchange Agreement will begin to accrue
interest from August 24, 1996. Interest is payable quarterly on January 1, April
1, July 1 and October 1, commencing on the date of final closing of a
particular acquisition. Principal on the Subordinated Debentures is to be paid
quarterly on each interest payment date in accordance with the schedule and
priority set forth in the Debenture Agreement, commencing on April 1, 1999.

         The Debenture Agreement pursuant to which the Senior and Subordinated
Debentures are being issued to the Acquisition Parties requires the Company to
use its best efforts to refinance the Senior Debentures, which are expected to
aggregate approximately $39,920,000. In connection with such refinancing, the
Company has engaged Bank of Boston as financial advisor to the Company's Board
of Directors. Bank of Boston has been requested to provide fee based services
in connection with the development of a financing restructuring for the
transactions and with the related placement of debt and/or equity securities.
The Company has had discussions with several different entities, introduced to
the Company by Bank of Boston, interested in providing such financing. However,
the Company has not received a final financing commitment nor reached a final
agreement regarding such financing.

         The Company also plans to restructure existing Company and Acquisition
Parties bank and third party debt and to consolidate banking relationships. The
Company further plans to expand bank lines of credit to support working capital
and other requirements of the Combined Companies. The Company has had
discussions with several different entities interested in providing such
financing to the Combined Companies. At present, the Company has not entered
into any new debt and/or equity placements through the Bank of Boston or
through any other financial adviser in connection with the transactions.

    
COMMITMENTS AND CONTINGENCIES

         The Company has entered into long-term contracts (generally three
years) with its most important customers. These contracts resulted in the gross
margin reductions of 1996.

         The Company has been named as a defendant in various litigation
matters. Management intends to vigorously defend these outstanding claims. The
Company believes it has an adequate accrual for these claims and that any
current pending or threatened litigation matters will not have a material
adverse impact on the Company's results of operations or financial conditions.
(See Note 13 to the Consolidated Financial Statements.)

INFLATION

         The impact of inflation on wholesale and retail operations is
difficult to measure. The Company cannot easily pass magazine costs on to
customers unless the publisher increases the cover price of the periodical, so
it must control inflation at the point of purchase. The Company is engaged in
activities to control these costs. As a result, the Company believes that the
effect of inflation, if any, on the results of operations and financial
condition has been minor and is expected to remain so in the future.

                                       17
<PAGE>   20

SEASONALITY

         The sale of magazines, books, and newspapers is subject to minimal
seasonality.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - SAFE HARBOR CAUTIONARY
STATEMENT

         This Management's Discussion and Analysis of Financial Condition and
Results of Operation contains forward looking statements as defined by the
Private Securities Litigation Reform Act of 1995 (the Reform Act). These
forward-looking statements express the beliefs and expectations of management
regarding UNIMAG's future results and performance and include, without
limitation, the following: statements concerning the Company's outlook for 1997
and 1998; the Company's plans for the acquisition transactions to be voted on
at the next Annual Meeting of Shareholders; the Company's plans for revenue
growth and operational cost reductions; the Company's plans for future
acquisitions (as discussed in "Background" above); the Company's plans for
future consolidations and changes in properties (as discussed in "Operating
Synergies" above); the Company's plans for future financing and refinancing (as
discussed in "Financing Arrangements" above); the Company's future operational
strategies to improve operating cash flow; and other similar expressions
concerning matters that are not historical facts.

         Such statements are based on current expectations and involve a number
of known and unknown uncertainties that could cause the actual results,
performances, and/or achievements of the Company to differ materially from any
future results, performances, or achievements, expressed or implied by the
forward-looking statements, and any such statement is qualified by reference to
the following cautionary statements. In connection with the safe harbor
provisions of the Reform Act, the Company's management is hereby identifying
important factors that could cause actual results to differ materially from
management's expectations including, without limitation, the following: delays
in the date of the Annual Meeting of Shareholders; the ability to obtain
required levels of product for all geographic markets; the acquisition or
disposition of additional entities; the ability of the Company to obtain
financing and refinancing; the timing of the implementation of operating
synergies; further changes in the industry; the factors discussed in paragraph
four of the Opinion in the Report of Independent Public Accountants and the
related Note 2 to the financial statements; and other risks described from time
to time in the Company's Securities and Exchange Commission filings. The
Company undertakes no obligation to publicly release any revisions to these
forward looking statements for events occurring after the date hereof or
reflect any other unanticipated events.

                                       18
<PAGE>   21



ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                            UNITED MAGAZINE COMPANY

                           ==========================


                       CONSOLIDATED FINANCIAL STATEMENTS

                AS OF SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

                         TOGETHER WITH AUDITORS' REPORT

                                       19
<PAGE>   22



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of
   United Magazine Company:

We have audited the accompanying consolidated balance sheets of United Magazine
Company (an Ohio corporation) and Subsidiaries as of September 28, 1996 and
September 30, 1995, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Magazine
Company and Subsidiaries as of September 28, 1996 and September 30, 1995, and
the results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring operating losses, is
currently in default under certain of its acquired debt agreements, acquired
certain unpaid taxes due the Internal Revenue Service and has current
liabilities in excess of current assets of approximately $45 million. These
matters raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.

                                 ARTHUR ANDERSEN LLP
Columbus, Ohio,
   January 13, 1997.

                                       20
<PAGE>   23
                            UNITED MAGAZINE COMPANY

                          Consolidated Balance Sheets
                As of September 28, 1996 and September 30, 1995

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
             ASSETS                                        1996               1995
-------------------------------------------------------------------------------------
<S>                                                  <C>                   <C>
CURRENT ASSETS:
  Cash                                               $   2,546,785            755,338
  Accounts receivable, net of allowance
  for doubtful accounts of $2,985,000 in
    1996 and $63,000 in 1995                            29,835,357          2,869,762
  Inventories                                           35,746,922          3,096,982
  Marketable securities                                    473,556                 --
  Notes receivable from related parties                  1,352,646                 --
  Prepaids and other                                     1,335,458             58,007
                                                     -------------        -----------
     Total current assets                               71,290,724          6,780,089
                                                     -------------        -----------
PROPERTY AND EQUIPMENT, at cost:
  Land                                                     290,706                 --
  Building and improvements                              2,260,740                 --
  Furniture and equipment                                6,174,452            590,068
  Vehicles                                               4,789,336            479,628
  Leasehold improvements                                   522,336            101,616
                                                     -------------        -----------
                                                        14,037,570          1,171,312
  Less - accumulated depreciation and amortization      (1,585,503)          (475,501)
                                                     -------------        -----------
     Total property and equipment, net                  12,452,067            695,811
                                                     -------------        -----------
ASSETS HELD FOR SALE                                     1,239,605                 --
                                                     -------------        -----------
INVESTMENT IN WILMINGTON:
  Business option                                               --          3,202,672
  Note and interest receivable from Wilmington                  --            524,375
                                                     -------------        -----------
     Total investment in Wilmington                             --          3,727,047
                                                     -------------        -----------
OTHER ASSETS:
  Sales orders and regulation records, net of
   accumulated amortization of $847,475 in 1996 and
   $593,236 in 1995                                        423,720            677,959
  Costs in excess of net assets acquired,
   net of accumulated amortization of $911,143
   in 1996 and $153,965 in 1995                        154,518,179            452,616
  Covenants not to compete, net of amortization of
   $105,362 in 1996                                        538,777                 --
  Notes receivable from related parties                  1,788,645                 --
  Prepaids                                               5,501,703                 --
  Other assets, net                                      3,617,107                 --
                                                     -------------        -----------
     Total other assets                                166,388,131          1,130,575
                                                     -------------        -----------
     Total assets                                    $ 251,370,527        $12,333,522
                                                     -------------        -----------
</TABLE>

(Continued on next page)

                                       21
<PAGE>   24



                            UNITED MAGAZINE COMPANY

                          Consolidated Balance Sheets
                As of September 28, 1996 and September 30, 1995

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
     LIABILITIES AND SHAREHOLDERS' EQUITY               1996                       1995
--------------------------------------------------------------------------------------------
<S>                                               <C>                        <C>
CURRENT LIABILITIES:
 Current portion of debt obligations                $10,822,386                   $113,076
 Current portion of Senior debentures                 3,329,295                         --
 Short-term borrowings * related parties              6,206,853                         --
 Accounts payable                                    70,302,971                  4,763,693
 Accrued expenses                                    12,762,143                    801,291
 Accrued interest on debentures                       1,041,006                         --
 Income taxes payable                                 1,534,602                         --
 Reserve for gross profit on sales returns           10,474,409                    541,499
                                                   ------------                -----------
       Total current liabilities                    116,473,665                  6,219,559

LONG-TERM DEBT OBLIGATIONS                            9,247,711                    137,500

DEBENTURES:
 o Senior                                            36,590,520                         --
 o Subordinated                                      18,559,707                         --

DEFERRED COMPENSATION PLAN                            1,231,041                         --

ACCRUED PENSION OBLIGATION                            2,115,478                         --

POST-RETIREMENT OBLIGATION                            1,450,015                         --

DEALER ADVANCE PAYMENTS AND OTHER                       146,938                     38,750
                                                   ------------                -----------
       Total liabilities                            185,815,074                  6,395,809
                                                   ------------                -----------
COMMITMENTS AND CONTINGENCIES

COMMON STOCK SUBJECT TO PUT AGREEMENTS, 
  482,140 shares                                      4,329,287                  3,804,185
SHAREHOLDERS' EQUITY:
 Common stock, no par value, 53,250,000 shares
  authorized, 4,283,506 and 4,250,056 issued,
  and 2,676,034 and 2,642,585 outstanding
  (including shares subject to Put Agreements),
  in 1996 and 1995, respectively
                                                            250                        250
 Paid-in capital                                     43,079,563                 42,701,846
 Obligation to issue shares (4,349,476)              65,242,138                         --
 Treasury stock, at cost                                (16,998)                   (16,998)
 Unrealized loss                                        (31,219)                        --
 Minimum pension liability adjustment                  (108,204)                        --

 Retained deficit                                   (46,939,365)               (40,551,570)
                                                   ------------                -----------
       Total shareholders' equity                    61,226,165                  2,133,528
                                                   ------------                -----------
       Total liabilities and shareholders'
         equity                                    $251,370,527                $12,333,522
                                                   ------------                -----------
</TABLE>

         The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.

                                       22
<PAGE>   25



                            UNITED MAGAZINE COMPANY

                     Consolidated Statements of Operations
         For the Years Ended September 28, 1996 and September 30, 1995

<TABLE>
<CAPTION>
                                                      1996                   1995
                                                 ------------            ------------
<S>                                              <C>                     <C>
NET SALES                                        $ 80,232,472            $ 24,561,801

COST OF SALES                                     (60,277,303)            (17,918,114)
                                                 ------------            ------------
   Gross profit                                    19,955,169               6,643,687

SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES                                        (22,203,107)             (6,426,601)

DEPRECIATION AND AMORTIZATION                      (2,511,654)               (553,971)

INCOME (LOSS) FROM INVESTMENT IN WILMINGTON          (163,192)                 32,405

WRITE-OFF OF ASSETS                                        --                (534,102)
                                                 ------------            ------------
LOSS FROM OPERATIONS                               (4,922,784)               (838,582)
                                                 ------------            ------------
+OTHER INCOME (EXPENSES), net:
  Interest expense                                 (1,781,141)               (347,809)
  Interest income                                     182,123                  25,103
  Prudential settlement, net (Note 13.a.)                  --               2,352,170
  Accounts payable settlement gain                         --                 665,135
  Other, net                                          134,007                   8,163
                                                 ------------            ------------
         Total other income (expenses), net        (1,465,011)              2,702,762
                                                 ------------            ------------
INCOME (LOSS) BEFORE TAXES                         (6,387,795)              1,864,180

INCOME TAXES                                               --                      --
                                                 ------------            ------------
NET INCOME (LOSS)                                $ (6,387,795)           $  1,864,180
                                                 ============            ============
WEIGHTED AVERAGE SHARES OUTSTANDING                 3,225,729               2,390,318
                                                 ============            ============
EARNINGS (LOSS) PER SHARE                        $      (1.98)           $        .78
                                                 ============            ============
</TABLE>

         The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.

                                       23
<PAGE>   26



                            UNITED MAGAZINE COMPANY

                Consolidated Statements of Shareholders' Equity
         For the Years Ended September 28, 1996 and September 30, 1995

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                      Number of                                           
                                       Shares         Treasury                            Obligation
                                     Outstanding        Shares    Common      Paid-in      to Issue      Treasury    Unrealized
                                    (post-split)    (post-split)   Stock      Capital     Common Stock     Stock        Loss
--------------------------------------------------------------------------------------------------------------------------------
<S>                                       <C>         <C>           <C>     <C>             <C>         <C>          <C>
BALANCE, October 1, 1994                   2,139,199   1,606,413     $250    $ 42,467,355    $      --    $     --    $      --

 Issuance of common stock                     22,305          --       --         223,046           --          --           --
 Purchase of shares previously issued         (1,059)      1,059       --              --           --     (16,998)          --
 Shares earned under consulting agreement:
 - 22,315 shares earned in 1994
   issued in 1995                                 --          --       --        (223,046)          --          --           --
 - 23,449 shares earned but not
   issued in 1995                                 --          --       --         234,491           --          --           --
 Net income                                       --          --       --              --           --          --           --

BALANCE, September 30, 1995                2,160,445   1,607,472      250      42,701,846                  (16,998)

 Issuance of common stock                     33,449          --       --         325,491           --          --           --
 Obligation to issue 4,349,476
 shares of common stock                           --          --       --                   65,242,138          --           --
 Shares earned under consulting agreement:
 - 23,449 shares earned in 1995
   issued in 1996                                 --          --       --        (234,491)          --          --           --
 - 25,096 shares earned but not
   issued in 1995                                 --          --       --         286,717           --          --           --
 Unrealized loss on investments held for sale     --          --       --              --           --          --      (31,219)

 Minimum pension liability adjustment             --          --       --              --           --          --           --
 Net loss                                         --          --       --              --           --          --           --

BALANCE, September 28, 1996                2,193,894   1,607,472     $250    $ 43,079,563   $65,242,138   $(16,998)    $(31,219)
---------------------------------------------------------------------------------------------------------------------------------


-------------------------------------------------------------------------------------
                                          Minimum
                                          Pension
                                          Liability        Retained
                                          Adjustment        Deficit          Total
-------------------------------------------------------------------------------------
<S>                                      <C>             <C>                 <C>
BALANCE, October 1, 1994                   $      --     $(42,415,750)       $51,855

 Issuance of common stock                         --              --         223,046
 Purchase of shares previously issued             --              --         (16,998)
 Shares earned under consulting agreement:
 - 22,315 shares earned in 1994
   issued in 1995                                 --              --        (223,046)
 - 23,449 shares earned but not
   issued in 1995                                 --              --         234,491
 Net income                                       --       1,864,180       1,864,180

BALANCE, September 30, 1995                       --     (40,551,570)      2,133,528

 Issuance of common stock                         --              --         325,491
 Obligation to issue 4,349,476
 shares of common stock                           --              --      65,242,138
 Shares earned under consulting agreement:
 - 23,449 shares earned in 1995
   issued in 1996                                 --              --        (234,491)
 - 25,096 shares earned but not
   issued in 1995                                 --              --         286,717
 Unrealized loss on investments held for sale     --              --         (31,219)

 Minimum pension liability adjustment       (108,204)             --        (108,204)
 Net loss                                         --      (6,387,795)     (6,387,795)

BALANCE, September 28, 1996                $(108,204)   $(46,939,365)   $ 61,226,165
-------------------------------------------------------------------------------------
</TABLE>


The accompanying notes to consolidated financial statements are an integral
                       part of these consolidated statements.

                                       24
<PAGE>   27



                            UNITED MAGAZINE COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

         FOR THE YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

                          INCREASE (DECREASE) IN CASH

<TABLE>
<CAPTION>
                                                        1996           1995
                                                   -----------    -----------
<S>                                                <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)                                 $(6,387,795)   $ 1,864,180
 Adjustments to reconcile net income (loss)
  to net cash provided by (used in)
  operating activities -
  (Income) loss on investment in Wilmington            163,192        (32,405)
  Consulting fee paid with common stock                286,717        234,491
  Gain from settlement of accounts payable                  --       (665,134)
  Accretion of interest on common stock
   subject to put agreements                           525,102        238,161
  Depreciation and amortization                      2,512,574        553,971
  Loss due to write-off of certain assets                   --        534,102
Changes in certain assets and liabilities, net of the
 effect of acquisitions and investments-
 (Increase) decrease in certain assets:
   Accounts receivable                              (2,017,379)      (394,760)
   Inventories                                        (464,131)        (7,146)
   Prepaids and other current assets                   496,841       (242,557)
   Other assets                                       (191,532)            --
   Long-term prepaids                               (2,002,379)            --
 Increase (decrease) in certain liabilities:
   Accounts payable                                  2,053,805          6,912
   Accrued expenses                                  2,924,386       (135,536)
   Reserve for gross profit on sales returns           892,598        123,728
   Dealer advance payments                             108,188          5,525
   Other liabilities                                   (73,289)            --
   Deferred compensation                              (109,181)            --
   Accrued pension obligation                          (95,526)            --
   Post-retirement obligation                           59,611             --
                                                   -----------    -----------
      Net cash provided by operating activities     (1,318,198)     2,083,532
                                                   -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Additions to property and equipment                (1,066,245)      (153,480)
 Cash (used) for acquisitions, net of cash acquired  1,200,069       (495,167)
 (Issuance) of receipt of payment on notes
   receivable from related parties                     347,941       (500,000)
                                                   -----------    -----------
      Net cash used in investing activities            481,765     (1,148,647)
                                                   -----------    -----------
</TABLE>

(Continued on next page)

                                       25
<PAGE>   28



                     CONSOLIDATED STATEMENTS OF CASH FLOWS

         FOR THE YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

                          INCREASE (DECREASE) IN CASH
                                  (Continued)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                                                           1996           1995
-------------------------------------------------------------------------------
<S>                                                 <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
 Borrowings under debt obligations                  $ 4,352,266    $   125,000
 Payments on debt obligations                        (1,724,386)    (1,392,753)
 Proceeds from issuance of common stock
  subject to put agreements                                  --        482,140
 Buy-back of common stock                                    --        (16,998)
       Net cash provided by (used in)
          financing activities                        2,627,880       (802,611)

NET INCREASE IN CASH                                  1,791,447        132,274

CASH, beginning of year                                 755,338        623,064

CASH, end of year                                   $ 2,546,785    $   755,338

Supplemental Disclosure of Cash Flow Information
------------------------------------------------
 Cash paid during the year for interest             $   532,000    $   133,000
 Cash paid during the year for taxes                $    49,000    $    20,000
-------------------------------------------------------------------------------
</TABLE>

Supplemental Schedule of Noncash Investing and Financing Activities
-------------------------------------------------------------------
1996
----
The company made six significant acquisitions in 1996. In addition, they
disposed of an insignificant subsidiary. See Note 4 for additional discussion.

1995
----
See Note 12 for discussion on common shares issued for the investment in
Wilmington.

The Company acquired approximately $545,500 of assets and assumed $45,500 of
liabilities through the acquisition of Reader's Choice, Inc.

The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.

                                       26
<PAGE>   29
                            UNITED MAGAZINE COMPANY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                AS OF SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995

(1)   ORGANIZATION

United Magazine Company (UNIMAG or the Company) is an Ohio corporation which
was incorporated on April 8, 1964. UNIMAG (the Parent) is a holding company.
All operations for the year were conducted through its wholly-owned
subsidiaries. UNIMAG also has three inactive subsidiaries.

Business of UNIMAG

UNIMAG operates wholesale operations primarily in the northern midwest (Ohio,
Michigan, Northern Indiana and Western Pennsylvania), Connecticut and North
Carolina. From various distribution facilities UNIMAG distributes approximately
3,500 different titles of magazines to its customers on a weekly basis. UNIMAG
also distributes books and various other sundry items. In addition to the
wholesaling business, UNIMAG has 31 retail bookstores. These retail operations
generated approximately $3 million in revenue during fiscal 1996.

UNIMAG grew significantly during 1996 by the acquisition of six wholesalers
(two in the second quarter and four in the fourth quarter).  Consideration for
these acquisitions was in the form of cash, notes payable, debentures and
common stock of the Company. Due to the significant amount of shares to be
issued, for the fourth quarter acquisitions, UNIMAG is required to obtain
shareholder approval. The Company is currently preparing the Proxy Statement
for the shareholder vote at the Annual Meeting of Shareholders. Upon approval
the exchanges will occur and legal titles will pass. However, the Company has
already received the necessary approvals from two significant shareholders who
have agreed to vote their shares, which represent a majority of the outstanding
shares, in favor of the acquisitions discussed above as well as a 1 for 10
reverse stock split. Since the approval is assured, the Company has reflected
the reverse stock split for all periods presented and the effect of the
acquisitions.

(2)   MANAGEMENT PLAN

Certain recent developments have had an adverse effect on the Company's
short-term liquidity. At September 28, 1996 the Company has current liabilities
in excess of current assets of approximately $45 million.  Through its
acquisitions, the Company has banking relationships with several banks;
however, the Company is seeking to consolidate its borrowing and increase its
borrowing capacity with one or more large financial institutions following the
Annual Meeting of Shareholders.  Because of the delays in the final closing of
the acquisition transactions, certain of the acquisition companies are in
default with their loans, and one of the acquisition companies has an
outstanding obligation to the Internal Revenue Service of approximately $1.2
million.  It is anticipated that the bank defaults will not be cured until
after the expected refinancing following the Annual Meeting of Shareholders.
Obligations in default have been classified as current liabilities in the
accompanying financial statements.

The Company is pursuing several alternative forms of additional financing.
This additional financing includes approximately $40 million to refinance the
Senior Debentures and an approximate $25 million line of credit to consolidate
present bank borrowings and to provide

                                       27
<PAGE>   30

additional working capital. This financing alternative cannot be finalized
until after the Company's Annual Meeting of Shareholders scheduled for late
March, 1997 and there is no assurance that the Company will be able to secure
this financing.

The Company has a history of operating losses; however, the losses in 1992
through 1994 were from operations unrelated to the periodical wholesale
distribution industry. The Company's Connecticut wholesale operations have
operated profitably since 1993. The prior annual financial statements of
Michiana, Stoll, Scherer Affiliates and Klein (the fourth quarter acquisitions)
indicates profitable operations as family businesses through 1995. During 1996
with the increased levels of competition the entire industry experienced
reductions in profitability due to margin reduction and increased costs of
providing higher levels of customer service.

The Company plans to return to historical industry profit levels by the end of
1998. Through the consolidation of the geographically contiguous acquisitions,
management expects the combined company to achieve considerable cost savings
and operating efficiencies through the elimination of redundant overhead and
the consolidation of overlapping markets and facilities. Duplicate
administrative and distribution functions are being eliminated, and the costs
and benefits of technology are being spread over a larger customer base.
Additionally, management expects that the consolidation of the businesses of
the Company and the acquisition parties should increase purchasing power and
the ability to negotiate favorable quantity discounts with publishers and
national brokers. UNIMAG's pro forma annual sales for 1996 are $281 million
which management believes makes UNIMAG the fifth largest periodical wholesaler
in the country based on published sales volumes.

During the latter part of 1996 the Company began to consolidate its
distribution operations with a corresponding reduction in general and
administrative expenses. The Company will continue these consolidation efforts
in 1997 with further expense reductions from operating synergies.  During 1997
the Company plans to increase revenue per customer by the implementation of
proven high impact marketing in all newly acquired locations and by utilization
of the Company's proprietary SMARTS system for more efficient and targeted
distribution of product. The Company also is engaged in negotiations with the
publisher for better pricing.

During 1997 the Company anticipates improved cash flow. In 1996, signing
bonuses were paid to certain customers to secure multi-year contracts. In many
cases, these contracts covered a period of three years. Hence, cash outflows
will be substantially less in 1997. In addition, the Company expects that its
requirements for capital expenditures will not be significant. Through route
consolidations and greater use of in-store service personnel, the Company
anticipates minimal increases in its delivery fleet. The Company does
anticipate additional capital expenditures for store fixtures; however, these
increases in fixtures have historically generated enough additional revenue and
gross margin to pay for the fixtures cost within one year.

The Company also is engaged in an effort to reduce the average days outstanding
of current accounts receivable and has negotiated with suppliers for more
favorable payment terms on vendor payables.

In summary, the Company believes that its current strategic plan will produce a
new financial partner and positive cash flow. There can be no assurance that
this plan will succeed. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.

(3)   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) Fiscal Year - UNIMAG follows the practice of a 52/53 week fiscal year which
    ends on the Saturday nearest to September 30.

                                       28
<PAGE>   31

(b) Principles of Consolidation - All intercompany balances and transactions
    have been eliminated in the consolidated financial statements.

(c) Estimates - The preparation of financial statements in conformity with
    generally accepted accounting principles requires management to make
    estimates and assumptions, such as allowance for doubtful accounts and the
    reserve for gross profit on sales returns, that affect the reported amounts
    of assets and liabilities and disclosure of contingent assets and
    liabilities at the date of the financial statements and the reported
    amounts of revenues and expenses during the reporting period. Actual
    results could differ from their estimates.

(d) Inventories - Inventories are valued at the lower of cost or market as
    determined by the first-in, first-out (FIFO) cost method.

(e) Marketable Securities - The Company accounts for its marketable securities
    in accordance with Statement of Financial Accounting Standards No. 115. The
    Company's investment in marketable securities represent securities that are
    "available for sale". The securities have been recorded at fair market
    value as of September 28, 1996 with an unrealized loss of $31,219 reported
    as a separate component of shareholders' equity.

(f) Property and Equipment - Property and equipment are stated at cost or
    acquired cost (fair value) after acquisition. Depreciation is provided on
    the straight-line method over the estimated useful lives of the related
    assets as follows:

<TABLE>
<CAPTION>
                                    Years
                                    -----
      <S>                           <C>
      Building                       31
      Building improvements          10
      Furniture and equipment       5-7
      Vehicles                      3-5
</TABLE>

    Leasehold improvements are being amortized on a straight-line basis over
    the life of the lease.

    The cost and accumulated depreciation and amortization applicable to assets
    retired are removed from the accounts and any resulting gain or loss on
    disposition is recognized in income. Betterments, renewals and
    extraordinary repairs that extend the life of the asset are capitalized;
    other maintenance and repair costs are expensed as incurred.

(g) Asset Held For Sale - The Company has an airplane that was part of the
    fourth quarter acquisition. The value assigned represents its estimated
    fair value.

(h) Prepaid Signing Bonuses - The Company has entered into supplier contracts
    with many of their large chain customers. As part of the contract UNIMAG
    paid the customer an up-front payment (signing bonus) for obtaining a
    multi-year contract. These payments are being amortized straight-line
    against revenue over the life of the contract.

(i) Excess of Cost Over Net Assets Acquired - Excess of cost over net assets
    acquired (goodwill) consists of the excess of the cost to acquire an entity
    over the estimated fair market value of the net assets acquired. Goodwill
    is amortized on a straight-line basis over 40 years. The Company
    continually evaluates whether events and circumstances have occurred that
    indicate the remaining estimated useful life of goodwill may warrant
    revision or that the remaining balance of goodwill may not be recoverable.
    In evaluating whether goodwill is recoverable, the Company estimates the
    sum of the expected future cash flows, undiscounted and without

                                       29
<PAGE>   32

    interest charges, derived from such goodwill over its remaining life.  The
    Company believes that no such impairment existed at September 28, 1996.

(j) Revenue Recognition - Revenues and cost of sales from the sale of
    periodical inventories are recognized upon shipment to the customers.
    However, due to the significant volume of merchandise returns that are
    typical in the periodical industry, the Company records a reserve for
    merchandise returned. This reserve is based on the gross profit margin on
    merchandise sold in the current period that is estimated to be returned by
    the customers in the subsequent period. The Company receives credit for the
    cost of such returns from the publisher.

(k) Discounts and Rebates - The Company records all discounts and rebates given
    to the customer on the accrual basis of accounting as a reduction in net
    sales.

(l) Income Taxes - The Company follows SFAS No. 109 "Accounting for Income
    Taxes" (SFAS 109). (See Note 8).

(m) Fair Value of Financial Instruments - The carrying amounts of current
    assets and liabilities approximate their fair market value because of the
    short-term maturity of these financial instruments. The fair market value
    of long-term debt is discussed further in Note 5.

(n) Weighted Average Shares Outstanding - The weighted average number of shares
    outstanding for earnings per share purposes is calculated using common
    shares issued, shares earned but not issued under a consulting agreement,
    shares obligated to be issued as well as common shares subject to put
    agreements. All years presented have been restated to reflect the 1 for 10
    reverse split. The shares to be issued upon shareholders approval at the
    Annual Shareholders Meeting have been included in the weighted average
    shares outstanding from the respective acquisition dates as discussed in
    Note 4.c.

(o) Concentration of Credit Risk - Financial instruments that potentially
    subject the Company to concentrations of credit risk consist principally of
    trade accounts receivable. The majority of the Company's revenues are
    derived from chain and independent grocery stores through the territories
    discussed in Note 1. No one chain represents a significant portion of the
    Company's revenue.

(p) Reclassifications - Certain reclassifications have been made to the
    consolidated financial statements for 1995 to conform with the 1996
    presentation.

(4)   ACQUISITIONS AND DISPOSITIONS

The Company has made significant acquisitions through three different
transactions as described below.

   
a.    In January 1996, the Company exercised its option for a nominal amount to
    acquire the outstanding stock of Service News Company of Wilmington, North
    Carolina. See Note 12 for additional discussion and the purchase of the
    business option in 1995. The following summarizes the allocation of fair
    values of the various assets and liabilities acquired: 

         Cash                                      $    67,856
         Accounts receivable, net                      663,726
         Inventories                                   842,292
         Property and equipment                        337,654
         Note receivable - prior owners                 47,456
         Other assets                                    2,950
         Sales O&R records                              76,950
         Covenants not to compete                      425,000
         Goodwill                                    5,206,159
         Accounts payable and accrued expenses      (3,161,768)
         Advanced from UNIMAG                       (3,403,542)
         Intercompany payable                         (289,242)
         Reserve for gross profit on sales returns    (357,000)
         Debt obligations                             (458,490)
                                                   ------------
         Option exercise price                      $        1
                                                   ============

b.      Also in January 1996, the Company acquired the operations of Triangle
    News Company (Triangle) in Pittsburgh Pennsylvania. UNIMAG acquired Triangle
    for approximately $2.7 million in a transaction accounted for as a purchase.
    The consideration given was in the form of cash, seller financing and 10,000
    shares of UNIMAG stock (estimated fair value of $9.10 per share). The amount
    of goodwill recorded from this transaction was approximately $6.9 million.
    The results of operations for Triangle were included in the consolidated
    statement of operations from January 1996 forward. Triangle generated
    revenue of $18 million during the nine month period ended September 28,
    1996. The following summarizes the allocation of purchase price based on the
    fair values of the various assets and liabilities acquired:

         Cash                                      $    39,768
         Accounts receivable, net                    3,223,097
         Inventories                                 1,951,043
         Property and equipment                        627,623
         Receivables from related parties              244,356
         Other assets                                   12,509
         Sales O&R records                             162,215
         Goodwill                                    6,857,280
         Accounts payable and accrued expenses      (6,626,452)
         Advanced from related parties                (126,739)
         Reserve for gross profit on sales returns    (712,800)
         Deferred benefit obligations               (2,985,084)
                                                   ------------
         Total purchase price                      $ 2,666,816
                                                   ============
        
    
c.     As part of a regional rollup, at the end of July 1996 the Company
    acquired the periodical and management operations of Northern News Company,
    Ohio Periodical Distributors, Inc., MacGregor News Agency, Inc., Wholesalers
    Leasing Corp. and Scherer Companies (collectively referred to as the Scherer
    Affiliates), Michiana News Services, Inc. (Michiana) and The Stoll Company.
    In the middle of September the rollup was completed by the addition of Klein
    News Company and affiliates. UNIMAG also acquired a small retail bookstore
    chain (Read-Mor Books, Inc.). This bookstore chain acquisition was not
    considered significant for financial reporting purposes.

        
    UNIMAG acquired the various companies with UNIMAG common stock of $65.2
    million (estimated fair value of $15 per share) and subordinated debentures
    of $58.5 million in a transaction accounted for as a purchase. In the
    Company's preliminary allocation of the purchase price to the fair value of
    net assets acquired, goodwill of approximately $143 million was recorded.
    The results of operations for these entities were included in the
    consolidated results of UNIMAG from their respective acquisition dates
    forward (July 31, 1996 and September 14, 1996), and represented
    approximately $30 million of the consolidated revenues for the year ended
    September 28, 1996. The following summarizes the allocation of purchase
    price based on the fair values of the various assets and liabilities
    acquired:


         Cash                                        $     3,462,905   
         Accounts receivable, net                         21,362,374
         Inventories                                      29,905,639
         Property and equipment                           11,132,211
         Receivables from related parties                  3,012,859
         Other assets                                      5,023,552
         Deposits and prepaid signing bonuses              3,350,692
         Note receivable - related party                   3,756,686
         Investments                                       7,500,000
         Covenants not to compete                            219,139
         Goodwill                                        140,834,624
         Accounts payable and accrued expenses           (63,553,227)
         Advanced from related parties                      (400,000)
         Reserve for gross profit on sales returns        (8,248,918)
         Income taxes payable                               (978,243)
         Accrued pension and post retirement obligations  (1,848,342)  
         Other liabilities                                  (913,799)  
         Debt obligations                                (23,083,850) 
                                                         ------------         
         Total purchase price                           $130,534,302
                                                        =============
    
               

                                     30
<PAGE>   33

   
    
d.  In July 1996, UNIMAG sold the operations of Readers Choice for
    approximately $500,000 which approximated book value. This disposition was
    not considered significant for financial reporting purposes.

The following unaudited pro forma summary presents the revenues, net income and
earnings per share from the combination of operations of the Company and the
significant acquisitions. The pro forma information is provided as if each
acquisition had occurred at the beginning of fiscal 1995. The pro forma
information is provided for information purposes only.  It is based on
historical information and does not purport to reflect the results that would
have occurred had the acquisition occurred on October 1, 1994.

<TABLE>
<CAPTION>
      in 000's, except EPS        1996           1995
      --------------------      --------       --------- 
   <S>                          <C>            <C>
   Net Revenue                  $280,751       $276,756
   Net Income (Loss)             (21,523)          (877)
   EPS                          $  (3.09)      $   (.13)
</TABLE>

(5)   DEBT OBLIGATIONS

The components of the Company's debt obligations at September 28, 1996 and
September 30, 1995 are as follows:

    Short Term Borrowings
    ---------------------
    The Company has short term demand notes as of September 28, 1996 as
    follows:

<TABLE>
<CAPTION>
                                                 1996
                                              ----------
           <S>                                <C>
           (a) Note from shareholder          $5,000,000
           (b) Other related parties           1,206,853
                                              ----------
                                              $6,206,853
                                              ==========
</TABLE> 

    (a)  The Company has a $5 million note from a company affiliated with a
         shareholder. This loan was assumed as part of the acquisitions made
         during the fourth quarter. The note accrues interest at 11.75% and is
         collateralized by 5 million shares of UNIMAG stock.  This note is
         anticipated to be converted to a subordinated debenture in 1997.

                                       31
<PAGE>   34

    (b)  The other related party loans are primarily with employees of
         Michiana. These notes are unsecured and accrue interest at a rate of
         8%.

    Long term Debt Obligations
    --------------------------
<TABLE>
<CAPTION>
                                                    1996        1995
                                                -----------   ---------
    <S>                                         <C>           <C>
    (a) Lines of Credit                         $ 7,778,192    $ 63,076
    (b) Term Loans with financial institutions    1,973,453          --
    (c) Seller Financing                          8,998,622          --
    (d) Loans from Related Parties                  320,132     187,500
    (e) Notes with Publishers                       999,698          --
                                                -----------   ---------
    Total                                        20,070,097     250,576
    Less: current portion                       (10,822,386)   (113,076)
                                                -----------   ---------
    Long-term portion of debt obligations        $9,247,711   $ 137,500
                                                ===========   ========= 
</TABLE>

    (a)  At September 28, 1996, the Company has five lines of credit with
         banks. The lines of credit bear interest at rates ranging from prime
         (8.25% at September 28, 1996) to 9.25%. The balance outstanding at
         September 28, 1996 and September 30, 1995 was $7,778,192 and $63,076,
         respectively. Maturities of the lines vary from February 1997 through
         December 31, 1998. The weighted average interest rates on the
         outstanding borrowings under the lines of credit as of September 28,
         1996 and September 30, 1995 were approximately 8.3% and 9.75%,
         respectively.

    (b)  The Company has various term loans with financial institutions.  These
         loans accrue interest at rates ranging from 6.75% to 9.5%.  Principal
         payments are made on a monthly basis. These loans expire at various
         times during 1997 through April 1999.

    (c)  Seller financing represents the portion of the consideration
         associated with an acquisition that was funded by the seller.  These
         obligations relate primarily to prior acquisitions made by the
         companies that were acquired by UNIMAG during the fourth quarter of
         1996. These loans bear interest at rates ranging from 5.8% to 11.0%.
         Principal payments are made primarily on a monthly basis. These loans
         expire at various times during 1999 through August 2007.

    (d)  The loans from related parties are from the former shareholders of
         Michiana. These notes were assumed as part of the acquisition.  These
         notes accrue interest at rates ranging from 8% to 10% and principal
         and interest payments are made monthly. The notes expire at various
         times during April 1997 through April 1998.

    (e)  The Company has entered into agreements with two significant vendors
         which converted certain publisher payables balances into secured term
         loans. These loans accrue interest at 10%. Principal and interest
         payments are made monthly with the loans expiring at various times
         during 1997 through 1999.

    The above loans are collateralized by substantially all of the assets of
    the Company. These debt obligations contain various financial covenants,
    among them being maintenance of minimum net worth and working capital. The
    Company was in compliance with its debt covenants prior to the fourth
    quarter acquisitions. However, certain of the debt acquired contain
    financial covenants that were violated as a result of the acquisitions,
    operating losses and pre-acquisition dividends. Debt in default of
    approximately $6.3 million has been included

                                       32
<PAGE>   35

    in current portion of debt in the accompanying financial statements.  The
    Company anticipates curing the defaults in 1997.

    Michiana, acquired by the Company in the fourth quarter of 1996, has
    guaranteed debt of one of its affiliated companies. The outstanding balance
    of this guaranteed debt was approximately $882,000 at September 28, 1996.
    The bank has agreed to terminate this guarantee upon the closing of the
    acquisition transactions and the repayment by UNIMAG of outstanding
    Michiana debt totaling approximately $1.6 million. The $1.6 million of debt
    is guaranteed by two former shareowners of Michiana.

    The George R. Klein News Company, acquired by the Company in the fourth
    quarter of 1996, has guaranteed approximately $320,000 of debt of another
    company that is 50% owned by George R. Klein.

    Shareholder Debentures
    ----------------------

    As part of the acquisitions described in Note 4, the Company issued Senior
    and Subordinated debentures. The components of these debentures are as
    follows:

<TABLE>
<CAPTION>
       ------------------------------------------------------------------
       Shareholder Group                          Senior    Subordinated
       ------------------------------------------------------------------
       <S>                                   <C>             <C>
       Stoll Company                         $16,800,000     $ 9,105,267
       Michiana                                3,500,000       2,334,256
       Scherer Affiliates                      9,197,604       1,527,309
       Klein                                  10,180,000       5,498,281
       Read-Mor                                  242,211          94,594
       Total                                  39,919,815      18,559,707

       Less: current portion                  (3,329,295)             --
       Long-term portion of debentures       $36,590,520     $18,559,707
       ------------------------------------------------------------------
</TABLE>

         The senior debentures began to accrue interest on July 1, 1996 (August
    24, 1996 for Klein) at 8% payable quarterly commencing on the closing date
    of the acquisitions (Annual Shareholders Meeting).  Quarterly principal
    payments are scheduled from April 1, 1997 through January 1, 2002 in
    accordance with the schedule and priority set forth in the Debenture
    Agreement. The senior debentures are secured by all of the assets of the
    Company, however, these debentures are subordinated to substantially all of
    the long-term debt obligations discussed above. The entire $16,800,000 of
    Stoll Senior debentures must be paid before any other debentures may be
    paid.

         The subordinated debentures began to accrue interest on July 1, 1996
    (August 24, 1996 for Klein) at 10% payable quarterly commencing on the
    closing date of the acquisitions (Annual Shareholders Meeting).  Quarterly
    principal payments are scheduled from April 1, 1999 through January 1,
    2004. However, no payments on subordinated debentures are allowed until all
    senior debentures have been paid. The subordinated debentures are secured
    by all the assets of the Company, however, these subordinated debentures
    are subordinated to the senior debentures.

                                       33
<PAGE>   36



Maturities of all debt obligations at September 28, 1996, are as follows:

<TABLE>
<CAPTION>
                     Long-Term
  Fiscal Year     Debt Obligations    Debentures           Total
  -----------     ----------------    ----------           -----   
   <S>            <C>                <C>                <C>
      1997        $10,822,386        $ 3,329,295        $14,151,681
      1998          2,408,000          7,489,000          9,897,000
      1999          2,271,000         10,171,000         12,442,000
      2000          1,193,000         12,027,000         13,220,000
      2001            485,000         12,027,000         12,512,000
   Thereafter       2,890,711         13,436,227         16,326,938
                  -----------        -----------        -----------
      Total       $20,070,097        $58,479,522        $78,549,619
                  ===========        ===========        ===========
</TABLE>

The carrying value of the long-term debt obligations described above
approximates its fair value because of the significant portion that is either
short-term or has been recently priced or is variable rate based that is
repriced frequently.

(6)   LEASE COMMITMENTS

    UNIMAG or its subsidiaries have entered into operating lease agreements for
facilities and certain vehicles and equipment. Expenses related to these leases
were as follows:

<TABLE>
              <S>            <C>
              -------------------------
              1996           $1,344,000
              -------------------------
              1995           $  384,000
              -------------------------
</TABLE>

    As of September 28, 1996, the future minimum annual rental commitments of
lease agreements are as follows:

<TABLE>
<CAPTION>
                    Related
    Fiscal Year      Party             Other             Total
    -----------      -----             -----             -----
    <S>           <C>               <C>               <C>
      1997        $  871,000        $1,458,000        $2,329,000
      1998           604,000         1,077,000         1,681,000
      1999           434,000           628,000         1,062,000
      2000           112,000           535,000           647,000
      2001             7,000           404,000           411,000
    Thereafter            --           201,000           201,000
                  ----------        ----------        ---------- 
      Total       $2,028,000        $4,303,000        $6,331,000
                  ==========        ==========        ==========
</TABLE>

(7)   COMMON STOCK

As discussed in Note 1, the shareholders will vote on a proposal at the annual
shareholders meeting for a 1 for 10 reverse split. Since a favorable outcome of
the proxy vote is assured, all share information has been reported post split.

The Company is obligated to issue 4,349,476 shares valued at $15 per share
pursuant to the acquisition agreements entered into during the fourth quarter
of 1996. These shares will be issued after the annual shareholders meeting
scheduled for March, 1997.

                                       34
<PAGE>   37

The Company also issued 10,000 shares valued at $9.10 per share as part of the
Triangle News Company acquisition discussed in Note 4.

The Company issued 23,449 shares under a consulting agreement, see Note 11.a.

(8)   INCOME TAXES

The provision (benefit) for income taxes for the years ended September 28, 1996
and September 30, 1995 is as follows:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------
                                                     1996          1995
---------------------------------------------------------------------------
<S>                                              <C>             <C>
Current tax expense:
 Federal                                         $        --     $   6,000
 State                                                    --            --
Deferred tax expense (benefit):
  (Increase) decrease in deferred tax assets      (2,555,000)      497,000
  Increase (decrease) in valuation allowance       2,555,000      (503,000)
                                                 -----------     ---------
     Income tax provision                        $        --     $      --
                                                 ===========     ========= 
</TABLE>

    The Company has provided deferred income taxes at a 40% tax rate which
represents a blended statutory federal and state income tax rate. The types of
differences between the tax bases of assets and liabilities and their financial
reporting amounts that give rise to significant portions of deferred income tax
assets and liabilities are: reserve for gross profit on sales returns, property
and equipment asset valuation, deferred compensation, amortization life of
intangibles and certain taxes.

    The Company's net deferred tax assets have been fully reserved due to the
uncertainty of future realization.

    The difference between the statutory tax rate and the effective rate of
zero is due primarily to the benefit of the net operating losses generated that
may not be realized in the future.

    As of September 28, 1996, UNIMAG has approximately $47 million of Federal
net operating loss (NOL) carryforwards for tax purposes. The amount that UNIMAG
can utilize each year is restricted due to multiple changes in ownership. The
NOL carryforwards will expire in the years 2003 through 2011.

   
    As a result of the application of the Section 382 limitation, a significant
amount of pre-change net operating losses of the UNIMAG Group should expire
unutilized. The Company estimates that over $20 million of such net operating
losses should expire unutilized as a result of such limitation (assuming that
the limitation is not increased in respect of any built-in gains).
    

    At September 28, 1996, UNIMAG had income taxes payable of $1,534,602.  This
relates primarily to Michiana's tax assessment and interest due to the Internal
Revenue Service as a result of unfavorable tax settlements relating to years
1994 and prior that was assumed by UNIMAG. See Note 2 for discussion of payment
strategy.

(9)   BENEFIT PLANS

    The Company's Connecticut subsidiary participates in a union sponsored,
collectively bargained, multi-employer pension and welfare plan. Contributions
are determined in accordance with the provisions of negotiated labor contracts
and generally are based on the number of labor-hours worked. The Company made
contributions of approximately $30,000 in fiscal year 1996 and $28,000 in
fiscal year 1995.

Under the provisions of the Multi-Employer Pension Plan Amendments Act of 1980
covering such pension plans, certain events, such as withdrawal or plan
termination, may cause the Company to be obligated to fund its share of any
unfunded vested benefits in this plan. Data concerning the funded status or
this multi-employer plan is not available.

                                       35

<PAGE>   38
      Union Pension Plan

      As a result of the acquisition of Triangle and Klein, the Company has
      defined benefit pension plans covering various employees whose retirement
      benefits are subject to collective bargaining. The benefits are based on
      years of service multiplied by the yearly amount of basic retirement
      income. The Company's funding policy for the plan is to make the minimum
      annual contribution required by applicable regulations.

      The following table sets forth the plan's funding status and amounts
      recognized in the Company's financial statements at September 28, 1996:

<TABLE>
      ---------------------------------------------------------------------  
      Actuarial present value of benefit obligations:
      ---------------------------------------------------------------------  
      <S>                                                       <C>

        Vested benefit obligations                              $ 3,429,833
        Non-vested benefit obligations                              177,718

      Accumulated benefit obligation (ABO)                      $ 3,607,551
      Projected benefit obligation (PBO)                        $ 3,607,551
      Plan assets at fair value                                  (1,793,548)
      Projected benefit obligation in excess of plan assets       1,814,003
      Unrecognized net loss                                        (108,204)
      Accrued pension cost                                        1,705,799
      Additional minimum pension liability                          108,204
      Accrued pension and minimum liability                     $ 1,814,003
      ---------------------------------------------------------------------  
</TABLE>

      The key assumption used in determining the projected benefit obligation
      in 1996 were as follows:

<TABLE>
          <S>                                            <C>
          ---------------------------------------------------
          Discount rate                                    7%
          ---------------------------------------------------
          Expected long-term rate of return on assets      8%
          ---------------------------------------------------
</TABLE>

      Net pension cost for 1996 included the following components:

<TABLE>
      <S>                                                       <C>
      --------------------------------------------------------------------
      Asset loss                                                $ (89,027)
      --------------------------------------------------------------------
      Service cost                                                 56,961
      Interest cost on projected benefit obligation               179,674
      Actual return on plan assets                                 (9,125)
          Net pension cost                                      $ 138,483
      --------------------------------------------------------------------
</TABLE>

      Funding of the plan was approximately $200,000 in 1996.

      Other Pension Plan

      The former Stoll Company has certain non-collective bargaining employees
      who are covered by a noncontributory defined benefit pension plan. The
      benefits are based on years of service and the employee's compensation.
      The Company's policy is to make the minimum annual contribution required
      by applicable regulations. In connection with the acquisition of The
      Stoll Company by UNIMAG, The Stoll Company elected to terminate the plan.
      The following table sets forth the plan's funding status at September 28,
      1996.

                                       36
<PAGE>   39



<TABLE>
<CAPTION>
      --------------------------------------------------------------------
      Actuarial present value of benefit obligations:
      --------------------------------------------------------------------
      <S>                                                     <C>
         Vested benefit obligations                           $ 2,747,977
         Non-vested benefit obligations                           240,453

      Accumulated benefit obligation (ABO)                    $ 2,988,430

      Projected benefit obligation (PBO)                      $ 2,988,430
      Plan assets at fair value                                (2,686,955)
      Accrued pension liability                               $   301,475
      --------------------------------------------------------------------
</TABLE>

      The key assumptions used in determining the projected benefit obligation
      at September 28, 1996 were as follows:

<TABLE>
               <S>                                          <C>
               Discount rate                                  8%
               Expected long-term rate of return on assets
                                                              8%
</TABLE>

      Other Postretirement Benefit Plans

      In addition to the Company's defined benefit pension plan, certain of the
      Company's subsidiaries sponsor defined benefit postretirement health care
      and life insurance plans that provides postretirement health care and
      life insurance benefits to full-time collective bargaining employees who
      have met required service periods with the Company and have attained age
      requirements as defined in the plan. The plans contains certain
      cost-sharing features such as deductibles and coinsurance.

      The following table presents the plan's funded status reconciled with
      amounts recognized in the Company's balance sheets:

<TABLE>
<CAPTION>
                                                            September 28,
                                                                1996
                                                            -------------
      <S>                                                   <C>

      Accumulated postretirement benefit obligations:
       Current retirees                                       $  685,176
       Other fully eligible participants                         242,825
       Other active plan participants                            515,613
                                                              ----------

      Accumulated postretirement benefit obligations in
       excess of plan assets                                   1,443,614
      Unrecognized net gain                                        6,401
                                                              ----------
      Accrued postretirement benefit cost                     $1,450,015
                                                              ==========

      Net periodic postretirement benefit cost includes the following
      components:


          Service cost                                           $27,610
          Interest cost                                           66,455
                                                                 -------
          Net periodic postretirement benefit cost               $94,065
                                                                 =======
</TABLE>

      The weighted-average annual assumed rate of increase in the per capita
      cost of covered benefits (i.e., health care cost trend rate) for 1996 is
      11% for participants less than age 65 and 8.5% for participants 65 and
      older. The rate is assumed to decrease over 10 years to 6% and remain at
      that level thereafter. The health care cost trend rate assumption has a
      significant effect on the amounts reported. For example, increasing
      assumed health care cost trend rates by one

                                       37
<PAGE>   40

      percentage point in each year would increase the accumulated
      postretirement benefit obligation as of September 28, 1996 by
      approximately $163,000 and the aggregate of the service and interest cost
      components of net periodic postretirement benefit cost for 1996 by
      approximately $15,000.

      The weighted-average discount rate used in determining the accumulated
      postretirement benefit obligation was 7.5% at September 28, 1996.

      Retirement Savings Plan

      Effective April 1994, the Company adopted a defined contribution
      retirement savings plan for substantially all nonbargaining employees.
      The provisions of the plan allow employees to contribute 15% of their
      salary with a maximum of $9,240 for pre-tax contributions. The plan
      provides for a matching contribution at the discretion of the Company.
      Employees are fully vested in the Company's contributions after 3 years.
      The Company has not made any significant contributions to the Plan.

      Deferred Compensation Plan

      An officer and former owner of The Stoll Company is entitled to receive
      deferred compensation pursuant to an agreement in effect prior to the
      acquisition. The agreement provides for the payment of $250,000 a year
      for a five year period beginning in 1997 and $100,000 a year for a period
      of seven years thereafter. The present value of this obligation of
      approximately $1.4 million has been reflected in the accompanying
      financial statements.

(10)  SIGNIFICANT VENDORS AND CUSTOMERS

      The Company purchased approximately 75% of its product from four
      publishers. These publishers represent approximately 70% of accounts
      payable.

(11)  RELATED PARTY TRANSACTIONS

      The Company had the following related party transactions:

      (a) In 1993, the Company's Connecticut subsidiary entered into a
          consulting agreement with MDI (a Northeast wholesaler) and its
          majority shareholder for a period of 10 years. During the first five
          years of the agreement, the consulting fee is calculated as 2% of the
          subsidiaries agency net sales and is payable 1% in cash and 1% in
          UNIMAG stock (valued at $10 per share). During the last five years of
          the agreement, the consulting fee is calculated as 1% of Yankee's
          agency net sales, payable in cash.

          The expense was $537,677 and $468,982 in 1996 and 1995, respectively.
          The $537,677 is to be paid in cash of $250,960 and through the
          issuance of 25,096 shares of UNIMAG stock (post-reverse split).

      (b) The Company has a consulting agreement with a former officer of the
          Connecticut subsidiary for eight years commencing June 27, 1994.
          During years one and two, the consultant will be paid $4,000 per
          month. During years three through five, the consultant will be paid
          $5,000 per month. During years six through eight, the consultant will
          be paid $8,500 per month. The Company expensed $51,000 in 1996 and
          $48,000 in 1995.

      (c) At September 28, 1996, the Company had notes receivable from related
          parties of approximately $3,100,000. Approximately $3,000,000 of this
          amount is due from Hall of Cards and Books, Inc., which is owned by
          the former shareholders of Michiana, and which operates retail stores
          that are supplied by the Michiana division of UNIMAG. The interest
          rate on the

                                       38
<PAGE>   41

          note is 9.25% and the repayment of the note is secured by a pledge of
          the stock of Hall of Cards and Books, Inc. and the UNIMAG stock
          received by the Michiana shareholders as part of UNIMAG's acquisition
          of Michiana. The remaining notes receivable are due from former
          shareowners of Michiana. Amounts due in 1997 pursuant to these
          agreements is approximately $1,353,000, with the remaining amounts
          due in equal installments over the subsequent four years.

      (d) The Company has lease agreements for facilities from the former
          owners of the fourth quarter acquisitions. These lease payments will
          be approximately $187,000 in 1996.

(12)  INVESTMENT IN WILMINGTON

      On April 5, 1995, UNIMAG entered into a Services and Management Agreement
      with Service News Company of Wilmington, North Carolina ("Wilmington")
      and SNPC, Inc. ("SNPC"), both North Carolina corporations, and with Doris
      R. Marshall, the individual shareholder of the Companies residing in
      Martinsville, Virginia, ("Shareholder") pursuant to which UNIMAG managed
      the operations commencing April 1, 1995. In consideration, UNIMAG was
      entitled to receive a management fee.

      Also, on April 5, 1995, the Shareholder and other family members of the
      Shareholder purchased 482,140 (post-split) shares of UNIMAG stock at $1
      per share for a total cost of $482,140. These shares are subject to
      future Put Agreements by the Shareholder and Shareholder family members
      commencing 24 months after the date of the Agreement, see Note 13.b. At
      April 1, 1995, the present value of the putable shares was $3,566,024.
      The Put Agreements are guaranteed by UNIMAG and by one of its
      subsidiaries and are part of the consideration for the option to purchase
      the stock of Wilmington. The Company accretes the put value of these
      shares with the offset to interest expense. The charge to interest
      expense for the accretion was $525,102 in 1996 and $238,161 in 1995.

      The Agreement granted UNIMAG an option to purchase all of the outstanding
      stock of Wilmington through the life of the Agreement. The option price
      was originally estimated at $482,140 but was subject to additional
      adjustment upon resolution of contingent provisions of the agreement.
      UNIMAG had no legal right to these shares until they exercised their
      option. As of September 30, 1995, the Company had not exercised its
      option and treated the option as an investment and accounted for the
      investment under the equity method.

      In conjunction with the Agreement, UNIMAG loaned Wilmington $500,000.
      This was a demand loan bearing interest at prime plus 1% (9.75% at
      September 30, 1995) and was payable quarterly.

      On January 12, 1996 UNIMAG exercised the business option for $1. The
      exercise price, after adjustments pursuant to the Agreement was $10. With
      the exercising of the business option on January 12, 1996, the
      transaction was accounted for as a business combination and has been
      consolidated with UNIMAG prospectively.

(13)  CONTINGENCIES AND COMMITMENTS

      (a) Prudential Settlement

          In January, 1992, UNIMAG filed an $85 million suit against Prudential
          Insurance Company of America and two of its affiliates in the United
          States District Court for the Southern District of Ohio, Eastern
          Division. The suit charges the insurer and its affiliates with
          breaching agreements to provide $10 million in equity and $40 million
          in financing for the acquisition of SNC and future acquisitions. This
          breach forced UNIMAG to make other corporate reorganization and
          financing arrangements detrimental to its business and caused it to
          suffer unanticipated related expenses and loss of profits.

                                       39
<PAGE>   42

          On January 26, 1995, the Company reached final settlement of its
          lawsuit against Prudential Insurance Company of America and two if
          its affiliates. As part of the settlement, the Company received
          $3,000,000 less related professional fees of $647,798.

      (b) Common Stock Subject to Put Agreements

          In conjunction with the Company's investment in Wilmington, 482,140
          shares of common stock are subject to Put Agreements. In the event
          the put options are exercised as they become exercisable, the related
          payments would be $167,916, $335,832, $3,599,534, $335,832 and
          $335,832 in 1997, 1998, 1999, 2000 and 2001, respectively and
          $3,161,380 in total over the succeeding 12 years.

      (c) Union Claims

          A demand has been made on the Company by the Newspaper and Mail
          Deliverers'-Publishers' Pension Fund (Fund) for withdrawal liability
          payments arising from the January 23, 1991 cessation of covered
          operations under that plan by Imperial News Company (an inactive
          subsidiary). The principal amount of the liability was assessed by
          the Pension Fund in August, 1991, to be $729,053 (payable in 16
          quarterly installments) with interest totaling $811,290 based on the
          Fund's actuarial valuation of its fiscal year ended May 31, 1989,
          plus any additional amounts (or credits) that may be due with respect
          to the Fund's fiscal years ended May 31, 1990 and 1991, pending
          completion of actuarial valuations as of those dates. The original
          withdrawal liability assessment of $811,290 plus interest has been
          reduced by escrow payments to $573,349 plus interest from August 7,
          1991, paid to the Fund from an escrow fund established pursuant to
          ERISA.

          Imperial is in the process of liquidation under Chapter 7 of the U.S.
          Bankruptcy Code, and is unable to make the required payments.
          However, under Title IV of ERISA, the Fund may proceed against
          Imperial's predecessors-in-interest (Brooklyn News Company and Dale
          News Company) or, possibly, against the Company and/or other entities
          alleged to be members of Imperial's "control group" within the
          meaning of Internal Revenue Code Section 1563(a), to collect the
          $573,349 remaining unpaid as of December 7, 1992. As required by
          ERISA, the Company has requested review and has initiated arbitration
          proceedings contesting, inter alia, the accuracy, amount and
          calculation of the Fund's assessment. The Company intends to defend
          its position vigorously.

          The Company had filed five (5) proofs of claim in the Imperial
          bankruptcy case for contingent claims that might be assessed pursuant
          to the above demand and the WARN suits, discussed hereinafter. The
          Company entered into an agreement with the Bankruptcy Trustee in the
          Imperial bankruptcy estate. In exchange for the release by the
          Company of its previously filed claims against the estate, the
          Trustee provided the Company with dollar for dollar offsets of
          $1,500,000 against claims by the Union in its lawsuit. This case has
          not yet been set for trial. The ultimate outcome of the case is
          uncertain and no provision has been made in the accompanying
          consolidated financial statements.

      (d) WARN Suit

          On February 3, 1992, the Newspaper and Mail Deliverers' Union of New
          York and Vicinity (NMDU) and certain trustees of a related Welfare
          Fund and Pension Fund filed a complaint against UNIMAG and its
          Connecticut subsidiary, MDI, MDI L.P. and two related parties
          alleging damages, in an unspecified amount, had been suffered by
          approximately 100 NMDU members formerly employed by Imperial. The
          suit, which was filed in the United States District Court for the
          Eastern District of New York, alleges that the employees were damaged
          because:

                                       40
<PAGE>   43

            (i)   the employees were not given a 60 day advance notice of the
                  permanent closing of Imperial's operation at its Melville,
                  New York facility as allegedly required by the Worker's
                  Adjustment and Retraining Notification Act (WARN);

            (ii)  Imperial failed to make certain contributions alleged to be
                  due under its NMDU labor contract to certain benefit plans;
                  and

            (iii) Imperial failed to make certain severance and other fringe
                  benefit payments alleged to be due under its NMDU labor
                  contract to such employees.

          Management believes the claims to be without merit. The Company has
          been dismissed from all claims except the WARN claim. On November 27,
          1992, the District Court dismissed the first causes of action under
          WARN as time-barred by the six month statute of limitations contained
          in the National Labor Relations Act, 29 U.S.C. Sec. 160(b), however,
          that decision was overturned on appeal. On October 20, 1995, the
          earlier dismissal of the Company from the second and third causes of
          actions was overturned. The Company has filed an answer denying the
          material allegations of the complaint and interposing a number of
          affirmative defenses. The Company intends to defend its position
          vigorously. The parties to the litigation have scheduled mediation in
          efforts to resolve this litigation without trial. The ultimate
          outcome of this case is uncertain and no provision has been made in
          the accompanying financial statements.

      (e) Taubman Suit

          The Company and its inactive subsidiary Team Logos Sportstuff, Inc.
          ("TLSI") have been named as defendants, along with several unrelated
          parties, in a suit by the Taubman Company in United States District
          Court, Eastern District of Michigan, Southern Division. The suit
          claims approximately $2 million in damages based on an assertion that
          the Company and TLSI assumed certain retail leases associated with
          companies who were part of an asset purchase by the Company in July,
          1992. Trial is scheduled for early 1997. A summary judgment was
          recently granted to the plaintiff on one count of the 14 contained in
          the complaint. While this is not yet a final appealable order, and is
          subject to revision through the date of trial, the Company has
          instructed counsel to seek reconsideration. In the event it should
          become a final judgment, the Company expects to appeal such judgment
          and intends to vigorously pursue at the appellate level. The Company
          believes that the actual liability, if any, is substantially less
          than the amount of the claim. The ultimate outcome of the case is
          uncertain.

      (f) San's Suit

          The Company has been named as defendant in a suit by two prior
          employees for breach of employment contracts, promissory estoppel and
          misrepresentation. On September 19, 1996, a jury returned a verdict
          in favor of plaintiffs in the amount of $338,500. Plaintiffs filed a
          motion seeking attorneys fees, which was granted by the court and
          then reversed upon defendants' motion for judgment notwithstanding
          the verdict. The judgment in this matter is now appealable.
          Management has instructed counsel for the Company to appeal the
          judgment when entered. Management believes that defendants have
          meritorious defenses and have instructed counsel to defend the
          litigation vigorously on appeal. The ultimate outcome of the case is
          uncertain.

      (g) Other Legal Matters

          The Company has been named as a defendant in various litigation
          matters including those discussed above. Management intends to
          vigorously defend these outstanding claims. The Company believes it
          has adequate accrued loss contingencies for all legal matters and the
          current or threatened litigation matters will not have a material
          adverse impact on the Company's financial position or results of
          operations.

                                       41
<PAGE>   44



ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

                                       42
<PAGE>   45



                                    PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors, Executive Officers, Promoters and Control Persons

The information concerning the directors, executive officers, promoters and
control persons of the Registrant are incorporated by reference from the
sections of the Company's Preliminary Proxy Statement filed in June 1997 for
its 1997 Annual Meeting of Shareholders entitled "Election of Directors --
Nominees for Election" which is filed as Exhibit 99 to this Form 10-KSB.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Securities Exchange Act of 1934 requires officers,
directors, and beneficial owners of more than 10% of the common stock of the
Company to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Based solely on its review of copies of
such forms received by it, the Company believes that all filing requirements
applicable to its officers, directors and 10% beneficial owners were complied
with.

ITEM 11.  EXECUTIVE COMPENSATION

The information regarding executive compensation is incorporated by reference
from the Section of the Company's Preliminary Proxy Statement filed in June
1997 for its 1997 Annual Meeting of Shareholders entitled "Election of
Directors -- Executive Compensation" which is filed as Exhibit 99 to this Form
10-KSB.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS

         The following tables set forth, to the knowledge of management, the
number of shares of Common Stock of the Company and the percentage of
outstanding shares of Common Stock of the Company represented thereby, owned
directly, indirectly and beneficially by: (a) each person or entity who is the
beneficial owner of more than 5% of the shares of Common Stock of the Company
outstanding as of May 30, 1997, (b) each person or entity who is expected to
become a holder of more than 5% of the outstanding shares of Common Stock of
the Company following the Acquisitions, (c) each executive officer, director,
and director nominee of the Company, and (d) all executive officers and
directors of the Company as a group. The tables reflect the anticipated
one-for-ten reverse stock split to be presented to the shareholders for
approval at the 1997 Annual Meeting of Shareholders. The following tables also
reflect the number of shares of Common Stock of the Company owned, and the
percentage of outstanding shares of Common Stock of the Company for each of the
foregoing, as adjusted to reflect completion of the Acquisitions, the future
issuance of 25,096 shares (post split) of Common Stock to MDI, the proposed
issuance of 33,333 shares (post split) to R. David Thomas, and assume the
exercise of warrants held by the Bank of Boston Connecticut to acquire 5,000
shares (post split) of Common Stock of the Company. The tables also have been
adjusted to reflect adjustments to net worth based on the preliminary unaudited
balance sheets as of June 30, 1996 for Michiana, Stoll, Read-Mor and Scherer
Affiliates (and August 23, 1996 for Klein). No other rights, options, and
warrants to acquire any of the Company's securities are presently outstanding.

                                       43
<PAGE>   46
TABLE FOR MORE THAN FIVE PERCENT (5%) SHAREHOLDERS


<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                                               After Completion
                                                                                               of Acquisitions
                                       Number of Shares of          Percentage of              ---------------
Name and Address                       Common Stock                 Common Stock          Anticipated
of Beneficial Owner                    Beneficially Owned (1)       Outstanding (2)       # of Shares     Percentage(2)
-----------------------------------------------------------------------------------------------------------------------
<S>                                    <C>                           <C>               <C>                      <C>
Ronald E. Scherer                      1,045,600(3)(5)(6)(7)(10)     39.00%           1,747,530(3)(5)          24.65%
Chairman of the Board
of Directors, President
and Chief Executive Officer
5131 Post Road
Dublin, OH 43107

Ohio Periodical                          500,000(3)(6)(7)            18.65%                   0(7)                 0%
Distributors, Inc.
5131 Post Road
Dublin, OH 43017

The Roger L. Scherer                     500,000(7)                  18.65%           1,180,498(7)             16.65%
Trust FBO Ronald E. Scherer
U/A 6/14/79
100 East Broad Street
Columbus, Ohio 43215

The Roger L. Scherer                     500,000(7)                  18.65%           1,180,498(7)             16.65%
Trust FBO Linda Hayner
Talbott U/A 6/14/79
100 East Broad Street
Columbus, Ohio 43215

Linda Hayner Talbott                     510,550(7)                  19.04%           1,212,480(7)             17.10%
5131 Post Road
Dublin, Ohio 43017

R. David Thomas                          300,000(6))                 11.19%             333,333                 4.70%
One Bay Colony
Ft. Lauderdale, FL 33308
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       44
<PAGE>   47



(continued)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                                               After Completion
                                                                                               of Acquisitions
                                       Number of Shares of          Percentage of              ---------------
Name and Address                       Common Stock                 Common Stock          Anticipated
of Beneficial Owner                    Beneficially Owned (1)       Outstanding (2)       # of Shares     Percentage(2)
-----------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                            <C>             <C>                      <C>
Richard H. Stoll, Sr.                         0(5)                        0%             391,693(5)(11)          5.53%
Director Nominee
6477 Mill Ridge Road
Maumee, Oh. 43537

George R. Klein                               0(5)                        0%           1,087,881(5)             15.35%
Director Nominee
1771 East 30th Street
Cleveland, Ohio 44114


Magazine Distributors, Inc.             153,608(8)                     5.73%             178,704                 2.52%
100 Cantiague Rock Rd.
Hicksville, NY 11801


Doris Marshal                           237,302(4)                     8.85%             237,302                 3.35%
P. O. Box 5503
Martinsville, VA 24115
------------------------------------------------------------------------------------------------------------------------
</TABLE>


TABLE FOR EXECUTIVE OFFICERS, DIRECTORS AND DIRECTOR NOMINEES
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                                               After Completion
                                                                                               of Acquisitions
                                       Number of Shares of          Percentage of              ---------------
Name and Address                       Common Stock                 Common Stock          Anticipated
of Beneficial Owner                    Beneficially Owned (1)       Outstanding (2)       # of Shares     Percentage(2)
-----------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                             <C>              <C>                      <C>
Ronald E. Scherer                     1,045,600(3)(5)(6)(7)           39.00%           1,747,530(3)(5)(7)       24.65%
Chairman of the Board
of Directors, President
and Chief Executive Officer
5131 Post Road
Dublin, OH 43107

David B. Thompson                        61,164(3)                     2.28%              61,164(3)                *
Director and Treasurer
5131 Post Road
Dublin, Ohio 43017
-----------------------------------------------------------------------------------------------------------------------
Eugene J. Alfonsi                         5,000                         *                  5,000                   *
Director
5131 Post Road
Dublin, Ohio 43017
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       45
<PAGE>   48



(continued)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                                               After Completion
                                                                                               of Acquisitions
                                       Number of Shares of          Percentage of              ---------------
Name and Address                       Common Stock                 Common Stock          Anticipated
of Beneficial Owner                    Beneficially Owned (1)       Outstanding (2)       # of Shares     Percentage(2)
-----------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                            <C>            <C>                      <C>
Thaddeus A. Majerek                           0(5)(9)                     0%             262,435(5)(9)           3.70%
Director
2232 S. 11th Street
Niles, MI 49120

Robert H. Monnaville, Jr.                39,925                         1.49%             39,925                   *
Director
62 Harper Avenue
Waterbury, CT 06705

Thomas L. Gerlacher                       1,900                            *               1,900                   *
Chief Financial Officer
5131 Post Road
Dublin, Ohio 43017

Nancy Stoll Lyman                             0(5)                         0             142,420(5)(10)          2.01%
Director Nominee
203 N. Wabash, Suite 1504
Chicago, IL 60601

William D. Parker                             0                            0                   0                    0
Director Nominee
5131 Post Road
Dublin, Ohio 43017

Richard H. Stoll, Sr.                         0(5)                         0             391,693(5)(11)          5.53%
Director Nominee
6477 Mill Ridge Road
Maumee, Ohio 43537

R.L. Richards                             1,250                            *               1,250                   *
Director Nominee
5131 Post Road
Dublin, Ohio 43017

George R. Klein                               0(4)                         0           1,087,881                15.35%
Director Nominee
1771 E. 30th Street
Cleveland, Ohio 44114
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       46
<PAGE>   49



(continued)

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
                                                                                               After Completion
                                                                                               of Acquisitions
                                       Number of Shares of          Percentage of              ---------------
Name and Address                       Common Stock                 Common Stock          Anticipated
of Beneficial Owner                    Beneficially Owned (1)       Outstanding (2)       # of Shares     Percentage(2)
-----------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                              <C>             <C>                      <C>
All Directors and Executive           1,154,839                        43.07%          3,741,198                52.78%
Officers as a Group
(6 persons before the Annual
Meeting, 11 persons after the
Annual Meeting)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

* Less than 1%

          (1) Unless otherwise specified, the beneficial owners of the shares
      of Common Stock have sole voting and investment power over such shares.

          (2) The total number of shares of Common Stock of the Company
      outstanding on the date hereof, assuming the exercise of warrants held by
      the Bank of Boston Connecticut to acquire 5,000 shares, is 2,681,034
      shares. None of the executive officers, directors or holders of more than
      5% of the Company's issued and outstanding Common Stock hold any options
      or warrants to acquire Common Stock. The anticipated number of shares
      outstanding after completion of the Acquisitions and the issuance of
      shares to MDI, L. P., assuming the exercise of warrants held by the Bank
      of Boston Connecticut to acquire 5,000 shares and the anticipated
      purchase of 33,333 shares by R. David Thomas, is 7,088,939.

          (3) For Ronald E. Scherer, includes 500,000 shares of Common Stock of
      the Company owned by OPD, which Ronald E. Scherer is entitled to vote as
      the Chief Executive Officer of OPD, but does not include 58,900 shares of
      Common Stock of the Company held of record by RAP Diversified, Inc.
      ("RAP"), the sole shareholder of which is David B. Thompson, Trustee for
      a trust of which the children of Ronald E. Scherer are the beneficiaries.
      Mr. Scherer disclaims any beneficial ownership of such shares of RAP. The
      shares of RAP are reflected as beneficially owned by Mr. Thompson.

          After the completion of the Acquisitions, includes 133,542 (1.88%)
      shares of Common Stock of the Company to be received by Northern in the
      Exchange Transactions and 48,260 (0.68%) shares of Common Stock of the
      Company to be received by Wholesalers in the Exchange Transactions. Mr.
      Scherer is expected to have voting power over the shares of Common Stock
      of the Company held by these companies by virtue of his position as Chief
      Executive Officer of these Companies.

          (4) Does not include 122,419 shares of Common Stock of the Company
      (4.57%) held by Mrs. Marshall's son, David Marshall, and 122,419 shares
      of Common Stock of the Company (4.57%) held by Mrs. Marshall's daughter,
      Miranda Marshall, all of which shares of Common Stock of the Company are
      subject to Put Agreements between the Company and each of Mrs. Marshall's
      children.

          (5) All of such shares of Common Stock of the Company are subject to
      a shareholders' voting agreement dated as of October 9, 1996, among
      Ronald E. Scherer, certain of the Scherer Affiliates, the Stoll
      Shareholders, the Michiana Shareholders and the Klein Shareholder,
      pursuant to which they have agreed to act together in the election of
      directors of the Company until such time as all principal and interest on
      the Debentures have been paid in full. The parties to the agreement have
      agreed to vote for the election to the Board of Directors of two Scherer
      representatives, two Stoll

                                       47
<PAGE>   50

      representatives, one Michiana representative and two Klein
      representatives. The agreement is limited only to the election of seven
      directors until such time as the Debentures have been paid in full.
      Parties to the Agreement do not share voting or investment power over the
      securities held by the other parties to the Agreement.

          (6) Ronald E. Scherer, OPD and R. David Thomas have agreed to vote
      their shares of Common Stock of the Company in favor of the acquisitions
      of Stoll, Michiana, Klein and the Scherer Affiliates and to vote in favor
      of the reverse stock split at the Annual Meeting of Shareholders.

          (7) 49.5% of the stock of OPD is owned by a trust established for the
      benefit of Ronald E. Scherer and his family, and 49.5% of the stock of
      OPD is owned by a trust established for the benefit of Linda Hayner
      Talbott, the sister of Ronald E. Scherer, and her family. The trusts are
      reflected in the foregoing table as beneficially owning the Company stock
      owned by OPD because the trusts are stockholders of OPD. In connection
      with the merger of OPD into the Company, the shares of stock of the
      Company owned by OPD will become treasury stock of the Company. The two
      trusts will become direct shareholders in the merger. Additionally, each
      of the trusts will become beneficial owners of the shares of stock of the
      Company owned by the other trust due to shared voting arrangements. The
      two trusts will also become beneficial owners of shares of stock received
      by Wholesalers and Northern in the Acquisitions because the trusts are
      stockholders of these entities. Mr. Scherer and Ms. Talbott are reflected
      in the table as beneficially owning the shares of stock owned by the
      trusts.

          (8) Does not include approximately 25,096 shares of Common Stock of
      the Company which will be issued in 1997 under terms of the Company's
      agreement with MDI.

          (9) Includes 262,435 (3.70%) shares of Common Stock of the Company to
      be owned by a trust over which Thaddeus A. Majerek is expected to have
      voting power as one of the co-trustees. Does not include 273,146 (3.85%)
      shares of Common Stock of the Company to be owned by another family
      trust, over which Mr. Majerek disclaims any beneficial ownership because
      he will not have voting or investment power over the Company stock.

          (10) Does not include 1,816,047 (25.62%) shares of Common Stock of
      the Company to be received by the other Stoll Shareholders, over which
      Nancy Stoll Lyman disclaims any beneficial ownership.

          (11) Does not include 1,566,773 (22.10) shares of Common Stock of the
      Company to be received by the other Stoll Shareholders, over which
      Richard H. Stoll, Sr. disclaims any beneficial ownership.

                                       48
<PAGE>   51



ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See Note 11 of the United Magazine Company consolidated financial statements as
of September 28, 1996, included in Item 8 of this report. Other information
provided under this Item is incorporated by reference from the section of the
Company's Preliminary Proxy Statement filed in June 1997 for its 1997 Annual
Meeting of Shareholders entitled "The Stock and Asset Exchanges -- Conflicts of
Interest and Related Party Transactions" which is filed as Exhibit 99 to this
Form 10-KSB.

                                       49
<PAGE>   52



                                    PART IV

ITEM 14.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

      3.1   Articles of Incorporation of the Registrant (incorporated by
            reference from 1989 Form 10-K, Exhibit I).

      3.2   Code of Regulations of Registrant (incorporated by reference from
            1989 Form 10-K, Exhibit II).

      4.1   Put Agreement between UNIMAG and Donald E. Garlikov dated July 25,
            1992 together with commitment letter between Donald E. Garlikov and
            Team Logos Corporation dated July 7, 1992 (incorporated by
            reference from Exhibit 4 to the Current Report on Form 8-K of the
            Registrant, filed August 7, 1992).

      4.2   Services and Management Agreement with Service News Company and
            SNPC, Inc. and Doris R. Marshall together with related Put
            Agreements and related documents dated April 5, 1995 (incorporated
            by reference from the Current Report in Form 8-KA, Amendment No. 3
            to Form 8-K, Current Report filed April 17, 1995 of the registrant,
            filed January 13, 1996.)

      10.1  Partnership Dissolution and Distribution Plan and Agreement between
            UNIMAG, Service News Company and Magazine Distributors, Inc.
            relative to the dissolution of MDI Distributors, Limited
            Partnership, dated May 24, 1993 (incorporated by reference from
            Exhibit 1 to the Current Report on Form 8-K of the Registrant,
            filed June 8, 1993.

      10.2  Services and Management Agreement with Service News Company and
            SNPC, Inc. and Doris R. Marshall together with related Put
            Agreements and related documents dated April 5, 1995 (incorporated
            by reference from the Current Report in Form 8-KA, Amendment No. 3
            to Form 8-K, Current Report filed April 17, 1995 of the registrant,
            filed January 13, 1996.)

      10.3  Asset Transfer and Exchange Agreement between United Magazine
            Company and Northern News Company, effective July 29, 1996
            (incorporated by reference from the Current Report on Form 8-KA
            filed September 30, 1996, See Exhibit 2 (a) therein).

      10.4  Stock Transfer and Exchange Agreement among United Magazine
            Company, Michiana News Service, Inc. and all of the shareholders of
            Michiana News Service, Inc. effective July 30, 1996 (incorporated
            by reference from the Current Report on Form 8-KA filed September
            30, 1996, See Exhibit 2 (b) therein).

      10.5  Stock Transfer and Exchange Agreement among United Magazine
            Company, The Stoll Companies and all of the shareholders of The
            Stoll Companies effective July 31, 1996 (incorporated by reference
            from the Current Report on Form 8-KA filed September 30, 1996, See
            Exhibit 2 (c) therein).

      10.6  Asset Transfer and Exchange Agreement, subsequently modified to a
            Stock Transfer and Exchange Agreement, between United Magazine
            Company and Ohio Periodical

                                       50
<PAGE>   53

            Distributors, Inc., effective August 1, 1996 (incorporated by
            reference from the Current Report on Form 8-KA filed September 30,
            1996, See Exhibit 2 (d) therein).

      10.7  Asset Transfer and Exchange Agreement between United Magazine
            Company and Wholesalers Leasing Corp., effective August 2, 1996
            (incorporated by reference from the Current Report on Form 8-KA
            filed September 30, 1996, See Exhibit 2 (e) therein).

      10.8  Stock Transfer and Exchange Agreement among United Magazine
            Company, Scherer Companies and all of the shareholders of Scherer
            Companies effective August 2, 1996 (incorporated by reference from
            the Current Report on Form 8-KA filed September 30, 1996, See
            Exhibit 2 (f) therein).

      10.9  Stock Transfer and Exchange Agreement among United Magazine
            Company, Read-Mor Bookstores, Inc. and all of the shareholders of
            Read-Mor Bookstores, Inc. effective August 2, 1996 (incorporated by
            reference from the Current Report on Form 8-KA filed September 30,
            1996, See Exhibit 2 (g) therein).

      10.10 Stock Transfer and Exchange Agreement among United Magazine
            Company, The George R. Klein News Co., Central News Co., Newspaper
            Sales Inc. and the shareholder of all of those companies,
            effective September 27, 1996 (incorporated by reference from the
            Current Report on Form 8-K filed September 27, 1996, See Exhibit 2
            therein).

                                       51
<PAGE>   54



      21    Subsidiaries of the Registrant

<TABLE>
<CAPTION>
                                                                            Name in Which
                                             Jurisdiction of                Incorporation or Business
            Name of Subsidiary               Organization                   Is Conducted
            ------------------               ------------                   ------------
     <S>    <C>                              <C>                            <C>
            Current Subsidiaries:

            Service News Company             Connecticut                    Yankee News Company

            Imperial News Co., Inc.          Delaware                       Imperial News

            Team Logos Sportstuff, Inc.      Ohio                           Team Logos and Sportstuff

            Sportstuff Marketing, Inc.       Ohio                           Sportstuff Marketing

            UNIMAG I, Inc.                   Delaware                       Team Logos and Sportstuff
            (subsidiary of Team
            Logos Sportstuff, Inc.)

            Service News Company of          North Carolina                 Service News and
            North Carolina (acquired                                        Wilmington
            January 13, 1996)

            Triangle News Company            Pennsylvania                   Triangle and Pittsburgh
            (acquired January 23, 1996)

            Acquisition Transaction Subsidiaries:

            Michiana News Service, Inc.      Michigan                       Michiana

            MacGregor News Service, Inc.     Michigan                       MacGregor

            The Stoll Companies              Ohio                           Stoll

            Ohio Periodical Distributors,    Ohio                           OPD
            Inc

            Scherer Companies                Delaware                       Scherer Companies

            Read-Mor Bookstores, Inc.        Ohio                           Read-Mor

            The George R. Klein News Co.     Ohio                           Klein

            Central News Co.                 Ohio                           Klein

            Newspapers Sales, Inc.           Ohio                           Klein

      27    Financial Data Schedules - EDGAR Filing
</TABLE>

                                       52
<PAGE>   55

<TABLE>
      <S>   <C>
      99    Excerpt of Portions of the Company's Proxy Statement for its 1997
            Annual Meeting of Shareholders which have been incorporated by
            reference into the Form 10-KSB.
</TABLE>

(b)   Reports on Form 8-K:

          On August 8, 1996 UNIMAG filed a Form 8-K for the acquisition of
          Michiana News Services, Inc., Stoll Companies, Ohio Periodical
          Distributors, Inc., MacGregor News Agency, Inc. (through the
          acquisition of the assets of Northern News Company) and Scherer
          Companies and for the acquisition of the assets of Wholesalers
          Leasing Corp. On September 27, 1996 UNIMAG filed a Form 8-KA for the
          aforementioned acquisitions.

          On September 27, 1996 UNIMAG filed a Form 8-K for the acquisition of
          George R. Klein News Co., Central News Co., and Newspaper Sales, Inc.

          On September 30, 1996 UNIMAG filed a Form 8-KA Amendment to its Form
          8-K filed August 8, 1996.

(c)   Filing Status:

          Effective October 2, 1994, UNIMAG began filing as an SB filer. The
          first such filing was the Company's Form 10-QSB for the first quarter
          of fiscal 1995.

                                       53
<PAGE>   56



                                   SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.

                                      UNITED MAGAZINE COMPANY

Date   June 16, 1997                  by  /s/
       -------------                      ---------------------------
                                          Ronald E. Scherer, President

Pursuant to the required Securities and Exchange Act of 1934, this Report has
been signed below by the following persons on behalf of the registrant and in
the capacities as stated as of the dates indicated below, and in the capacities
indicated.

  Signature                   Title                   Date
  ---------                   -----                   ----
/s/                     Chairman, President        June 16, 1997
-----------------       and Chief Executive                 ----
Ronald E. Scherer       Officer


/s/                     Director and Treasurer,    June 16, 1997
-----------------                                           ----
David B. Thompson


/s/                     Director, Vice President   June 16, 1997
-----------------                                           ----
Eugene J. Alfonsi


/s/                     Chief Financial            June 16, 1997
-------------------     Officer                             ----
Thomas L. Gerlacher     

                                       54