<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended April 30, 1996
[_] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to _________
Commission file number 0-26238
-------------------------------------------
THE SOURCE COMPANY
(Exact Name of Small Business Issuer as Specified in Its Charter)
MISSOURI 43-1710906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11644 LILBURN PARK ROAD
ST. LOUIS, MISSOURI 63146
(Address of Principal Executive Offices)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---------------- --------------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
6,382,389 (as of May 28, 1996)
- - ------------------------------
Traditional Small Business Disclosure Format (check one):
Yes No X
--------- -----------
<PAGE>
THE SOURCE COMPANY
------------------
QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED
April 30, 1996
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. Financial Statements Page
-------------------- -----
<S> <C> <C>
Unaudited Balance Sheet as of April 30, 1996 3 - 4
Unaudited Statements of Income for the three 5
months ended April 30, 1996 and 1995
Unaudited Statements of Cash Flows for the three 6
months ended April 30, 1996 and 1995
Notes to Financial Statements 7 - 11
ITEM 2. Management's Discussion and Analysis 12 - 16
------------------------------------
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 17
--------------------------------
SIGNATURE PAGE 18
EXHIBIT INDEX 19
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
THE SOURCE COMPANY
UNAUDITED BALANCE SHEET
30-APR-96
- - ------------------------------------------------------------------------------
<S> <C>
(Unaudited)
Assets
Current
Cash $ 1,073,570
Receivables:
Trade (net of allowance for 4,493,721
doubtful accounts of $82,824)
Related Parties 53,171
Employees 3,623
Interest Receivable 21,498
Notes Receivable - Officers 75,853
Prepaid Expenses 178,438
Other current assets 1,665
- - ------------------------------------------------------------------------------
Total Current Assets 5,901,539
- - ------------------------------------------------------------------------------
Office Equipment and Furniture 1,578,744
Less Accumulated Depreciation and Amortization (1,035,201)
- - ------------------------------------------------------------------------------
Net Office Equipment and Furniture 543,543
- - ------------------------------------------------------------------------------
Other Assets
Notes Receivable - Officers 241,474
Investment in limited partnership 62,956
Goodwill, net of accumulated amortization 80,968
Cash surrender value of life insurance 71,618
Other 59,335
- - ------------------------------------------------------------------------------
Total Other Assets 516,351
- - ------------------------------------------------------------------------------
Total Assets $ 6,961,433
- - ------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
THE SOURCE COMPANY
Unaudited Balance Sheet
30-APR-96
- - --------------------------------------------------------------------------------
<S> <C>
Liabilities and Stockholders' Equity
Current
Note payable - bank (Note 3) $ 1,807,715
Accounts payable 52,660
Due to Retailers (Note 10) 195,026
Accrued liabilities:
Compensation 249,669
Income taxes (Note 6) 85,464
Other 86,614
Deferred income taxes (Note 6) 117,000
Current maturities of long-term debt (Note 4) 45,165
- - --------------------------------------------------------------------------------
Total Current Liabilities 2,639,313
- - --------------------------------------------------------------------------------
Long-term Debt (Note 4) 71,787
Less current maturities (45,165)
- - --------------------------------------------------------------------------------
Total Long-term Debt 26,622
- - --------------------------------------------------------------------------------
Deferred income taxes (Note 6) 278,000
- - --------------------------------------------------------------------------------
Total Liabilities 2,943,935
- - --------------------------------------------------------------------------------
Stockholders' Equity
Preferred stock (Note 8) 200
Common stock 63,824
Additional paid-in-capital 2,928,753
Retained Earnings 1,024,721
- - --------------------------------------------------------------------------------
Total Stockholders' Equity 4,017,498
- - --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,961,433
- - --------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
THE SOURCE COMPANY
Unaudited Statements of Income
- - ------------------------------------------ ----------------------------------
Three Months Ended April 30
1996 1995
--------------------------------
<S> <C> <C>
Commission Revenues $1,917,738 $1,840,943
Merchandising Revenues 29,938 275,252
- - ------------------------------------------ ----------------------------------
1,947,676 2,116,195
- - ------------------------------------------ ----------------------------------
Cost of Commission Revenues 1,091,404 842,708
Cost of Merchandise Sold 0 171,592
- - ------------------------------------------ ----------------------------------
1,091,404 1,014,300
- - ------------------------------------------ ----------------------------------
Gross Profit 856,272 1,101,895
Selling, General and Administrative Expense 714,855 751,363
- - ------------------------------------------ ----------------------------------
Operating Income 141,417 350,532
- - ------------------------------------------ ----------------------------------
Other Income (Expense)
Interest income 8,956 3,145
Interest expense (42,322) (23,669)
Other (5,955) (1,898)
- - ------------------------------------------ ----------------------------------
Total Other Income (Expense) (39,321) (22,422)
- - ------------------------------------------ ----------------------------------
Income Before Income Taxes 102,096 328,110
Provision for Income Taxes (54,300) (247,675)
- - ------------------------------------------ ----------------------------------
Net Income $ 47,796 $ 80,435
- - ------------------------------------------ ----------------------------------
Earnings Per Share - Primary $0.01 $0.02
- - ------------------------------------------ ----------------------------------
Weighted Average of shares Outstanding - 6,607,389 5,340,000
Primary
- - ------------------------------------------ ----------------------------------
Earnings Per Share - Fully Diluted $0.01 $0.02
- - ------------------------------------------ ----------------------------------
Weighted Average of shares Outstanding - 6,937,965 5,340,000
Fully Diluted
- - ------------------------------------------ ----------------------------------
Pro Forma Amounts
Income before income taxes N/A 328,110
Provision for income taxes N/A (131,244)
- - ------------------------------------------ ----------------------------------
Net Income N/A 196,866
- - ------------------------------------------ ----------------------------------
Earnings Per Share N/A $0.03
- - ------------------------------------------ ----------------------------------
Weighted Average of Shares Outstanding N/A 6,607,389
- - ------------------------------------------ ----------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
THE SOURCE COMPANY
Unaudited Statement of Cash Flows
- - ------------------------------------------------------------------------------
<S> <C> <C>
THREE MONTHS ENDED APRIL 30
-------------------------------
1996 1995
Operating Activites
Net income (loss) 47,796 80,435
Adjustments to reconcile net cash
provided by operating activities:
Depreciation and amortization 44,566 34,396
Provision for losses on each account (16,376) 34,683
receivable
Impairment of investment in limited 5,000 5,000
partnership
Write-of related party receivable 0 10,644
Deferred income taxes (41,000) 58,000
Changes in assets and liabilities:
(Increase)/Decrease in accounts
receivable (318,363) (697,172)
(Increase)/Decrease in other assets (169,481) (107,551)
Increase/(Decrease) in A/P and
accrued expenses (529,680) 133,919
Increase/(Decrease) in amounts due
customers 111,572 0
- - ------------------------------------------------------------------------------
Cash Used in Operating Activities (865,966) (447,646)
- - ------------------------------------------------------------------------------
Investment Activities
Loans to Officers (54,033) 0
Repayments from related party 0 240,240
Advances to employees 2,815 (3,000)
Capital expenditures (53,559) (37,575)
- - ------------------------------------------------------------------------------
Cash Provided by (Used in) investing
Activites (104,777) 199,665
- - ------------------------------------------------------------------------------
Financing Activities
Sale of Common Stock 1,952,075 0
Borrowings under short-term debt
agreements 311,000 281,571
Repayments under short-term debt
agreements (217,000) 0
Other Investments (5,875) 0
Principal payments on long-term debt (19,715) (29,603)
- - ------------------------------------------------------------------------------
Cash (Used in) Provided by Financing
Activities 2,020,485 251,968
- - ------------------------------------------------------------------------------
Increase/(Decrease) in Cash 1,049,742 3,987
Cash, beginning of period 23,828 252,555
- - ------------------------------------------------------------------------------
CASH, end of period $1,073,570 $ 256,542
- - ------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
1. Related Party Transactions
The Company purchases data processing services from an employment service
company owned by certain officers of the Company. There were $109,867 and
$40,712 of such purchases made during the three months ended April 30, 1996 and
1995 respectively.
At January 31, 1995, the Company was indebted to director and stockholder
Timothy A. Braswell in the amount of $56,192. Such debt bore interest at 10.0%
and matured on January 1, 1996. The Company's indebtedness under the promissory
note was secured by an interest in the accounts receivable of the Company. This
obligation was fully satisfied on December 29, 1995.
One of the Company's stockholders also owns a majority of stock of FMG, Inc.
primarily an investing company. At April 30, 1996 the Company had a receivable
from FMG of $53,171 at prime plus .5%. On May 30, 1996, an additional payment of
$22,000 was received by the Company reducing the balance at May 31, 1996 to
$31,571.
The Company currently leases certain office space and has, in the past, leased
an airplane from partnerships controlled by stockholders of the Company. Amounts
paid for the office space were $46,575 and $45,750 for the three months ended
April 30, 1996 and 1995, respectively. Amounts paid for the airplane were $0 and
$22,063 for the three months ended April 30, 1996 and 1995 respectively.
Three officers of the Company, have from time to time, received cash advances
from the Company. The officers executed promissory notes in favor of the Company
in the aggregate amount of $317,327. Such notes bear interest at the rate of
7.34% per annum and are payable in five equal installments.
2. Notes Receivable
Officers
The notes receivable relate to advances to certain officers of the Company. The
notes bear interest at 7.34% and are payable in five equal, annual payments of
$69,488.98 beginning April 1996. These notes are current and the Company is
unaware of any circumstances that would negatively impact the collectibility of
these notes.
Other
The Company held a $120,000 unsecured, non-interest bearing note of a non-
affiliated company which required quarterly installments $6,000 through June
2000. The note was stated net of discount of $27,454 which was computed using a
10% imputed interest rate. On March 31, 1996, the debtor defaulted on the note.
Based on the financial condition of the debtor, the note was written off
resulting in a charge to selling, general and administrative expenses during the
year ended January 31, 1996 of $92,063.
7
<PAGE>
3. NOTES PAYABLE
The Company has a revolving loan credit facility providing for an aggregate
borrowings of $4,000,000 that expires on July 1, 1997. Borrowings under the
loans bear interest at the bank's prime plus 1% (effectively 9.25% at June 12,
1996) and are secured by an assignment of interest in the limited partnership
investment, personal guarantees of certain of the stockholders of the Company,
and a security agreement including equipment, fixtures, personal property,
accounts receivable, contract rights, notes and general intangibles.
Borrowings under the revolving credit facility at April 30, 1996 were
$1,807,715.
The revolving credit facility requires the Company to maintain specified levels
of working capital and net worth, restricts capital additions and the payment of
dividends, and limits additional indebtedness. The Company was in compliance
with such terms and covenants at April 30, 1996.
4. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
April 30, 1996
- - ---------------------------------------------------------------
<S> <C>
Note payable to a bank, $3,950 per month
including interest at bank's prime rate plus
.5% (effectively 8.75%) through October 1996,
collateralized by equipment 23,337
Obligations under capital leases 48,450
- - ---------------------------------------------------------------
71,787
Current Maturities 45,165
- - ---------------------------------------------------------------
Long-term Debt 26,622
- - ---------------------------------------------------------------
</TABLE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental information on interest and income taxes paid is as follows:
<TABLE>
<CAPTION>
Three Months Ended April 30, 1996 1995
- - ---------------------------------------------------------------
<S> <C> <C>
Interest 41,169 23,401
Income Taxes 220,634 90,789
- - ---------------------------------------------------------------
</TABLE>
8
<PAGE>
6. INCOME TAXES
Provision for federal and state income taxes in the statement of income consists
of the following components:
<TABLE>
<CAPTION>
April 30, 1996
- - ---------------------------------------------------------------
<S> <C>
Current
Federal 78,000
State 17,300
- - ---------------------------------------------------------------
Total Current 95,300
- - ---------------------------------------------------------------
Deferred
Federal (36,000)
State (5,000)
- - ---------------------------------------------------------------
Total Deferred (41,000)
- - ---------------------------------------------------------------
Total Income Taxes 54,300
- - ---------------------------------------------------------------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The sources of
the temporary differences and their effect on deferred taxes are as follows:
<TABLE>
<CAPTION>
April 30, 1996
- - ---------------------------------------------------------------
<S> <C>
Deferred Tax Assets 32,000
- - ---------------------------------------------------------------
Total Deferred Tax Asset 32,000
- - ---------------------------------------------------------------
Deferred Tax Liabilities
Depreciation 18,000
Accrual to cash conversion at January 31,
1995 to be recognized over four years 409,000
Other 0
- - ---------------------------------------------------------------
Total Gross Deferred Tax Liabilities 427,000
- - ---------------------------------------------------------------
Net Deferred Tax Liability 395,000
- - ---------------------------------------------------------------
</TABLE>
Included in the balance sheet:
<TABLE>
<CAPTION>
April 30, 1996
- - ---------------------------------------------------------------
<S> <C>
Deferred Tax Liability
Current 117,000
Non-Current 278,000
- - ---------------------------------------------------------------
Net Deferred Tax Liability 395,000
- - ---------------------------------------------------------------
</TABLE>
The following summary reconciles income taxes at the maximum federal statutory
rate with the effective rate with the pro forma effective rate:
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended April 30, 1996 Amount Percent
- - ----------------------------------------------------------------
<S> <C> <C>
Statutory Rate $ 34,700 34.0%
State income taxes, net of federal
income tax effect 7,000 6.8%
Non-deductible goodwill 600 0.6%
Non-deductible meals 7,600 7.4%
Non-deductible dues 3,800 3.7%
Non-deductible officers'
life insurance 9,300 9.1%
Change in A/R Reserves (5,600) -5.5%
Other, net (3,100) -3.0%
- - ----------------------------------------------------------------
Effective Income Taxes $ 54,300 53.1%
- - ----------------------------------------------------------------
</TABLE>
Other, net is primarily deferred income taxes associated with undistributed S
corporation earnings taxed on the cash basis until February 1, 1995.
7. BUSINESS COMBINATION
ACQUISITION OF THE COMPANY BY PERIODICO, INC.
On May 1, 1995, Periodico, Inc. (formerly Garner Investments, Inc.) acquired the
Company through an exchange of stock. Periodico then changed its name to The
Source Company.
Since Periodico had no significant assets or operations at the transaction date,
the transaction was accounted for as an issuance of 959,389 shares of common
stock by the Company in exchange for the net assets of Periodico, which were
recorded at Periodico's cost basis and amounted to $-0- at the transaction date.
In addition, the pre-transaction date financial statements of the combined
entity are those of the Company.
ACQUISITION OF DIXON'S MODERN MARKETING
CONCEPTS, INC. AND TRI-STATE STORES, INC.
On June 15, 1995, the Company acquired the assets of Dixon's Modern Marketing
Concepts, Inc. and Tri-State Stores, Inc.(MMC) in exchange for 300,000 shares of
common stock of The Source Company and the assumption by the Company of all the
liabilities of MMC. The transaction has been accounted for as a pooling of
interests, and, accordingly, the Company's financial statements have been
restated for all periods prior to the acquisition to include the results of
operations, financial position, and cash flows of The Source Company and MMC.
The S corporation retained earnings of MMC totaling approximately $225,000
representing undistributed earnings on June 15, 1995 net of $27,000 distributed
in lieu of taxes to shareholders, has been credited to additional paid-in
capital.
10
<PAGE>
8. PREFERRED STOCK
The Company has authorized 2,000,000 shares of $.01 par preferred stock. On
March 13, 1996, 65,000 shares were designated as 1996 Series 7% Convertible
Preferred Stock. Rights and restrictions on the remaining shares will be
established if, and when, any shares are issued.
Each share of the 1996 Series 7% Convertible Preferred Stock entitles its holder
to receive an annual dividend, when and as declared by the Board of Directors,
of $7 per share payable in shares of the Company's common stock; to convert it
into shares of common stock subject to the conversion rights described in the
Certificates Designations, Preferences and Relative Rights of 1996 Series 7%
Convertible Preferred Stock (the Certificate); to receive $100 per share in the
event of dissolution, liquidation or winding up of the Company, whether
voluntary or involuntary; and, subject to certain conditions in the Certificate,
may be redeemed at the option of the Company at a price of $100 per share or at
the option of the holder at a price of $100 per share within 30 days following
the effective date of a merger or consolidation in which the Company is not the
surviving entity.
During March 1996, the Company issued 20,000 shares of 1996 Series 7%
Convertible Preferred Stock for $100 per share. Brokers' fees totaling $120,000
were incurred in connection with the stock issuances of which $60,000 was paid
in cash and $60,000 will be paid by issuance of additional shares of preferred
stock.
On May 29, 1996, an investor converted 5,000 shares of the Company's 1996 Series
7% Convertible Preferred Stock into Common Stock of the Company. The conversion
price was $3.5533 per share, which resulted in the issuance of 140,714 shares of
Common Stock. This conversion also resulted in the issuance to certain of the
Company's financial advisors of options to purchase an additional 2,814 shares
of the common stock of the Company. This option to purchase is exercisable for a
two year period at an exercise price equal to $4.26296 per share.
9. ADVANCE PAY PROGRAM
The Company has established an Advance Pay Program. Under this program the
Company purchases from retailers, at a discount, their incentive payments
receivable from publishers. Included in trade receiveables at April 30, 1996 are
approximately $550,000 of receiveables purchased under this program.
10. DUE TO RETAILERS
The Company has arrangements with certain of its customers whereby the Company
is authorized to collect and deposit in its own accounts, checks payable to its
customers for incentive payments. The Company retains the commission related to
such payments and pays the customer the difference. The Company owes retailers
$195,026 at April 30, 1996 under such arrangements.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report contains forward looking information that is subject
to certain risks, trends and uncertainties that could cause actual results to
differ materially from those projected. Among these risks, trends and
uncertainties are those related to the ability of the Company to attract
adequate capital resources to fund its growth, and the dependence of the Company
on the terms of incentive programs over which it has no control. For a more
complete discussion of these and other risks, trends and uncertainties,
investors are directed to Exhibit 99.1 attached to the Company's Annual Report
on Form 10-KSB, a copy of which may be obtained without charge by written
request to the Company.
OVERVIEW
The Company provides monitoring, documentation and collection services
required to obtain single copy magazine sales incentive payments available for
magazine publishers to magazine and periodical retailers. The Company has
developed a contractual relationship with approximately 50,000 mass merchandise,
grocery and pharmacy stores located throughout the United States and in eastern
Canada under which it provides such services and related merchandising services
on a frequent basis, in many cases daily, and holds power of attorney from its
retailer clients to collect incentive payments from publishers. To further
expand its presence in the upper midwest and increase the number of its mid-
sized chain retailer clients, the Company acquired all of the business and
assets of Dixon's Modern Marketing Concepts, Inc. and Tri-State Stores, Inc.,
both of Chicago Heights, Illinois, in exchange for the issuance of an aggregate
of 300,000 shares of Common Stock (the "MMC/TSS Acquisition"). The MMC/TSS
Acquisition has been accounted for as a pooling of interest and, accordingly,
financial statements of the Company prepared as if the MMC/TSS Acquisition had
been consummated on February 1, 1994, have been included elsewhere in this
statement.
A majority of the Company's revenues are derived from commissions earned in
connection with the collection of incentive payments owed to the Company's
retailer clients from magazine publishers. Most such incentive payment programs
offer the retailer a cash rebate equal to a percentage of the retailer's actual
net sales of the publisher's titles which is payable quarterly upon submission
of a properly documented claim. Under agreements with its retailer clients, the
Company gathers sales data, submits claims for payment, collects payments and
receives a percentage of the aggregate payments collected on the retailers'
behalf. Claims for incentive payments are generally submitted to the publishers
quarterly based on actual net sales of the publishers' titles recorded in the
previous calendar quarter and are substantially paid during the quarter
following such submissions. Except in connection with its expanded advanced pay
program, the Company does not guaranty to its retailer clients any payments due
to the client from magazine publishers, and accordingly, does not assume any
credit risk associated with such incentive payments.
Commission Revenue is recognized at the time claims for incentive payments
are submitted to the publishers based on the amount claimed, less a reserve of
2.5% in the case of RDA claims and 5% in the case of RDP claims for
uncollectible claims. However, invoices for services rendered by the Company in
connection with the claim process are not issued until the Company receives
settlement of the claim, typically 90 to 150 days following submission of the
claim.
12
<PAGE>
Results of Operations
The following table sets forth, for the periods presented, certain
information relating to the operations of the Company expressed as a percentage
of Total Revenue:
<TABLE>
<CAPTION>
Three Months
Ended April 30,
----------------
1996 1995
---- ----
<S> <C> <C>
Commission Revenue 98.5% 87.0%
Merchandising Revenue 1.5 13.0
Total Revenue 100.0% 100.0%
Gross Profit 44.0 52.1
Selling, General &
Administrative Expenses 36.7 35.5
Operating Income 7.3 16.6
Interest Expense, Net (1.7) (1.0)
Other Income/(Expense), Net (0.3) 0.0
Earnings Before Income
Taxes 5.2 15.5
Net Income 2.5% 3.8%
</TABLE>
- - ------------------------------
Three Months Ended April 30, 1996 Compared to the Three Months Ended April 30,
1995
Total Revenue decreased $168,519, or 8.0%, from $2,116,195 in 1995 to
$1,947,676 in 1996. Commission Revenue increased $76,795 or 4.2%, from
$1,840,943 in 1995 to $1,917,738 in 1996. The increases in Commission Revenue
primarily resulted from increased retailer participation in the Company's
Advance Pay Program and increases in actual net sales of magazines and other
periodicals recorded by the Company's retailer clients through the opening of
new stores and increased same store sales. Management believes that the
increases in actual net sales achieved by its retailer clients resulted in part
from improvements in the Company's data-gathering and reporting techniques which
are believed to increase the accuracy of the sales totals reported by the
Company's retailer clients. In addition, management believes that the sales
results reported by its retailer clients were favorably impacted by Company-
suggested adjustments to merchandising programs and in-store title mix to more
accurately reflect consumer demand in the market served by each particular
store.
Merchandising Revenue decreased $245,314, or 89.2%, from $275,252 in
1995 to $29,938 in 1996. The decrease was primarily the result of the
discontinuation of time specific programs with Walgreens and Kmart that expired
prior to January 31, 1996. Merchandising Revenue consists of revenue derived by
the Company (i) from
13
<PAGE>
consulting and other services rendered to clients on other than a commission
basis, and (ii) the sale, as principal or broker, of merchandise to the
Company's retailer clients for resale by them.
Gross Profits decreased $245,623, or 22.3%, from $1,101,895 (or 52.1% of
Total Revenue) in 1995 to $856,272 (or 44.0% of Total Revenue) in 1995. These
decreases resulted primarily from the reduced merchandise revenue as well as
increased direct commission revenue expenses. This expense increase resulted
from additional personnel in the commission revenue area. These additions were
to improve services to existing clients as well as to secure and service new
clients.
Selling, general and administrative expenses ("SG&A")decreased $36,508, or
4.9%, from $751,363 (or 35.5% of Total Revenue) in 1995 to $714,855 (or 36.7% of
Total Revenue) in 1996 This decrease primarily resulted from moving overhead
functions to functions directly associated with generating and servicing
commission revenue clients.
As a result of the foregoing, Operating Income decreased approximately
$209,115 or 59.7% from $350,532 in 1995 to $141,417 in 1996.
Interest Expense, Net increased from approximately $20,524 in 1995 to
$33,366 in 1996. This increase is primarily the result of increased short term
borrowing activity necessary to fund, in part, incremental increases in working
capital attributable primarily to accounts receivable purchased under the
Advance Pay Program.
Income taxes decreased from $328,110 in 1995 to $101,096 in 1996. The
decrease is attributable to the decrease in Operating Income.
As a result, Net Income decreased $32,639 or, 40.6%, from $80,435 (or 3.8%
of Total Revenue) in 1995 to $47,796 (or 2.5% of Total Revenue) in 1996.
Liquidity and Capital Resources
The Company's requirements for cash emanate primarily from selling, general
and administrative expenses (particularly salaries, travel and data entry
expenses) incurred in connection with the solicitation of new clients and the
maintenance of existing accounts. Historically, the Company has financed its
business activities almost entirely through cash flow from operations and, to a
significantly lesser extent, short-term borrowings under available lines of
credit.
Net cash used by operating activities was approximately $865,965 for the
three months ended April 30, 1996 compared to approximately $447,646 for the
same period in 1995. The increase was primarily due to an increase in accounts
receivable as well as a decrease in accounts payable and accrued expenses.
Accounts receivable, trade, increased $318,279 or 7.5%, from $4,258,266 at
January 31, 1996 to $4,576,545 at April 30, 1996 as a result of increased
retailer participation in the Advance Pay program.
The average collection period for the three months ended April 30, 1996 was
199.9 days versus 114.0 days for the three months ended April 30, 1995. Such
change resulted primarily from increased participation in the Advance Pay
Program which results in higher accounts receivable balances. Although the
average collection period increased, the Company believes that the percentage of
revenues actually collected and the period of such collection will stabilize.
Although there can be no assurance that unexpected delays will not occur, or
that should a delay occur that it will not have a material adverse effect on the
Company's cash flow from operations, to provide necessary liquidity in the event
such an unexpected delay would occur, the Company has established a credit
facility in an amount believed to be sufficient to fund any reasonably possible
cash deficits.
14
<PAGE>
Because the Company is primarily engaged in the business of providing
services to its retailer clients, its capital expenditure requirements are
minimal. At April 30, 1996, the Company had no outstanding material commitments
for capital expenditures.
The Company has entered into an agreement with Boatmen's Bank of St. Louis,
N.A. ("Boatmen's") to make available two separate revolving loans to the
Company. All borrowings under the agreement mature on July 1, 1997. Borrowings
under the agreement bear interest at an annual rate equal to the Boatmen's
Corporate Base Rate plus 1% (9.25% at April 30, 1996) and are secured by
substantially all of the assets of the Company as well as the personal
guarantees of Messrs. S. Leslie Flegel and William H. Lee and their spouses.
The first of these loans is a working capital facility based on eligible
Accounts Receivable of the Company. The total available borrowings under this
working capital facility at April 30, 1996 was $180,285. The second facility is
reserved to fund the Company's Advance Pay Program. Under this facility the
Company is able to borrow up to $2,500,000 based on a percentage of its'
Accounts Receivable derived from the Advance Pay Program. At June 3, 1996, the
Company had $1,880,000 outstanding under this facility.
During March 1996, the Company sold an aggregate of 20,000 of its 1996
Series 7% Convertible Preferred Stock, $0.01 par value per share (the "Preferred
Stock"), in a series of transactions exempt from the registration requirements
of the Securities Act of 1933, as amended. The Preferred Stock was sold for an
aggregate purchase price of $2,000,000, resulting in net proceeds to the Company
of $1,880,000 after deducting commissions and expenses totaling $120,000 of
which $60,000 has been paid in cash and $60,000 will be paid through the
issuance of an additional 600 shares of Preferred Stock.
On February 28, 1996, the Company sold 8,000 shares of its Common Stock in
a private transaction in reliance on Section 4(2) on the Securities Act and
Regulation D promulgated thereunder. The transaction resulted in net proceeds
to the Company of $27,000, after the deduction of associated commissions and
expenses.
From time to time, the Company has made cash advances to the Company's
Chief Executive Officer totaling $270,675 at April 30, 1996. The Company has
made similar advances to the Company's Chief Operating Officer and the Company's
Executive Vice President totaling $18,794 and $14,618 at April 30, 1996,
respectively. Such advances are evidenced by promissory notes, bear interest at
the rate of 7.34%, are payable in five equal annual installments. The Company
also made advances to FMG, Inc., a North Carolina corporation in which Company
officers hold a controlling interest. Such advances bear interest at an annual
rate equal to prime plus one-half percent, are payable on demand and had a
balance at May 31, 1996 of $31,571. Each of the related parties including those
described above, which are indebted to the Company are current with respect to
all payments of principal and interest, and the Company is unaware of any
circumstance which is reasonably likely to negatively impact the collectibility
of such indebtedness.
At April 30, 1996, the Company's total long-term debt obligations were
$71,787. Of such amount, $45,165 matures in the next twelve months. The
Company anticipates that the funds necessary to satisfy these obligations will
be derived primarily from cash flows from operations.
At April 30, 1996, the Company's had an accrued deferred tax liability of
$395,000 reflecting the net tax effects of temporary differences between the
carrying amount of the assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Of this liability, $409,000
results from a change in accounting method from cash to accrual by the Company's
predecessors in connection with the formation of the Company. The Company
intends to elect to pay its deferred income tax liability in four equal annual
installments commencing in FY 1996. The Company anticipates that the funds
necessary to satisfy this tax obligation will be derived primarily from cash
flows from operations.
15
<PAGE>
The Company is currently experiencing a period of growth in its working
capital requirements as a result of increased retailer participation in the
Advance Pay Program. In addition, the Company's business plan contemplates
expansion into new services, products and geographic areas, directly or by
acquisition. Cash flows from operations and borrowings may not be sufficient in
the short-term to support increased needs. The Company has engaged a financial
advisor to introduce the Company to persons who may be interested in purchasing
equity securities issued by the Company. Although the Company has held
discussions with several such persons it has no present agreements to obtain
additional funding through the sale of its securities. No assurance can be given
that such funding will be available, or, if available, that it would be
available on terms acceptable to the Company.
16
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(A) See Exhibit Index.
(B) No current reports on Form 8-K have been filed during
the three months ended April 30, 1996.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE SOURCE COMPANY
Date June 14, 1996 /s/ Lance C. McCord
_______________________________
Lance C. McCord
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- - ----------- ----------- ----
10.12 Amendment No. 1 to Loan Agreement dated
as of May 31, 1996 with Boatmen's Bank
of St. Louis, N.A.
10.13 Term Note Dated May 31, 1996
27 Financial Data Schedule
19
<PAGE>
Exhibit: 10.12
Amendment No. 1
to Loan Agreement
by and between
The Boatmen's National Bank of St. Louis
and
The Source Company
This Amendment No. 1 to Loan Agreement (this "Amendment"), dated as of May
31, 1996, is entered into by and between THE SOURCE COMPANY ("Borrower")
and THE BOATMEN'S NATIONAL BANK OF ST. LOUIS ("Lender").
RECITALS
--------
A. Borrower and Lender have entered into that certain Loan Agreement dated as
of August 16, 1995 (the "Loan Agreement"); and
B. Borrower and Lender have agreed to amend the Loan Agreement on the terms
and conditions set forth below.
AGREEMENT
---------
In consideration of the mutual covenants and promises contained herein and
for other sufficient consideration, the receipt and adequacy of which is
hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS; SECTION REFERENCES. Capitalized terms used and not otherwise
defined herein have the meanings given them in the Loan Agreement. Section
references are to Sections of the Loan Agreement unless otherwise
indicated.
2. AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby amended,
subject to the terms and conditions set forth herein, as follows:
2.1. The first sentence of Section 2.1 of the Loan Agreement is hereby deleted
in its entirety and replaced with the following:
Lender commits to make advances to Borrower (each a "Working Capital
Advance") from time to time during the period commencing on the Effective
Date and ending at the close of business on July 1, 1997 (the "Ultimate
Revolving Maturity Date").
2.2. Section 2.2 of the Loan Agreement is hereby deleted in its entirety and
replaced with the following:
2.2. REBATE PROGRAM COMMITMENT. Lender commits to make advances to
Borrower (each a "Rebate Program Advance") from time to time during the
period commencing on the Effective Date and ending at the close of business
on the Ultimate Revolving Maturity Date. (The from time to time outstanding
principal balance of all Rebate Program Advances from the Lender is
referred to herein as the "Rebate Program Loan".) The obligation of
Borrower to repay the Rebate Program Loan shall be evidenced by a
promissory note payable
20
<PAGE>
to the order of Lender in the principal amount of $2,500,000.00 (the
"Rebate Program Note") satisfactory to Lender. Amounts applied to reduce
the Rebate Program Loan may be reborrowed as Rebate Program Advances as
provided herein, but no Rebate Program Advance will be made on or after the
Ultimate Revolving Maturity Date. At any time after an Event of Default
occurs that is not waived in writing by Lender, Lender may cancel the
Rebate Program Commitment as provided in Section 15.3.
2.3. Section 2.6 of the Loan Agreement is hereby deleted in its entirety and
replaced with the following:
2.6. DEFINITION OF WORKING CAPITAL BORROWING BASE. The "Working
Capital Borrowing Base" on any date shall be 60% of the total outstanding
principal balance of the Eligible Accounts as of the close of business on
such date, plus 75% of the total outstanding principal balance of the
Eligible Magazine Accounts as of the close of business on such date, minus
the outstanding principal balance of the Term Loan as of the close of
business on such date.
2.4. There is hereby added a new Section 2.8 of the Loan Agreement to read as
follows:
2.8 TERM COMMITMENT. Lender commits to make a term loan (the "Term
Loan") to Borrower in the amount of $275,000.00 (the "Term Commitment").
The Term Loan will be made in a single advance on the date of this
Amendment. The obligation of Borrower to repay the Term Loan shall be
evidenced by a promissory note payable to the order of Lender in a
principal amount equal to the Term Commitment (the "Term Note"). Amounts
applied in repayment of the Term Loan may not be reborrowed.
2.5. Section 3.1 of the Loan Agreement is hereby deleted in its entirety and
replaced with the following:
3.1. RATES. The Working Capital Loan, the Rebate Program Loan, and
the Term Loan shall each bear interest at a per annum rate equal to the CBR
plus one percent (1%).
2.6. The following is hereby added to the end of Section 4.3.1 of the Loan
Agreement:
Borrower may wholly prepay the Term Loan at any time, and may make
partial prepayments on the Term Loan in whole multiples of $1,000 from time
to time, but only if (i) Borrower gives Lender written notice of Borrower's
intention to make such prepayment at least one Business Day prior to
tendering the prepayment, and (ii) Borrower pays any accrued interest on
the amount prepaid at the time of such prepayment. Each partial prepayment
on the Term Loan shall be applied to the remaining principal installments
in the inverse order of their due dates.
2.7. There is hereby added a new Section 4.6 of the Loan Agreement to read as
follows:
4.6 SCHEDULED PAYMENTS ON TERM LOAN. Borrower shall pay interest
accrued on the Term Loan monthly in arrears, beginning on the first day
July,
21
<PAGE>
1996, and continuing on the first day of each calendar month thereafter,
through and including June 1, 1999 (the "Term Maturity Date"). Borrower
shall pay interest accrued on the Term Loan after the Term Maturity Date on
demand. Borrower shall repay the Term Loan in 36 monthly installments of
principal each in the amount of $7,640.00, commencing on July 1, 1996, and
continuing on the first day of each calendar month thereafter, with the
final installment in the amount of the remaining outstanding principal
balance due on the Term Maturity Date.
2.8. The following sentence is hereby added to the end of Section 12.1 of the
Loan Agreement:
The proceeds of the Term Loan shall be used solely to fund Borrower's
acquisition of the assets of Magazine Marketing, Inc.
2.9. Section 12.14.1 of the Loan Agreement is hereby deleted in its entirety
and replaced with the following:
12.14.1. BORROWING BASE CERTIFICATE. A Borrowing Base Certificate
on the thirtieth (30th) day of each month, to be dated as of the last day
of the preceding month.
2.10. Section 12.14.3 of the Loan Agreement is hereby deleted in its entirety
and replaced with the following:
12.14.3. AGINGS REPORT. At Lender's request, a report of the aging
of all Accounts and Rebates of Borrower in such reasonable detail as Lender
may require.
2.11. Section 12.14.4 of the Loan Agreement is hereby deleted in its entirety.
2.12. Section 12.14.8 of the Loan Agreement is hereby deleted in its entirety
and replaced with the following:
12.14.8. FEDERAL TAX RETURNS. At Lender's request, a copy of each
tax return filed by Borrower.
2.13. Sections 14.3 through 14.6 of the Loan Agreement are hereby deleted in
their entirety and replaced with the following:
14.3. MINIMUM INTEREST COVERAGE. The ratio of Borrower's Net
Operating Cash Flow to Interest Expense for each fiscal quarter, calculated
as of the last day of each such quarter, shall not be less than 5.0:1.
14.4. MINIMUM NET WORTH. Borrower's Net Worth shall at no time be
less than $3,500,000.00.
14.5. WORKING CAPITAL. Borrower's Working Capital shall at no time
be less than $2,500,000.00.
14.6. DEBT RATIO. The ratio of Borrower's Total Liabilities as of
the end of each fiscal quarter to its Adjusted Tangible Net Worth as of the
end of such fiscal quarter shall not exceed 1.5:1.
22
<PAGE>
2.14. The following definitions contained in Appendix 1.2 of the Loan Agreement
are hereby amended to read as follows:
"Commitments": the Working Capital Commitment, the Rebate Program
Commitment and the Term Commitment.
"Loans": on any date, the outstanding principal balance of all
Advances and the outstanding principal balance of the Term Loan.
"Notes": the Working Capital Note, the Rebate Program Note and the
Term Note.
"Rebate Program Commitment": Lender's obligation to make Rebate
Program Advances as described in Section 2.2, up to a maximum principal
amount of $2,500,000.
3. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT.
3.1. CERTAIN DOCUMENTS. As conditions precedent to the effectiveness of this
Amendment, Borrower shall, unless waived in writing by Lender, furnish or
cause to be furnished to Lender the following, all in form and substance
satisfactory to Lender:
3.1.1. AMENDMENT. This Amendment, duly executed on behalf of Borrower.
3.1.2. GOOD STANDING CERTIFICATES. Certificates of good standing of Borrower in
Borrower's states of incorporation and qualification, issued by the
Secretary of State of such states.
3.1.3. CERTIFICATE OF SECRETARY. A Certificate of the Secretary of Borrower
certifying (i) that the copies of its articles or certificate of
incorporation and bylaws delivered to Lender in connection with the
initial loan closing are accurate and complete and there have been no
amendments thereto, (ii) the resolutions adopted by the Board of
Directors of Borrower authorizing the execution, delivery and performance
of this Amendment by Borrower, and (iii) the names, titles, incumbency
and true signatures of the corporate officers who are authorized to sign
this Amendment on behalf of Borrower.
3.1.4. REBATE PROGRAM NOTE AND TERM NOTE. A new Rebate Program Note in the
amount of $2,500,000.00 in replacement of the existing $1,500,000.00
Rebate Program Note, along with a Term Note in the amount of $275,000.00.
4. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower hereby represents
and warrants to Lender that (i) this Amendment has been duly authorized
by Borrower's Board of Directors, (ii) the Person executing this
Amendment on behalf of Borrower has been duly authorized to do so; (iii)
no consents are necessary from any third parties for Borrower's
execution, delivery or performance of this Amendment, (iv) each of this
Amendment and the Loan Agreement as amended hereby constitutes the legal,
valid and binding obligation of Borrower enforceable against Borrower in
accordance with its terms, except to the extent that the enforceability
thereof against Borrower may be limited by bankruptcy, insolvency or
other laws affecting the enforceability of creditors
23
<PAGE>
rights generally or by equity principles of general application (whether
considered in an action at law or in equity), (v) except as disclosed on
the disclosure schedule attached hereto as Exhibit A and the disclosure
schedule attached to the Loan Agreement, all of the representations and
warranties contained in Section 10 of the Loan Agreement are true and
correct in all material respects with the same force and effect as if
made on and as of the date of this Amendment, except that with respect to
the representations and warranties made regarding financial data in
Section 10.12, such representations and warranties are hereby made with
respect to the most recent Financial Statements and other financial data
(in the form required by the Loan Agreement) delivered by Borrower to
Lender, and (vi) there exists no Default which is continuing and no Event
of Default has occurred under the Loan Agreement, as amended by this
Amendment.
5. EFFECT OF AMENDMENT. The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy of
Lender under the Loan Agreement or any of the other Loan Documents, nor
constitute a waiver of any provision of the Loan Agreement, any of the
other Loan Documents or any existing Default or Event of Default, nor act
as a release or subordination of the Liens of Lender under the Security
Documents. Each reference in the Loan Agreement to "the Agreement",
"hereunder", "hereof", "herein", or words of like import, shall be read
as referring to the Loan Agreement as amended hereby.
6. REAFFIRMATION. Borrower hereby acknowledges and confirms that (i) except
as expressly amended hereby the Loan Agreement and other Loan Documents
remain in full force and effect, (ii) the Loan Agreement, as amended
hereby, is in full force and effect, (iii) Borrower has no defenses to
its obligations under the Loan Agreement and the other Loan Documents,
(iv) the Liens of Lender under the Security Documents continue in full
force and effect and have the same priority as before this Amendment, and
(v) Borrower has no claim against Lender arising from or in connection
with the Loan Agreement or the other Loan Documents.
7. GOVERNING LAW. This Amendment has been delivered in St. Louis, Missouri
and shall be governed by and construed in accordance with the laws and
decisions of the State of Missouri without giving effect to the choice or
conflicts of law principles thereunder.
8. SECTION TITLES. The section titles contained in this Amendment are for
convenience of reference only and shall not be construed so as to modify
any provisions of this Amendment.
9. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. Signatures to
this Amendment may be given by facsimile or other electronic
transmission, and such signatures shall be fully binding on the party
sending the same.
10. INCORPORATION BY REFERENCE. Lender and Borrower hereby agree that all of
the terms of the Loan Documents are incorporated in and made a part of
this Amendment by this reference.
24
<PAGE>
11. STATUTORY NOTICE The following notice is given pursuant to Section
432.045 of the Missouri Revised Statutes; nothing contained in such
notice will be deemed to limit or modify the terms of the Loan Documents
or this Amendment:
ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND CREDIT OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES TO EXTEND OR RENEW
SUCH DEBT ARE NOT ENFORCEABLE. TO PROTECT YOU (BORROWER(S)) AND US
(CREDITOR) FROM MISUNDERSTANDING OR DISAPPOINTMENT, ANY AGREEMENTS WE
REACH COVERING SUCH MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE
COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN US, EXCEPT AS
WE MAY LATER AGREE IN WRITING TO MODIFY IT.
BORROWER AND LENDER HEREBY AFFIRM THAT THERE IS NO UNWRITTEN ORAL CREDIT
AGREEMENT BETWEEN BORROWER AND LENDER WITH RESPECT TO THE SUBJECT MATTER
OF THIS AMENDMENT.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first above written.
THE SOURCE COMPANY
By: /s/ Lance McCord
-------------------------------------
Print Name:
-----------------------------
Title: Chief Financial Officer
----------------------------------
THE BOATMEN'S NATIONAL BANK
OF ST. LOUIS
By: /s/ Timothy Halls
-------------------------------------
Print Name:
-----------------------------
Title:
----------------------------------
25
<PAGE>
EXHIBIT A
(DISCLOSURE SCHEDULE)
26
<PAGE>
Exhibit 10.13
REVOLVING NOTE
(Rebate Program Loan)
$2,500,000.00 St. Louis, Missouri
May 31, 1996
For value received, The Source Company, a Missouri corporation
("Borrower") promises to pay to the order of The Boatmen's National Bank of St.
Louis ("Bank"), the principal sum of Two Million Five Hundred Thousand and
00/100 Dollars ($2,500,000.00), or such lesser aggregate unpaid principal amount
as shall be outstanding under this Revolving Note (this "Note"), plus all
interest accrued thereon, on the Ultimate Revolving Maturity Date.
Borrower further promises to pay interest from the date hereof on the
balance of said principal from time to time outstanding at a per annum rate
equal to the CBR plus one percent (1%), such rate to change simultaneously with
any change in the CBR. Such interest shall be computed on the basis of a year
deemed to consist of 360 days and paid for the actual number of days elapsed.
Interest shall be payable monthly in arrears commencing on the first day of the
first full month following the Effective Date and on the first day of each month
thereafter, so long as there is any principal amount outstanding under this
Note.
Both principal and interest are payable in Dollars to Bank at its
office at 75 West Lockwood, St. Louis, Missouri 63119 Attention: Timothy J.
Halls.
This Note is issued under the terms of, and pursuant to, the
provisions of that certain Loan Agreement dated August 16, 1995, as amended,
between Bank and Borrower (as the same may be amended, supplemented, restated,
renewed, extended or otherwise modified from time to time, the "Loan
Agreement"). All capitalized terms used and not otherwise defined herein shall
have the same meanings as given them in the Loan Agreement.
This Note is secured by the Collateral described in the Loan
Documents, dated as of the Effective Date, executed by Borrower in favor of Bank
as set forth in the Loan Agreement and reference to the Loan Documents and the
Loan Agreement is made for a statement of the rights of Bank with respect to
such Collateral.
Borrower shall prepay the principal amount of this Note to the extent
provided in the Loan Agreement. Borrower may voluntarily prepay the principal
amount of this Note to the extent and upon the conditions provided in the Loan
Agreement.
This Note is the "Rebate Program Note" as described in the Loan
Agreement. The proceeds of Advances under this Note shall be used by Borrower
solely to prepay
27
<PAGE>
Rebates to customers of Borrower in accordance with Borrower's prepaid rebate
program. The date and amount of all disbursements and receipts representing
principal and receipts of interest by Bank with respect to the Rebate Program
Loan shall be recorded by Bank in the records it maintains with respect thereto.
The failure to record, or any error in recording, any of the foregoing shall
not, however, affect the obligations of Borrower under the Loan Agreement and
this Note to repay the principal amount advanced hereunder together with all
interest accruing thereon. Such record as maintained by Bank shall constitute
prima facie evidence of the amount outstanding under this Note.
Upon an Event of Default described in Section 15.1.9 of the Loan
Agreement, all of the principal outstanding hereunder and all interest accrued
thereon shall automatically become immediately due and payable. Upon the
occurrence of any other Event of Default, the principal outstanding hereunder
and all accrued interest thereon, at the option of Lender, shall become and be
immediately due and payable as provided in the Loan Agreement.
Upon the occurrence of any Default, at the option of Bank, all
outstanding principal and, to the extent permitted by law, accrued interest in
respect of this Note and all other amounts owing hereunder shall bear interest,
payable on demand, at a rate per annum of 4% in excess of the rate which would
otherwise apply hereunder, such rate to change simultaneously with any change in
the CBR. In addition, such default rate of interest shall apply after maturity,
whether by acceleration or otherwise. Such interest shall be computed on the
basis of a year deemed to consist of 360 days, paid for the actual number of
days elapsed and shall be payable on demand.
If this Note shall not be paid as herein provided and shall be placed
in the hands of one or more attorneys for collection (including representation
of Lender in connection with any bankruptcy or insolvency proceeding of
Borrower) Borrower hereby promises to pay the reasonable fees and expenses of
such attorney in addition to the full amount due hereon, whether or not
litigation is commenced.
Demand for payment, presentment, protest, notice of protest and
nonpayment, notice of dishonor, and all other notices and demands under this
Note and any and all lack of diligence in the enforcement of this Note are
hereby waived by all who are or shall become parties to this Note and the same
hereby assent to each and every extension or postponement of the time of
payment, before or after Maturity, at or after demand, or other indulgence, and
hereby waive any and all notice thereof. Every such party by becoming a party to
this Note further waives any and all defenses which such party may have based on
suretyship or impairment of collateral with respect to this Note.
No amendment, modification or waiver of any provision of this Note,
nor consent to any departure by Borrower herefrom, shall be effective unless the
same shall be in writing signed by an authorized officer of Bank, and then only
in the specific instance and for the purpose for which given. No failure on the
part of Bank to exercise, and no delay in exercising, any right under this Note
shall operate as a waiver thereof, nor shall any single or partial exercise by
Bank of any right under this
28
<PAGE>
Note preclude any other or further exercise thereof, or the exercise of any
other right. Each and every right granted to Bank under this Note or allowed to
it at law or in equity shall be deemed cumulative and such remedies may be
exercised from time to time concurrently or consecutively at Bank's option.
All notices required to be given or which may be given in connection
with this Note shall be given in the manner required for notices under the Loan
Agreement.
This Note is governed by and shall be interpreted in accordance with
the laws of the State of Missouri, without regard to choice or conflict of laws
rules.
THE SOURCE COMPANY
a Missouri corporation
By: /s/ Lance McCord
-------------------------------------
Print Name:
-----------------------------
Title: Chief Financial Officer
----------------------------------
29
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<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> APR-30-1996
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<RECEIVABLES> 4,576,545
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