<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ ] Quarterly report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended July 31, 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: 6,814,771 (as of July 31,
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
July 31, 1996
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. Financial Statements Page
-------------------- ----
<S> <C>
Unaudited Balance Sheet as of July 31, 1996 3-4
Unaudited Statements of Income for the three 5
months ended July 31, 1996 and 1995 and for the
six months ended July 31, 1996 and 1995
Unaudited Statements of Cash Flows for the three 6
months ended July 31, 1996 and 1995 and for the
six months ended July 31, 1996 and 1995
Notes to Financial Statements 7-11
ITEM 2. Management's Discussion and Analysis 12-18
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 19
SIGNATURE PAGE 20
EXHIBIT INDEX 21
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
THE SOURCE COMPANY
Unaudited Balance Sheet
31-JULY-96
- --------------------------------------------------------------------------------
(Unaudited)
<S> <C>
ASSETS
CURRENT
Cash $ 573,556
Receivables:
Trade (net of allowance for doubtful accounts of $63,806) 6,715,395
Related Parties 31,171
Employees 4,280
Interest Receivable 6,792
Notes Receivable - Officers 58,395
Prepaid Expenses 325,650
Other current assets 1,627
- --------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 7,716,866
- --------------------------------------------------------------------------------
OFFICE EQUIPMENT AND FURNITURE 1,648,414
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION (1,082,312)
- --------------------------------------------------------------------------------
NET OFFICE EQUIPMENT AND FURNITURE 566,102
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OTHER ASSETS
Notes Receivable - Officers 175,183
Investment in limited partnership 57,956
Goodwill, net of accumulated amortization 79,273
Unallocated purchase price of acquisitions 1,001,618
Cash surrender value of life insurance 71,618
Other 56,747
- --------------------------------------------------------------------------------
TOTAL OTHER ASSETS 1,442,395
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 9,725,363
================================================================================
</TABLE>
3
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THE SOURCE COMPANY
UNAUDITED BALANCE SHEET
<TABLE>
<CAPTION>
31-JULY-96
- --------------------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Note payable - bank (Note 3) $3,464,715
Accounts payable 147,971
Due to Retailers (Note 9) 85,553
Accrued liabilities:
Compensation 212,220
Income taxes 178,397
Other 144,071
Deferred income taxes 169,000
Current maturities of long-term debt (Note 4) 164,531
- --------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,566,458
- --------------------------------------------------------------------------------
LONG-TERM DEBT (Note 4) 384,349
Less current maturities (164,531)
- --------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT 219,818
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DEFERRED INCOME TAXES 239,000
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TOTAL LIABILITIES 5,025,276
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REDEEMABLE COMMON STOCK
211,245 SHARES ISSUED
AND OUTSTANDING 752,708
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STOCKHOLDERS' EQUITY
Preferred stock (Note 7) 129
Common stock 68,097
Additional paid-in-capital 2,925,663
Retained Earnings 953,490
- --------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 3,947,379
- --------------------------------------------------------------------------------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK & STOCKHOLDERS' EQUITY $9,725,363
- --------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
THE SOURCE COMPANY
UNAUDITED STATEMENTS OF INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
1996 1995 1996 1995
------------------------------------ --------------------------------
<S> <C> <C> <C> <C>
COMMISSION REVENUES $1,861,822 $1,933,782 $3,779,560 $3,774,725
MERCHANDISING REVENUES 97,266 67,280 127,203 342,532
- ------------------------------------------------------------------------------------------------------------------------------------
1,959,088 2,001,062 3,906,763 4,117,257
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COST OF COMMISSION REVENUES 1,116,000 910,297 2,207,404 1,753,005
COST OF MERCHANDISE SOLD 153 4,550 153 176,142
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1,116,153 914,847 2,207,557 1,929,147
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GROSS PROFIT 842,935 1,086,215 1,699,206 2,188,110
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 753,200 795,408 1,468,054 1,546,771
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 89,735 290,807 231,152 641,339
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OTHER INCOME (EXPENSE)
Interest income 7,284 5,336 16,240 8,481
Interest expense (71,856) (23,512) (114,178) (47,181)
Other (4,760) (21,228) (10,714) (23,126)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (69,332) (39,404) (108,652) (61,826)
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 20,403 251,403 122,500 579,513
PROVISION FOR INCOME TAXES 91,634 95,677 145,934 343,352
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NET INCOME $ (71,231) $ 155,726 $ (23,434) $ 236,161
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE - PRIMARY $ (0.01) $ 0.02 $ (0.00) $ 0.04
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE OF SHARES OUTSTANDING - PRIMARY 6,843,144 6,299,389 6,728,438 6,299,389
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE - FULLY DILUTED $ (0.01) N/A $ (0.00) N/A
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE OF SHARES OUTSTANDING - FULLY DILUTED 7,332,605 N/A 7,136,871 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE SOURCE COMPANY
UNAUDITED STATEMENT OF CASH FLOWS
- -----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
------------------------------------- --------------------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (71,231) $ 155,726 $ (23,434) $ 236,161
Adjustments to reconcile net cash
provided by operating activities:
Depreciation and amortization 52,951 39,598 97,519 73,994
Provision for losses on accounts
receivable (19,019) 26,096 (35,394) 60,779
Impairment of investments in limited
partnership 5,000 5,000 10,000 10,000
Write-off related party receivable 0 0 0 10,644
Deferred income taxes 13,000 (27,000) (28,000) (27,000)
Changes in assets and liabilities:
(Increase)/Decrease in accounts
receivable (2,202,656) (111,816) (2,520,947) (808,988)
(Increase)/Decrease in other assets (129,620) (164,777) (299,173) (272,328)
(Increase)/Decrease in A/P and
accrued expenses 208,251 (39,801) (321,429) 94,118
(Increase)/Decrease in amounts due
customers (109,473) (61,000) 2,098 (3,000)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (2,252,797) (177,974) (3,118,760) (625,620)
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Loans to Officers 83,748 0 29,715 0
Increase in unallocated purchase
price of acquisition (1,005,763) 0 (1,005,764) 0
Repayments from related party 22,000 0 22,000 240,240
Advances to employees (915) 0 1,900 (3,000)
Capital expenditures (69,670) (24,449) (123,230) (62,024)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES (970,600) (24,449) (1,075,379) 175,216
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Sale/issuance of Common Stock 403,820 0 2,355,895 0
Issuance of redeemable common stock 350,000 0 350,000 0
Borrowings under long-term debt
agreements 355,268 0 355,268 0
Principal payments on long-term debt (42,706) 0 (62,421) 0
Borrowings under short-term debt
agreements 1,765,000 113,930 2,076,000 395,501
Repayments under short-term debt
agreements (108,000) (127,288) (325,000) (156,891)
Other Investments 0 0 (5,875) 0
- -----------------------------------------------------------------------------------------------------------------------------------
CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES 2,723,382 (13,358) 4,743,867 238,610
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN CASH (500,015) (215,781) 549,728 (211,794)
CASH, beginning of period 1,073,571 256,542 23,828 252,555
- -----------------------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 573,556 $ 40,761 $ 573,556 $ 40,761
- -----------------------------------------------------------------------------------------------------------------------------------
</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 $174,345 and
$116,988 of such purchases made during the six months ended July 31, 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 July 31, 1996 the Company had a receivable
from FMG of $31,171 at prime plus .5%.
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 $94,783 and $73,500 for the six months ended July
31, 1996 and 1995, respectively. Amounts paid for the airplane were $0 and
$37,204 for the six months ended July 31, 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 $233,578. Such notes bear interest at the rate of
7.34% per annum and are payable in five equal installments beginning in April
1996.
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.
3. NOTES PAYABLE
The Company has a revolving loan credit facility providing for an aggregate
borrowings of $5,000,000 that expires on July 1, 1997. Borrowings under the
loans bear interest at the bank's prime plus 1% (effectively 9.25% at September
1, 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 July 31, 1996 were $3,464,715.
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. For the quarter ended July 31,
1996, the Company was in compliance with these requirements.
7
<PAGE>
4. LONG-TERM DEBT
Long-term debt consists of:
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.............................. $11,995
Note Payable to Jim Looman, former owner of
Magazine Marketing. Note is non-interest bearing
and is payable over the over next 2 years in 8
quarterly payments of $10,000. This note is carried
by the Company at a discounted rate based on the
Company's effective borrowing rate...................................... 63,950
$275,000 term loan payable over three years ............................ 259,720
Obligations under capital lease......................................... 48,684
- --------------------------------------------------------------------------------
Total Long Term Debt.................................................... 384,349
Current Maturities...................................................... 164,531
- --------------------------------------------------------------------------------
Long Term Debt.......................................................... 219,818
- --------------------------------------------------------------------------------
5. SUPPLEMENTAL CASH
FLOW INFORMATION
Supplemental information on interest and income taxes paid is as
follows:
Six Months Ended July 31, 1996 1995
---------------------------------------------------------------
Interest 112,369 47,181
Income Taxes 285,947 343,352
---------------------------------------------------------------
8
<PAGE>
6. 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.
ACQUISITION OF MAGAZINE MARKETING, INC.
On June 28, 1996, the Company acquired all of the stock of Magazine Marketing,
Inc. in exchange for 100,000 shares of common stock of The Source Company and
$275,000 in cash. In addition, the Company shall pay $10,000 at the end of the
quarter for a two year period following the closing date (or a total of
$80,000). The first such payment was made on July 29, 1996.
The transaction has been accounted for as a purchase and, accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price of the transaction exceeds the fair value of the assets acquired
in the amount of $762,368. This amount has been recorded as unallocated purchase
price of acquisitions. This amount will be amortized on a straight line basis
over a 15 year period beginning July 1, 1996.
The following schedule reflects pro forma statement of income:
<TABLE>
<CAPTION>
July 31, 1996, July 31, 1995
6 Months Ended 3 Months Ended 6 Months Ended 3 Months Ended
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Revenue $4,143,697 $2,077,555 $4,371,347 $2,128,107
Income From Continuing Operations 215,746 82,032 648,145 294,210
Net Income (40,395) (79,711) 239,598 157,445
Net Income (Pro Forma) (65,805) (92,416) 214,188 144,740
Net Income Per Share $ (0.01) $ (0.01) $ 0.04 $ 0.02
Net Income Per Share (Pro Forma)
$ (0.01) $ (0.01) $ 0.03 $ 0.02
</TABLE>
9
<PAGE>
ACQUISITION OF READERS CHOICE, INC.
On June 30, 1996, the Company acquired all of the issued and outstanding shares
of Readers Choice, Inc., a wholly owned subsidiary of United Magazine Company,
in exchange for 111,245 shares of common stock of The Source Company. This
transaction has been accounted for as a purchase and accordingly, the assets and
liabilities have been recorded at fair market value. Results of operations have
been included as of the effective date of the transaction. This transaction did
not meet any of the conditions to be considered a significant business
combination. The purchase price of the transaction exceeds the fair value of the
assets acquired in the amount of $243,395. This amount has been recorded as
unallocated purchase price of acquisitions. This amount will be amortized on a
straight line basis over a 15 year period beginning July 1, 1996.
7. 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 issuance's of which $60,000 was paid
in cash and $60,000 was 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.
On July 29, 1996 two investors converted 2,250 & 500 shares of the Company's
1996 Series 7% Convertible Preferred Stock into common stock of the Company. The
conversion price was $3.65 per share, which resulted in the issuance of 61,643
and 13,698 shares, respectively, of common stock.
On August 30, 1996, the Company issued a common stock dividend to investors who
held the Company's 1996 Series 7% Convertible Preferred Stock. At this date
there were 12,850 shares of such stock outstanding. The 7% dividend resulted in
a common stock dividend of 9,514 shares based on an issuance price of $4.4292
per share.
On September 11, 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 $3.50 per share, which resulted in the issuance of 142,857
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 2,857
10
<PAGE>
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 $4.20 per share.
8. 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 July 31, 1996 are
approximately $2,264,059 of receiveables purchased under this program.
9. 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
$85,553 at July 31, 1996 under such arrangements.
10. UNAUDITED FINANCIAL STATEMENTS
In the opinion of management, the unaudited financial information as of July 31,
1996 and contained herein reflects all adjustments (consisting only of normal
recurring adjustments) necessary to fairly present such information in
accordance with generally accepted accounting principles. The results of
operations for the six months ended July 31, 1996 are not necessarily indicative
of the results to be expected for the entire year.
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.
The Company has continued to expand its operations in the upper
midwest through the acquisitions of Magazine Marketing, Inc. and Readers Choice,
Inc., a wholly owned subsidiary of United Magazine Company.
The Company issued 100,000 shares of its common stock, cash of
$275,000 and a note payable totaling $80,000 payable quarterly over a two year
period, in exchange for all the stock of Magazine Marketing, Inc. This
transaction has been accounted for as a purchase and, accordingly, the
financial statements reflect the combined results of operations as of June 28,
1996, the transaction date. Assets have been recorded at fair value and the
purchase price in excess of such fair value has been recorded as unallocated
purchase price of acquisitions and will be amortized over 15 years on a straight
line basis.
The Company issued 111,245 shares of its common stock in exchange for
all issued and outstanding stock of Readers Choice, Inc. This transaction has
been accounted for as a purchase and, accordingly, the assets have been recorded
at fair value and the results of operations reflect combined results of
operations from June 30, 1996, the transaction date. The purchase price in
excess of the fair value of the assets has been recorded as unallocated purchase
price of acquisitions. This amount will be amortized on a straight line basis
over a 15 year period.
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
12
<PAGE>
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.
13
<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 Six Months
Ended July 31, Ended July 31,
-------------- --------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Commission Revenue 95.0% 96.6% 96.7% 91.7%
Merchandising Revenue 5.0% 3.4% 3.3% 8.3%
Total Revenue 100.0% 100.0% 100.0% 100.0%
Gross Profit 43.0% 54.3% 43.5% 53.1%
Selling, General &
Administrative Expenses 38.5% 39.7% 37.6% 37.6%
Operating Income 4.6% 14.5% 5.9% 15.6%
Interest Expense, Net (3.3)% (0.9)% (2.5)% (0.9)%
Other Income/(Expense), Net (0.2)% (1.1)% (0.3)% (0.6)%
Earnings Before Income Taxes 1.0% 12.6% 3.1% 14.1%
Net Income (3.6)% 7.8% (0.6)% 5.7%
- ------------------------------
</TABLE>
THREE MONTHS ENDED JULY 31, 1996 COMPARED TO THE THREE MONTHS ENDED JULY 31,
1995
Total Revenue decreased $41,974, or 2.1%, from $2,001,062 in 1995 to
$1,959,088 in 1996. Commission Revenue decreased $71,960 or 3.7%, from
$1,933,782 in 1995 to $1,861,822 in 1996. The decreases in Commission Revenue
primarily resulted from a decrease in revenue from space design as a result of
slower than anticipated deliveries. Such decrease was offset by 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 increased $29,986, or 44.6%, from $67,280 in 1995 to
$97,266 in 1996. The increase was primarily the result of the increased revenue
from acting as a broker in the sale of merchandise to the Company's retailer
clients. Merchandising Revenue consists of revenue derived by the Company (i)
from 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.
14
<PAGE>
Gross Profits decreased $243,280, or 22.4%, from $1,086,215 (or 54.3% of
Total Revenue) in 1995 to $842,935 (or 43.0% of Total Revenue) in 1995. These
decreases resulted primarily from the reduced commission 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. The Companies costs of producing revenue are relatively inelastic and
are not directly proportional to revenue. Accordingly, the decrease in revenue
experienced by the Company in the three months ended July 31, 1996 created a
disproportionate decrease in gross profit.
Selling, general and administrative expenses ("SG&A")decreased $42,208, or
5.3%, from $795,408 (or 39.7% of Total Revenue) in 1995 to $753,200 (or 38.5% of
Total Revenue) in 1996. This decrease primarily resulted from the reallocation
of personnel resources from indirect to direct cost functions which benefits
SG&A costs while adversely impacting gross profit.
As a result of the foregoing, Operating Income decreased approximately
$201,072 or 69.1% from $290,807 in 1995 to $89,735 in 1996.
Interest Expense, Net increased from approximately $18,176 in 1995 to
$64,572 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 $95,677 in 1995 to $91,634 in 1996. The
decrease is partly attributable to the decrease in Operating Income. Income
taxes also reflect the recognition of income not previously taxed under cash
basis of accounting for income tax purposes.
As a result, Net Income decreased $226,957 or, 145.7%, from $155,726 (or
7.8% of Total Revenue) in 1995 to $(71,231) (or (3.6)% of Total Revenue) in
1996.
SIX MONTHS ENDED JULY 31, 1996 COMPARED TO THE SIX MONTHS ENDED JULY 31, 1995
Total Revenue decreased $210,494, or 5.1%, from $4,117,257 in 1995 to
$3,906,763 in 1996. Commission Revenue increased $4,835 or 0.1%, from $3,774,725
in 1995 to $3,779,560 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 offset by a decrease in revenues from space design as
a result of slower than anticipated deliveries. 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 $215,329, or 62.9%, from $342,532 in 1995
to $127,203 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 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 $488,904, or 22.3%, from $2,188,110 (or 53.1% of
Total Revenue) in 1995 to $1,699,206 (or 43.5% 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. The Companies costs of producing revenue are relatively inelastic and
are not directly
15
<PAGE>
proportional to revenue. Accordingly, the decrease in revenue experienced by the
Company in the six months ended July 31, 1996 created a disproportionate
decrease in gross profit.
Selling, general and administrative expenses ("SG&A")decreased $78,717, or
5.1%, from $1,546,771 (or 37.6% of Total Revenue) in 1995 to $1,468,054 (or
37.6% of Total Revenue) in 1996. This decrease primarily resulted from removing
overhead functions to functions directly associated with generating and
servicing commission revenue clients.
As a result of the foregoing, Operating Income decreased approximately
$410,187 or 64.0% from $641,339 in 1995 to $231,152 in 1996.
Interest Expense, Net increased from approximately $38,700 in 1995 to
$97,938 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 $343,352 in 1995 to $145,934 in 1996. The
decrease is attributable to the decrease in Operating Income.
As a result, Net Income decreased $259,595 or, 109.9%, from $236,161 (or
5.7% of Total Revenue) in 1995 to $(23,434) (or(0.6%) 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 through cash flow from operations and, short-term borrowings
under available lines of credit.
Net cash used by operating activities was approximately $3,118,760 for the
six months ended July 31, 1996 compared to approximately $625,620 for the same
period in 1995. The increase was primarily due to an increase in accounts
receivable, a decrease in accounts payable and an increase in other assets.
Accounts receivable, trade, increased $2,202,656 or 32.5%, from $4,576,545 at
January 31, 1996 to $6,779,201 at July 31, 1996 as a result of increased
retailer participation in the Advance Pay program.
The average collection period for the six months ended July 31, 1996 was
250.5 days versus 119.2 days for the six months ended July 31, 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 will remain at historical levels. 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.
Because the Company is primarily engaged in the business of providing
services to its retailer clients, its capital expenditure requirements are
minimal. At July 31, 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 and a term
loan 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
16
<PAGE>
Corporate Base Rate plus 1% (9.25% at September 1, 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 September 10, 1996 was $680,285. The second facility
is reserved to fund the Company's Advance Pay Program. Under this facility the
Company is able to borrow up to $3,000,000 based on a percentage of its'
Accounts Receivable derived from the Advance Pay Program. At September 10, 1996,
the Company had $1,823,000 outstanding under this facility.
The term loan funded the cash payment in the acquisition of Magazine
Marketing, Inc. The total amount borrowed under this agreement was $275,000. The
note is payable in thirty-six (36) consecutive principal payments to be made
monthly commencing on July 1, 1996 through and including May 1, 1999. A final
installment in the amount of the remaining outstanding principal balance and all
accrued interest thereon being due will be made on June 1, 1999. Additionally,
the Company will pay interest from May 31, 1996 on the balance of said principal
monthly, in arrears, commencing on the first day of July, 1996.
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 was 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 $221,485 at July 31, 1996. The Company has made
similar advances to the Company's Chief Operating Officer and the Company's
Executive Vice President totaling $0 and $12,093 at July 31, 1996, respectively.
Such advances are evidenced by promissory notes, bear interest at the rate of
7.34%, are payable in four remaining 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 August 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 July 31, 1996, the Company's total long-term debt obligations were
$384,439. Of such amount, $164,531 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 July 31, 1996, the Company's had an accrued deferred tax liability of
$408,000 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, $417,000
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
17
<PAGE>
Company anticipates that the funds necessary to satisfy this tax obligation will
be derived primarily from cash flows from operations.
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 assist it with respect to its potential sale of debt or equity
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.
18
<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 July 31, 1996.
19
<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
/s/ Lance C. McCord
Date September 17, 1996 __________________________
Lance C. McCord
Chief Financial Officer
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page
- ----------- ----------- ----
<S> <C> <C>
10.14 Amendment No. 2 to Loan Agreement dated as of September 1, 1996
with Boatmen's Bank of St. Louis, N.A.
10.15 $275,000 Term Loan Dated May 31, 1996
10.16 $3,000,000 Revolving Note (Rebate Program Loan) dated as of September 1, 1996
with Boatmen's Bank of St. Louis, N.A.
10.17 $2,000,000 Revolving Note (Working Capital Loan) dated as of
September 1, 1996 with Boatmen's Bank of St. Louis, N.A.
27 Financial Data Schedule
</TABLE>
21
<PAGE>
Exhibit: 10.14
AMENDMENT NO. 2
TO LOAN AGREEMENT
BY AND BETWEEN
THE BOATMEN'S NATIONAL BANK OF ST. LOUIS
AND
THE SOURCE COMPANY
This Amendment No. 2 to Loan Agreement (this "Amendment"), dated as of
September 1, 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, as amended by that certain Amendment No. 1 to Loan
Agreement dated as of May 31, 1996 (as amended, the "Loan Agreement"); and
B. Borrower and Lender have agreed to further 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:
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 .
AMENDMENTS TO LOAN AGREEMENT. The Loan Agreement is hereby amended, subject
to the terms and conditions set forth herein, as follows:
Section 2.1 of the Loan Agreement is hereby deleted in its entirety and
replaced with the following:
2.1 WORKING CAPITAL COMMITMENT. 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"). (The from time to time
outstanding principal balance of all Working Capital Advances from Lender is
referred to herein as the "Working Capital Loan".) The obligation of Borrower
to repay the Working Capital Loan shall be evidenced by a promissory note
payable to the order of Lender in the principal amount of $2,000,000.00 (the
"Working Capital Note") satisfactory to Lender. Amounts applied to reduce the
Working Capital Loan may be reborrowed as Working Capital Advances as provided
herein, but no Working Capital 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 Working Capital
Commitment as provided in Section 15.3.
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 to the order of
Lender in the principal amount of $3,000,000.00 (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
22
<PAGE>
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.
The following definitions contained in Appendix 1.2 of the Loan
Agreement are hereby amended to read as follows:
"Rebate Program Commitment": Lender's obligation to make Rebate
Program Advances as described in Section 2.2, up to a maximum principal amount
of $3,000,000.
"Working Capital Commitment": Lender's obligation to make Working
Capital Advances as described in Section 2.1, up to a maximum principal amount
of $2,000,000.
CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT.
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:
AMENDMENT. This Amendment, duly executed on behalf of Borrower.
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.
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.
REBATE PROGRAM NOTE AND WORKING CAPITAL NOTE. A new Rebate
Program Note in the amount of $3,000,000.00 in replacement of the existing
$2,500,000.00 Rebate Program Note, along with a new Working Capital Note in
the amount of $2,000,000.00 in replacement of the existing $1,500,000.00
Working Capital Note.
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
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.
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.
23
<PAGE>
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.
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.
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.
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.
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.
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:
---------------------------------------
Print Name:
-------------------------------
Title:
-----------------------------------
THE BOATMEN'S NATIONAL BANK
OF ST. LOUIS
By:
---------------------------------------
Print Name:
-------------------------------
Title:
-----------------------------------
24
<PAGE>
EXHIBIT A
(DISCLOSURE SCHEDULE)
NONE, if no items listed below:
25
<PAGE>
Exhibit 10.15
TERM NOTE
$275,000.00 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 Hundred Seventy Five Thousand and
00/100 Dollars ($275,000.00), in thirty six (36) consecutive principal payments
to be made monthly commencing on July 1, 1996, and on the first day of each
month thereafter, through and including May 1, 1999, with a final installment in
the amount of the remaining outstanding principal balance and all accrued
interest thereon being due on the Term 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
July, 1996 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 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 "Term Note" as described in the Loan Agreement. The
proceeds of this Note shall be used by Borrower solely as required in the Loan
Agreement. The date and amount of all disbursements and receipts representing
principal and receipts of interest by Bank with respect to the Term 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.
26
<PAGE>
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 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:
Print Name:
Title:
27
<PAGE>
Exhibit: 10.16
REVOLVING NOTE
(Rebate Program Loan)
$3,000,000.00 St. Louis, Missouri
September 1, 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 Three Million and 00/100 Dollars
($3,000,000.00), 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 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
28
<PAGE>
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 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:
--------------------------------------
Print Name:
------------------------------
Title:
-----------------------------------
29
<PAGE>
Exhibit: 10.17
REVOLVING NOTE
(Working Capital Loan)
$2,000,000.00 St. Louis, Missouri
September 1, 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 and 00/100 Dollars
($2,000,000.00), 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, of even date herewith, 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 "Working Capital Note" as described in the Loan
Agreement. The proceeds of Advances under this Note shall be used by Borrower
solely for working capital purposes. The date and amount of all disbursements
and receipts representing principal and receipts of interest by Bank with
respect to the Working Capital 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.
30
<PAGE>
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 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:
---------------------------------
Print Name:
-------------------------
Title:
------------------------------
31
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<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> JUL-31-1996
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