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 October 31, 1997
|_| 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 Information Management 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: 8,014,185 (as of December
1, 1997)
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Unaudited Balance Sheet as of October 31, 1997
Unaudited Statements of Operations for the three
months ended October 31, 1997 and 1996 and for the
nine months ended October 31, 1997 and 1996
Unaudited Statements of Cash Flows for the nine
months ended October 31, 1997 and 1996
Notes to Financial Statements
ITEM 2. Management's Discussion and Analysis
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 6. Exhibits and Reports on Form 8-K
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Balance Sheet
October 31, 1997
- --------------------------------------------------------------------------------
Assets (Note 3)
Current
Cash $ 17,387
Trade receivables (net of allowance for doubtful
accounts of $374,841) (Note 5) 15,760,271
Income tax receivable 151,989
Notes receivable - officer (Note 2) 7,351
Other current assets 222,995
- --------------------------------------------------------------------------------
Total Current Assets 16,159,993
- --------------------------------------------------------------------------------
Office equipment and furniture 2,109,953
Less accumulated depreciation and amortization 1,378,829
- --------------------------------------------------------------------------------
Net Office Equipment and Furniture 731,124
- --------------------------------------------------------------------------------
Other Assets
Notes receivable - officer (Note 2) 14,742
Goodwill (net of accumulated amortization of $191,274) 3,233,763
Other 156,239
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Total Other Assets 3,404,744
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$ 20,295,861
- --------------------------------------------------------------------------------
See accompanying notes to financial statements
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Balance Sheet
October 31, 1997
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current
Checks issued against future deposits $ 856,437
Accounts payable and accrued expenses 640,383
Due to retailers (Note 6) 183,254
Deferred income taxes (Note 7) 91,000
Current maturities of long-term debt (Note 3) 2,207,564
- --------------------------------------------------------------------------------
Total Current Liabilities 3,978,638
- --------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 3) 4,163,794
- --------------------------------------------------------------------------------
Deferred Income Taxes (Note 7) 178,000
- --------------------------------------------------------------------------------
Total Liabilities 8,320,432
- --------------------------------------------------------------------------------
Commitments and Contingencies
- --------------------------------------------------------------------------------
Stockholders' Equity
Common Stock, $.01 par - shares authorized,
16,528,925; outstanding 8,014,185 80,142
Additional paid-in capital 10,616,884
Retained earnings 1,278,403
- --------------------------------------------------------------------------------
Total Stockholders' Equity 11,975,429
- --------------------------------------------------------------------------------
$ 20,295,861
- --------------------------------------------------------------------------------
See accompanying notes to financial statements
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Statements of Operations
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------------- ------------------------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service Revenues $ 2,943,766 $ 2,004,343 $ 8,403,434 $ 4,750,601
Merchandise Revenues - 95,847 8,348 108,088
- ---------------------------------------------------------------------------------------------------------------------
2,943,766 2,100,190 8,411,782 4,858,689
- ---------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues 1,522,201 1,222,833 4,374,058 3,573,925
Cost of Merchandise Sold - 81,967 32,720 93,221
- ---------------------------------------------------------------------------------------------------------------------
1,522,201 1,304,800 4,406,778 3,667,146
- ---------------------------------------------------------------------------------------------------------------------
1,421,565 795,390 4,005,004 1,191,543
Selling, General and Administrative
Expense 536,058 649,027 1,598,231 2,320,529
- ---------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 885,507 146,363 2,406,773 (1,128,986)
- ---------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 1,198 10,158 14,860 26,398
Interest expense (192,494) (88,276) (608,245) (202,454)
Other (20,955) (3,589) (61,579) (14,304)
- ---------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (212,251) (81,707) (645,964) (190,360)
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 673,256 64,656 1,751,809 (1,319,346)
Income Tax (Expense) Benefit (Note 7) 296,000 (2,246) 785,000 476,217
- ---------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 377,256 $ 62,410 $ 966,809 $ (843,129)
- ---------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per Share - Primary
and Fully Diluted $ 0.06 $ 0.01 $ 0.16 $ (0.15)
- ---------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Out-
standing - Primary and Fully Diluted 6,746,376 5,809,050 6,158,063 5,470,010
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Statements of Cash Flows
Nine Months Ended October 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 966,809 $ (843,129)
Adjustments to reconcile net income to cash used in operating
activities:
Depreciation and amortization 307,151 167,711
Provision for losses on accounts receivable 39,224 97,636
Impairment of investment in limited partnership 15,000 15,000
Loss on disposition of assets 1,338 -
Increase in cash surrender value of life insurance (43,564) -
Deferred income taxes (161,000) (195,191)
Services received in exchange for Common Stock 8,000 21,600
Changes in assets and liabilities:
Increase in accounts receivable (2,284,433) (2,361,834)
Increase in other assets (101,942) (520,839)
Decrease in checks issued against future deposits (2,369,231) -
Decrease in accounts payable and accrued expenses (177,711) (545,734)
(Decrease) increase in amounts due customers (16,321) 29,758
- ------------------------------------------------------------------------------------------------------------------
Cash Used in Operating Activities (3,816,680) (4,135,022)
- ------------------------------------------------------------------------------------------------------------------
Investment Activities
Acquisition of Mike Kessler & Associates, Inc., net of cash acquired (349,777) -
Acquisition of Magazine Marketing, Inc. - (275,000)
Capital expenditures (205,113) (176,780)
Loan to affiliate (38,000) -
Collections from affiliate 27,576 -
Loan to officer (10,000) -
Collections from related party - 22,000
Collections on officer notes receivable 221,485 29,715
Proceeds from sale of fixed assets 2,000 -
Proceeds from surrender of life insurance policies 83,959 -
- ------------------------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (267,870) (400,065)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Statements of Cash Flows
<CAPTION>
Nine Months Ended October 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financing Activities
Proceeds from issuance of Common Stock 6,828,797 30,000
Proceeds from issuance of Preferred Stock - 1,922,075
Borrowings under credit facility 27,051,000 281,317
Principal payments on credit facility (30,019,000) (104,261)
Borrowings under short-term debt agreements - 3,206,000
Repayments under short-term debt agreements (43,656) (647,000)
Preferred Stock dividends (3) (6)
Purchase of fractional shares (322) -
Proceeds from issuance of warrants 200 -
- ------------------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 3,817,016 4,688,125
- ------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash (267,534) 153,038
Cash, beginning of period 284,921 23,828
- ------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 17,387 $ 176,866
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Unaudited Financial Statements
In the opinion of management, the unaudited financial information as of October
31, 1997 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 nine months ended October 31, 1997 are not necessarily
indicative of the results to be expected for the entire year.
2. Related Party Transactions
The Company purchased $276,000 in data processing services from an employment
service company owned by certain officers of the Company during the nine months
ended October 31, 1996. The Company acquired this employment service company for
$45,000 on January 1, 1997.
One of the Company's stockholders also owns a majority of the stock of FMG,
Inc., primarily an investing company. At October 31, 1996, the Company had a
receivable from FMG of $31,171 at prime plus .5%. The receivable was collected
in full on November 5, 1996.
The Company currently leases certain office space from businesses controlled by
stockholders of the Company. Amounts paid for the office space were
approximately $169,000 and $139,000 for the nine months ended October 31, 1997
and 1996, respectively. The Company occasionally charters an airplane owned by a
partnership in which one of the Company's stockholders owns an interest. Amounts
paid to the partnership were $7,400 and $0 for the nine months ended October 31,
1997 and 1996, respectively.
Certain 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 $295,293. Collections on these notes totaled $273,200
through October 31, 1997, including $221,485 collected during October, leaving a
balance outstanding of $22,093. The remaining notes bear interest at rates
varying from 6.96% to 7.34% per annum.
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
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3. Long-term Debt and Revolving Credit Facility
Long-term debt consists of:
October 31, 1997
- --------------------------------------------------------------------------------
Revolving Credit Facility $ 4,156,000
Note payable to former owner of Mike Kessler & Associates,
Inc., due January 5, 1998, interest at 6.25%, secured by a
letter of credit for $2,231,912 for the benefit of the
former owner 2,150,000
Unsecured note payable to stockholder (former owner of
Magazine Marketing, Inc.), non-interest bearing, payable in
eight quarterly installments of $10,000, discounted based on
the Company's effective borrowing rate 28,664
Term note payable in monthly installments of $629 through
November 1999, collateralized by an automobile 14,401
Obligations under capital lease 22,293
- --------------------------------------------------------------------------------
Total Long-term Debt 6,371,358
Less current maturities 2,207,564
- --------------------------------------------------------------------------------
Long-term Debt $ 4,163,794
- --------------------------------------------------------------------------------
The Company has an agreement providing for a revolving loan up to $15,000,000.
The bank has the right to terminate the agreement upon not less than thirteen
months prior written notice. Borrowings bear interest at a rate related to the
monthly LIBOR index rate plus a percentage ranging from 2.5% to 3.5%, depending
upon the ratio of funded debt to earnings before interest, taxes, depreciation
and amortization (effectively 9.1563% at October 31, 1997). Borrowings are
secured by a security interest in substantially all the Company's assets
including receivables, inventory, equipment, goods and fixtures, software,
contract rights, notes, and general intangibles.
The revolving loan agreement requires the Company to maintain certain ratios and
a specified level of net worth, restricts payment of dividends, and limits
additional indebtedness. The Company was in compliance with such ratios at
October 31, 1997.
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- -------------------------------------------------------------------------------
4. Supplemental Cash Flow Information
Supplemental information on interest and income taxes paid is as follows:
Nine Months Ended October 31, 1997 1996
- --------------------------------------------------------------------------------
Interest Paid $ 549,000 $ 200,000
Income Taxes Paid $ 925,000 $ 264,000
- --------------------------------------------------------------------------------
On February 28, 1997, 7,721 shares of Common Stock were issued as a dividend to
the Preferred Stockholders as of that date.
5. Advance Pay Program
The Company has established an Advance Pay Program. Under this program the
Company advances an agreed upon percentage of the incentive payments otherwise
due the retailer from magazine publishers upon quarterly submission of claims
for such payments. The claims otherwise due the retailer become due the Company.
Included in trade receivables at October 31, 1997 is $11,386,382 due the Company
under the Advance Pay Program (net of $2,623,508 due the program participants).
Income from the program was approximately $2,876,000 and $731,000 during the
nine months ended October 31, 1997 and 1996, respectively.
6. 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
$183,254 at October 31, 1997 under such arrangements.
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- -------------------------------------------------------------------------------
7. Income Taxes
Provision for federal and state income taxes (benefit) in the statements of
operations consist of the following components:
Nine Months Ended October 31, 1997 1996
- --------------------------------------------------------------------------------
Current
Federal $ 750,000 $ (255,458)
State 196,000 (66,759)
- --------------------------------------------------------------------------------
Total Current 946,000 (322,217)
- --------------------------------------------------------------------------------
Deferred
Federal (128,000) (122,435)
State (33,000) (31,565)
- --------------------------------------------------------------------------------
(161,000) (154,000)
- --------------------------------------------------------------------------------
Total Income Tax (Benefit) Expense $ 785,000 $ (476,217)
- --------------------------------------------------------------------------------
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:
October 31, 1997
- --------------------------------------------------------------------------------
Deferred Tax Assets
Allowance for doubtful accounts $ 148,000
Deferred compensation 28,000
Other 16,000
- --------------------------------------------------------------------------------
Total Deferred Tax Assets 192,000
- --------------------------------------------------------------------------------
Deferred Tax Liabilities
Income not previously taxed under cash
basis of accounting for income tax purposes 401,000
Depreciation 26,000
Other 34,000
- --------------------------------------------------------------------------------
Total Deferred Tax Liabilities 461,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net Deferred Tax Liability 269,000
- --------------------------------------------------------------------------------
Classified as:
Current 91,000
Non-current 178,000
- --------------------------------------------------------------------------------
Net Deferred Tax Liability $ 269,000
- --------------------------------------------------------------------------------
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- -------------------------------------------------------------------------------
The following summary reconciles income taxes at the maximum federal statutory
rate with the effective rate for the first nine months of fiscal 1998 and 1997:
Nine Months Ended October 31, 1997 1996
- --------------------------------------------------------------------------------
Income tax expense (benefit) at statutory rate $ 596,000 $ (449,000)
State income tax expense (benefit), net of
federal income tax benefit 129,000 (65,000)
Non-deductible meals and entertainment 15,000 28,000
Non-deductible goodwill amortization 40,000 9,000
Non-deductible officers' life insurance (6,000) 20,00
Other, net 11,000 (19,217)
- --------------------------------------------------------------------------------
Income Tax Expense (Benefit) $ 785,000 $ (476,217)
- --------------------------------------------------------------------------------
8. Business Combinations
On May 30, 1997, the Company acquired all of the stock of Mike Kessler and
Associates, Inc. (MKA) for $2,500,000 of which $350,000 was paid upon closing.
The balance is due January 5, 1998 with interest at 6.25%. Wachovia Bank, N.A.
issued a standby letter of credit for $2,231,912 for the benefit of the former
owner of MKA covering the period from May 30, 1997 through January 31, 1998. The
seller operated MKA as a business engaged in the collection of retail display
allowances for retail store chains. The Company has continued the operation of
such business and has continued servicing MKA's customer base.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired in the amount of
$2,330,004.
9. Preferred Stock
In July 1997, the Company exchanged all 5,600 outstanding shares of the
Company's 1996 Series 7% Convertible Preferred Stock for an aggregate of 166,667
shares of Common Stock and non-transferable warrants, expiring in 2000, to
purchase 310,709 shares of Common Stock at an exercise price of $3.00 per share.
Such exchange resulted in a constructive dividend of $109,937 which was reported
in the fiscal quarter ended July 31, 1997.
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- -------------------------------------------------------------------------------
10. Common Stock
In October 1997, the Company sold in a public offering (the "Offering"),
2,000,000 shares of the Company's Common Stock. Concurrent with the Offering,
the Company effected the 1 for 1.21 reverse stock split previously approved by
the Company's shareholders. The weighted average number of common shares
presented in the financial statements have been retroactively restated to give
effect to such reverse stock split.
In September 1997, the Company issued to Aron Katzman, Harry L. Franc, III and
Timothy A. Braswell, each a director of the Company, non-transferable warrants,
expiring in 2000, to purchase an aggregate of 89,289 shares of Common Stock at
an exercise price of $3.00 per share. These warrants will vest at a rate of 25%
on August 1, 1998, 25% on November 1, 1998, 25% on February 1, 1999 and 25% on
May 1, 1999. Thus, expense of approximately $54,000 will be recognized ratably
over those periods.
11. Earnings Per Share
In calculating earnings per share, Net Income for the nine months ended October
31, 1997 was reduced by a constructive dividend of $109,936, which resulted from
the exchange of all 5,600 outstanding shares of Preferred Stock for 166,667
shares of Common Stock and non-transferable warrants, expiring in 2000, to
purchase 310,709 shares of Common Stock at an exercise price of $3.00 per share.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This quarterly report contains forward looking statements that are
necessarily subject to significant uncertainties and risks, including, but not
limited to those set forth in "RISK FACTORS" in Form SB-2, a copy of which may
be obtained without charge by written request to the Company. When used in this
quarterly report, the words "believes," "anticipates," "intends," "expects," and
similar expressions are intended to identify forward-looking statements. Actual
results could be materially different as a result of various possibilities,
including increased competition, significant changes in the marketing strategies
of publishers, the inability of the Company to successfully manage its expansion
and the availability of suitable acquisition candidates. Readers are cautioned
not to place undue reliance on forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Overview
For more than 20 years, the Company and its predecessors have provided
information gathering, consulting and other information based services to
operators of mass merchandise, grocery, convenience and pharmacy stores located
throughout the United States and eastern Canada. Currently, the Company provides
monitoring and documentation services to more than 725 retailers, such as
Wal-Mart Stores, Inc., Kmart Corporation, Target Stores, Inc., Food Lion, Inc.,
and W. H. Smith, Inc., in connection with processing and collection of incentive
payments from magazine publishers on single copy sales of approximately 6,000
magazine titles offered in approximately 70,000 stores. As an extension of this
service, the Company established its Advance Pay Program, under which the
Company advances an agreed upon percentage of the incentive payments due to the
retailer from magazine publishers. It then directly collects from the publishers
the claims due to the retailer. In fiscal 1996 and 1997, the Company advanced
approximately $1,783,000 and $16,743,000 under the Advance Pay Program,
respectively. In October 1996, the Company expanded its services and potential
client base with the introduction of the Periodical Information Network ("PIN"),
an information service in which the Company provides subscribing magazine
publishers with industry-wide, single copy magazine sales information in a user
friendly format. Based on conversations with representatives of magazine
publishers, the Company believes that publishers and advertisers perceive that
PIN provides a valuable basis on which to formulate marketing, distribution,
advertising and other policies.
A majority of the Company's revenues are derived from service fees
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. Except in
connection with its Advance Pay Program, the Company does not guarantee 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. In substantially all the contracts under the Advance Pay Program the
Company bears the risk of uncollectibility associated with collecting payments
from publishers. To date, the reserve maintained by the Company as an allowance
for doubtful accounts in the amount of 2% of accounts receivable has been
adequate to satisfy any losses incurred by the Company from uncollectible
accounts receivable.
Under both the standard arrangement and the Advance Pay Program service
revenues are recognized at the time claims for incentive payments are
substantially completed for submission to the publishers based on the amount
claimed, less an estimated reserve necessary to maintain an allowance for
doubtful accounts of approximately 2% of trade accounts receivable. However,
under the standard arrangement, invoices for services provided by the Company in
connection with the claim process are not issued until the Company receives
settlement of the claim. Under the Advance Pay Program, the customer is not
invoiced for the commission, which is the difference between the claim and the
advance amount.
<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 Revenues:
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service Revenues 100.0% 95.4% 99.9% 97.8%
Merchandise Revenues -% 4.6% 0.1% 2.2%
Total Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Service Revenues 51.7% 58.2% 52.0% 73.6%
Cost of Merchandise Sold -% 3.9% 0.4% 1.9%
Gross Profit 48.3% 37.9% 47.6% 24.5%
Selling, General &
Administrative Expenses 18.2% 30.9% 19.0% 47.8%
Operating Income (Loss) 30.1% 7.0% 28.6% (23.3)%
Interest, Net (6.5)% (3.7)% (7.1)% (3.6)%
Other Income (Expense), Net (0.7)% (0.2)% (0.7)% (0.3)%
Income (Loss) Before
Income Taxes 22.9% 3.1% 20.8% (27.2)%
Net Income (Loss) 12.8% 3.0% 11.5% (17.4)%
</TABLE>
Service Revenues
Increased retailer participation in the Advance Pay Program, the
acquisition of Mike Kessler and Associates, Inc. and the growth in subscriptions
to PIN contributed to an increase in service revenue during both the quarter and
the nine month period ended October 31, 1997 of approximately $940,000 and
$3,653,000, respectively, over the comparable periods in fiscal 1997. The
increases consisted of approximately $836,000 and $3,036,000, respectively, of
claims, PIN and Advance Pay Program revenue over the comparable periods in
fiscal 1997. Also, space design revenue increased from $183,000 for the quarter
ended October 31, 1996 to $287,000 for the quarter ended October 31, 1997 and
from $365,000 for the nine month period ended October 31, 1996 to $982,000 for
the nine month period ended October 31, 1997. Currently, the Company is
negotiating flat fee arrangements; however, historically, space
<PAGE>
design revenues have been recognized as front end display manufacturers ship the
displays to the retailers, the timing of which is not within the Company's
control. Space design revenues have historically fluctuated significantly
depending upon a variety of factors including the number and magnitude of
reconfiguration programs undertaken by the Company's retailer clients and the
timely shipping of displays by manufacturers. As a result, variations in the
timing and amounts of space design revenues could have a material adverse effect
on the Company's quarterly operating results.
Merchandise Revenues and Cost of Merchandise Sold
As a result of its relationships with the leading retailers in the
United States, the Company has had opportunities from time to time to purchase
merchandise, such as gift and greeting cards, caps and other leisure time
products for resale to its retailer clients. However, management has decided to
de-emphasize this portion of its business in order to dedicate more resources to
its core services. The revenues derived from merchandising sales are declining
while the inventory is being liquidated.
Cost of Service Revenues and Selling, General and Administrative Expense ("Total
Costs")
Total Costs for the nine month period ended October 31, 1997 increased
approximately $78,000 compared to the same period in the prior year. The
acquisitions of Magazine Marketing, Inc., Readers Choice, Inc. and Mike Kessler
and Associates, Inc. (MKA) have led to increased costs, including wages,
amortization, rent and depreciation. Wages also increased as a result of hiring
individuals formerly employed by Data-Pros, Inc., a service company purchased on
January 1, 1997. However, a decrease in the expenses for the data processing
area more than offset the increase in wages. Travel and entertainment expenses
decreased $26,000 and $19,000, respectively. Lastly, bad debt expense decreased
$56,000 over the same period in the prior year.
Total Costs for the third quarter increased over the third quarter of
the prior year by $186,000. The acquisition of MKA resulted in costs of
approximately $295,000 during the quarter ended October 31, 1997. Additionally,
legal costs, depreciation expense, deferred compensation costs and costs
associated with filings required by the Securities and Exchange Commission and
Nasdaq increased approximately $63,000. All other expenses included in Total
Costs combined for a decrease of approximately $172,000.
Although Total Costs increased over the prior year, Total Costs as a
percentage of Revenues decreased dramatically. This decrease is due primarily to
improved sales growth and the Company's cost containment initiative.
Interest Expense
Interest Expense increased for the three month and the nine month
periods ended October 31, 1997 $104,000 and $406,000, respectively, over the
comparable periods in the prior year. This increase is due to increased
borrowings necessary to fund the Advance Pay Program. Because the net proceeds
of the offering have been temporarily applied to reduce the amounts due under
the Company's credit facility, interest expense is expected to decrease next
quarter.
Income Tax (Expense) Benefit
The effective income tax rates for the three month and nine month
periods ended October 31, 1997 were 44.0% and 44.8%, respectively. These rates
varied from the statutory rate due to expenses not deductible for income tax
purposes. Such non-deductible expenses include meals and entertainment, goodwill
amortization, and officers' life insurance premiums.
Earnings Per Share
In calculating earnings per share, Net Income for the nine months ended
October 31, 1997 was reduced by a constructive dividend of $109,936, which
resulted from the exchange of all 5,600 outstanding shares of Preferred Stock
for 166,667 shares of Common Stock and non-transferable warrants, expiring in
2000, to purchase 310,709 shares of Common Stock at an exercise price of $3.00
per share.
<PAGE>
Liquidity and Capital Resources
The Company's primary cash requirements are for funding the Advance Pay
Program and selling, general and administrative expenses (particularly salaries,
travel and entertainment) incurred in connection with the maintenance of
existing accounts and the solicitation of new clients. Historically, the Company
has financed its business activities through borrowings under available lines of
credit, cash flow from operations and through the issuance of equity securities.
Net cash used by operating activities decreased from $4,135,000 during
the nine months ended October 31, 1996 to $3,817,000 during the nine months
ended October 31, 1997. During the nine months ended October 31, 1997,
$2,369,000 was used to cover checks drawn against future deposits at January 31,
1997, net cash used for the Advance Pay Program was approximately $71,000, net
cash paid for income taxes was $925,000 and cash paid for interest was $549,000.
The average collection period for the nine months ended October 31,
1997 was 134 days compared to 163 days for the nine months ended October 31,
1996. The collection periods were calculated as follows: 365
days/(Revenues/Average Accounts Receivable), where accounts receivable includes
all trade accounts receivable, but only the commission portion of amounts due
from publishers in association with the Advance Pay Program.
The Company is primarily engaged in the business of providing services
to its retailer clients; therefore, its capital expenditure requirements are
minimal. At October 31, 1997, the Company had no outstanding material
commitments for capital expenditures.
The Company has a credit agreement that provides for a revolving loan
of up to $15,000,000 with Wachovia Bank, N.A. Wachovia Bank has the right to
terminate the agreement upon not less than thirteen months prior written notice.
Borrowings bear interest at a rate related to the monthly LIBOR index rate plus
a percentage ranging from 2.5% to 3.5% depending upon the ratio of funded debt
to earnings before interest, taxes, depreciation and amortization. Borrowings
are secured by a security interest in substantially all of the Company's assets
including receivables, inventory, equipment, goods and fixtures, software,
contract rights, notes, and general intangibles. Under the Credit Agreement, the
Company is required to maintain certain financial ratios. At October 31, 1997,
the Company was in compliance with all financial ratios imposed by the Credit
Agreement. Although the Company believes it is unlikely, Wachovia Bank may
decide to enforce any or all of its remedies, including declaring the loan
immediately due and payable, if the financial ratios are not maintained. Such
action would have a material adverse effect on the financial condition of the
Company and would require the Company to curtail the Advance Pay Program.
At October 31, 1997, the Company's total long-term debt obligations
were $6,371,000. Of such amount, $2,208,000 matures in the next 12 months. The
Company anticipates that the funds necessary to satisfy these obligations will
be derived from additional bank borrowings and/or cash flows from operations.
On May 30, 1997, the Company acquired all of the stock of MKA for
$2,500,000 of which $350,000 was paid upon closing. The balance is due January
5, 1998 with interest at 6.25%. Wachovia Bank of North Carolina, N.A. issued a
standby letter of credit for $2,231,912 for the benefit of the former owner of
MKA covering the period from May 30, 1997 through January 31, 1998. The seller
operated MKA as a business engaged in the collection of retail display
allowances for retail store chains. The Company has continued the operation of
such business and has continued servicing MKA's customer base.
In July 1997, the holders of the Company's 1996 Series 7% Convertible
Preferred Stock exchanged all 5,600 outstanding shares for 166,667 shares of
Common Stock at an effective price of $3.00 per share and non-transferable
warrants, expiring in 2000, to purchase 310,709 shares of Common Stock at an
exercise price of $3.00 per share. Such exchange resulted in a constructive
dividend of $109,937 which was reported in the fiscal quarter ending July 31,
1997.
<PAGE>
In September 1997, the Company issued to Aron Katzman, Harry L. Franc,
III and Timothy A. Braswell, each a director of the Company, non-transferable
warrants, expiring in 2000, to purchase an aggregate of 89,289 shares of Common
Stock at an exercise price of $3.00 per share. These warrants will vest at a
rate of 25% on August 1, 1998, 25% on November 1, 1998, 25% on February 1, 1999
and 25% on May 1, 1999. Thus, expense of approximately $54,000 will be
recognized ratably over those periods.
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(c) During the quarter ended October 31, 1997, 89,289 warrants, each
to purchase one share of Common Stock at $3.00, expiring in
September, 2000, were issued to certain directors of the
Company. These transactions were made in reliance on Section
4(2) of the Securities Act of 1933, as amended ("Securities
Act").
(d) On October 7, 1997, the Company sold 2,000,000 shares of Common
Stock in a public offering for an aggregate price of $8,000,000.
Additionally, certain selling shareholders sold 300,000 shares
of Common Stock which were offered through an over-allotment
option for an aggregate price of $1,200,000. The registration
statement on Form SB-2 (No. 333-32733) under which the Common
Stock was offered was filed under the Securities Act. The
managing underwriter was Donald & Co. Securities Inc.
As of October 31, 1997, the total amount of expenses incurred in
connection with the issuance and distribution of the Common
Stock was $1,171,203. Underwriting discounts were $640,000,
expenses paid to the underwriters were $177,146 and other
expenses totaled $354,057. None of the expenses were paid
directly or indirectly to directors, officers, persons owning
ten (10) percent or more of any class of equity securities or
affiliates of the Company.
Pending the use of net proceeds of $6,808,797 from the sale of
the shares of Common Stock, such funds have been used to reduce
the principal balance under the Company's credit facility. Such
credit facility provides for the availability of up to
$15,000,000 of borrowings until termination by Wachovia Bank on
not less than thirteen months prior notice. At October 31, 1997,
the unused availability thereunder was approximately
$10,844,000. The Company intends to make additional borrowings
under the credit facility for the expansion of the Advance Pay
Program, development of new or enhanced products and services,
acquisition of one or more business and general corporate
purposes, including the continued upgrade of the Company's
computer systems.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See Exhibit Index.
(b) No current reports on Form 8-K have been filed during the three months
ended October 31, 1997.
<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 INFORMATION MANAGEMENT COMPANY
Date: December 15, 1997 /S/ W. BRIAN RODGERS
------------------------------------
W. Brian Rodgers
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
10.26 Amendment to Credit Agreement dated October 31, 1997
by and between The Source Information Management
Company and Wachovia Bank, N.A.
11.1 Statement re: computation of per share earnings
27.1 Financial Data Schedule (Filed in EDGAR version only)
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT TO CREDIT AGREEMENT, made this Thirty-first day of October, 1997,
by and between THE SOURCE INFORMATION MANAGEMENT COMPANY (the "Borrower") and
WACHOVIA BANK, N.A. (the "Bank");
WITNESSETH:
WHEREAS, the Borrower and the Bank entered into a Credit Agreement dated the
Fourteenth day of November, 1996; and
WHEREAS the Borrower and the Bank now mutually desire to effect certain
amendments to the Credit Agreement;
NOW, THEREFORE in consideration of the premises and the mutual covenants herein
and in the Credit Agreement contained, the parties agree as follows:
The first Sentence of Section 2.01(a) of the Credit Agreement is
deleted in its entirety and the following is substituted therefor:
Subject to the terms and conditions set forth herein, you agree to make
loans and advances to us from time to time; provided, however, (i) the
aggregate outstanding principal amount of Receivable Based Advances
shall at no time, without your consent, exceed eighty-five percent
(85%) of the net amount of Eligible Current Receivables, plus seventy
percent (70%) of the net amount of Eligible Non-Current Receivables (as
defined in the General Security Agreement); and (ii) in no event shall
the aggregate principal amount of Receivable Based Advances at any time
exceed Fifteen Million dollars ($15,000,000.00).
Except as herein amended, the terms and provisions of the Credit Agreement and
all subsequent Amendments to the Credit Agreement shall be and remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the Credit
Agreement to be executed as of the year and the day first above written.
CONSENTED TO AND AGREED:
THE SOURCE INFORMATION MANAGEMENT COMPANY
By:_____________________________________
President and Chief Operating Officer
ATTEST:
[CORPORATE SEAL]
By:____________________________________
Assistant Secretary
WACHOVIA BANK, N.A.
By:____________________________________
Vice President
Exhibit 11.1
<TABLE>
The Source Information Management Company
Calculation for Weighted Average Number of
Common Shares Outstanding
<CAPTION>
Weighted
Weighted Average
Common Common Days Average Number
Share Shares Out- Number of Shares
Date Description Activity Outstanding standing of Shares Outstanding
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
February 1, 1997 Balance 5,819,403 27 575,545
February 28, 1997 Stock dividend on preferred stock 6,381 5,825,784 75 1,600,490
May 15, 1997 Assumed conversion of stock options 48,166 5,873,950 41 882,168
June 25, 1997 Assumed conversion of stock options 53,941 5,927,891 7 151,997
July 1, 1997 Assumed conversion of warrants 55,332 5,983,223 28 613,664
July 29, 1997 Stock issued in payment of services 1,811 5,985,034 2 43,846
July 31, 1997 Exchange of preferred stock for
common stock and assumed
conversion of warrants 186,826 6,171,860 35 791,264
September 3, 1997 Assumed conversion of warrants 22,155 6,194,015 32 726,038
October 6, 1997 Purchase and retirement of
fractional shares (77) 6,193,938 1 22,688
October 7, 1997 Issuance of 2,000,000 shares 2,000,000 8,193,938 25 750,361
October 31, 1997 Balance 8,193,938 6,158,063
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet at July 31, 1997 (Unaudited) and the Statement of Income for the Nine
Months Ended October 31, 1997 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> OCT-31-1997
<CASH> 17,387
<SECURITIES> 0
<RECEIVABLES> 15,760,271
<ALLOWANCES> 374,841
<INVENTORY> 0
<CURRENT-ASSETS> 16,159,993
<PP&E> 2,109,953
<DEPRECIATION> 1,378,829
<TOTAL-ASSETS> 20,295,861
<CURRENT-LIABILITIES> 3,978,638
<BONDS> 0
0
0
<COMMON> 80,141
<OTHER-SE> 11,895,288
<TOTAL-LIABILITY-AND-EQUITY> 20,295,861
<SALES> 8,411,782
<TOTAL-REVENUES> 8,411,782
<CGS> 4,406,778
<TOTAL-COSTS> 1,598,231
<OTHER-EXPENSES> 46,719
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 608,245
<INCOME-PRETAX> 1,751,809
<INCOME-TAX> 785,000
<INCOME-CONTINUING> 966,809
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 966,809
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
