U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended April 30, 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 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: 7,049,199 (as of May 31,
1997)
Transitional Small Business Disclosure Format (check one):
Yes |_| No|X|
<PAGE>
THE SOURCE COMPANY
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Unaudited Balance Sheet as of April 30, 1997
Unaudited Statements of Operations for the three
months ended April 30, 1997 and 1996
Unaudited Statements of Cash Flows for the three
months ended April 30, 1997 and 1996
Notes to Financial Statements
ITEM 2. Management's Discussion and Analysis
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
<PAGE>
THE SOURCE COMPANY
Unaudited Balance Sheet
April 30, 1997
- --------------------------------------------------------------------------------
Assets (Note 3)
Cash $ 78,816
Trade receivables (net of allowance
for doubtful accounts of $312,940)(Note 5) 13,559,544
Notes recevable - officers (Note 1) 108,530
Other current assets 182,762
- --------------------------------------------------------------------------------
Total Current Assets 13,929,652
- --------------------------------------------------------------------------------
Office equipment and furniture 1,888,713
Less accumulated depreciation and amortization 1,250,554
- --------------------------------------------------------------------------------
Net Office Equipment and Furniture 638,159
- --------------------------------------------------------------------------------
Other Assets
Notes receivable - officers (Note 1) 125,048
Goodwill, net of accumulated amortization of $90,325 1,004,708
Other 192,791
- --------------------------------------------------------------------------------
Total Other Assets 1,322,547
- --------------------------------------------------------------------------------
$ 15,890,358
- --------------------------------------------------------------------------------
1
<PAGE>
THE SOURCE COMPANY
Unaudited Balance Sheet
April 30, 1997
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current
Revolving line of credit (Note 3) $ 9,696,000
Checks issued against future deposits 793,358
Accounts payable and accrued expenses 389,177
Due to retailers (Note 6) 188,303
Income tax payable (Note 7) 154,466
Deferred income taxes (Note 7) 20,000
Current maturities of long-term debt (Note 2) 70,816
- --------------------------------------------------------------------------------
Total Current Liabilities 11,312,120
- --------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 2) 5,166
- --------------------------------------------------------------------------------
Deferred Income Taxes (Note 7) 145,000
- --------------------------------------------------------------------------------
Total Liabilities 11,462,286
- --------------------------------------------------------------------------------
Commitments and Contingencies
- --------------------------------------------------------------------------------
Redeemable Preferred Stock, $.01 par - shares authorized, 2,000,000;
outstanding, 5,600 522,506
Redeemable Common Stock
111,245 shares outstanding 503,820
- --------------------------------------------------------------------------------
1,026,326
- --------------------------------------------------------------------------------
Stockholders' Equity
Common Stock, $.01 par - shares authorized, 20,000,000;
outstanding 6,937,954 69,379
Additional paid-in-capital 2,764,646
Retained earnings 567,721
- --------------------------------------------------------------------------------
Total Stockholders' Equity 3,401,746
- --------------------------------------------------------------------------------
$ 15,890,358
- --------------------------------------------------------------------------------
2
<PAGE>
<TABLE>
THE SOURCE COMPANY
Unaudited Statements of Operations
<CAPTION>
Three Months Ended April 30, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service Revenues $ 2,519,531 $ 1,424,030
Merchandise Revenues 8,348 29,938
- --------------------------------------------------------------------------------------------------------------------
2,527,879 1,453,968
- --------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues 1,261,226 1,204,838
Cost of Merchandise Sold 32,720 0
- --------------------------------------------------------------------------------------------------------------------
1,293,946 1,204,838
- --------------------------------------------------------------------------------------------------------------------
Gross Profit 1,233,933 249,130
Selling, General and Administrative Expense 527,786 876,902
- --------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 706,147 (627,772)
- --------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 6,258 8,956
Interest expense (202,136) (42,322)
Other (19,142) (5,955)
- --------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (215,020) (39,321)
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 491,127 (667,093)
Income Tax Expense (Benefit) (Note 7) 235,000 (196,864)
- --------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 256,127 $ (470,229)
- --------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per Share - Primary and Fully Diluted $ .04 $
(0.07)
- --------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Primary and Fully Diluted 6,935,525 6,379,900
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
THE SOURCE COMPANY
Unaudited Statements of Cash Flows
<CAPTION>
Three Months Ended April 30, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 256,127 $ (470,229)
Adjustments to reconcile net income to
cash used in operating activities:
Depreciation and amortization 77,165 44,566
Provision for losses on accounts receivable (10,647) (16,376)
Impairment of investment in limited partnership 5,000 5,000
Increase in cash surrender value of life insurance (21,027) -
Deferred income taxes (32,000) (41,000)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (626,159) 327,263
Decrease (increase) in other assets 119,365 (307,540)
Decrease in checks issued against future deposits (2,432,310)
-
Decrease in accounts payable and accrued expenses (15,798) (525,698)
(Decrease) increase in amounts due customers (11,272) 111,571
- --------------------------------------------------------------------------------------------------------------------
Cash Used in Operating Activities (2,691,556) (872,443)
- --------------------------------------------------------------------------------------------------------------------
Investment Activities
Loan to affiliate (9,843) -
Loans to officers - (54,034)
Collections on notes receivable - 3,417
Proceeds from surrender of life insurance policies 83,959 -
Capital expenditures (115,079) (53,559)
- --------------------------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (40,963) (104,176)
- --------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of Common Stock - 30,000
Proceeds from issuance of Preferred Stock - 1,922,075
Borrowings under credit facility 9,740,000 -
Principal payments on credit facility (7,168,000) (19,714)
Borrowings under short-term debt agreements - 311,000
Repayments under short-term debt agreements (16,035) (217,000)
Registration costs (29,548) -
Preferred Stock dividends (3) -
- --------------------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 2,526,414 2,026,361
- --------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash (206,105) 1,049,742
Cash, beginning of period 284,921 23,828
- --------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 78,816 $ 1,073,570
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
THE SOURCE COMPANY
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Related Party
Transactions The Company purchased $110,000 in data processing
services from an employment service company owned by
certain officers of the Company during the three
months ended April 30, 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 April 30, 1996, the Company had a
receivable from FMG of $53,171 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
$57,300 and $46,600 for the three months ended April
30, 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
$2,700 and $0 for the three months ended April 30,
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 amounts of $233,578. Such
notes bear interest at the rate of 7.34% per annum.
2. Long-term Long-term debt consists of:
Debt
April 30, 1997
------------------------------------------------------
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 $ 37,790
Obligations under capital lease 38,192
------------------------------------------------------
Total Long-term Debt 75,982
Less current maturities 70,816
------------------------------------------------------
Long-term Debt $ 5,166
------------------------------------------------------
5
<PAGE>
3. Revolving Credit
Facility The Company has an agreement providing for a revolving
loan up to $12,500,000. 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
9.1875% at April 30, 1997). Borrowings are secured by
personal guarantees of Messrs. S. Leslie Flegel and
William H. Lee and their spouses and 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 not in
compliance with certain ratios at April 30, 1997, and,
consequently, the debt has been classified as current.
4. Supplemental
Cash Flow
Information Supplemental information on interest and income taxes
paid is as follows:
Three Months Ended April 30, 1997 1996
------------------------------------------------------
Interest Paid $173,000 $ 41,000
Income Taxes Paid (Refunded) $(59,000) $ 222,000
------------------------------------------------------
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 April 30, 1997 is
$11,821,316 due the Company under the Advance Pay
Program (net of $2,682,766 due the program
participants). Income from the program was
approximately $809,000 and $277,000 during the three
months ended April 30, 1997 and 1996, respectively.
6
<PAGE>
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
$188,303 at April 30, 1997 under such arrangements.
7. Income Taxes Provision for federal and state income taxes (benefit)
in the statements of operations consist of the
following components:
Quarter Ended April 30, 1997 1996
------------------------------------------------------
Current
Federal $213,000 $(113,488)
State 54,000 (42,376)
------------------------------------------------------
Total Current 267,000 (155,864)
------------------------------------------------------
Deferred
Federal (26,000) (36,000)
State (6,000) (5,000)
------------------------------------------------------
(32,000) (41,000)
------------------------------------------------------
Total Income Tax (Benefit)
Expense $235,000 $(196,864)
------------------------------------------------------
7
<PAGE>
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:
April 30, 1997
------------------------------------------------------
Deferred Tax Assets
Allowance for doubtful accounts $ 122,000
Deferred compensation 18,000
Other 12,000
------------------------------------------------------
Total Deferred Tax Assets 152,000
------------------------------------------------------
Deferred Tax Liabilities
Income not previously taxed
under cash basis of accounting
for income tax purposes 274,000
Depreciation 26,000
Other 17,000
------------------------------------------------------
Total Deferred Tax Liabilities 317,000
------------------------------------------------------
------------------------------------------------------
Net Deferred Tax Liability 165,000
------------------------------------------------------
Classified as:
Current 20,000
Non-current 145,000
------------------------------------------------------
Net Deferred Tax Liability $ 165,000
-----------------------------------------------------
The following summary reconciles income taxes at the
maximum federal statutory rate with the effective rate
for the first quarters of fiscal 1998 and 1997:
Quarter Ended April 30, 1997 1996
------------------------------------------------------
Income tax expense (benefit)
at statutory rate $167,000 $(226,000)
State income tax expense
(benefit), net of
federal income tax benefit 36,000 (27,000)
Non-deductible meals and
entertainment 10,000 15,000
Non-deductible goodwill
amortization 10,000 1,000
Non-deductible officers'
life insurance 4,000 10,000
Other, net 8,000 30,136
------------------------------------------------------
Income Tax Expense (Benefit) $235,000 $(196,864)
------------------------------------------------------
8
<PAGE>
8. Subsequent Events 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 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 intends to continue the
operation of such business.
9. Unaudited Financial In the opinion of management, the unaudited financial
Statements information as of April 30, 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 three months ended April 30, 1997 are not
necessarily indicative of the results to be expected
for the entire year.
The financial statements and notes are presented as
permitted by Form 10-QSB, and do not contain certain
information included in the Company's audited
financial statements and notes for the fiscal year
ended January 31, 1997.
9
<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 from
magazine publishers to magazine and periodical retailers. The Company has
developed a contractual relationship with approximately 50,000 mass merchandise,
grocery, convenience 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 and holds power of attorney from its
retailer clients to collect incentive payments from publishers.
The Company has engaged in several acquisitions in order to expand its
market presence and increase the number of its mid-sized chain retailer clients.
In June of 1995 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 Company expanded its operations in the upper midwest
through the acquisitions of Magazine Marketing, Inc. and Readers Choice, Inc.,
formerly a wholly owned subsidiary of United Magazine Company. On May 30, 1997,
the Company continued to expand by acquiring Mike Kessler and Associates, Inc.
located in Fair Lawn, New Jersey.
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. 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.
10
<PAGE>
Under both the standard arrangement and the Advance Pay Program
commission revenue is 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.
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:
Three Months Ended April 30,
----------------------------
1997 1996
---- ----
Service Revenues 99.7% 97.9%
Merchandise Revenues 0.3% 2.1%
Total Revenues 100.0% 100.0%
Cost of Service Revenues 49.9% 82.9%
Cost of Merchandise Sold 1.3% 0.0%
Gross Profit 48.8% 17.1%
Selling, General & Administrative
Expense 20.9% 60.3%
Operating Income (Loss) 27.9% (43.2)%
Interest Expense, Net (7.7)% (2.3)%
Other Income (Expense), Net (0.8)% (0.4)%
Income (Loss) Before Income Taxes 19.4% (45.9)%
Net Income (Loss) 10.1% (32.3)%
11
<PAGE>
Service Revenues
Increased retailer participation in the Advance Pay Program, the
acquisitions of Magazine Marketing, Inc. and Readers Choice, Inc. and the
implementation of PIN during the third quarter of fiscal year 1997 contributed
to an increase in service revenue during the first quarter of fiscal 1998 of
approximately $817,000 over the comparable period in fiscal 1997. Also, space
design revenue increased from $32,000 for the quarter ended April 30, 1996 to
$310,000 for the quarter ended April 30, 1997. Currently, the Company is
negotiating flat fee arrangements; however, historically, space 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.
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.
Cost of Service Revenues and Selling, General and Administrative Expense ("Total
Costs")
Total Costs decreased approximately $293,000. Bad debt expense
decreased $151,000 causing the largest decrease in Total Costs. Travel and
entertainment expenses decreased $23,000 and $16,000, respectively. Life
insurance expense decreased $26,000 due to the surrender of certain policies
during the fourth quarter of fiscal year 1997. Contract labor and data entry
costs decreased $120,000 as a result of permanent hirings. However, these
decreases were partially offset by increased labor costs. Depreciation and
amortization increased $32,000 due to business acquisitions and capital
expenditures that occurred subsequent to the first quarter of fiscal 1997.
Interest Expense
Interest Expense increased $160,000 due to increased borrowings
necessary to fund the Advance Pay Program.
Income Tax Expense (Benefit)
The effective income tax rate for the quarter ended April 30, 1997 was
47.8%. This rate 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.
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
and travel) incurred in connection with the solicitation of new clients and the
maintenance of existing accounts. Historically, the Company has financed its
business activities through short-term borrowings under available lines of
credit, cash flow from operations and through the issuance of equity securities.
12
<PAGE>
Net cash used by operating activities increased from $872,000 during
the quarter ended April 30, 1996 to $2,692,000 during the quarter ended April
30, 1997. During the quarter ended April 30, 1997, $2,432,000 was used to cover
checks drawn against future deposits at January 31, 1997 and net cash used for
the Advance Pay Program was approximately $287,000.
The average collection period for the three month period ended April
30, 1997 was 127 days compared to 122 days for the three month period ended
April 30, 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 April 30, 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 $12,500,000 with Wachovia Bank of North Carolina, N.A. 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. Borrowings are secured by personal guarantees of Messrs. S. Leslie
Flegel and William H. Lee and their spouses and 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.
On February 28, 1997, the Company issued 7,721 shares of Common Stock
as a dividend to the Preferred Stockholders as of that date.
At April 30, 1997, the Company's total long-term debt obligations were
$76,000. Of such amount, $71,000 matures in the next 12 months. The Company
anticipates that the funds necessary to satisfy these obligations will be
derived primarily from cash flows from operations.
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 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
intends to continue the operation of such business.
The Company believes that it will be necessary to raise additional
funds through the sale of its equity securities in order to achieve management's
goals with respect to (i) expanding the Company's business in new and existing
services, particularly the Advance Pay Program, products and geographic areas,
directly or by acquisition, and (ii) increasing its shareholder base and the
market and liquidity of its securities. Accordingly, the Company intends to
offer approximately 2,000,000 shares of its Common Stock to the public through
an underwriter on a firm commitment basis. The Company anticipates that the
offering will commence in September, 1997, and will provide the Company with
proceeds of approximately $7,000,000 after deducting underwriting discounts and
commissions and other offering expenses.
13
<PAGE>
PART II - OTHER INFORMATION
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
April 30, 1997.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE SOURCE COMPANY
Date: June 16, 1997 /s/ W. BRIAN RODGERS
-----------------------------
W. Brian Rodgers
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
27.1 Financial Data Schedule (Filed in EDGAR version only)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the Balance
Sheet at April 30, 1997 (Unaudited) and the Statement of Operations for the
Three Months Ended April 30, 1997 (Unaudited) and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> APR-30-1997
<CASH> 78,816
<SECURITIES> 0
<RECEIVABLES> 13,872,484
<ALLOWANCES> 312,940
<INVENTORY> 0
<CURRENT-ASSETS> 13,929,652
<PP&E> 1,888,713
<DEPRECIATION> 1,250,554
<TOTAL-ASSETS> 15,890,358
<CURRENT-LIABILITIES> 11,312,120
<BONDS> 0
0
0
<COMMON> 69,379
<OTHER-SE> 3,332,367
<TOTAL-LIABILITY-AND-EQUITY> 15,890,358
<SALES> 2,527,879
<TOTAL-REVENUES> 2,527,879
<CGS> 1,293,946
<TOTAL-COSTS> 527,786
<OTHER-EXPENSES> 12,884
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 202,136
<INCOME-PRETAX> 491,127
<INCOME-TAX> 235,000
<INCOME-CONTINUING> 256,127
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 256,127
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
