AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 15 , 1997
Registration No. 333- 32733
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
Under the
SECURITIES ACT OF 1933
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Name of Small Business Issuer in Its Charter)
Missouri 7374 43-1710906
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Identification Number)
Classification
Code Number)
W. Brian Rodgers
Chief Financial Officer
11644 Lilburn Park Road 11644 Lilburn Park Road 11644 Lilburn Park Road
St. Louis, Missouri 63146 St. Louis, Missouri 63146 St. Louis, Missouri 63146
(314) 995-9040 (314) 995-9040 (Address of Principal
(Address and Telephone (Name, Address and Telephone Place of Business
of Principal Number of Agent for Service) or Intended Place
Executive Offices) of Business)
Copies of all correspondence to:
Douglas J. Bates, Esq. Michael D. DiGiovanna, Esq.
Gallop, Johnson & Neuman, L.C. Parker Duryee Rosoff & Haft
101 South Hanley Road 529 Fifth Avenue
St. Louis, Missouri 63105 New York, New York 10017
(314) 862-1200 (212) 599-0500
Approximate Date of Proposed Sale to the Public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 10 , 1997
PROSPECTUS [LOGO]
2,000,000 Shares
THE SOURCE INFORMATION MANAGEMENT COMPANY
Common Stock
--------------
The Source Information Management Company, a Missouri corporation (the
"Company"), is offering hereby 2,000,000 shares of its common stock (the "Common
Stock"). If the option granted to the Representative to cover over-allotments is
exercised, certain shareholders of the Company (the "Selling Shareholders") will
also offer up to 300,000 shares of Common Stock pursuant to this
Prospectus. The Company will not directly receive any of the proceeds
from the sale of Common Stock by the Selling Shareholders. See "PRINCIPAL AND
SELLING SHAREHOLDERS."
The Common Stock is quoted on The Nasdaq SmallCap Market ("Nasdaq
SmallCap") under the symbol "SORC." On September 8, 1997 , the last sale
price of the Common Stock, as reported on Nasdaq SmallCap, was $3.06 per
share, or $3.71 per share after giving effect to the proposed 1-to-1.21 reverse
stock split. See "PROSPECTUS SUMMARY" and "PRICE RANGE OF COMMON STOCK".
The securities offered hereby involve a high degree of risk. See "RISK
FACTORS" commencing on page 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Price to Underwriting Proceeds to
Public Discounts(1) Company(2)
Per Share $ $ $
Total(3) $ $ $
(1) Does not include additional compensation payable to Donald & Co.
Securities Inc., acting as representative (the "Representative") of the
several underwriters identified elsewhere herein (the "Underwriters"),
in the form of a non-accountable expense allowance equal to 2% of the
gross proceeds of this offering. The Company has also agreed to sell
the Representative warrants to purchase up to 200,000 shares of Common
Stock at an exercise price of $ per share, subject to adjustment,
exercisable over a period of four years commencing one year from the
date hereof (the "Representative's Warrants") and to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). See
"UNDERWRITING."
(2) Before deducting expenses estimated to be $450,000, payable by the
Company, including the Representative's nonaccountable expense
allowance.
(3) The Selling Shareholders have granted the Representative an
option exercisable within 45 days after the date of this Prospectus
(the "Over-Allotment Option") to purchase up to 300,000 additional
shares of Common Stock, on the same terms and conditions as set forth
above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts,
Proceeds to Company and Proceeds to Selling Shareholders will be $ , $
, $ and $ , respectively. The Company will not receive any of the
proceeds from the sale of Common Stock by the Selling Shareholders. See
"PRINCIPAL AND SELLING SHAREHOLDERS" and "UNDERWRITING."
The Common Stock is being offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to approval of certain legal matters by their counsel and subject to
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify this offering and to reject any order in whole or in part. It is
expected that delivery of the certificates evidencing the Common Stock will be
made against payment therefor on or about _____________, 1997 at the offices of
Donald & Co. Securities Inc., New York, New York or through the facilities of
the Depository Trust Company.
DONALD & CO. SECURITIES INC.
The date of this Prospectus is _________, 1997
<PAGE>
[MAP]
The Company is currently a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and furnishes its
shareholders with annual reports containing audited financial statements
after the close of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING TRANSACTIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
(IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ SMALL-CAP MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the notes related thereto, appearing
elsewhere in this Prospectus. Except as otherwise indicated, all information in
this Prospectus (other than the historical financial statements contained
herein) reflects the formation of the Company and subsequent acquisitions, as if
such transactions had occurred on February 1, 1995. See "BUSINESS -Formation of
the Company." All share and per share data in this Prospectus (other than the
historical financial statements contained herein) (i) have been adjusted to give
effect to a 1-to-1.21 reverse stock split to occur as of the date of this
Prospectus and (ii) assume that the Representative's Over-Allotment Option, the
Representative's Warrants and all other options and warrants outstanding on the
date of this Prospectus will not be exercised.
The Company
For more than 20 years, The Source Information Management Company (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
approximately 710 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.
The Company intends to continue to capitalize on its retailing
experience and extensive database of single copy magazine sales information.
Since the introduction of PIN, several leading publishers have subscribed,
including Time Distribution Services, ICD/The Hearst Corp. and Globe Marketing
Services. In addition, the Company is currently preparing to launch a new
administrative support service enabling publishers and retailers to efficiently
verify and correct price changes and other information contained in the
magazine's uniform product code ("UPC"). The Company also intends to introduce
services, comparable to those currently offered, in connection with
merchandising of high volume consumer products other than magazines, and the
processing and collection of incentive payments and cooperative advertising
payments offered with respect thereto.
The Company's integrated software system is designed to efficiently and
accurately accumulate and manage sales data with respect to sales of low-cost,
high volume consumer products, allowing the Company's retailer clients to
optimize the effectiveness of their marketing effort. While the Company's
software system was developed to aid retailers in the collection of sales
incentive payments and the merchandising of magazines, it has been used in
connection with integrated magazine and confections displays and may be
adaptable for use in connection with most other consumer products, including
high volume items such as soft drinks and batteries. Such capability enables the
Company to provide consulting services to retailers, such as Kmart Corporation
which has engaged the Company to provide services with respect to the
reconfiguration of display fixtures in the checkout area of its stores,
including fixture design, product selection, plan-o-gramming, vendor
negotiation, vendor billing and collection, fixture prototype review and
supervision of fixture installation.
The Company was formed by the consolidation of two significant
providers, Display Information Systems Corporation ("DISC") and Periodical
Management and Marketing, Inc. ("PMM"), of information services to retailers of
magazines. The Company has expanded, and intends to continue to expand, through
the acquisition of businesses and technologies that address additional services
or products, market segments or geographic regions in which the Company is not
currently active and which would allow the Company to expand the services
offered to its clients, or its ability to support existing or planned services.
3
<PAGE>
Client Services
The Company is dedicated to providing full information services to its
clients. Such services include the following:
Claim Submission. Through its software system, the Company offers to
assist retailers in accurately monitoring, documenting, claiming and
collecting publisher incentive payments. Based on information gathered
with respect to the titles and number of copies actually sold, the
Company prepares publisher supplied claim forms and submits the
documented claim for payment to the appropriate national distributor,
which acts as payment agent for the publisher. Typically, the Company
receives payment to the order of the retailer, records the payment and
forwards it to the retailer. The Company charges the retailer a
negotiated percentage of the cash collected. As an extension of its
claim submission service, the Company has established an Advance Pay
Program. Under this program, the Company advances an agreed upon
percentage of the incentive payments due the retailer from magazine
publishers. It then directly collects from the publishers the claims
due to the retailer. Service revenues earned under the Advance Pay
Program generally exceed those charged under the traditional method.
Periodical Information Network. The Company's large and sophisticated
database of magazine industry information has resulted in it becoming a
magazine information center which many companies in the magazine
industry use to formulate their publishing and distribution strategies.
PIN is a comprehensive system designed to use current computer
technologies, including CD ROM, to effectively manage all elements of
its database including information packaging and efficient inbound,
outbound access. The network provides access to periodically updated
historical information concerning the titles and quantity of each title
sold by retailers for analysis purposes. Several leading
publishers have subscribed to PIN.
Space Design. Through its Display Group, the Company offers to assist
retailers in the placement of displays and the selection of titles to
optimize available display space, and thereby to maximize sales and
incentive payment revenues. Based on its knowledge of local consumer
preferences and the terms and conditions of publisher incentive payment
programs, the Company analyzes the retailer's store layout, customer
traffic patterns and available display alternatives. Thereafter, the
Company consults with its retailer client to develop an appropriate
display program.
Marketing and Promotional Program. As part of its full-service
philosophy, the Company offers its clients advice and suggestions
concerning specialized marketing and promotional programs which may
include, for example, special mainline and checkout displays and
cross-promotions of magazines and products of interest to readers of
such magazines. Such services are offered to enhance single copy
magazine sales by the Company's clients, and thereby increase service
revenue due the Company in connection with the submission of incentive
payment claims; accordingly, no separate charge is made for these
services.
Administrative Support. The Company assists retailers to more
efficiently conduct their magazine sales operations through
computerized inventory control, automated pricing updates and
management reporting. For example, the Company is currently preparing
to launch a new administrative support service enabling publishers and
retailers to efficiently verify and correct price changes and other
information contained in the magazine's uniform product code ("UPC").
The Source Information Management Company is organized under the laws
of the State of Missouri, its principal executive offices are located at 11644
Lilburn Park Road, St. Louis, Missouri 63146, and its telephone number is (314)
995-9040.
4
<PAGE>
The Offering
Securities Offered hereby........ 2,000,000 shares of Common Stock, $0.01
par value per share
Common Stock Outstanding
Prior to the Offering(a)....... 6,014,263 shares of Common Stock,
$0.01 par value per share
Common Stock Outstanding
After the Offering............. 8,014,263 shares of Common Stock,
$0.01 par value per share
Use of Proceeds.................. To fund the expansion of the Company's
Advance Pay Program, the development of
new or enhanced products and services,
the acquisition by the Company of one or
more businesses and to fund working
capital and other general corporate
activities, including the continued
upgrade of the Company's computer
systems. See "USE OF PROCEEDS."
Risk Factors..................... This offering involves a high degree of
risk. See "RISK FACTORS" beginning on
page 7 .
Nasdaq SmallCap Trading Symbol: SORC
- ----------
(a) Based on shares outstanding as of September 4 , 1997, after
giving retroactive effect to the proposed reverse stock split. Includes
91,938 shares of Common Stock with respect to which the holder thereof
has been granted an option to sell such shares to the Company at a
price of $4.84 per share subject to adjustment. Excludes shares
reserved for issuance under the Company's stock option and other stock
based plans and upon exercise of the Over-Allotment Option, the
Representative's Warrants , as well as 408,414 reserved for issuance
under other outstanding warrants . See "CAPITALIZATION" and
"UNDERWRITING."
5
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data should be read in conjunction with the
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
January 31, July 31,
Statements of Operations Data: 1997 1996 1997 1996
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Service Revenue................................ $7,056,270 $7,195,176 $5,459,668 $2,633,958
Merchandise Revenue............................ 242,177 926,008 8,348 124,540
---------- --------- --------- ----------
Total Revenue................................ 7,298,447 8,121,184 5,468,016 2,758,498
---------- ---------- --------- ---------
Gross Profit................................. 2,233,859 3,711,962 2,583,439 396,152
Selling, General &
Administrative Expenses...................... 2,904,372 2,799,841 1,062,128 1,671,502
---------- ---------- --------- ----------
Operating Income (Loss)...................... (670,513) 912,121 1,521,311 (1,275,350)
Other Expense, Net ............................ 309,992 314,127 442,713 108,653
---------- ---------- --------- ----------
Income (Loss) Before Income Taxes.............. (980,505) 597,994 1,078,598 (1,384,003)
Net Income (Loss)............................ (603,317) 191,994 589,598 (905,540)
Earnings (Loss) Per Share...................... $ (0.09) $ 0.03 $ 0.07 $ (0.14)
Weighted Average
Outstanding Shares........................... 6,658,891 6,084,542 7,087,838 6,463,909
Pro Forma(1) Earnings (Loss) Per Share......... $ (0.11) $ 0.06 $ 0.08 $ (0.17)
Pro Forma(1) Weighted Average
Outstanding Shares........................... 5,503,215 5,028,547 5,857,717 5,342,074
<CAPTION>
July 31, 1997
Balance Sheet Data: Actual As Adjusted(2)
- ------------------- ------ --------------
<S> <C> <C>
Working Capital................................ $ 11,681,190 $ 11,681,190
Total Assets................................... 20,079,046 20,079,046
Long-term debt, less current portion........... 10,960,682 4,050,682
Redeemable Common Stock ....................... 503,820 503,820
Stockholders' Equity........................... 4,265,724 11,175,724
<FN>
(1) Pro forma data is presented to reflect a provision for income taxes
as if DISC, a Subchapter S Corporation prior to the merger between DISC
and PMM, had not been a Subchapter S Corporation, and the proposed
1-to-1.21 reverse stock split.
(2) Assumes (a) the net proceeds of this offering will be applied
initially to the temporary reduction of the outstanding principal
balance of the Company's credit facility resulting in total
availability thereunder of $8,461,000 and (b) the proposed 1-to-1.21
reverse stock split. .
</FN>
</TABLE>
6
<PAGE>
RISK FACTORS
Any forward-looking statements set forth in this Prospectus are
necessarily subject to significant uncertainties and risks, including, but not
limited to those set forth in "RISK FACTORS." When used in this Prospectus, 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.
Prospective Investors should consider carefully the following factors,
in addition to the other information contained in this Prospectus, in evaluating
an investment in the Common Stock offered hereby.
Dependence on the Marketing and Distribution Strategy of Publishers
Substantially all of the Company's revenues are currently derived from
the service revenues earned in connection with the collection of payments owed
to the Company's retailer clients from magazine publishers under programs
designed by publishers to provide magazine retailers with an incentive to
increase single copy magazine sales. Although these incentive programs have been
offered as part of the publishers' overall marketing strategy for more than 20
years, the incentive programs are governed by short-term contracts and,
accordingly, magazine publishers are under no long-term contractual obligation
to continue the incentive programs in their present form or otherwise. Certain
magazine publishers have entered into experimental contracts with magazine
retailers under which selected magazines and other periodicals are distributed
directly to such retailers rather than indirectly though independent magazine
distributors. Such arrangements replace the traditional incentive payment
programs with discounted sale pricing. If magazine publishers increase the use
of direct retail distribution without incentive payment programs or otherwise
discontinue or significantly modify the incentive programs to which the
Company's services relate in a manner which is not compatible with the Company's
services, the Company's results of operations and financial condition may be
materially and adversely affected. See "BUSINESS-The Magazine Industry."
Risk Associated with the Advance Pay Program
The recent increases in revenue and profitability recorded by the
Company result, in part, from the admission of existing retailer clients to the
Advance Pay Program. The profitability of the Advance Pay Program is dependent,
in part, on (a) the difference between the service revenues collected by the
Company with respect to the Advance Pay Program and the interest paid by the
Company for borrowed funds advanced thereunder and (b) the length of the
collection period of the trade accounts receivable associated with the Advance
Pay Program. Interest rates applicable to borrowings made by the Company are
subject to fluctuation and any decrease in the spread between service revenues
collected and interest paid would have a negative effect on the Company's
results of operations and financial condition. The availability of funds under
the Company's credit facility is conditioned on the maintenance of certain
financial ratios. There can be no assurance that the Company will be able to
satisfy such conditions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital Resources."
Additionally, any increase in the average collection period for trade accounts
receivable associated with the Advance Pay Program will increase the Company's
interest expense and have a negative effect on the Company's results of
operations and financial condition.
Furthermore, in connection with the Advance Pay Program, the Company
assumes the risk otherwise borne by the retailer client that magazine publishers
will refuse or be unable to pay the amount of incentive payments claimed. Based
on historical experience, the Company maintains a reserve of 2% of all claims
submitted against such refusal or inability to pay. However, if a prominent
magazine publisher files a petition in bankruptcy or otherwise seeks protection
from its creditors, such reserve may be inadequate and the results of operations
and financial condition of the Company could be materially and adversely
affected.
7
<PAGE>
Unspecified Acquisitions
The Company has allocated $500,000 (or 7.2%) of the net proceeds of
this offering to acquire businesses primarily by issuing equity securities, but
may also utilize cash payments or debt financing, or both, in making
acquisitions. At the date of this Prospectus, the Company has no commitments or
contracts to acquire any businesses. Furthermore, management has not selected
any specific business for investment of any of the proceeds of this offering.
Purchasers of Common Stock will not have the opportunity to vote on any such
potential acquisitions or review the financial status of any business to be
acquired. Shareholders of the Company must rely upon management for prudent
expenditure of the funds of the Company in making such acquisitions. Management
of the Company does not anticipate seeking independent appraisals of any
businesses which it may acquire.
Possible Need for Additional Financing
To date, the Company has met its liquidity requirements through the
private sale of its equity securities and borrowings under existing credit
facilities. However, the Company will not be able to expand its Advance Pay
Program, in accordance with the Company's current plan without additional
financing. If the proceeds of this offering together with the Company's
currently available funds and internally generated cash flows are not sufficient
to satisfy its financing needs, the Company likely will seek additional funding
through increased bank borrowings and/or the public or private sale of debt or
equity securities. There can be no assurance that additional funds will be
available on a timely basis, on acceptable terms or at all, or that such funds,
if raised, would be sufficient to permit the Company to continue its expansion
as planned. If the proceeds of this offering and funding through any additional
public or private sales of debt or equity securities are inadequate, and
borrowings under the existing credit facility or a comparable replacement
thereof are not available, the Company may be required to curtail the Advance
Pay Program. If the Company is required to pay $2,150,000 from its credit
facility in connection with amounts due for an acquisition, the amount available
for the Advance Pay Program would be reduced. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Liquidity and
Capital Resources."
Risk of Increased Competition
Competition among providers of many of the Company's products and
services, particularly the processing of incentive payment claims, is highly
competitive. While such competition is fragmented, the Company recognizes
approximately 32 direct competitors, all of which are closely-held private
companies. Based on its review of the industry and informal discussions with
magazine publishers and retailers, the Company believes that none of its direct
competitors have greater financial, technological, marketing and sales resources
than the Company. However, it is possible that certain services offered by the
Company could be performed directly by its retail customers or otherwise offered
or performed in the future by publishers, distributors or other organizations,
such as Nielsen IRI and Audit Bureau of Circulation. Many of such organizations
have greater financial, technological, marketing and sales resources than the
Company. Additionally, competitors may develop new or different service programs
which are perceived by customers to be of similar or superior quality at the
same or lower prices than the Company's services. There can be no assurance that
its present competitors or companies that choose to enter its marketplace in the
future will not exert significant competitive pressures on the Company resulting
in a deterioration of the business environment in which the Company operates,
including a decrease in the number of clients served by the Company and a
decrease in the service revenues chargeable by the Company. See
"BUSINESS-Competition."
8
<PAGE>
Management of Expansion
The Company intends to continue to implement its expansion strategy
through the acquisition of one or more companies which offer products and
services compatible to those of the Company, some of which may involve products
or services with which management of the Company has little or no experience.
Such acquisitions also could continue to place a significant strain on the
Company's capital and human resources. There can be no assurance that the
Company will be able to adequately manage its expansion successfully, introduce
new services or products, or integrate any business which it may acquire, the
failure of any of which could have a material adverse effect on the Company.
Need to Manage New Service Introduction
The Company believes that its future growth is dependent, in part, on
its ability to anticipate the informational needs of existing and potential
clients and develop and introduce, in a timely manner, new services that
adequately address such needs. There can be no assurance that the Company will
be successful in developing, introducing and marketing new services. If the
Company is unable to introduce new services or if the Company's new services do
not receive sufficient market acceptance, the Company's revenues and results of
operations may be adversely affected.
Limited Trading Volume for Common Stock.
Although the Company's Common Stock is quoted on Nasdaq SmallCap, the
volume of shares of Common Stock actually traded, as reported by Nasdaq
SmallCap, averaged approximately 28,000 shares per week during the
four-week period ended August 29 , 1997. There can be no assurance that a
public market having the desirable characteristics of depth, liquidity and
orderliness, over which neither the Company, its affiliates, nor any marketmaker
has control will develop or, if developed, will be sustained. Persons purchasing
the securities offered hereby may be unable to readily sell such securities at
such time or price as the security holder may desire.
Possible Delisting
The trading of the Common Stock on the Nasdaq SmallCap is conditioned
upon the Company meeting certain asset, capital and surplus, earnings and stock
price tests. The requirements to maintain eligibility on the Nasdaq SmallCap
requires the Company to maintain net tangible assets in excess of $2,000,000,
and (subject to certain exceptions) a bid price of $1.00 per share. If the
Company fails to satisfy either of these tests, the Common Stock may be delisted
from trading on the Nasdaq SmallCap. The effects of delisting include the
limited release of market prices of the Common Stock and more limited news
coverage of the Company. Delisting may restrict investors interest in the Common
Stock and materially adversely effect the trading market and prices for the
Common Stock and the Company's ability to issue additional securities or to
secure additional financing.
Penny Stock Regulation
If the Common Stock were delisted from trading on the Nasdaq SmallCap
and the trading price of the Common Stock were less than $5.00 per share, the
Common Stock would be subject to Rule 15g-2 under the Exchange Act, which among
other things requires that brokers/dealers satisfy special sales practice
requirements, including making individualized written suitability determinations
and receiving a purchaser's written consent prior to any transaction. If the
Common Stock was delisted and the trading price was less than $5.00 per share,
the Common Stock could also be deemed Penny Stock under the Securities
Enforcement and Penny Stock Reform Act of 1990, which would require additional
disclosure in connection with trades in the Common Stock including the delivery
of a disclosure schedule explaining the nature and risks of the penny stock
market. Such requirements could severely limit the liquidity of the Common Stock
and the ability of purchasers in this offering to sell their shares in the
secondary market.
9
<PAGE>
Shares Eligible for Future Sale; Preferred Stock; Registration Rights
Of the 6,014,263 shares of Common Stock outstanding on
September 4, 1997, 1,656,854 shares are currently eligible for
sale to the public by persons who are not "affiliates" of the Company without
restriction except, in certain cases, volume limitation. All of the remaining
shares of Common Stock outstanding are "restricted" within the meaning of Rule
144 under the Securities Act, and may not be sold in the absence of
registration under the Securities Act or the exemption therefrom.
However, the Company, its executive officers and directors and certain other of
its shareholders, who as of September 4, 1997 beneficially held an
aggregate of 4,728,364 shares of Common Stock, have agreed that they will
not without the prior consent of the Representative, sell or otherwise dispose
of any shares of Common Stock beneficially owned by them for a period of one
year from the date of this Prospectus. Thereafter, such persons are entitled to
sell, without the consent of the Representative, an increasing portion of the
shares beneficially owned by them, subject in some cases to the volume and other
conditions of Rule 144.
Pursuant to authority granted by its Articles of Incorporation, the
Company's Board of Directors has authority to issue up to 2,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions thereof, including voting rights, without any further vote or
action by the Company's shareholders. The voting and other rights of the holders
of Common Stock will be subject to and may be adversely affected by the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in connection
with obtaining necessary capital resources and for other corporate purposes,
could have the effect of delaying, deferring or preventing a change of control
of the Company. The Company has no current arrangements to issue any additional
shares of Preferred Stock. See "DESCRIPTION OF CAPITAL STOCK."
The Company has filed a registration statement under the
Securities Act to register an aggregate of 520,661 shares of Common Stock issued
or reserved for issuance under the Company's 1995 Incentive Stock Option
Plan and 41,322 shares issued or reserved for issuance under the Company's Stock
Award Plan. The holders of approximately 619,061 shares of Common Stock
have the right to require the Company to file a registration statement with
respect to the sale of such shares. No prediction can be made as to the effect,
if any, that future sales of Common Stock or the availability of such shares for
sale will have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of Common Stock, or the perception that such
sales might occur, could adversely effect the prevailing market price of the
Common Stock. See "CAPITALIZATION" and "SHARES ELIGIBLE FOR FUTURE SALE."
Continued Control By Management
Upon completion of this offering, the Company's executive officers and
directors will beneficially own approximately 47.8% (45.0% if the
Over-Allotment Option is exercised in full) of the outstanding shares of Common
Stock. As a result, the Company's executive officers and directors will have
effective voting control of the Company and the practical ability to elect all
of the Company's directors and determine the vote on any matter being voted on
by the Company's shareholders, including any merger, sales of assets or other
change of control of the Company. The Company's Articles of Incorporation and
Bylaws do not provide for cumulative voting in the election of directors. See
"PRINCIPAL AND SELLING SHAREHOLDERS" and "CERTAIN PROVISIONS OF THE ARTICLES OF
INCORPORATION AND BYLAWS."
10
<PAGE>
Related Party Transactions; Potential Conflicts of Interest
From time to time, the Company has engaged in various transactions with
its directors, executive officers and other affiliated parties. The terms and
conditions of such transactions were not negotiated on an arms-length basis and
inherently involve conflicts of interest between the Company and the related
party. However, all future transactions between the Company and its officers,
directors, principals, shareholders and affiliates will be approved by a
majority of the independent and disinterested outside directors and must be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties under similar circumstances.
Dependence on Key and Other Personnel
The Company believes that its success is dependent, in part, on the
efforts of its key executives, including S. Leslie Flegel and William H. Lee.
The Company has entered into employment agreements with all of its key
executives except W. Brian Rodgers and Messrs. Flegel and Lee, each of which
are required as a condition to the consummation of this offering to enter into
an employment agreement with the Company effective as of the date of this
Prospectus . Although the Company believes that the loss of no single
executive will have a material adverse effect on the Company, certain events,
many of which are beyond the control of the Company, could result in the loss of
the services of such executives. The Company has procured and intends to
maintain policies of insurance on the lives of certain members of its senior
management, including Messrs. Flegel and Lee. See "MANAGEMENT."
No Dividends With Respect to Common Stock
The Company currently anticipates that it will retain all of its future
earnings, if any, for use in the expansion and operation of its business, and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. There can be no assurance that the Company will pay cash
dividends at any time with respect to the Common Stock, or that the failure to
pay dividends for a period of time will not adversely affect the market price
for the Company's Common Stock. See "PRICE RANGE OF COMMON STOCK AND DIVIDEND
POLICY."
Anti-Takeover Affects of Articles of Incorporation and Bylaws
The Company's Board of Directors has authority to issue up to 2,000,000
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions thereof, including voting rights, without any
further vote or action by the Company's shareholders. The voting and the rights
of the holders of Common Stock will be subject to and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with obtaining necessary capital resources and other corporate
purposes, could have the affect of delaying, deferring or preventing a change in
control of the Company. The Company has no current arrangements to issue any
additional shares of preferred stock. See "DESCRIPTION OF CAPITAL STOCK." In
addition, the Company's Articles of Incorporation and Bylaws include certain
provisions providing for the staggered election of directors and restrictions on
the ability of shareholders to call special meetings of shareholders. See
"CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS." The Company is
also subject to the Missouri Takeover Bid Disclosure Act, which under certain
circumstances may prohibit a business combination between the Company and a
shareholder owning 20% or more of the outstanding voting power of the Company.
Such provisions could have the affect of delaying, deferring or preventing a
change in control of the Company.
11
<PAGE>
Representative's Warrants
The Company will sell to the Representative and/or its designees, for
nominal consideration, the Representative's Warrants to purchase from the
Company up to 200,000 shares of Common Stock. The Representative's Warrants are
exercisable for a period of four years commencing on the first anniversary of
the date of this Prospectus, at an exercise price equal to $_____________ per
share. For the life of the Representative's Warrants, the holders are given, at
nominal cost, the opportunity to profit from a rise in the market price for the
securities of the Company without assuming the risk of ownership, with a
resulting dilution in the interest of other security holders. As long as the
Representative's Warrants remain unexercised, the terms under which the Company
could obtain additional capital may be adversely affected. Moreover, the holders
of the Representative's Warrants may be expected to exercise them at a time when
the Company would, in all likelihood, be able to obtain any needed capital by a
new offering of its securities on terms more favorable than those provided by
the Representative's Warrants. Additionally, if the holders of the
Representative's Warrants should exercise their registration rights to effect a
distribution of the Representative's Warrants or underlying securities, the
Representative, prior to and during such distribution, will be unable to make a
market in the Company's securities and will be required to comply with other
limitations on trading set forth in Rules 101, 103, and 104 of Regulation M
promulgated under the Exchange Act. Such rules restrict the solicitation of
purchasers of a security when a person is interested in the distribution of such
security and also limit market making activities by an interested person until
the completion of the distribution. If the Representative must cease making a
market, the market and market price for such securities may be adversely
affected and the holders of such securities may be unable to sell such
securities. See "UNDERWRITING."
Representative's Influence on the Market
A significant amount of the Common Stock offered hereby may be sold to
customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of shares of Common Stock through or with
the Representative. If it participates in the market, the Representative
may exert a dominating influence on the market for the shares of Common Stock
offered hereby. Such market making activity may be discontinued at any time. The
price and liquidity of the shares may be significantly affected by the
degree, if any, of the Representative's participation in such market. See
"DESCRIPTION OF CAPITAL STOCK" and "UNDERWRITING."
12
<PAGE>
USE OF PROCEEDS
The following table sets forth the Company's anticipated use of
proceeds, expressed in dollars and as a percentage of gross proceeds.
Amount Percentage
------ ----------
Gross proceeds $8,000,000 100.0%
Less:
Underwriting discounts 640,000 8.0%
Offering expenses 450,000 5.6%
---------- ------
Net proceeds $6,910,000 86.4%
---------- -------
Use of Proceeds:
Expansion of Advance Pay Program 5,000,000 62.5%
Development of new or enhanced
products and services 1,310,000 16.4%
Acquisition of one or more
businesses 500,000 6.3%
Working Capital and general corporate
purposes, including the continued
upgrade of the Company's computer systems 100,000 1.2%
----------- --------
Total Use of Proceeds $6,910,000 100.0%
=========== ========
Pending the use of the net proceeds from the sale of the shares of
Common Stock as described above such funds will be used to temporarily reduce
the principal balance under the Company's credit facility. Such credit facility
provides for the availability of up to $12,500,000 of borrowings until
termination by Wachovia Bank on not less than 13 months prior notice. At July
31 , 1997, the outstanding principal balance under this credit facility was
$10,949,000 the effective interest rate thereon was 9.1875% and the
unused availability thereunder was approximately $1,551,000 . After
application of the net proceeds of this offering to the temporary repayment of
the outstanding principal balance on its credit facility, the Company intends to
make additional borrowings under the credit facility for the foregoing purposes.
The foregoing represents the Company's present intentions for the use
of the proceeds of this offering based on its currently contemplated operations,
business plan and currently prevailing economic and industry conditions. The
Company's business plan contemplates that the Company may acquire businesses or
introduce additional products and services. Although the Company has had and
will continue to have discussions with potential acquisition candidates it does
not have any present agreements or understandings with respect to any
significant acquisitions. Changes in the proposed expenditures may be made in
response to, among other things, changes in the Company's plans and its future
revenues and expenditures, as well as changes in general industry conditions and
technology.
The Company believes that the net proceeds of this offering, cash flow
from operations, trade credit and existing lines of credit will be sufficient to
meet its immediate cash needs and finance its plans for expansion for the
indefinite future, and in any case for not less than twelve months from the date
of this Prospectus. This belief is based upon certain assumptions regarding the
13
<PAGE>
Company's business and cash flow as well as prevailing industry and economic
conditions. The Company's capital requirements may vary significantly, depending
on how rapidly management seeks to expand the business and the expansion
strategies elected. Accordingly, the Company may, in the future, require
additional financing to continue to expand its business. There is no assurance
that the Company will be successful in obtaining additional financing, if
required, on favorable terms, or at all. If the Company were unable to obtain
additional financing, its ability to meet its current plan for expansion could
be materially and adversely affected. See "CAPITALIZATION" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
PRICE RANGE OF COMMON STOCK
From June 22, 1995 until February 12, 1996, the Company's Common Stock
was quoted on the Nasdaq OTC Bulletin Board. Beginning on February 12, 1996, the
Common Stock was quoted on the Nasdaq SmallCap under the symbol "SORC." The
following table sets forth, for the periods indicated, the high and low closing
bid prices for the Common Stock as reported by the OTC Bulletin Board and the
Nasdaq SmallCap, as applicable.
<TABLE>
<CAPTION>
Actual Pro forma(1)
------ ------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Fiscal 1996
Second Quarter (beginning June 22, 1995) $7.00 $6.00 $ 8.47 $7.26
Third Quarter $8.50 $6.25 $10.29 $7.56
Fourth Quarter $7.50 $3.50 $ 9.08 $4.24
Fiscal 1997
First Quarter $5.75 $4.38 $ 6.96 $5.30
Second Quarter $4.75 $4.00 $ 5.75 $4.84
Third Quarter $4.75 $2.63 $ 5.75 $3.18
Fourth Quarter $3.25 $2.25 $ 3.93 $2.72
Fiscal 1998
First Quarter $2.88 $2.13 $ 3.48 $2.58
Second Quarter $3.06 $1.00 $ 3.70 $1.21
<FN>
(1) Pro forma to reflect the proposed 1-to-1.21 reverse stock split.
</FN>
</TABLE>
The foregoing quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions. On September 8 , 1997, the last sale price for the
Common Stock as reported by the Nasdaq SmallCap was $3.06 per share or
$3.71 per share after giving effect to the proposed 1-to-1.21 reverse stock
split . As of September 4 , 1997, there were 171 holders of
record of the Common Stock.
DIVIDEND POLICY
During the last two years, the Company has not declared or paid any
cash dividends on its Common Stock. The Board of Directors presently intends to
retain all of its earnings, if any, for the development of the Company's
business for the foreseeable future. The declaration and payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon a number of factors, including among others,
future earnings, operations, capital requirements, the general financial
condition of the Company and such other factors that the Board of Directors may
deem relevant.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as
of July 31 , 1997, (ii) pro forma to reflect the proposed 1-to-1.21
reverse stock split as if such transaction had occurred on July
31 , 1997, and (iii) pro forma as adjusted to reflect the sale by the Company
of the shares of Common Stock offered hereby and the application of the
estimated net proceeds therefrom. This table should be read in conjunction with
the financial statements of the Company, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "DESCRIPTION OF CAPITAL
STOCK" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
July 31, 1997
-------------
Pro Forma
Actual Pro Forma As Adjusted
------ --------- -----------
<S> <C> <C> <C>
Long-term debt (less current portion)................................. 10,960,682 10,960,682 4,050,682(a)
Redeemable Common Stock, par value $0.01 per share
111,245 shares outstanding
actual, 91,938 shares pro
forma and pro forma as adjusted.................................... 503,820 503,820 503,820
Stockholders' equity:
Common Stock, par value $0.01 per share
7,165,953 shares outstanding actual,
5,922,275 shares pro forma, and
7,922,275 shares outstanding pro forma
as adjusted ..................................................... 71,659 59,223 79,223
Additional paid-in capital........................................... 3,292,872 3,305,308 10,195,308
Retained earnings ................................................... 901,193 901,193 901,193
Total stockholders' equity .................................. 4,265,724 4,265,724 11,175,724
Total capitalization ................................................. 15,730,226 15,730,226 15,730,226
<FN>
(a) Assumes the net proceeds of this offering will be applied to the temporary
reduction in the outstanding principal balance of the Company's credit
facility resulting in total availability thereunder of $8,461,000 .
</FN>
</TABLE>
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data as of and for the periods presented below
have been derived from the financial statements of the Company. The financial
statements of the Company as of and for the fiscal years ended January 31, 1997
and 1996 have been audited by BDO Seidman, LLP, and its report thereon is
included elsewhere herein. The balance sheet data as of July 31 , 1997 and
the statement of operations data as of and for the six months ended
July 31 , 1997 and 1996 have been derived from unaudited financial
statements, which have been prepared on the same basis as the audited financial
statements and in the opinion of management, include all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly the
information set forth herein. Results of operations for the six months
ended July 31 , 1997 are not necessarily indicative of the results to be
expected for the year ending January 31, 1998. The selected financial data
should be read in conjunction with the financial statements, including the notes
thereto, appearing elsewhere in this Prospectus and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
January 31, July 31,
Statements of Operations Data: 1997 1996 1997 1996
--------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Service Revenues............................ $7,056,270 $7,195,176 $5,459,668 $2,633,958
Merchandise Revenues........................ 242,177 926,008 8,348 124,540
--------- ---------- ------- ---------
7,298,447 8,121,184 5,468,016 2,758,498
Cost of Service Revenues.................... 4,862,207 3,859,409 2,851,857 2,351,092
Cost of Merchandise Sold.................... 202,381 549,813 32,720 11,254
--------- --------- -------- ----------
Gross Profit................................ 2,233,859 3,711,962 2,583,439 396,152
Selling, General & Administrative Expenses . 2,904,372 2,799,841 1,062,128 1,671,502
--------- ---------- ----------- ----------
Operating Income (Loss)................... (670,513) 912,121 1,521,311 (1,275,350)
Other Income (Expense)...................... (309,992) (314,127) ( 442,713) ( 108,653)
----------- ---------- ---------- ----------
Income (Loss) Before Income Taxes......... (980,505) 597,994 1,078,598 (1,384,003)
Income Tax (Expense) Benefit.............. 377,188 (406,000) (489,000) 478,463
---------- ------------ ----------- --------
Net Income (Loss)......................... (603,317) 191,994 589,598 (905,540)
Earnings (Loss) per Share................... $(0.09) $0.03 $0.07 ($0.14)
Pro Forma(1) Earnings
(Loss) per Share.......................... (0.11) 0.06 0.08 (0.17)
Pro Forma(1) Weighted Average Outstanding
Shares.................................... 5,503,215 5,028,547 5,857,717 5,342.074
<CAPTION>
January 31, July 31, 1997
Balance Sheet Data: 1997 1996 Actual As Adjusted
-------- -------- ---------- ------------
<S> <C> <C> <C> <C>
Working Capital............................. $2,322,778 $ 1,305,679 $ 11,681,190 $ 11,681,190
Total Assets ............................. 15,569,649 5,346,384 20,079,046 20,079,046
Revolving Line of Credit.................... 7,124,000 1,713,715 - -
Long-term debt, less current portion........ 22,814 32,341 10,960,682 4,050,682
Redeemable Stock............................ 1,026,326 - 503,820 503,820
Stockholders' Equity........................ 3,145,622 2,017,626 4,265,724 11,175,724
<FN>
(1) Pro forma data is presented to reflect a provision for income taxes
as if DISC, a Subchapter S Corporation prior to the merger between DISC
and PMM, had not been a Subchapter S Corporation, and the proposed
1-to-1.21 reverse stock split.
(2) Assumes (a) the net proceeds of this offering will be applied
initially to the temporary reduction of the outstanding principal
balance of the Company's credit facility resulting in total
availability thereunder of $8,461,000 , and (b) the proposed
1-to-1.21 reverse stock split.
</FN>
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
For more than 20 years, The Source Information Management Company (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
approximately 710 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, management believes that the reserve maintained
by the Company as an allowance for doubtful accounts in the amount of
approximately 2% of accounts receivable is 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 service fee, which is the difference between the claim and the
advance amount.
17
<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>
Six Months Ended July 31, Fiscal Year Ended January 31,
------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service Revenues 99.8% 95.5% 96.7% 88.6%
Merchandise Revenues 0.2 4.5 3.3 11.4
100.0 100.0 100.0 100.0
Cost of Service Revenues 52.2 85.2 66.6 47.5
Cost of Merchandise Sold 0.6 0.4 2.8 6.8
47.2 14.4 30.6 45.7
Selling, General &
Administrative Expense 19.4 60.6 39.8 34.5
Operating Income (Loss) 27.8 (46.2) (9.2) 11.2
Interest Expense, Net (7.4) (3.6) (3.9) (1.2)
Other Income (Expense), Net (0.7) (0.4) (0.4) (2.7)
Income (Loss) Before
Income Taxes 19.7 (50.2) (13.4) 7.4
Net Income (Loss) 10.8 (32.8) (8.3) 2.4
</TABLE>
Six Months Ended July 31, 1997 Compared to Six Months Ended July 31, 1996
Service Revenues
Increased retailer participation in the Advance Pay Program, the
acquisitions of Magazine Marketing, Inc. , Readers Choice, Inc. and
Mike Kessler and Associates, Inc. and the implementation of PIN during
the third quarter of fiscal year 1997 contributed to an increase in service
revenue of approximately $2,826,000 during the six month period ended
July 31, 1997 . The increase consisted of approximately $2,313,000 of
claims, PIN and Advance Pay Program revenue over the comparable period in fiscal
1997. Also, space design revenue increased from $182,000 for the six
months ended July 31 , 1996 to $695,000 for the six
months ended July 31 , 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. 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 client 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.
18
<PAGE>
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 six month period ended July 31, 1997 decreased
approximately $109,000 compared to the same period in the prior year, resulting
from a $500,765 increase in Cost of Service Revenues offset by a $609,374
decrease in Selling, General and Administrative Expense. The largest decrease in
Total Costs was in the data processing area. These costs decreased $174,000 over
last year's comparable period due to the purchase of the employment service
company on January 1, 1997 which previously provided such services. However,
this decrease was partially offset by an increase in wages since the individuals
formerly employed by the employment services company are now employed by the
Company. The acquisitions of Magazine Marketing, Inc., Readers Choice, Inc. and
Mike Kessler and Associates, Inc. have led to increased costs, including wages,
amortization, rent and depreciation. Travel and entertainment expenses decreased
$38,000 and $16,000, respectively. Bad debt expense decreased $56,000 over the
same period in the prior year.
Other Expense
Interest Expense increased $302,000 due to increased borrowings
necessary to fund the Advance Pay Program.
Income Tax Expense (Benefit)
The effective income tax rate for the six months ended July
31 , 1997 was 45.3% compared to 34.6% for the six months ended July 31,
1996. This increase was a result of an increase in expenses not deductible for
income tax purposes as a percentage of income (loss) before income taxes .
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 six months ended
July 31, 1997 was reduced by a constructive dividend of $109,937, which resulted
from the exchange of all 5,600 outstanding shares of Preferred Stock for 186,667
shares of Common Stock and non-transferable warrants expiring in 2000 to
purchase 310,710 shares of Common Stock at an exercise price of $3.00 per
share.
Fiscal 1997 Compared to Fiscal 1996
Service Revenues
Increased retailer participation in the Advance Pay Program, the
acquisition 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 revenue from claims submission services of approximately
$468,000. However, space design revenue decreased from $1,243,000 in 1996 to
$636,000 in 1997 causing an overall decrease in Service Revenues of $139,000.
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. Based on management's understanding of the
anticipated shipment dates for proposed and planned programs expected to occur
during the next year, space design revenue should exceed both 1996 and 1997
levels.
19
<PAGE>
Merchandise Revenues
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. Thus, Merchandise Revenues decreased $684,000 from $926,000
in 1996 to $242,000 in 1997.
Cost of Merchandise Sold
The Cost of Merchandise Sold decreased primarily as a result of
de-emphasizing this portion of the business as noted above. Comparing the gross
profit percentage associated with Merchandise Revenues to the prior year is not
considered meaningful by management since a wide variety of items with varying
profit margins have been purchased and resold.
Cost of Service Revenues and Selling, General and Administrative Expense ("Total
Costs")
Total Costs increased approximately $1,100,000 resulting from a
$1,002,798 increase in Cost of Service Revenues and a $104,531 increase in
Selling, General and Administrative Expense . Wages accounted for $840,000 of
the increase. New hires, including personnel formerly employed by Magazine
Marketing, Inc., comprised approximately $579,000 of this increase, while the
balance of the increase was the result of wage increases and bonuses. Insurance
costs increased approximately $152,000 resulting from the addition of directors
and officers insurance, additional life insurance policies and an increase in
the package policy due to the Company's expansion into other states and Canada.
Rent, telephone and utilities have increased $100,000 as a direct result of
expanding the square footage rented in North Carolina and adding regional
offices in Canada, Arizona and California (which was subsequently closed as a
result of de-emphasizing the merchandising portion of the business). Computer
hardware and software acquisitions combined with equipment and furniture
acquisitions related to the additional regional offices contributed to a $48,000
increase in depreciation expense. Lastly, bad debt expense increased
approximately $40,000. Such increases were mitigated by decreases in contract
labor and data entry costs. During 1997, permanent hires reduced the need to
utilize temporary employees as frequently as in 1996, and an increase in the
number of wholesalers supplying sales data on tape contributed to a decrease in
data entry costs.
Other Expense
Interest Expense increased $191,000 due to increased borrowings
necessary to fund the Advance Pay Program. Registration expenses decreased by
$213,000 in 1997 following the one time expense incurred in 1996 to register the
Company's Common Stock under the Exchange Act.
Income Tax (Benefit) Expense
The effective income tax rate decreased to 38.5% for 1997 from a pro
forma effective rate of 47.5% for 1996. This decrease was a result of a decrease
in expenses not deductible for income tax purposes as a percentage of income
(loss) before income taxes. Such non-deductible expenses include meals and
entertainment, officers' life insurance premiums and goodwill amortization.
Seasonality
To date, the Company's results of operation have not been subject to
seasonal variation and management does not expect such seasonal variation to
occur in the future.
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Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128). The new standard simplifies the standards for computing earnings per
share and requires presentation of two new amounts, basic and diluted earnings
per share. The Company will be required to retroactively adopt this standard
when it reports its operating results for the fiscal quarter and year ending
January 31, 1998. When the Company adopts SFAS No. 128, it expects no changes in
its previously reported Primary and Fully Diluted earnings per share. In
addition, SFAS No. 128 is expected to have no effect on earnings per share for
the six months ended July 31 , 1997 and 1996 if it had been
adopted.
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 solicitation of
new clients and the maintenance of existing accounts. 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 increased from $3,051,000
during the six months ended July 31 , 1996 to $3,542,000 during the
six months ended July 31 , 1997. During the six months ended
July 31 , 1997, $2,787,000 was used to cover checks drawn against
future deposits at January 31, 1997, net cash used for the Advance Pay Program
was approximately $339,000 and cash paid for interest was $359,000 .
The average collection period for the six months ended July
31 , 1997 was 137 days compared to 148 days for the six
months ended July 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 July 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 $12,500,000 with Wachovia Bank of North Carolina, N.A. ("Wachovia
Bank"). 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 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. Under the Credit Agreement, the Company is required to
maintain certain financial ratios. Although the Company was not in compliance at
January 31, 1997, with the requisite ratio of Earnings Before Interest, Lease
Obligations and Taxes to Interest Expense and Lease Obligations ("EBILT/IELO")
or the requisite ratio of Funded Debt to Total Capitalization ("Debt/Cap"), it
received a written temporary waiver of such ratios from Wachovia Bank.
Subsequently, the Credit Agreement was amended to provide the Company with
greater flexibility with respect to the maintenance of certain financial ratios
including the EBILT/IELO and Debt/Cap ratios. At July 31 , 1997, the
Company was in compliance with all financial ratios imposed by the Credit
Agreement, as amended . During fiscal 1999 certain of such financial ratios
become more stringent; however, the Company expects to remain in compliance with
all financial ratios through October 31, 1998 . 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.
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At July 31, 1997, the Company's total long-term debt obligations
were $13,174,000. Of such amount, $2,150,000 was incurred by the Company in
connection with its acquisition of all of the stock of Mike Kessler and
Associates, Inc. ("MKA"). Such indebtedness which is due January 5, 1998 with
interest at 6.25%, is expected to be financed by operations and an additional
term loan from Wachovia Bank. To the extent that such additional term loan is
unavailable, the Company intends to repay such obligation from its existing
credit facility thereby reducing the funds available for the Advance Pay
Program. Wachovia Bank 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. The Company anticipates that the funds necessary to satisfy these
obligations will be derived from cash provided by operations and/or additional
bank borrowings.
In July 1997, the holders of the Company's 1996 Series 7%
Convertible Preferred Stock exchanged all 5,600 outstanding shares for 186,667
shares of Common Stock at an effective exchange price of $3.00 per share and
non-transferable warrants expiring 2000 to purchase 310,710 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.
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 2000 to purchase an aggregate of 89,289
shares of Common Stock at an exercise price of $3.00 per share. Although the
effect of this transaction will be reported in the third quarter, the Company
expects that such warrants will be deemed to have an aggregate value ranging
from $30,000 to $50,000.
Without additional financings, the Company will not be able to
expand its operations, particularly its Advance Pay Program, in accordance with
the Company's current plan . If the proceeds of this offering together
with the Company's currently available funds and internally generated cash flows
are not sufficient to satisfy its financing needs, the Company likely will seek
additional funding through increased bank borrowings and/or the public or
private sale of debt or equity securities. There can be no assurance that
additional funds will be available on a timely basis, on acceptable terms or at
all, or that such funds, if raised, would be sufficient to permit the Company to
continue its expansion as planned. If the proceeds of this offering and funding
through additional public or private sale of debt or equity securities are
inadequate, and borrowings under the existing credit facility or a comparable
replacement thereof are not available, the Company may be required to curtail
the Advance Pay Program.
BUSINESS
Overview
For more than 20 years, The Source Information Management Company (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
approximately 710 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.
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Formation of the Company
The Company was organized in 1995 by the consolidation of two
significant providers of services to retailers of magazines and other
periodicals. Since its organization the Company has expanded through the
acquisition of businesses and technologies that address additional services or
products, market segments or geographic regions in which the Company is not
currently active and which would allow the Company to expand the services
offered to its clients, or its ability to support existing or planned services.
In 1995, the Company acquired the business of Dixon's Modern Marketing Concepts,
Inc. and Tri-State Stores, Inc., both of Chicago Heights, Illinois. In 1996, the
Company again expanded its presence in the upper Midwest by acquiring the
businesses of Magazine Marketing, Inc. of Canton, Ohio and Readers Choice, Inc.,
a subsidiary of United Magazine Company located in Columbus, Ohio. In May 1997,
the Company acquired the business of Mike Kessler and Associates, Inc. of Fair
Lawn, New Jersey.
The Magazine Industry
Based on its knowledge of the industry and discussions with magazine
publishers and retailers, management of the Company believes that magazine
publishers are placing an increasing degree of importance on revenues derived
from single copy newsstand sales and that the emphasis placed on single copy
sales by publishers will continue to increase as: (i) mailing costs continue to
rise with respect to subscription distribution; and (ii) magazine advertisers
continue to value the increased target market accuracy achieved through single
copy sales.
The distribution of the approximately 6,000 magazine titles currently
published for single copy sales on a national basis is dominated by six national
distributors, which distribute to over 200 local independent distributors, which
in turn supply copies to magazine retailers. Although the nature of the
businesses in which magazine retailers are engaged is wide ranging, the largest
volumes of single copy sales historically are achieved by grocery retailers and
mass merchandise stores. The primary function of the retailer is the display of
available titles in two store locations, at a dedicated section called a
"mainline display" and at displays located within the merchandise checkout area.
Because magazines are frequently purchased on impulse, publishers increasingly
compete for display spaces, referred to as "pockets," at the checkout.
National distributors receive a brokerage fee based on sales and
distribution to local independent distributors. Local independent distributors
purchase copies at a discount to the suggested retail price and resell to
retailers, also at a discount to the suggested retail price. All unsold copies
are returnable by the retailer for full credit to all parties in the
distribution chain, such that payments are made only with respect to copies
actually sold. All accounting for copies is done by the local independent
distributors which invoice for distributed copies, credit retailers for returns
and credit national distributors for sales through a computer-assisted single
entry information system.
To provide further incentives to retailers to prominently display their
respective titles, publishers typically enter into Retail Display Allowance
("RDA") programs under which the retailer is entitled to receive, on a quarterly
basis, a cash rebate directly from the publisher equal to a percentage of the
retailer's actual net sales of the publisher's titles upon submission of a
properly documented claim. Conversely, certain publishers of high volume
magazines rent "pocket" space from retailers for the display and sale of
specific titles. Such rent, referred to as "pocket payments" (or "RDP"
payments), is a fixed amount per pocket, per store based on the verified
location and other criteria of the pocket, and is paid quarterly. The national
distributors administer a majority of RDA and RDP programs on behalf of the
publishers.
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Publishers have also implemented programs to encourage retailers to
upgrade their checkout and mainline display fixtures by making one-time
incentive payments, based on the pockets allocated to their respective titles.
Similar to RDA and RDP, such payments are made only upon submission of a
properly documented claim.
Client Services
The Company is dedicated to providing full information services to its
clients. Such services include the following:
Claim Submission. Through its software system, the Company offers to
assist retailers in accurately monitoring, documenting, claiming and collecting
publisher incentive payments. The claim submission process begins at the end of
each calendar quarter when the Company obtains information from the local
independent distributors detailing the titles and number of copies actually sold
by the client retailer. Based on this information, the Company prepares
publisher supplied claim forms and submits the documented claim to the
appropriate national distributor, which acts as payment agent for the publisher.
After verification of the claim, the national distributor remits payment to the
order of the retailer in care of the Company, which records the payment and
forwards it to the retailer. The Company charges the retailer a negotiated
percentage of the cash collected.
As an extension of its claim submission service, the Company has
established an Advance Pay Program. Under the provisions of the written
agreement signed by each participating retailer, the Company acquires the right
to collect the incentive payments otherwise due the retailer directly from
magazine publishers with respect to the sale and display of magazines. In
return, the Company pays to the retailer a negotiated fixed percentage of the
total incentive payments otherwise due the retailer with respect to each
calendar quarter generally not later than ninety days after the end of each such
quarter. The funds necessary to make such payments are derived from cash flow
from operations and borrowings under the Company's existing $12,500,000 credit
facility. Typically, the agreement provides for a minimum term of one year and
thereafter is terminable by either party on not less than ninety days notice.
This service relieves the retailer from the burdensome administrative task of
processing multitudes of small publisher checks. Service fees earned under the
Advance Pay Program generally exceed those charged under the traditional method;
however the Company generally assumes the risk of uncollectibility of the
incentive payments. Based on historical experience, the Company maintains a
reserve for doubtful accounts equal to approximately 2% of outstanding accounts
receivable. The Company believes such reserve will be adequate.
Space Design. Through its Display Group, the Company offers to assist
retailers in the placement of displays and the selection of titles to optimize
available display space, and thereby to maximize sales and incentive payment
revenues. Based on its knowledge of local consumer preferences and the terms and
conditions of publisher incentive payment programs, the Company analyzes the
retailer's store layout, customer traffic patterns and available display
alternatives. Thereafter, the Company consults with its retailer client to
develop an appropriate display program.
Generally, retailers undertake a comprehensive redesign of the checkout
display space on three-year cycles. As a result of its marketing experience, the
Company is frequently engaged to provide services with respect to the entire
redesign process including, fixture design and assisting the retailer in product
selection, plan-o-gramming and vendor negotiations. The Company provides
additional services to retailers including vendor billing and collection,
fixture prototype reviews and supervision of fixture installation in the stores.
In June 1997, K-Mart Corporation contracted with the Company to provide such
services with respect to the reconfiguration of display fixtures in the checkout
area of its stores. The new merchandising units which display magazines,
confections and selected general merchandise illustrate the applicability of the
Company's existing services beyond magazines to other high volume consumer
products.
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Periodical Information Network. The Company's large and sophisticated
database of magazine industry information has resulted in it becoming a magazine
information center which management believes is used by many companies in
the magazine industry to formulate their publishing and distribution
strategies. PIN is a comprehensive system designed to use current computer
technologies, including CD-ROM, to effectively manage all elements of the
Company's database including information packaging and efficient inbound,
outbound access. The network provides access to periodically updated historical
information concerning the titles and quantity of each title sold by retailers
for analysis purposes. Several leading publishers have subscribed to PIN. The
PIN subscription agreement provides that the Company will furnish each
subscriber with a historical database of sales information and quarterly updates
capable of generating three general types of reports: total sales, sales by
class of trade, and sales by retailer. Each report ranks titles in order of
sales volume, and provides other sales related information, including sales
efficiencies, category contributions and total sales ranking. For such database,
subscribers pay service fees equal to a one-time enrollment fee and quarterly
update fees. PIN subscriptions have a term of one year, which is automatically
renewed for successive one-year terms unless either party terminates by notice
to the other not later than ninety days before commencement of the next renewal
term.
Marketing and Promotional Program. As part of its full-service
philosophy, the Company offers its clients advice and suggestions concerning
specialized marketing and promotional programs which may include, for example,
special mainline and checkout displays and cross-promotions of magazines and
products of interest to readers of such magazines. Such services are offered to
enhance single copy magazine sales by the Company's clients, and thereby
increase service revenues due the Company in connection with the submission of
incentive payment claims; accordingly, no separate charge is made for these
services.
Administrative Support. The Company assists retailers to more
efficiently conduct their magazine sales operations through computerized
inventory control, automated pricing updates and management reporting. During
the fourth quarter of fiscal 1998, the Company intends to introduce a new
administrative support service enabling publishers and retailers to efficiently
verify and correct price changes and other information contained in the
magazine's uniform product code ("UPC").
Growth Opportunities
Expansion of Services to New Product Categories. The Company's
information services have been designed to efficiently and accurately accumulate
and manage sales data with respect to sales of low cost, high volume consumer
products. While the Company's services, including PIN and the Advance Pay
Program, were developed for use in the magazine industry, the Company has
been engaged to provide its services in connection with integrated magazine and
confections displays and expects to offer its services for use in connection
with other consumer products, such as soft drinks and batteries.
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Development of New and Enhanced Products and Services. The Company was
founded and believes that its future success will be dependent upon its ability
to anticipate the informational needs of existing and potential clients and to
develop and introduce, in a timely manner, new products and services which
address such needs. A portion of the proceeds of this offering are expected
to be used to continue the Company's development of new and enhanced products
and services. The Company encourages creativity and originality in its sales
personnel and believes that one of the keys to the growth of the Company has
been the willingness of senior management to implement product and service
solutions suggested by the Company's personnel to address the needs of customers
with whom they interact. In addition, Messrs. Flegel and Lee, as well as various
members of the Company's senior management and sales staff , periodically
meet with consumers to discuss industry trends and informational requirements.
After identifying an unsatisfied consumer need, members of the Company's senior
management and sales team meet to design new or enhanced products and services
addressing such consumer need. Thereafter, a team is appointed to develop such
products and services for introduction to the market.
Customers/Clients
The Company provides services to approximately 710 operators of mass
merchandise, grocery, convenience and pharmacy stores located throughout the
United States and eastern Canada. Such retailers include Wal-Mart Stores, Inc.,
Kmart Corporation, Target Stores, Inc., Food Lion, Inc. and W.H. Smith, Inc. In
addition, the Company provides market data to publishers, including Time
Distribution Services, ICD/The Hearst Corp. and Globe Marketing Services. All of
the Company's services are rendered pursuant to short term contracts and,
accordingly, the Company's clients are under no long term contractual obligation
to continue to employ the Company's services.
Marketing and Sales
The Company markets its services through its own direct sales force.
The Company's sales group consists of seven regional managers and three
divisional vice presidents. Each manager is assigned to a specific geographic
territory and is responsible for the preparation of quotations, program
presentations and the general development of sales, as well as maintenance of
existing accounts, within his or her assigned territory.
Competition
Competition among providers of many of the Company's products and
services, particularly the processing of incentive payment claims, is highly
competitive. While such competition is fragmented, the Company recognizes
approximately 32 direct competitors, all of which are closely held private
companies. The Company believes that, in virtually all cases, it is the sole
provider of magazine incentive payment claim services to its clients and the
Company's clients do not perform such services on their own behalf. Based on its
review of the industry and informal discussions with magazine publishers and
retailers, the Company believes that none of its direct competitors have greater
financial, technological, marketing and sales resources than the Company.
However, it is possible that certain services offered by the Company could be
performed directly by its retail customers or otherwise offered or performed in
the future by publishers, distributors or other organizations, such as Nielsen,
IRI and Audit Bureau of Circulation. Many of such organizations have greater
financial, technological, marketing and sales resources than the Company.
Additionally, competitors may develop new or different service programs which
are perceived by customers to be of similar or superior quality at the same or
lower prices than the Company's services.
Management further believes that the principal competitive factors in
the retail information industry include information access, technological
support, accuracy, system flexibility, financial stability, customer service and
reputation. The Company believes it competes effectively with respect to each of
the above factors.
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Properties
The Company conducts its operations from 11 office facilities, located
in St. Louis, Missouri; New York, New York; Chicago Heights, Illinois;
Schaumburg, Illinois; Oklahoma City, Oklahoma; San Antonio, Texas; Cranberry
Township, Pennsylvania; Canton, Ohio; Fair Lawn, New Jersey; Woodstock, Georgia;
and Mississauga, Ontario, Canada. These facilities contain an aggregate of
approximately 19,000 square feet of space. Each of the facilities is occupied by
the Company under leases containing terms and conditions believed to be
comparable to those prevailing in the market in which the facility is located.
The Company believes that each of such facilities may be relocated without
material expense or delay, and that suitable alternative office facilities are
available in each market on comparable terms, if required.
In addition, the Company's data processing center, located in High
Point, North Carolina, contains approximately 13,900 square feet and is occupied
under a written lease with 711 Gallimore Partnership, a North Carolina general
partnership ("711 Partnership"), expiring in 2012. Such lease provides for the
payment of monthly rent of approximately $14,000, subject to adjustment for
taxes, insurance and utilities. See "MANAGEMENT-Certain Relationships and
Related Transactions."
Management Information Systems
The Company uses a customized software system to accumulate and manage
sales data in connection with its processing of claims and maintenance of the
PIN database under a license from a third party which has been retained by the
Company to service and upgrade the Company's software system. This sophisticated
software system is of a type used by several companies engaged in the collection
of sales incentive payments in the magazine industry. Although the Company uses
several service marks in connection with its business, it believes that its
business is not dependent on the strength of its service marks or any of its
intellectual property rights.
Legal Proceedings
The Company is not a party to any legal proceedings, other than routine
claims and lawsuits arising in the ordinary course of business. The Company does
not believe that such claims and lawsuits, individually or in the aggregate,
will have a material adverse effect on the Company's business.
Employees
As of August 31, 1997, the Company employed 125 persons, of whom 108
were employed on a full-time basis and 17 were employed on a part-time basis. Of
such persons, 31 are engaged in administrative activities and two devote at
least a portion of their efforts to research and development activities. The
Company's employees are not subject to a collective bargaining agreement. The
Company considers its relations with its team members to be good.
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MANAGEMENT
The following table sets forth certain information concerning the
directors and executive officers of the Company:
Name Age Position
S. Leslie Flegel 59 Director, Chairman and Chief
Executive Officer
William H. Lee 46 Director, President and Chief
Operating Officer
John P. Watkins 41 Chief Administrative Officer and
President-Retail Services
Dwight L. DeGolia 52 Executive Vice President
Robert B. Dixon 46 Executive Vice President and
President-Periodical Information
Management
W. Brian Rodgers 31 Assistant Secretary and Chief
Financial Officer
Jason S. Flegel 31 Sr. Vice President of RDA Operations
Robert G. Shupe 50 Sr. Vice President
Timothy A. Braswell 68 Director
Harry L. "Terry" Franc, III 61 Director
Aron Katzman 59 Director
Randall S. Minix 47 Director
Each of the Executive Officers is a full-time employee of the Company.
Non-employee directors of the Company devote such time to the affairs of the
Company as is necessary and appropriate. Set forth below are descriptions of the
backgrounds of the Executive Officers and Directors of the Company:
S. Leslie Flegel has been a director, Chairman and Chief Executive
Officer of the Company since its inception in April 1995. For more than 14 years
prior thereto, Mr. Flegel was the principal owner and chief executive officer of
Display Information Systems Company ("DISC"), a predecessor of the Company.
William H. Lee has been a director, President and Chief Operating
Officer of the Company since its inception in April 1995. For approximately 14
years prior thereto, Mr. Lee was the principal owner and chief executive officer
of Periodical Marketing and Management, Inc. ("PMM"), a predecessor of the
Company.
John P. Watkins has served as Chief Administrative Officer and
President-Retail Services since February 1, 1996. For more than 16 years prior
thereto, Mr. Watkins served in several senior management positions with Food
Lion, Inc., a seven billion dollar retail grocery chain. From September 1992 to
July 1995, Mr. Watkins served as Senior Vice President and Chief Operating
Officer and as a member of the Board of Directors of Food Lion, Inc.
Dwight L. DeGolia has served as Executive Vice President of the Company
since its commencement of operations in May 1995. For more than seven
years prior thereto, Mr. DeGolia served as Executive Vice President of Sales and
Marketing for DISC. From 1986 to 1993, Mr. DeGolia also served as a director of
Advanced Marketing Services, a leading supplier of books to wholesale clubs.
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Robert B. Dixon became Executive Vice President and President -
Periodical Information Management in June 1995. For more than 13 years prior
thereto, Mr. Dixon served as President and was the principal shareholder of
Dixon's Modern Marketing Concepts, Inc. and related entities.
W. Brian Rodgers has served as Assistant Secretary of the Company and
Chief Financial Officer since October 1996. Prior to joining the Company, Mr.
Rodgers practiced for seven years as a Certified Public Accountant with BDO
Seidman, L.L.P.
Jason S. Flegel has served as Senior Vice President of RDA Operations
since June 1996. Prior thereto, and since the Company's inception in April 1995,
Mr. Flegel served as Vice President - Western Region. Mr. Flegel was an owner
and the Chief Financial Officer of DISC. Jason S. Flegel is the son of S. Leslie
Flegel.
Robert G. Shupe has served as Senior Vice President since February 1996
and had served as President-Display Group of the Company from the
commencement of its operations in May 1995 to September 1, 1997 . From
February 1985 to January 1995, Mr. Shupe held the position of Executive Vice
President-Sales for PMM. Prior to joining PMM, Mr. Shupe was employed in the
marketing division of McCall's Magazine.
Timothy A. Braswell has been a director of the Company since it
commenced operations in May 1995. He established Braswell Investment Company, a
consultant and broker of wholesale magazine businesses in 1994 and is its owner.
For more than five years prior thereto, Mr. Braswell was the principal owner and
chief executive officer of City News Co. and Dixie News Co., each of which is a
wholesale periodical company.
Harry L. "Terry" Franc, III, has been a director of the Company since
it commenced operations in May 1995. Mr. Franc is one of the founders of Bridge
Information Systems, Inc., a St. Louis, Missouri-based provider of information
services to the securities industry ("BIS") and of BIS's subsidiary, Bridge
Trading Company, a registered broker-dealer and member of the New York Stock
Exchange ("BTC"). For more than 20 years, Mr. Franc has served as a director and
an Executive Vice President of BIS and an Executive Vice President of BTC.
Aron Katzman has served as a director of the Company since it commenced
operations in May 1995. Mr. Katzman is the President of New Legends, Inc., one
of St. Louis' leading country club/residential communities. For more than five
years prior to May 1994, when it was sold, Mr. Katzman served as the
Chairman and Chief Executive Officer of Roman Company, a manufacturer and
distributor of fashion custom jewelry. Mr. Katzman is a member of the board of
directors of Phonetel Technologies, an American Stock Exchange listed company.
Randall S. Minix has served as a director of the Company since it
commenced operations in May 1995. For more than five years, Mr. Minix has been
the managing partner of Minix, Morgan & Company, L.L.P., an independent
accounting firm headquartered in Greensboro, North Carolina.
The Board of Directors of the Company consists of six members, each of
whom serve in such capacity for a three year term or until a successor has been
elected and qualified, subject to earlier resignation, removal or death. The
number of directors comprising the Board of Directors may be increased or
decreased by resolution adopted by the affirmative vote of a majority of the
Board of Directors. The Company's Articles of Incorporation and Bylaws provide
for three classes of directorships serving staggered three year terms such that
one-third of the directors are elected at each annual meeting of shareholders.
The term of office of Messrs. Flegel and Lee will continue until the 1998 annual
meeting of shareholders, the terms of Messrs. Katzman and Minix will continue
until the 1999 annual meeting of shareholders and the terms of Messrs. Braswell
and Franc will continue until the 2000 annual meeting of shareholders.
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The Board of Directors of the Company has established an Audit
Committee, a Compensation Committee, a Finance Committee and an Acquisition
Committee. The Audit Committee is comprised of two non-employee directors,
presently Messrs. Minix and Katzman, and has the responsibility of recommending
the firm that will serve as the Company's independent auditors, reviewing the
scope and results of the audit and services provided by the Company's
independent accountants, and meeting with the financial staff of the Company to
review accounting procedures and policies. The Compensation Committee is
comprised of three non-employee directors, presently Messrs. Katzman, Braswell
and Franc, and has been given the responsibility of reviewing the financial
records of the Company to determine overall compensation and benefits for
executive officers of the Company and to establish and administer the policies
which govern employee salaries and benefit plans. The Finance Committee is to be
comprised of two directors. Presently, Mr. Franc serves as one member and the
other position is vacant. The Finance Committee has been given the
responsibility of monitoring the Company's capital structure, reviewing
available alternatives to satisfy the Company's liquidity and capital
requirements and recommending the firm or firms which will provide investment
banking and financial advisory services to the Company. The Company's
Acquisition Committee is comprised of three directors, presently Messrs. Franc,
Braswell and Katzman, and has been given the responsibility of monitoring the
Company's search for attractive acquisition opportunities, consulting with
members of management to review plans and strategies for the achievement of the
Company's external growth objectives and recommending the firm or firms that
will serve as advisors to the Company in connection with the evaluation of
potential business combinations.
30
<PAGE>
Executive Compensation
The following table summarizes information concerning cash and non-cash
compensation paid to or accrued for the benefit of the named executive officers
for all services rendered in all capacities to the Company and its predecessors.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation
Name of Principal Other Annual All Other
Position Year Salary Bonus Compensation(a) Compensation
-------- ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
S. Leslie Flegel 1997 $227,500 $78,856 $30,624 $97,542(b)
Chairman and Chief Executive 1996 200,000 26,543 30,995 -
Officer 1995 171,875 - 22,425 -
William H. Lee 1997 $224,830 $30,000 $13,944 -
President and Chief Operating 1996 192,646 - 19,006 -
Officer 1995 145,000 60,000 25,937 -
Dwight L. DeGolia 1997 $140,000 - $11,223 $4,773(b)
Executive Vice President 1996 134,884 - 16,739 -
1995 97,358 - 9,790 -
John P. Watkins 1997 $150,000 - $11,891 -
Chief Administrative Officer and 1996 - - - -
President-Retail Services 1995 - - - -
Robert B. Dixon 1997 $150,000 - $13,907 -
Executive Vice President and 1996 114,000 $ 50,000 5,458 -
President-Periodical Information 1995 36,000 128,500 26,982 -
Management
<FN>
(a) Reflects personal benefits derived by Messrs. Flegel, Lee, DeGolia,
Watkins and Dixon primarily in connection with personal use of Company
automobiles, country club membership dues and life insurance premiums.
In fiscal 1997 the estimated incremental cost to the Company of the use
by Messrs. Flegel, Lee, DeGolia, Watkins and Dixon of Company
automobiles was $10,339, $8,650, $6,090, $7,800 and $8,597,
respectively. In fiscal 1996, such cost was $11,444, $6,234, $6,360,
$-0- and $3,158, respectively. In fiscal 1995, such cost was $10,417,
$8,753, $5,728, $-0- and $-0-, respectively.
In fiscal 1997, the estimated incremental cost to the Company of the
membership dues paid on behalf of Messrs. Flegel, Lee, DeGolia, Watkins
and Dixon was $11,192, $2,239, $5,133, $3,330 and $5,310, respectively.
In fiscal 1996, such cost was $11,503, $4,738, $4,751, $-0- and $2,300,
respectively. In fiscal 1995, such cost was $8,212, $4,356, $4,751,
$-0-, and $2,300, respectively.
31
<PAGE>
In fiscal 1997, the estimated incremental cost to the Company of life
insurance premiums paid on behalf of Messrs. Flegel, Lee, DeGolia,
Watkins and Dixon was $9,093, $3,056, $-0-, $761 and $-0-,
respectively. In fiscal 1996, such cost was $8,048, $8,033, $5,628,
$-0-, and $-0-, respectively. No life insurance premiums were paid on
behalf of the officers in fiscal 1995.
(b) Represents compensation awarded by the Company and used to repay
certain indebtedness of the named executive officer to a predecessor of
the Company incurred in connection with subchapter S earnings of such
predecessor. If the Over-Allotment Option is exercised, the first
82,000 shares sold as a result thereof will be sold by Mr. Flegel and
the proceeds used to retire the principal balance and accrued
interest of Mr. Flegel's indebtedness to the Company which is in
the amount of approximately $245,000. Accordingly, the Company expects
that compensation of similar type will not be paid in the future to
Mr. Flegel . See "MANAGEMENT-Certain Relationships and Related
Transactions."
</FN>
</TABLE>
Director Compensation
With the exception of Mr. Minix, who is paid in cash, under the
Company's present policy, each director of the Company who is not also an
employee of the Company receives $1,000 payable in shares of Common
Stock, for each meeting of the Board of Directors attended. Directors are also
entitled to be reimbursed for expenses incurred by them in attending meetings of
the Board of Directors and its committees.
Employment Agreements with Named Executive Officers.
Pursuant to an agreement effective February 1, 1996, John P. Watkins is
to be employed by the Company for a minimum period of two years as President of
the Retail Services Group and Chief Administrative Officer. As compensation for
services rendered to the Company, the agreement provides for Mr. Watkins to
receive an annual base salary of $150,000. In addition, Mr. Watkins is eligible
to receive a pay performance bonus of up to 50% of his base salary in an amount
which is determined by reference to specified criteria including total revenue,
net income and stock performance. Mr. Watkins has agreed to refrain from
disclosing information confidential to the Company or engaging, directly or
indirectly, in activities competitive to the Company during the term of his
employment and for two years thereafter.
32
<PAGE>
The Company has entered into an employment agreement dated as of August
30, 1995 with Robert G. Shupe. Under the terms of the agreement, Mr. Shupe will
be employed by the Company subject to termination of not less than 30 days
notice, in exchange for an annual base salary equal to $110,000. Mr. Shupe has
also agreed to refrain from disclosing information confidential to the Company
or engaging directly or indirectly in activities competitive to the Company
during the term of his employment and for two years thereafter.
Under the terms of a written agreement with the Company, Dwight L.
DeGolia has agreed to refrain from disclosing information confidential to the
Company or engaging directly or indirectly, in any activity which is competitive
with the business of the Company during the term of his employment and for two
years thereafter.
The Company is required as a condition to consummation of this
offering to enter into employment agreements with S. Leslie Flegel, William H.
Lee and W. Brian Rodgers effective as of the date of this Prospectus. Under the
agreements, which expire January 31, 1999, (subject to renewal), Mr. Flegel will
serve as the Chairman of the Board and Chief Executive Officer of the Company in
exchange for annual base compensation of $255,000, Mr. Lee will serve as
President and Chief Operating Officer of the Company in exchange for annual base
compensation of $240,573, and W. Brian Rodgers will serve as Chief Financial
Officer of the Company in exchange for annual base compensation of $100,000,
subject to annual adjustment by the Compensation Committee of the Board of
Directors (the "Base Compensation"). In the event the employment of any such
person with the Company is terminated for reasons other than for cause,
permanent disability or death or there occurs a significant reduction in the
position, duties or responsibilities thereof (a "Termination") within two years
following a "Change of Control" (as defined in the agreement and which does not
include this offering), the discharged person will be entitled to an additional
bonus of 300% of the Base Compensation payable in the fiscal year in which such
Termination occurs. Such person also will agree to refrain from disclosing
information confidential to the Company or engaging, directly or indirectly, in
the rendition of services competitve with those offered by the Company during
the term of his employment agreement and for two years thereafter, without the
prior written consent of the Company.
In addition, each named executive officer is eligible to receive a
portion of a bonus pool funded by the Company in an amount equal to 8% of pretax
income if such pretax income is equal to budgeted pretax income, plus 10% of any
pretax income which exceeds budgeted pretax income but is less than or equal to
150% of budgeted pretax income, plus 12% of any pretax income which exceeds 150%
of budgeted pretax income. The amount received by each participant is determined
on a discretionary basis by Messrs. Flegel and Lee subject to the approval of
the Board of Directors.
Certain Relationships and Related Transactions.
From time to time, the Company and its predecessors have engaged in
various transactions with its directors, executive officers and other affiliated
parties. The following paragraphs summarize certain information concerning such
transactions and relationships which have occurred during the past two fiscal
years or which are presently proposed.
33
<PAGE>
Predecessor Transactions
S. Leslie Flegel, Chairman and Chief Executive Officer of the Company
and Dwight L. DeGolia, Executive Vice President of the Company, have from time
to time received cash advances from DISC, a subchapter S predecessor of the
Company with respect to distribution of the Subchapter S earnings of such
corporation. The largest aggregate amount of such indebtedness outstanding at
any time since February 1, 1996 was $248,675 and $22,093 and at July
31 , 1997, such outstanding balances were $221,485 and $22,093 ,
respectively. All such advances are evidenced by promissory notes in favor of
the Company. Such notes bear interest at the rate of 7.34% per annum, and are
payable in five equal annual installments.
PMM, a predecessor of the Company incurred a debt to Timothy A.
Braswell, a director of the Company, on March 1, 1991 in the amount of $300,000,
which accrued interest at the rate of 10.00% per annum. The indebtedness matured
on January 1, 1996 and was paid in full on the maturity date.
On June 28, 1991, PMM entered into a written lease with 711 Partnership
in which Mr. William H. Lee, President and Chief Operating Officer of the
Company, and Robert G. Shupe, Senior Vice President of the Company, are
partners, whereby 711 Partnership leases to the Company certain office space in
High Point, North Carolina. The lease, as amended in January 1996, provides for
annual rent of $168,072 and expires in 2012. In fiscal 1996 and fiscal 1997, the
Company paid rent to 711 Partnership of $147,275 and $157,498, respectively.
2532 Investments, Inc., a North Carolina corporation in which Mr. Lee
is a shareholder, has occasionally provided the Company with the use of an
airplane. In fiscal 1996, the Company paid 2532 Investments $57,926 in
consideration for the use of the airplane.
Under the terms of a written lease entered into prior to the Company's
acquisition of Dixon's Modern Marketing Concepts, Inc., Robert B. Dixon,
Executive Vice President and President-Periodical Information Management of the
Company, provides the Company with office space in Chicago Heights, Illinois.
The lease provides for annual rent of $36,000 and expired on December 31, 1996.
In fiscal 1996 and 1997, the Company paid Mr. Dixon $36,000 and $36,000,
respectively, in rent.
34
<PAGE>
Company Transactions
Data-Pros, Inc. ("Data-Pros"), a corporation in which Messrs. Lee and
Shupe are shareholders, provided the Company with data processing services. In
fiscal 1996 and 1997, the Company paid Data-Pros $306,751 and $274,893,
respectively, for such services. On January 1, 1997, the Company purchased the
assets of Data-Pros for $45,000.
2532 Investments, Inc., a North Carolina corporation in which Mr.
Lee is a shareholder, has occasionally provided the Company with the use of an
airplane. In fiscal 1996 and 1997, the Company paid 2532 Investments $57,926 and
$0, respectively in consideration for the use of the airplane. During the six
months ended July 31, 1997, the Company paid 2532 Investments $5,200 in
consideration for the use of the airplane.
On March 11, 1996, the Company sold an aggregate of 20,000
shares of its Preferred Stock in transactions exempt from the registration
requirements of the Securities Act, to Cameron Capital Ltd. ("Cameron"), and
Timothy A. Braswell, Harry L. Franc, , and Aron Katzman, each a
director of the Company. Cameron and Messrs. Braswell, Franc and Katzman
purchased 15,000, 2,250, 500 and 2,250 shares, respectively. The Company
received payment for the shares from each of the purchasers in the amount of
$100 per share.
In July 1997, the holders of the Company's 1996 Series 7%
Convertible Preferred Stock exchanged all 5,600 outstanding shares for 186,667
shares of Common Stock at an effective exchange price of $3.00 per share and
non-transferable warrants expiring 2000 to purchase 310,710 shares of Common
Stock at an exercise price of $3.00 per share.
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 2000 to purchase an aggregate of 89,289
shares of Common Stock at an exercise price of $3.00 per share. The Company
expects that such warrants will be deemed to have an aggregate value ranging
from $30,000 to $50,000.
James Looman, a shareholder and employee of the Company, provides the
Company with office space in Canton, Ohio, under the terms of a written lease
dated June 1, 1996. The lease provides for annual rent of $24,000. In fiscal
1997, the Company paid Mr. Looman $14,000 in rent.
The terms of the foregoing transactions were not negotiated on an
arms-length basis, but were ratified by a majority of the independent and
disinterested outside directors who had access, at the Company's expense, to the
Company's legal counsel. All future transactions between the Company and its
officers, directors, principal shareholders and affiliates will be approved by a
majority of the independent and disinterested outside directors, who have
access, at the Company's expense, to the Company's legal counsel, and must be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties under similar circumstances.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of September
4 , 1997, concerning the beneficial ownership of the Company's Common Stock
by: (i) each person known by the Company to be the beneficial owner of more than
five percent of the outstanding Common Stock, (ii) all directors, (iii) each
executive officer named in the Summary Compensation Table contained in this
Prospectus, and (iv) all directors and executive officers of the Company as a
group. Each person named has sole voting and investment power with respect to
the shares indicated, except as otherwise stated in the notes to the table:
35
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership Number of Shares Beneficial Ownership
Prior to Offering Being Offered(a) After the Offering(a)
----------------- ---------------- ---------------------
Name and Address
of Beneficial Owner Amount Percent Amount Percent
- ------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
S. Leslie Flegel 1,443,471 24.0 82,000(b) 1,361,471 17.0
11644 Lilburn Park Road
St. Louis, Missouri 63146
William H. Lee 1,105,434(c) 18.4 - 1,105,434(c) 13.8
711 Gallimore Dairy Road
High Point, North Carolina 27265
Cameron Capital Ltd. 712,829(d) 11.3 - 717,829(d) 8.9
10 Cavendish Road
Hamilton, HM 19, Bermuda
Timothy A. Braswell 513,262(e) 8.5 - 513,262(e) 6.4
711 Gallimore Dairy Road
High Point, North Carolina 27265
Robert B. Dixon 248,760 4.1 151,884 96,876 1.2
907 Park Drive
Flossmoor, Illinois 60422
Aron Katzman 170,121(e) 2.8 - 170,121(e) 2.1
10 Layton Terrace
St. Louis, Missouri 63124
Dwight L. DeGolia 152,099(f) 2.5 - 152,099(f) 1.9
11644 Lilburn Park Road
St. Louis, Missouri 63146
Harry L. Franc, III 42,167(g) * - 42,167(g) *
19 Briarcliff
St. Louis, Missouri 63124
James W. Looman 117,155(h) 1.9 66,166 50,991(h) *
2454 Whipple Ave., N.W.
Canton, OH 44708
John P. Watkins 27,521(i) * - 27,521(i) *
711 Gallimore Dairy Road
High Point, North Carolina 27265
Randall S. Minix 5,785 * - 5,785 *
5502 White Blossom Drive
Greensboro, North Carolina 27410
All directors and 3,898,378(j) 63.4 233,884 3,664,494(j) 45.0
executive officers
as a group (12 persons)
*Less than 1%
36
<PAGE>
<FN>
(a) These shares will be sold only upon exercise of the Over-Allotment
Option. If the Over-Allotment Option is not exercised in full, the
first 82,000 shares offered will be sold by Mr. Flegel and any
additional shares subject to the Over-Allotment Option will be sold
proportionately by the remaining Selling Shareholders .
(b) All of the proceeds from the sale of such shares will be used to retire
the indebtedness of Mr. Flegel to the Company. Accordingly, the Company
will indirectly receive the proceeds from the sale of these
shares.
(c) Includes exercisable options to acquire 9,818 shares of Common Stock
at an exercise price of $2.42 per share.
(d) Includes exercisable warrants to acquire 300,000 shares of Common Stock
at an exercise price of $3.00 per share.
(e) Includes exercisable warrants to acquire 40,180 shares of Common Stock
at an exercise price of $3.00 per share.
(f) Includes exercisable options to acquire 2,182 shares of Common Stock at
an exercise price of $2.42 per share.
(g) Includes exercisable warrants to acquire 8,930 shares of Common Stock
at an exercise price of $3.00 per share.
(h) Includes exercisable options to acquire 33,057 shares and 1,454 shares
of Common Stock at an exercise price of $5.30 per share and $2.42 per
share, respectively. Until acquired by the Company in 1996, Mr. Looman
was the sole shareholder and chief executive officer of Magazine
Marketing, Inc. After such acquisition, Mr. Looman joined the Company
as Vice-President.
(i) Includes exercisable options to acquire 24,793 shares and 2,727 shares
of Common stock at an exercise price of $5.60 per share and $2.42 per
share, respectively.
(j) Includes exercisable options not listed separately above to acquire
6,182 shares of Common stock at an exercise price of $2.42 per
share.
</FN>
</TABLE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
The Company's Articles of Incorporation (the "Articles") provide for
authorized capital of 22,000,000 shares, consisting of 20,000,000 shares of
Common Stock, $0.01 par value per share and 2,000,000 shares of preferred stock,
$0.01 par value per share. At September 4, 1997, 6,014,263 shares of
Common Stock were outstanding. The following summary description of the
capital stock of the Company is qualified in its entirety by reference to the
Articles.
37
<PAGE>
Common Stock
The holders of Common Stock are entitled to cast one vote for each
share of record on all matters to be voted on by shareholders, including the
election of directors. The Company's Articles (and Bylaws) provide for a
classified Board of Directors with three classes serving staggered three year
terms so that approximately one-third of the directors will be elected at each
annual meeting. This provision could have the effect of delaying, deferring or
preventing a change in control of the Company. Subject to payment or provision
for full cumulative dividends in respect of any outstanding shares of preferred
stocks, the holders of Common Stock are entitled to receive dividends when and
if declared by the Board of Directors out of legally available funds. In the
event of liquidation, dissolution or winding up of the affairs of the Company,
the holders of the Common Stock are entitled to share ratably in all remaining
assets available for distribution to them after the payment of liabilities and
after provision has been made for each class of stock, including the Preferred
Stock, having preference over the Common Stock. Holders of shares of Common
Stock, as such, have no conversion, preemptive or other subscription rights, and
there are no redemption provisions generally applicable to the Common Stock. A
holder of 91,938 shares of Common Stock has been granted an option to sell such
shares to the Company at a purchase price of $4.84 per share subject to
adjustment and a second holder (who is an officer of the Company) of 82,644
shares of Common Stock has also been granted a similar option to such shares at
a purchase price of $1.21 per share .
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of Preferred
Stock. The Board of Directors has the authority to issue Preferred Stock in one
or more series and to fix the number of shares constituting any such series, the
voting powers, designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions thereof,
including the dividend rights, dividend rate, terms of redemption, redemption
price or prices, conversion and voting rights and liquidation preferences of the
shares constituting any series, without any further vote or action by the
shareholders of the Company. The issuance of Preferred Stock by the Board of
Directors could adversely affect the rights of holders of Common Stock. For
example, issuance of Preferred Stock could result in a series of securities
outstanding that would have preferences over the Common Stock with respect to
dividends and in liquidation and that could (upon conversion or otherwise) enjoy
all of the rights appurtenant to the Common Stock.
The authority possessed by the Board of Director to issue Preferred
Stock could potentially be used to discourage attempts by others to obtain
control of the Company through merger, tender offer, proxy or consent
solicitation or otherwise by making such attempt more difficult to achieve or
more costly. The Board of Directors may issue Preferred Stock without
shareholder approval and with voting rights that could adversely affect the
voting power of holders of Common Stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is
ChaseMellon Shareholder Services, L.L.C.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
The Articles and Bylaws of the Company contain certain provisions
regarding the rights and privileges of stockholders, some of which may have the
effect of discouraging certain types of transactions that involve an actual or
threatened change of control of the Company, diminishing the opportunities for a
stockholder to participate in tender offers, including tender offers at a price
above the then current market value of the Common Stock or over a stockholder's
cost basis in the Common Stock, and inhibiting fluctuations in the market price
of the Common Stock that could result from takeover attempts. These provisions
of the Articles and Bylaws are summarized below.
38
<PAGE>
Size of Board, Election of Directors and Classified Board
The Articles provide that the number of Directors shall be fixed from
time to time as provided in the Bylaws. The Bylaws provide for a minimum of
three and a maximum of nine persons to serve on the Board . The number of
Directors may be increased or decreased by a resolution adopted by the
affirmative vote of a majority of the Board. The Articles further provide that
the Board may amend the Bylaws by action taken in accordance with such Bylaws,
except to the extent that any matters under the Articles or applicable law are
specifically reserved to the shareholders.
The Bylaws provide that the Board will be divided into three classes of
Directors, with the classes to be as nearly equal in number as possible, and one
of each such classes shall be elected each year to serve for a three-year term.
Shareholder Nominations and Proposals
The Company's Bylaws provide for advance notice requirements for
shareholder nominations and proposals at annual meetings of the Company.
Shareholders may nominate Directors or submit other proposals only upon written
notice to the Company not less than 120 days nor more than 150 days prior to the
date of the notice to shareholders of the previous year's annual meeting. A
shareholder's notice also must contain certain additional information, as
specified in the Bylaws. The Board may reject any proposals that are not made in
accordance with the procedures set forth in the Bylaws or that are not proper
subjects of shareholder action in accordance with the provisions of applicable
law.
Calling Shareholder Meetings; Action by Shareholders Without a Meeting
Matters to be acted upon by the shareholders at special meetings are
limited to those which are specified in the notice thereof. A special meeting of
shareholders may be called by the Board of Directors, the Chairman or the
President of the Company. As required by Missouri law, the Bylaws provide that
any action by written consent of shareholders in lieu of a meeting must be
signed by the holders of all outstanding shares of Common Stock.
The foregoing provisions contained in the Articles and Bylaws are
designed in part to make it more difficult and time consuming to obtain majority
control of the Board of Directors or otherwise to bring a matter before
shareholders without the Board's consent, and therefore to reduce the
vulnerability of the Company to an unsolicited takeover proposal. These
provisions are designed to enable the Company to develop its business in a
manner which will foster its long-term growth without the threat of a takeover
not deemed by the Board to be in the best interests of the Company and its
shareholders, and to reduce, to the extent practicable, the potential disruption
entailed by such a threat. However, these provisions may have an adverse effect
on the ability of shareholders to influence the governance of the Company and
the possibility of shareholders receiving a premium above the market price for
their securities from a potential acquirer who is unfriendly to management.
39
<PAGE>
Indemnification of Directors and Officers
Sections 351.355(1) and (2) of The General and Business Corporation Law
of the State of Missouri provide that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful, except that, in the case of an action or suit by or in the right of
the corporation, the corporation may not indemnify such persons against
judgments and fines and no person shall be indemnified as to any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of the person's duty to the
corporation, unless and only to the extent that the court in which the action or
suit was brought determines upon application that such person is fairly and
reasonably entitled to indemnity for proper expenses. Section 351.355(3)
provides that, to the extent that a director, officer, employee or agent of the
corporation has been successful in the defense of any such action, suit or
proceeding or in defense of any claim, issue or matter therein, the person shall
be indemnified against expenses, including attorney's fees, actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Section 351.355(7) provides that a corporation may provide
additional indemnification to any person indemnifiable under subsection (1) of
(2), provided such additional indemnification is authorized by the corporation's
articles of incorporation or an amendment thereto or by a shareholder- approved
bylaw or agreement, and provided further that no person shall thereby be
indemnified against conduct which was finally adjudged to have been knowingly
fraudulent, deliberately dishonest or willful misconduct or which involves an
accounting for profits pursuant to Section 16(b) of the Exchange Act. Paragraph
9 of the Articles of Incorporation of the Company permits the Company to enter
into agreements with its directors, officers, employees and agents to provide
such indemnification as deemed appropriate. Paragraph 9 also provides that the
Company may extend to its directors and executive officers such indemnification
and additional indemnification.
The Company has entered into an indemnification agreements with certain
of its directors and officers. The form of indemnity agreement provides that
each such person will be indemnified to the full extent permitted by applicable
law against all expenses (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement of any threatened, pending or completed
action, suit or proceeding, on account of his services as a director and officer
of the Company or any other company or enterprise in which he is serving at the
request of the Company, or as a guarantor of any debt of the Company. To the
extent the indemnification provided under the agreement exceeds that permitted
by applicable law, indemnification may be unenforceable or may be limited to the
extent it is found by a court of competent jurisdiction to be contrary to public
policy.
The Company may procure and maintain a policy of insurance under which
the directors and officers of the Company will be insured, subject to the limits
of the policy, against certain losses arising from claims made against such
directors and officers by reason of any acts or omissions covered under such
policy in their respective capacities as directors or officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
40
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
8,014,263 shares of Common Stock. Of the shares, approximately
3,656,854 shares, including those offered for sale in this offering, will
be tradeable without restriction under the Securities Act. The remaining
4,357,409 shares of Common Stock held by existing shareholders are
"restricted" within the meaning of Rule 144. Subject to compliance with the
provisions of Rule 144, all of such shares presently are eligible for sale to
the public, notwithstanding the fact that such shares have not been registered
under the Securities Act.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one year but less than two
years, will be entitled to sell in any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
common stock (approximately 80,142 shares immediately after this
offering) or (ii) the average weekly trading volume during the four calendar
weeks immediately preceding the date on which notice of the sales is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are subject to certain requirements relating to manner of sale, notice and
availability of current information about the Company. A person (or persons
whose shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned his or her shares for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations described above.
In accordance with the provisions of an agreement which each director,
executive officer and holder of more than 5% of the Common Stock must
execute and deliver to the Representative as a condition to the consummation of
this offering, certain restrictions prohibiting the sale of the 4,728,364
shares of Common Stock beneficially held by such persons will be imposed.
The restrictions imposed by these agreements will remain in effect for a period
of 12 months following the date of this Prospectus, after which the restrictions
on resale will lapse as to 25% of such shares each successive quarter. The
agreements to be executed by the existing directors, officers, and shareholders
of the Company will have no effect on the date on which shares become eligible
for sale pursuant to Rule 144.
UNDERWRITING
The Underwriters named below, for whom Donald & Co. Securities Inc. is
acting as representative (the "Representative"), have severally agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase from the
Company a total of 2,000,000 shares of Common Stock. The number of shares of
Common Stock that each Underwriter has agreed to purchase is set forth opposite
its name:
Number of
Underwriter Shares
----------- ------
Donald & Co. Securities Inc.
Total 2,000,000
41
<PAGE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain legal matters by counsel to the
Underwriters and various other conditions precedent, and that the Underwriters
are obligated to purchase all of the shares of Common Stock offered by this
Prospectus (other than the shares of Common Stock covered by the over-allotment
option described below), if any are purchased.
The Company has been advised by the Representative that the
Underwriters propose to offer the shares of Common Stock to the public at the
initial offering price set forth on the cover page of this Prospectus and to
certain dealers (who may include Underwriters) at that price less a concession
not in excess of $ _____ per share of Common Stock. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $_____ per share of
Common Stock to certain other dealers. After the initial public offering, the
offering price and other selling terms may be changed by the Representative.
The Selling Shareholders have granted to the Representative an
option, exercisable during the 45-day period after the date of this Prospectus,
to purchase from the Company at the offering price, less underwriting discounts
and the nonaccountable expense allowance, up to an aggregate of 300,000
additional shares of Common Stock for the sole purpose of covering
over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has also agreed to pay to the Representative an expense
allowance on a nonaccountable basis equal to 2% of the gross proceeds derived
from the sale of the shares of Common Stock underwritten (including the sale of
any shares of Common Stock subject to the Representative's over-allotment
option), $25,000 of which has been paid to date.
The Company has granted the Representative for a period of three years
from the date hereof the right to have the Representative's designee present at
all meetings of the Company's Board of Directors and each of its committees.
Such designee will be entitled to the same notices and communications sent by
the Company to its directors and to attend directors' and committees' meetings,
but will not be entitled to vote thereat. Such designee will also be entitled to
receive the same compensation payable to directors as members of the Board and
its committees and all reasonable expenses in attending such meetings. The
Representative has not named such designee as of the date of this Prospectus.
42
<PAGE>
In connection with this offering, the Company has agreed to sell to the
Representative, for nominal consideration, the right to purchase up to an
aggregate of 200,000 shares of Common Stock (the "Representative's Warrants").
The Representative's Warrants are exercisable initially at $_____ per share of
Common Stock (the "Exercise Price") for a period of four years commencing one
year from the date hereof. The Representative's Warrants contain antidilution
provisions providing for adjustment of the Exercise Price upon the occurrence of
certain events, including (i) the issuance of Common Stock, or securities
exercisable or convertible into Common Stock, at a price less than the Exercise
Price and (ii) any recapitalization, reclassification, stock dividend, stock
split, stock combination or similar transaction. In addition, the
Representative's Warrants grant to the holders thereof certain demand and "piggy
back" rights for periods of four and six years, respectively, commencing one
year from the date of this Prospectus with respect to the registration under the
Securities Act of the Common Stock issuable upon exercise of the
Representative's Warrants.
The Company has agreed that, upon the consummation of this offering, it
will enter into a two year consulting agreement with the Representative. The
consulting agreement will not require the Representative to devote a specific
amount of time in the performance of its duties thereunder. Pursuant to such
agreement, the Representative will provide the Company with investment banking
and financial consulting services at the rate of $3,000 per month for the
twenty-four months subsequent to the consummation of this offering (an aggregate
of $72,000). Such services will include, among other matters, consulting with
the Company's management with respect to stockholder relations, corporate
expansion and long-term financing. In the event that the Representative
originates a financing or a merger, acquisition, joint venture or other
transaction to which the Company is a party, the Representative will be entitled
to receive a fee in consideration for the origination of such transaction.
The offering price of the Common Stock was determined by negotiations
among the Company and the Representative, based in part upon the market price
for the Common Stock as reported on the Nasdaq SmallCap.
In connection with this offering, certain Underwriters and selling
group members (if any) who are qualified market makers on The Nasdaq Stock
Market may engage in passive market making transactions in the Common Stock on
The Nasdaq Stock Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the five business
days prior to the pricing of the offering before the commencement of offers
or sales of the Common Stock. Passive market makers must comply with applicable
volume and price limitations and must be identified as such. In general, a
passive market maker must display its bid at a price not in excess of the
43
<PAGE>
highest independent bid for such security; if all independent bids are lowered
below the passive market maker's bid, however, such bid must then be lowered
when certain purchase limits are exceeded.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids or effecting syndicate covering
transactions. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
common stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. Such transactions may
be effected on The Nasdaq Stock Market, in the over-the-counter market, or
otherwise. Such stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Securities offered hereby and certain other legal
matters in connection with the sale of the shares of Securities offered hereby
will be passed upon for the Company by Gallop, Johnson & Neuman, L.C., St.
Louis, Missouri. Certain legal matters relating to this offering will be passed
upon for the Underwriters by Parker Duryee Rosoff & Haft.
EXPERTS
The financial statements of the Company as of January 31, 1997 and for
the fiscal years ending January 31, 1996 and 1997 included in the Prospectus and
the Registration Statement and the financial schedules included in the
Registration Statement have been so included in reliance on the report of BDO
Seidman, LLP, independent certified public accountants given on the authority of
said Firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange of 1934 as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy or information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy or information statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following Regional Offices of the Commission: 7 World Trade Center, Suite
1500, New York, New York 10048; and Northwestern Atrium Center, Suite 1400, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can be
obtained at prescribed rates from the public reference section of the Commission
at 450 Fifth Street N.W., Washington, D.C. 20549 or retrieved electronically via
the internet at the Commission's web site (http://www.sec.gov). In addition,
reports, proxy statements and other information concerning the Company may be
inspected at the offices of The Nasdaq Stock Market, 1735 K Street N.W.,
Washington, D.C. 20549 on which the Common Stock is quoted. The Company has
filed with the Commission a registration statement on Form SB-2 herein,
(together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended, with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents and each such statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
Commission.
44
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
INDEX TO FINANCIAL STATEMENTS
Page
Unaudited Interim Financial Statements
Unaudited Balance Sheet as of July 31 , 1997
Unaudited Statements of Operations for the six
months ended July 31 , 1997 and 1996
Unaudited Statements of Cash Flows for the six
months ended July 31 , 1997 and 1996
Notes to Unaudited Financial Statements
Audited Financial Statements
Independent Auditors' Report
Balance Sheet as of January 31, 1997
Statements of Operations for the fiscal years
ended January 31, 1997 and 1996
Statements of Stockholders' Equity
Statements of Cash Flows for the fiscal years
ended January 31, 1997 and 1996
Summary of Accounting Policies
Notes to Financial Statements
F-1
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Balance Sheet
July 31, 1997
- --------------------------------------------------------------------------------
Assets (Note 3)
Current
Cash $ 70,718
Trade receivables (net of allowance for doubtful
accounts of $374,289) (Note 5) 15,336,384
Notes receivable - officers (Note 2) 108,530
Other current assets 272,378
- --------------------------------------------------------------------------------
Total Current Assets 15,788,010
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Office equipment and furniture 2,030,361
Less accumulated depreciation and amortization 1,313,535
- --------------------------------------------------------------------------------
Net Office Equipment and Furniture 716,826
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other Assets
Notes receivable - officers (Note 2) 135,048
Goodwill (net of accumulated amortization of $134,267) 3,285,112
Other 154,050
- --------------------------------------------------------------------------------
Total Other Assets 3,574,210
- --------------------------------------------------------------------------------
$ 20,079,046
- --------------------------------------------------------------------------------
See accompanying notes
to financial statements
F-2
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Balance Sheet
July 31, 1997
- -----------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current
Checks issued against future deposits $ 438,188
Accounts payable and accrued expenses 660,306
Due to retailers (Note 6) 167,741
Income tax payable 555,350
Deferred income taxes (Note 7) 72,000
Current maturities of long-term debt (Note 3) 2,213,235
- -----------------------------------------------------------------------------
Total Current Liabilities 4,106,820
- -----------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 3) 10,960,682
- -----------------------------------------------------------------------------
Deferred Income Taxes (Note 7) 242,000
- -----------------------------------------------------------------------------
Total Liabilities 15,309,502
- -----------------------------------------------------------------------------
Commitments and Contingencies
Redeemable Common Stock
111,245 shares outstanding 503,820
- -----------------------------------------------------------------------------
Stockholders' Equity
Common Stock, $.01 par - shares authorized
20,000,000; outstanding 7,165,953 71,659
Additional paid-in capital 3,292,872
Retained earnings 901,193
- -----------------------------------------------------------------------------
Total Stockholders' Equity 4,265,724
- -----------------------------------------------------------------------------
$20,079,046
See accompanying notes
to financial statements
F-3
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended July 31, 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Service Revenues $ 5,459,668 $ 2,633,958
Merchandise Revenues 8,348 124,540
- ----------------------------------------------------------------------------------------------
5,468,016 2,758,498
- ----------------------------------------------------------------------------------------------
Cost of Service Revenues 2,851,857 2,351,092
Cost of Merchandise Sold 32,720 11,254
- ----------------------------------------------------------------------------------------------
2,884,577 2,362,346
- ----------------------------------------------------------------------------------------------
Gross Profit 2,583,439 396,152
Selling, General and Administrative Expense 1,062,128 1,671,502
- ----------------------------------------------------------------------------------------------
Operating Income (Loss) 1,521,311 (1,275,350)
- ----------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 13,662 16,240
Interest expense (415,750) (114,178)
Other (40,625) (10,715)
- ----------------------------------------------------------------------------------------------
Total Other Income (Expense) (442,713) (108,653)
- ----------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 1,078,598 (1,384,003)
Income Tax (Expense) Benefit (Note 7) (489,000) 478,463
- ----------------------------------------------------------------------------------------------
Net Income (Loss) $ 589,598 $ (905,540)
- ----------------------------------------------------------------------------------------------
Earnings (Loss) per Share - Primary and Fully
Diluted $ 0.07 $ (0.14)
- ----------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Primary and
Fully Diluted 7,087,838 6,463,909
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
to financial statements
F-4
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
Unaudited Statements of Cash Flows
<CAPTION>
Six Months Ended July 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 589,598 $ (905,540)
Adjustments to reconcile net income to
cash used in operating activities:
Depreciation and amortization 184,851 98,812
Provision for losses on accounts receivable 38,672 (35,394)
Impairment of investment in limited partnership 10,000 10,000
Loss on disposition of assets 1,338 -
Increase in cash surrender value of life insurance (33,743) -
Deferred income taxes (116,000) (114,191)
Services received in exchange for Common Stock 8,000 -
Changes in assets and liabilities:
Increase in accounts receivable (1,855,845) (975,001)
Decrease (increase) in other assets 51,739 (557,556)
Decrease in checks issued against future deposits (2,787,840) -
Increase (decrease) in accounts payable and accrued expenses 399,071 (573,797)
(Decrease) increase in amounts due customers (31,834) 2,098
- --------------------------------------------------------------------------------------------------------------------------
Cash Used in Operating Activities (3,541,633) (3,050,569)
- --------------------------------------------------------------------------------------------------------------------------
Investing Activities
Acquisition of Mike Kessler and Associates, Inc., net of cash acquired (349,777) -
Acquisition of Magazine Marketing, Inc. - (275,000)
Loan to affiliate (5,820) -
Loans to officers (10,000) -
Collections from related party - 22,000
Collections on notes receivable - 32,475
Proceeds from sale of fixed assets 2,000 -
Proceeds from surrender of life insurance policies 83,959 -
Capital expenditures (125,521) (115,360)
- --------------------------------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (405,159) (335,885)
- --------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of Common Stock - 30,000
Proceeds from issuance of Preferred Stock - 1,922,075
Borrowings under credit facility 17,218,000 281,318
Principal payments on credit facility (13,393,000) (62,420)
Borrowings under short-term debt agreements - 2,076,000
Repayments under short-term debt agreements (34,098) (325,000)
Registration costs (58,310) -
Preferred Stock dividends (3) -
- --------------------------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 3,732,589 3,921,973
- --------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash (214,203) 535,519
Cash, beginning of period 284,921 23,828
- --------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 70,718 $ 559,347
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
to financial statements
F-5
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
- --------------------------------------------------------------------------------
1. Unaudited Financial
Statements In the opinion of management, the unaudited
financial information as of July 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
six months ended July 31 , 1997 are
not necessarily indicative of the results to be
expected for the entire year.
2. Related Party
Transactions The Company purchased $174,000 in data
processing services from an employment service
company owned by certain officers of the Company
during the six months ended July
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 July 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 $108,000 and $95,000 for the
six months ended July 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
$5,200 and $0 for the six months
ended July 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 amounts of
$243,578 . Such notes bear interest at the
rate of 7.34% per annum.
F-6
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
3. Long-term Long-term debt consists of:
Debt and Revolving
Credit Facility
July 31, 1997
----------------------------------------------------
Revolving Credit Facility $ 10,949,000
Note payable to former owner of
Mike Kessler and Associates,
Inc., payable in full on 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 15,970
Obligations under capital lease 30,283
----------------------------------------------------
Total Long-term Debt 13,173,917
Less current maturities 2,213,235
----------------------------------------------------
Long-term Debt $ 10,960,682
----------------------------------------------------
F-7
<PAGE>
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 July 31 ,
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 in
compliance with such ratios at July 31 , 1997.
4. Supplemental Cash
Flow Information Supplemental information on interest and income
taxes paid is as follows:
Six Months Ended July 31, 1997 1996
----------------------------------------------------
Interest Paid $ 359,000 $112,000
Income Taxes Paid (Refunded) $(122,000) $286,000
----------------------------------------------------
F-8
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
On February 28, 1997, 7,721 shares of Common
Stock were issued as a dividend to the Preferred
Stockholders .
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 July
31 , 1997 is $11,159,322 due the Company
under the Advance Pay Program (net of
$3,782,255 due the program participants).
Income from the program was approximately
$1,838,000 and $483,000 during the
six months ended July 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 service revenue related to such
payments and pays the customer the difference. The
Company owes retailers $167,741 at July 31 ,
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:
Six Months Ended July 31, 1997 1996
----------------------------------------------------
Current
Federal $482,000 $(295,463)
State 123,000 (110,000)
----------------------------------------------------
Total Current 605,000 (405,463)
----------------------------------------------------
Deferred
Federal (93,000) (53,000)
State (23,000) (20,000)
----------------------------------------------------
Total Deferred (116,000) (73,000)
----------------------------------------------------
Total Income Tax (Benefit)
Expense $489,000 $(478,463)
----------------------------------------------------
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:
July 31, 1997
----------------------------------------------------
Deferred Tax Assets
Allowance for doubtful accounts $ 146,000
Deferred compensation 22,000
Other 13,000
----------------------------------------------------
F-9
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
----------------------------------------------------
Total Deferred Tax Assets 181,000
----------------------------------------------------
Deferred Tax Liabilities
Income not previously taxed
under cash basis of accounting
for income tax purposes 455,000
Depreciation 25,000
Other 15,000
----------------------------------------------------
Total Deferred Tax Liabilities 495,000
----------------------------------------------------
Net Deferred Tax Liability 314,000
----------------------------------------------------
Classified as:
Current 72,000
Non-current 242,000
----------------------------------------------------
Net Deferred Tax Liability $ 314,000
----------------------------------------------------
F-10
<PAGE>
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:
Six Months Ended July 31, 1997 1996
----------------------------------------------------
Income tax expense (benefit)
at statutory rate $ 367,000 $(470,000)
State income tax expense
(benefit), net of federal
income tax benefit 80,000 (58,000)
Non-deductible meals and
entertainment 10,000 13,000
Non-deductible goodwill
amortization 21,000 3,000
Non-deductible officers'
life insurance 2,000 14,000
Other, net 9,000 19,537
----------------------------------------------------
Income Tax Expense (Benefit) $ 489,000 $(478,463)
----------------------------------------------------
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 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 servicing
MKA's customer base.
F-11
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
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 exceeds the fair value of the assets acquired
in the amount of $2,324,346.
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
225,867 shares of Common Stock and non-transferable
warrants expiring 2000 to purchase 375,959 shares of
Common Stock at an exercise price of $2.48 per
share. Such exchange resulted in a constructive
dividend of $109,937 which was reported in the
fiscal quarter ending July 31, 1997.
10. Reverse Stock
Split On July 1, 1997, the Company's shareholders approved
a proposal which gave the Board of Directors
the authority to execute a 1 for 1.21 reverse stock
split. As of the financial statement report date,
the Board of Directors has not effected the
reverse stock split.
11. Earnings Per
Share In calculating earnings per share, Net Income for
the six months ended July 31, 1997 was reduced by a
constructive dividend of $109,937, which resulted
from the exchange of all 5,600 outstanding shares of
Preferred Stock for 225,867 shares of Common Stock
and non-transferable warrants expiring in 2000 to
purchase 375,959 shares of Common Stock at an
exercise price of $2.48 per share.
12. Subsequent Events 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 2000 to purchase an aggregate of
108,041 shares of Common Stock at an exercise price
of $2.48 per share. Although the effect of this
transaction will be reported in the third quarter of
fiscal 1998, the Company expects that such warrants
will be deemed to have an aggregate value ranging
from $30,000 to $50,000.
On August 4, 1997, the Company filed a
preliminary registration statement with the
Securities and Exchange Commission. This statement
is being filed for the purpose of selling
approximately 2,000,000 shares of Common Stock after
giving effect to the proposed 1 for 1.21 reverse
stock split. The Company anticipates the aggregate
selling price of all the securities to approximate
$8,000,000. The proposed issue date of these
securities is expected to be in October, 1997.
F-12
<PAGE>
Independent Auditors' Report
Board of Directors
The Source Information Management Company
St. Louis, Missouri
We have audited the balance sheet of The Source Information Management Company
as of January 31, 1997 and the related statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended January 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Source Information
Management Company at January 31, 1997 and the results of its operations and its
cash flows for each of the two years in the period ended January 31, 1997 in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
St. Louis, Missouri
March 27, 1997
F-13
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Balance Sheet
January 31, 1997
- --------------------------------------------------------------------------------
Assets (Note 4)
Current
Cash $ 284,921
Trade receivables (net of allowance for doubtful
accounts of $323,587) (Note 11) 12,922,738
Income taxes receivable (Note 8) 171,305
Notes receivable - officers (Notes 1 and 2) 58,395
Other current assets 87,306
- --------------------------------------------------------------------------------
Total Current Assets 13,524,665
- --------------------------------------------------------------------------------
Office equipment and furniture (Note 5) 1,823,004
Less accumulated depreciation and amortization 1,191,668
- --------------------------------------------------------------------------------
Net Office Equipment and Furniture 631,336
- --------------------------------------------------------------------------------
Other Assets
Notes receivable - officers (Notes 1 and 2) 175,183
Goodwill, net of accumulated amortization of
$72,209 (Note 9) 1,022,824
Cash surrender value of life insurance 104,358
Other 111,283
- --------------------------------------------------------------------------------
Total Other Assets 1,413,648
- --------------------------------------------------------------------------------
$ 15,569,649
- --------------------------------------------------------------------------------
See accompanying summary of accounting
policies and notes to financial statements
F-14
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Balance Sheet
January 31, 1997
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current
Revolving Line of Credit (Note 4) $ 7,124,000
Checks issued against future deposits 3,225,668
Accounts payable and accrued expenses 559,441
Due to retailers (Note 12) 199,575
Deferred income taxes (Note 8) 24,000
Current maturities of long-term debt (Note 3) 69,203
- -----------------------------------------------------------------------------
Total Current Liabilities 11,201,887
- -----------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 3) 22,814
- -----------------------------------------------------------------------------
Deferred Income taxes (Note 8) 173,000
- -----------------------------------------------------------------------------
Total Liabilities 11,397,701
- -----------------------------------------------------------------------------
Commitments (Note 5 and 6)
- -----------------------------------------------------------------------------
Redeemable Preferred Stock, $.01 par - shares authorized,
2,000,000; outstanding, 5,600 (Note 10) 522,506
Redeemable Common Stock
111,245 shares outstanding (Note 13) 503,820
- -----------------------------------------------------------------------------
1,026,326
- -----------------------------------------------------------------------------
Stockholders' Equity
Common Stock, $.01 par - shares authorized,
20,000,000; outstanding, 6,930,233 69,302
Additional paid-in-capital 2,745,180
Retained earnings 331,140
- -----------------------------------------------------------------------------
Total Stockholders' Equity 3,145,622
- -----------------------------------------------------------------------------
$ 15,569,649
See accompanying summary of accounting
policies and notes to financial statements
F-15
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Statements of Operations
Years Ended January 31, 1997 1996
- --------------------------------------------------------------------------------
Service Revenues $ 7,056,270 $ 7,195,176
Merchandise Revenues 242,177 926,008
- --------------------------------------------------------------------------------
7,298,447 8,121,184
- --------------------------------------------------------------------------------
Cost of Service Revenues 4,862,207 3,859,409
Cost of Merchandise Revenues 202,381 549,813
- --------------------------------------------------------------------------------
5,064,588 4,409,222
- --------------------------------------------------------------------------------
Gross Profit 2,233,859 3,711,962
Selling, General and Administrative
Expense (Notes 1,2, 5 and 6) 2,904,372 2,799,841
- --------------------------------------------------------------------------------
Operating Income (Loss) (670,513) 912,121
- --------------------------------------------------------------------------------
Other Income (Expense)
Interest income 30,628 25,403
Interest expense (311,737) (120,427)
Registration expense - (213,666)
Other (28,883) (5,437)
- --------------------------------------------------------------------------------
Total Other Income (Expense) (309,992) (314,127)
- --------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (980,505) 597,994
Income Tax (Benefit) Expense (Note 8) (377,188) 406,000
- --------------------------------------------------------------------------------
Net Income (Loss) $ (603,317) $ 191,994
- --------------------------------------------------------------------------------
Earnings (Loss) per Share - Primary and
Fully Diluted $ (0.09) $ 0.03
- --------------------------------------------------------------------------------
Weighted Average of Shares Outstanding -
Primary and Fully Diluted 6,658,891 6,084,542
- --------------------------------------------------------------------------------
Pro Forma Amounts (unaudited)
Income before income taxes $ 597,994
Provision for income taxes (Note 8) 284,000
- --------------------------------------------------------------------------------
Net Income (unaudited) $ 313,994
- --------------------------------------------------------------------------------
Net Income per share (unaudited) $ 0.05
- --------------------------------------------------------------------------------
See accompanying summary of accounting
policies and notes to financial statements
F-17
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Statements of Stockholders' Equity
<CAPTION>
Common Stock Additional Total
Paid-in Retained Stockholders'
Capital Earnings Equity
--------------------------------------
Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, February 1, 1995 5,340,000 $ 53,400 $ 195,520 $ 1,377,587 $ 1,626,507
Issuance of Common Stock
(Note 9) 959,389 9,594 (9,594) - -
Issuance of Common Stock 75,000 750 225,375 - 226,125
Reclassification of Subchapter S
retained earnings, net of tax, net
of distributions to stockholders
(Note 9) - - 565,657 (592,657) (27,000)
Net income for the year - - - 191,994 191,994
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1996 6,374,389 $ 63,744 $ 976,958 $ 976,924 $2,017,626
Issuance of Common Stock 8,000 80 29,920 - 30,000
Conversion of 7% Preferred Stock
to Common Stock 423,197 4,232 1,395,337 - 1,399,569
Issuance of Common Stock to
purchase Magazine Marketing,
Inc. (Note 9) 100,000 1,000 249,000 - 250,000
Issuance of Common Stock in
payment of services 15,132 151 51,599 - 51,750
Dividend on Preferred Stock 9,515 95 42,366 (42,467) (6)
Net loss for the year - - - (603,317) (603,317)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1997 6,930,233 $ 69,302 $ 2,745,180 $ 331,140 $3,145,622
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements
F-18
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Statements of Cash Flows
<CAPTION>
Years Ended January 31, 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ (603,317) $ 191,994
Adjustments to reconcile net cash
used in operating activities:
Depreciation and amortization 246,599 140,622
Loss on disposition of equipment 299 -
Provision for losses on accounts receivable 224,387 (35,149)
Impairment of investment in limited partnership 20,000 20,000
Increase in cash surrender value of life insurance (32,740) (22,696)
Write-off of uncollectible note receivable - 92,063
Shareholder distribution - (27,000)
Deferred income taxes (259,064) (59,000)
Services received in exchange for Common Stock 51,750 -
Changes in assets and liabilities:
Increase in accounts receivable (8,789,885) (1,765,173)
Increase in other assets (230,004) (63,463)
Increase in checks issued against future deposits 3,225,668 -
Increase (decrease) in accounts payable
and accrued expenses (513,110) 107,590
Increase in amounts due customers 116,120 29,137
- --------------------------------------------------------------------------------------------------
Cash Used in Operating Activities (6,543,297) (1,391,075)
- --------------------------------------------------------------------------------------------------
Investing Activities
Acquisition of Magazine Marketing, Inc. (275,000) -
Loans to officers - (33,990)
Collections on notes receivable 29,715 483
Collections from related party 53,171 280,884
Capital expenditures (276,729) (197,331)
- --------------------------------------------------------------------------------------------------
Cash (Used in) Provided by Investing Activities (468,843) 50,136
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements
F-19
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Statements of Cash Flows
<CAPTION>
Years Ended January 31, 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Financing Activities
Proceeds from issuance of Common Stock 30,000 226,125
Proceeds from issuance of Preferred Stock 1,922,075 -
Borrowings under long-term debt agreements 9,791,000 -
Principal payments on long-term debt (2,756,121) (183,387)
Borrowings under short-term debt agreements 2,836,366 2,739,884
Repayments under short-term debt agreements (4,550,081) (1,670,370)
Preferred Stock dividends (6) -
- ------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 7,273,233 1,112,212
- ------------------------------------------------------------------------------------------
Increase (Decrease) in Cash 261,093 (228,727)
Cash, beginning of period 23,828 252,555
- ------------------------------------------------------------------------------------------
Cash ,end of period $ 284,921 $ 23,828
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements
F-20
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Basis of
Presentation The financial statements of The Source Information
Management Company reflect the accounts of companies
formerly known as Display Information Systems
Corporation (DISC), Periodical Management & Marketing,
Inc. (PMM) and Dixon's Modern Marketing
Concepts, Inc. and Tri-State Stores, Inc. (MMC). DISC
and PMM merged on February 1, 1995 and the net assets
of MMC were merged on June 15, 1995, as discussed in
Note 9.
Business The Source Information Management Company (the Company)
is a provider of merchandise management information and
related services primarily in connection with the
display and marketing of magazines and other
periodicals. The Company assists retailers in
monitoring, documenting, claiming and collecting
incentive payments, primarily from publishers of
periodicals, and performs consulting and other services
in exchange for service revenues. The Company obtains
merchandising revenue from (a) consulting and other
services rendered to clients on other than a commission
basis and (b) the sale, as principal or broker, of
merchandise to the Company's retailer clients for
resale by them.
Concentrations of
Credit Risk Services are provided to mass merchandise, grocery,
convenience and pharmacy stores throughout the United
States and in Eastern Canada. Management periodically
performs credit evaluations of its customers and
generally does not require collateral. At the balance
sheet date, the Company had no concentrated credit risk
with any individual customer.
Revenue
Recognition Service revenues are recognized during the period in
which services are performed. Merchandising revenues
are recognized in the period in which the merchandising
services are provided.
Equipment and
Furniture Equipment and furniture are stated at cost.
Depreciation is computed using the straight-line method
for financial reporting and accelerated methods for
income tax purposes over the estimated useful lives of
5 to 7 years.
Income Taxes Income taxes are calculated using the asset and
liability method specified by Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes."
Goodwill Goodwill represents the excess of the cost of a company
acquired over the fair value of the net assets acquired
which is amortized over 15 years.
Pro Forma
Information Pro forma data is presented for 1996 which reflects a
provision for income taxes as if DISC, an S corporation
prior to the merger discussed in Note 9, had not been
an S corporation in 1996. Pro forma net income per
share for 1996 has been determined by dividing pro
forma net income by the weighted average number of
common shares outstanding during the year.
F-21
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Stock-Based
Compensation The Company grants stock options for a fixed number of
shares to employees with an exercise price greater than
or equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB
Opinion No. 25). That Opinion requires that
compensation cost related to fixed stock option plans
be recognized only to the extent that the fair value of
the shares at the grant date exceeds the exercise
price. Accordingly, the Company recognizes no
compensation expense for its stock option grants.
In October 1995, the Financial Accounting Standards
Board, issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 allows
companies to continue to account for their stock option
plans in accordance with APB Opinion No. 25, but
encourages the adoption of a new accounting method
based on the estimated fair value of employee stock
option. Pro forma net loss and loss per share,
determined as if the Company had applied the new
method, are disclosed within Note 6.
Accounting
Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Long-Lived
Assets In March 1995, Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets Disposed
Of" ("SFAS No. 121) was issued. SFAS No. 121 requires
that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an
entity be received for impairment whenever events or
changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. During
fiscal 1997, the Company adopted this statement and
determined that no impairment loss need be recognized
for applicable assets of continuing operations.
Reclassifications Certain 1996 amounts have been reclassified to conform
to the 1997 presentation.
F-22
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Related Party
Transactions The Company purchased data processing services from an
employment service company owned by certain officers of
the Company. There were approximately $275,000 and
$307,000 of such purchases made during 1997 and 1996,
respectively. The Company purchased 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 January 31, 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 has been engaged by Specialty Marketing
Co., Inc., a corporation in which Robert B. Dixon is
the principal shareholder, to provide consulting
services. In fiscal 1996 Specialty Marketing Co., Inc.
paid the Company $85,611 in consideration for the
Company's services.
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 $207,498 and $183,275 for
1997 and 1996, respectively. Amounts paid for the
airplane were $0 and $57,926 for 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 and
are payable in five equal installments which began
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
$69,489 which began 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 had a $120,000 unsecured, non-interest
bearing note from a non-affiliated company which
required quarterly installments of $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.
F-23
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. Long-term Long-term debt consists of:
Debt
January 31, 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 $ 46,710
-------------------------------------------------------
Obligations under capital lease (Note 5) 45,307
-------------------------------------------------------
Total Long-term Debt 92,017
Less current maturities 69,203
-------------------------------------------------------
Long-term Debt $ 22,814
-------------------------------------------------------
Annual maturities of long-term debt are as follows:
1998 - $69,203; 1999 - $22,814.
4. Revolving
Line of Credit The Company has an agreement providing for revolving
loans 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
8.0039% at January 31, 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 January 31, 1997,
and, consequently, the debt has been classified as
current. However, the Company has received a waiver
from the bank stating that noncompliance with these
ratios is not considered a default at January 31, 1997.
5. Commitments Leases
The Company leases office space, an apartment, computer
equipment, and vehicles under leases that expire over
the next five years. The Company also leases an
administrative facility from a related party under an
operating lease that expires over the next 16 years. In
most cases, management expects that in the normal
course of business, leases will be renewed or replaced
with other leases. Rent expense was approximately
$427,000 and $410,000 for the years ended January 31,
1997 and 1996, respectively. Amounts paid to related
parties included in total rent expense were
approximately $207,000 and $240,000 for 1997 and 1996,
respectively.
F-24
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Office equipment and furniture includes $71,066 at
January 31, 1997 for equipment leases which have been
capitalized. Accumulated amortization was $35,148 at
January 31, 1997. Lease amortization is included in
depreciation and amortization expense.
Future minimum payments, by year and in the aggregate,
under capital leases and noncancelable operating leases
with initial or remaining terms of one year or more
consisted of the following at January 31, 1997:
Capital Operating
Year Ending January 31, leases leases
------------------------------------------------------
1998 $37,481 $ 458,791
1999 13,688 261,300
2000 -- 184,600
2001 -- 163,891
2002 -- 155,215
Thereafter -- 1,477,950
------------------------------------------------------
Total minimum lease
payments 51,169 $2,701,747
----------
Amount representing
interest 5,862
------------------------------------------------------
Present Value of Net
Minimum Lease Payments $45,307
------------------------------------------------------
Litigation
The Company has pending certain legal actions and
claims incurred in the normal course of business and is
actively pursuing the defense thereof. In the opinion
of management, these actions and claims are either
without merit or are covered by insurance and will not
have a material adverse effect on the Company's
financial position.
6. Employee Profit Sharing and 401(k) Plan
Benefit Plans
The Company has a combined profit sharing and 401(k)
Plan. Annual contributions to the profit sharing
portion of the Plan are determined by the Board of
Directors and may not exceed the amount that may be
deducted for federal income tax purposes. Profit
sharing contributions charged against operations were
$0 and $10,000 for the years ended January 31, 1997 and
1996, respectively.
Under the 401(k) portion of the Plan, all eligible
employees may elect to contribute 2% to 20% of their
compensation up to the maximum allowed under the
Internal Revenue Code. The Company matches one half of
an employee's contribution, not to exceed 5% of the
employee's salary. The amounts matched by the Company
during the years ended January 31, 1997 and 1996
pursuant to this Plan were approximately $50,000 and
$40,000, respectively.
F-25
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Deferred Compensation Plan
During the current year, the Company established an
unfunded deferred compensation plan for certain
officers, who elect to defer a percentage of their
current compensation. The Company does not make
contributions to the plan and is responsible only for
the administrative costs associated with the plan.
Benefits are payable to the participating officers upon
their death or termination of employment. From the
deferred funds, the Company has purchased certain life
insurance policies. However, the proceeds and surrender
value of these policies are not restricted to pay
deferred compensation benefits when they are due.
Stock Option Plan
In August 1995, the Company established The Source
Company 1995 Incentive Stock Option Plan for key
employees and reserved 630,000 shares of common stock
for such plan. Under the plan, the Stock Option
Committee may grant stock options to key employees at
not less than one hundred percent (100%) of the fair
market value of the Company's Common Stock at the date
of grant. The durations and exercisability of the
grants vary according to the individual options
granted. During 1997 the Company granted options for
225,000 shares, but had 125,000 shares forfeited. As of
January 31, 1997, options with a remaining contractual
life of 5 years to purchase 100,000 shares at a price
of $4.63 were outstanding, 20,000 of which were
exercisable.
As discussed in the Summary of Accounting Policies, the
Company applies APB Opinion No. 25 and related
interpretations in accounting for this plan.
Accordingly, no compensation cost has been recognized
for its incentive stock option plan. Had compensation
cost for the Company's stockbased compensation plan
been determined based on the fair value at the grant
dates for awards under the plan consistent with the
method of SFAS No. 123, the Company' net loss and loss
per share would have been reduced to the pro forma
amounts indicated below:
Year Ended January 31, 1997
-------------------------------------------------------
Net loss As reported (603,317)
Pro forma (611,369)
Primary loss per share As reported (0.09)
Pro forma (0.09)
Fully diluted loss per share As reported (0.09)
Pro forma (0.09)
-------------------------------------------------------
The fair value of each option granted in 1996 is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following
weighted-average assumptions used: dividend yield of 0
percent; risk-free interest rate of 4.88 percent;
volatility of .3; and expected lives of 1 year. The
fair value of options granted during the year is $.66.
F-26
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Stock Award Plan
In September 1996, the Company adopted The Source
Company Stock Award Plan for all employees and reserved
50,000 shares of Common Stock for such plan. Under the
plan, the stock award committee, appointed by the board
of directors of the Company, shall determine the
employees to whom awards shall be granted.
On September 18, 1996, 10,050 shares of Common Stock
were awarded to certain employees under the plan.
7. Supplemental Supplemental information on interest and income taxes
Cash Flow paid is as follows:
Information
Years Ended January 31, 1997 1996
-------------------------------------------------------
Interest $ 285,000 $ 109,000
Income Taxes $ 264,000 $ 254,000
-------------------------------------------------------
Capital lease obligations of $15,687 and $59,095 were
incurred in 1997 and 1996, respectively, when the
Company entered into leases for new office equipment.
On August 30, 1996, 9,515 shares of common stock were
issued as a dividend to the preferred stockholders as
of that date.
During 1997 the Company issued 100,000 shares and
111,245 shares of common stock in connection with the
acquisitions of Magazine Marketing, Inc. and Readers
Choice, Inc. (Note 9). During 1996 the Company issued
959,389 shares of common stock in connection with the
acquisition of the Company by Periodico, Inc. (Note 9).
8. Income Taxes Provision for federal and state income taxes (benefit)
in the statements of operations consist of the
following components:
Year Ended January 31, 1997 1996
-------------------------------------------------------
Current
Federal $(102,768) $355,000
State (15,356) 110,000
-------------------------------------------------------
Total Current (118,124) 465,000
-------------------------------------------------------
Pro Forma (Unaudited)
Federal (105,000)
State (17,000)
-------------------------------------------------------
Total Pro Forma (122,000)
-------------------------------------------------------
Deferred
Federal (225,386) (46,000)
State (33,678) (13,000)
-------------------------------------------------------
Total Deferred (259,064) (59,000)
-------------------------------------------------------
Total Income Tax (Benefit)
Expense $(377,188) $284,000
-------------------------------------------------------
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of
the assets and liabilities for financial reporting
F-27
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
purposes and the amounts used for income tax purposes.
The sources of the temporary differences and their
effect on deferred taxes are as follows:
January 31, 1997 1996
-------------------------------------------------------
Deferred Tax Assets
Allowance for doubtful
accounts $ 126,000 $ 38,000
Deferred compensation 14,000 -
Other 3,000 -
-------------------------------------------------------
Total Deferred Tax Assets 143,000 38,000
-------------------------------------------------------
Deferred Tax Liabilities
Income not previously taxes
under cash basis of
accounting for income tax
purposes 312,000 446,000
Depreciation 28,000 28,000
-------------------------------------------------------
Total Deferred Tax Liabilities 340,000 474,000
-------------------------------------------------------
Net Deferred Tax Liability 197,000 436,000
-------------------------------------------------------
Classified as:
Current 24,000 110,000
Non-current 173,000 326,000
-------------------------------------------------------
Net Deferred Tax Liability $ 197,000 $436,000
-------------------------------------------------------
The following unaudited summary reconciles income taxes
at the maximum federal statutory rate with the
effective rate for 1997 and the pro forma effective
rate for 1996:
Year Ended January 31, 1997 1996
-------------------------------------------------------
Income tax (benefit) expense
at statutory rate $(333,372) $ 204,000
State income tax (benefit)
expense, net of federal
income tax benefit (80,421) 52,000
Non-deductible meals and
entertainment 35,320 26,000
Non-deductible officers'
life insurance (3,250) 4,300
Non-deductible goodwill
amortization 2,306 2,300
Other, net 2,229 (4,600)
-------------------------------------------------------
Income Tax (Benefit) Expense $(377,188) $284,000
-------------------------------------------------------
F-28
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. Business Pooling of Interests of DISC and PMM
Combinations
On February 1, 1995 DISC and PMM merged into The Source
Company. DISC stockholders exchanged all of their
shares of common stock for 2,520,000 shares of Common
Stock of The Source Company, and PMM stockholders
exchanged all of their shares of common stock for
2,520,000 shares of Common Stock of The Source Company.
The merger 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 merger to include the results of operations,
financial position, and cash flows of DISC and PMM.
The S corporation retained earnings of DISC totaling
$462,389 representing undistributed earnings on
February 1, 1995 has been credited to additional
paid-in capital net of deferred taxes of approximately
$122,000 which has been recognized through a charge to
income tax expense.
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.
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 Modem 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.
Revenues and net income (loss) for the individual
entities and combined prior to the mergers were as
follows:
F-29
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
The
Source
Company MMC Combined
-------------------------------------------------------------------
February 1 to June 15, 1995
Revenues $2,175,383 $ 435,529 $2,610,912
Net income (loss) $ 96,829 $ (5,609) $ 91,220
-------------------------------------------------------------------
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 Company and $275,000 in
cash. In addition, the Company shall pay $10,000 at the
end of each quarter for a two year period following the
closing date (or a total of $80,000).
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
exceeded the fair value of the assets acquired in the
amount of $704,748 and is being amortized over 15
years.
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
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 exceeded the fair value of the assets
acquired in the amount of $280,507 and is being
amortized over 15 years.
10. Redeemable
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; 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 of Designations,
Preferences and Relative Rights of 1996 Series 7%
Convertible Preferred Stock, may be redeemed at the
option of the holder thereof 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.
F-30
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Each share of the 1996 Series 7% Convertible Preferred
Stock shall be convertible, at the option of the holder
thereof, into shares of the Common Stock of the
Company, at the conversion price equal to 80% of the
current market price of the Common Stock, provided,
however, the conversion price shall not be less than
$3.50 nor more than $5.50 per share of Common Stock.
For purposes of such conversion, each share of the 1996
Series 7% Convertible Preferred Stock shall be accepted
by the Company for surrender at its Liquidation Amount
of $100 per share.
During March 1996 the Company issued 20,000 shares of
1996 Series 7% Convertible Preferred Stock for $100 per
share. Commissions and expenses totalling $137,925 were
incurred in connection with the stock issuances of
which $77,925 was paid in cash and $60,000 was paid by
issuance of another 600 shares of preferred stock.
On June 3, 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 $3.55 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 $4.26 per
share.
During March 1996 the Company issued 20,000 shares of
1996 Series 7% Convertible Preferred Stock for $100 per
share. Commissions and expenses totaling $137,925 were
incurred in connection with the stock issuances of
which $77,925 was paid in cash and $60,000 was paid by
issuance of another 600 shares of preferred stock.
On June 3, 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 $3.55 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 $4.26 per
share.
On July 29, 1996 two investors converted 2,250 and 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
9,515 shares based on an issuance price of $4.46 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
F-31
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
an additional 2,857 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.
On September 22, 1996 an investor converted 2,250
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 64,285 shares of Common Stock.
11. Advance Pay
Program The Company has established an Advance Pay Program.
Under this program the 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 January 31, 1997 is
$11,206,666 due the Company under the Advance Pay
Program (net of $2,314,727 due the program
participants). Income from the program was
approximately $1,150,000 during 1997 and was not
material in 1996.
12. 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 service revenue related to such payments and pays
the customer the difference. The Company owes retailers
$199,575 at January 31, 1997 under such arrangements.
13. Redeemable
Common Stock During June 1996, the Company issued 100,000 shares of
Common Stock to James W. Looman in connection with the
purchase of Magazine Marketing, Inc. (Note 9). Pursuant
to the terms of the Purchase Agreement, Mr. Looman was
granted an option to sell his shares to the Company at
a price of $1.00 per share if, at any time during the
two year period following the acquisition date (June
28, 1996) the market value of all shares acquired in
the transaction becomes less than $100,000 for ten
consecutive trading days.
Also during June 1996, the Company issued 111,245
shares of Common Stock to United Magazine Company
("United Magazine") in connection with the purchase of
Readers Choice, Inc. (Note 9). Pursuant to the terms of
the Purchase Agreement, United Magazine was granted an
option to sell its shares to the Company at a price of
$4.00 per share if the Company's stock price for the
last five days of any calendar quarter during the two
year period following the acquisition date (June 30,
1996) is less than $4.00 per share.
The stock which was issued in each of the foregoing
transactions is recorded at the value which was
assigned in each of the respective transactions.
F-32
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
14. Fair Values of
Financial
Instruments The following methods and assumptions were used to
estimate the fair values of each class of financial
instruments for which it is practicable to estimate
that value:
Trade Receivables and Cash Surrender Value of Life
Insurance
The carrying amounts approximate fair value because of
the short maturity of those instruments.
Notes Receivable - Officers
The fair value is estimated by discounting the future
cash flows using the current interest rates at which
similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Accounts Payable and Accrued Expenses, and Amounts Due
to Retailers
Carrying amounts are reasonable estimates of fair value
due to the relatively short period between origination
and expected repayment of these instruments.
Long-term Debt (Excluding
Obligations Under Capital Leases)
The carrying amount approximates the fair value because
the financial instrument was originally recorded at its
discounted value.
Revolving Line of Credit
It is presumed that the carrying amount is a reasonable
estimate of fair value because the financial instrument
bears a variable interest rate.
The estimated fair values of the Company's financial
instruments are as follows:
Carrying Fair
January 31, 1997 value value
---------------------------------------------------------------
Financial Assets
Trade receivables $ 12,922,738 $ 12,922,738
Notes Receivable - officers $ 233,578 $ 207,600
Cash surrender value of life
insurance $ 104,358 $ 104,358
Financial Liabilities
Accounts payable and
Accrued expenses $ 559,441 $ 559,441
Due to retailers $ 199,575 $ 199,575
Long-term debt (excluding
obligations under capital
leases) $ 46,710 $ 46,710
Revolving line of credit $ 7,124,000 $ 7,124,000
---------------------------------------------------------------
F-33
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
15. Earnings Per
Share In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS No. 128).
The new standard simplifies the standards for computing
earnings per share and requires presentation of two new
amounts, basic and diluted earnings per share. The
Company will be required to retroactively adopt this
standard when it reports its operating results for the
fiscal quarter and year ending January 31, 1998. When
the Company adopts SFAS No. 128, it expects no changes
in its previously reported Primary and Fully Diluted
earnings per share.
F-34
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
16. Quarterly
Financial Data
(unaudited)
<CAPTION>
- -------------------------------------------------------------------------------------------
1997 April 30 July 31 October 31 January 31
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $1,453,968 $1,304,530 $2,100,190 $2,439,759
Gross Profit 249,130 147,022 795,390 1,042,317
Net Income (Loss) (470,229) (435,311) 62,410 239,813
Earnings (loss) per
common share (0.07) (0.07) 0.01 0.04
Weighted average
number of common
shares outstanding 6,379,900 6,508,607 6,793,267 6,879,147
1996
Net Sales $2,032,637 $1,887,799 $2,487,985 $1,712,763
Gross Profit 1,101,895 1,086,215 1,064,531 459,321
Net Income (Loss) 80,435 155,726 187,845 (232,012)
Earnings (loss) per
common share 0.02 0.02 0.03 (0.04)
Weighted average
number of common
shares outstanding 5,340,000 6,299,389 6,324,389 6,374,389
</TABLE>
F-35
<PAGE>
No underwriter, dealer, salesperson or
other person has been authorized to give
any information or to make any
representations other than those
contained in this prospectus and, if
given or made, such other information or THE SOURCE INFORMATION
representations must not be relied upon MANAGEMENT COMPANY
as having been authorized by the Company
or any Underwriter. Neither the delivery
of this Prospectus nor any sale made
hereunder shall, under any
circumstances, create any implication
that there has been no change in the
affairs of the Company since the date
hereof or that the information contained 2,000,000 SHARES
herein is correct as of any date
subsequent to the date hereof. This
Prospectus does not constitute an offer COMMON STOCK
to sell or a solicitation of an offer to
buy any securities offered hereby by
anyone in any jurisdiction in which such
offer or solicitation is not authorized
or in which the person making such offer
or solicitation is not qualified to do
so or to anyone to whom it is unlawful
to make such offer or solicitation.
--------------------------------
TABLE OF CONTENTS
Page
Prospectus Summary ............. 3
Risk Factors.................... 7 ---------
Use of Proceeds ................ 12 P R O S P E C T U S
Price Range of Common Stock..... 13 ---------
Dividend Policy................. 13
Capitalization ................. 14
Selected Financial Data .. 15
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations .................... 16
Business ....................... 21
Management ..................... 26
Principal and Selling
Shareholders .................. 31
Description of Capital
Stock ......................... 33 DONALD & CO.
Certain Provisions of the SECURITIES, INC.
Articles of Incorporation
and Bylaws..................... 33
Shares Eligible for Future
Sale .......................... 35
Underwriting ................... 37
Legal Matters .................. 38
Experts ....................... 38
Available Information .......... 39
Index to Financial
Statements ................... F-1
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Sections 351.355(1) and (2) of The General and Business Corporation Law
of the State of Missouri provide that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful, except that, in the case of an action or suit by or in the right of,
the corporation, the corporation may not indemnify such persons against
judgments and fines and no person shall be indemnified as to any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of the person's duty to the
corporation, unless and only to the extent that the court in which the action or
suit was brought determines upon application that such person is fairly and
reasonably entitled to indemnity for proper expenses. Section 351.355(3)
provides that, to the extent that a director, officer, employee or agent of the
corporation has been successful in the defense of any such action, suit or
proceeding or in defense of any claim, issue or matter therein, the person shall
be indemnified against expenses, including attorney's fees, actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Section 351.355(7) provides that a corporation may provide
additional indemnification to any person indemnifiable under subsection (1) of
(2), provided such additional indemnification is authorized by the corporation's
articles of incorporation or an amendment thereto or by a shareholder-approved
bylaw or agreement, and provided-further that no person shall thereby be
indemnified against conduct which was finally adjudged to have been knowingly
fraudulent, deliberately dishonest or willful misconduct or which involves
an-accounting-for profits pursuant to Section 16(b) of the Exchange Act.
Paragraph 9 of the Articles of Incorporation of the Company permits the Company
to enter into agreements with its directors, officers, employees and agents to
provide such indemnification as deemed appropriate. Paragraph 9 also provides
that the Company may extend to its directors and executive officers such
indemnification and additional indemnification.
The Company has entered into an indemnification agreement with its
directors and certain of its executive officers. The form of indemnity agreement
provides that such persons will be indemnified to the full extent permitted by
applicable law against all expenses (including attorneys' fees), judgments,
fines, penalties and amounts paid in settlement of any threatened, pending or
completed action, suit or proceeding, on account of such person's services as a
director or executive officer of the Company or any other company or enterprise
in which he is serving at the request of the Company, or as a guarantor of any
debt of the Company. To the extent the indemnification provided under the
agreement exceeds that permitted by applicable law, indemnification may be
unenforceable or may be limited to the extent it is found by a court of
competent jurisdiction to be contrary to public policy.
The Company has procured and intends to maintain a policy of insurance
under which the directors and officers of the Company will be insured, subject
to the limits of the policy, against certain losses arising from claims made
against such directors and officers by reason of any acts or omissions covered
under such policy in their respective capacities as directors or officers.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the shares of Preferred Stock offered hereby,
all of which will be paid by the Company:
SEC Registration fee.................................. $ 3,477
NASD Filing fee....................................... 1,508
State securities law compliance....................... 30,000
Listing fees.......................................... 7,500
Transfer agent fees and expenses...................... 5,000
Printing and engraving................................ 75,000
Legal fees and expenses............................... 100,000
Accounting fees and expenses.......................... 50,000
Non-accountable expense allowance..................... 160,000
Miscellaneous......................................... 17,515
--------
Total............................................. $450,000
=======
- ---------------------------
Item 26. Recent Sales of Unregistered Securities
Explanatory Note: The following share and per share data does not
reflect the proposed 1-to-1.21 reverse stock split.
During February of 1996, the Company issued 8,000 shares of Common
Stock to Dennis Mensch for $3.75 per share in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
During March of 1996, the Company issued 2,250, 2,250 and 500 shares of
1996 Series 7% Convertible Preferred Stock for $100 per share to Messrs. Aron
Katzman, Timothy A. Braswell and Harry L. Franc, III pursuant to Section 4(2) of
the Securities Act of 1933. 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 Certificate of 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 within 30 days following the effective date of a merger
or consolidation in which the Company is not the surviving entity.
In a series of transactions, taking place in August 1996 and September
1996, exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, the Company issued 5,082 shares of Common Stock to Financial Power Network
in exchange for $21,600 of marketing services.
During June 1996, the Company issued 100,000 shares of Common Stock to
James W. Looman in connection with the purchase of Magazine Marketing, Inc. in a
transaction exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933.
II-2
<PAGE>
During June 1996, the Company issued 111,245 shares of Common
Stock to United Magazine Company in connection with the purchase of Readers
Choice, Inc. in a transaction exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.
In July, 1997, the Company issued 225,867 shares of Common Stock to
the holders of the Company's 1996 7% Convertible Preferred Stock in exchange for
all of the issued and outstanding shares of such Preferred Stock.
Item 27. Exhibits
Exhibit
Number Description
1.1 Form Underwriting Agreement
2.1 Stock Purchase Agreement dated as of April 24, 1997 among
Michael Kessler, Mike Kessler and Associates, Inc.,
The Source Company and K-Sub, Inc.
2.2 First Amendment to Stock Purchase Agreement dated as of
May 19, 1997, among Michael and Loretta B. Kessler, Mike
Kessler and Associates, Inc. and The Source Company
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
3.3 Amendment to Articles of Incorporation of the Company
4.1 Form of Common Stock Certificate
4.4 Form of Representative's Warrants
4.5 Form of Privately Issued Warrant
5.1 Opinion of Gallop, Johnson & Neuman, L.C.
10.1 Form of Promissory Notes with S. Leslie Flegel and
Dwight DeGolia
10.2 Form of Indemnity Agreement with Officers and Directors
10.3 Lease Agreement dated June 28, 1991 with 711 Gallimore
Partnership
10.6 Lease Agreement dated January 1, 1993 with Robert B. Dixon
10.8 Addendum to the Lease Agreement, dated as of
January 1, 1994, with 711 Gallimore Partnership
10.9 Addendum to the Lease Agreement, dated as of
January 1, 1996, with 711 Gallimore Partnership
10.10 Addendum to the Lease Agreement, dated as of
April 1, 1996, with 711 Gallimore Partnership
10.11 Addendum to the Lease Agreement, dated as of
April 25, 1996, with 711 Gallimore Partnership
10.12 Stock Acquisition Agreement dated June 20, 1996
among James Looman, Magazine Marketing, Inc. and
The Source Company
10.13 $8,700,000 Credit Agreement dated as of November 14,
1996 between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.14 Amendment to Credit Agreement dated December 19, 1996
by and between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.15 Amendment to Credit Agreement dated January 31, 1997
by and between The Source Company and Wachovia Bank of
North Carolina, N.A.
II-3
<PAGE>
10.16 The Source Company Common Stock Award Plan .
10.17 The Source Company Amended and Restated 1995 Incentive Stock
Option Plan.
10.18 Employment Agreement, effective February 1, 1996, with
John P. Watkins
10.19 Employment Agreement dated as of August 30, 1995, with
Robert G. Shupe
10.20 Agreement with Dwight L. DeGolia.
10.21 Front End Management Agreement with Kmart Corporation
10.22 Amendment to Credit Agreement dated July 31, 1997 by and
between The Source Company and Wachovia Bank, N.A.
10.23 Form of Financial Consulting Agreement with Donald & Co.
Securities, Inc. (to be filed by Amendment)
10.24 Amendment to Credit Agreement dated May 29, 1997 by and
between the Source Company and Wachovia Bank of North
Carolina, N.A.
11.1 Statement Regarding Computation of Earnings Per Share
21.1 Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
23.3 Consent of Gallop, Johnson & Neuman, L.C.
(included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page of initial
filing)
27.1 Financial Data Schedule (Filed in EDGAR version only)
Item 28. Undertakings
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) If the issuer relies on Rule 430A under the Securities Act, that
the small business issuer will:
(1) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the small business issuer under Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it
Effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at the time
as the initial bona fide offering of those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Amendment
to Registration Statement to be signed on its behalf by the undersigned, in
the County of St. Louis, State of Missouri, on the 15th day of September ,
1997.
THE SOURCE INFORMATION MANAGEMENT COMPANY
By: /s/ W. Brian Rodgers
W. Brian Rodgers
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ S. Leslie Flegel* Chief Executive September 15, 1997
- ------------------------------- Officer and Chairman
S. Leslie Flegel of the Board
(principal executive
officer)
/s/ W. Brian Rodgers Chief Financial Officer September 15, 1997
- ------------------------------- (principal financial and
W. Brian Rodgers accounting officer)
/s/ William H. Lee* President, Chief Operating September 15, 1997
- ------------------------------- Officer and Director
William H. Lee
/s/ Timothy A. Braswell* Director September 15, 1997
- -------------------------------
Timothy A. Braswell
/s/ Harry L. "Terry" Franc, III* Director September 15, 1997
- -------------------------------
Harry L. "Terry" Franc, III
/s/ Aron Katzman* Director September 15, 1997
- -------------------------------
Aron Katzman
II-5
<PAGE>
/s/ Randall Minix* Director September 15, 1997
- -------------------------------
Randall Minix
- ------------
* By: /s/ W. Brian Rodgers
W. Brian Rodgers, Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
1.1* Form of Underwriting Agreement
2.1(1) Stock Purchase Agreement dated as of April 24, 1997
among Michael Kessler, Mike Kessler and Associates,
Inc., The Source Company and K-Sub, Inc.
2.2(1) First Amendment to Stock Purchase Agreement dated as of
May 19, 1997, among Michael and Loretta B. Kessler,
Mike Kessler and Associates, Inc. and The Source
Company
3.1(2) Articles of Incorporation of the Company
3.2(2) Bylaws of the Company
3.3* Amendment to Articles of Incorporation of the Company
4.1* Form of Common Stock Certificate
4.4* Form of Representative's Warrants
4.5 Form of Privately Issued Warrant (filed herewith)
5.1* Opinion of Gallop, Johnson & Neuman, L.C.
10.1(2) Form of Promissory Notes with S. Leslie Flegel and
Dwight DeGolia
10.2(2) Form of Indemnity Agreement with Officers and Directors
10.3(2) Lease Agreement dated June 28, 1991 with 711 Gallimore
Partnership
10.6(2) Lease Agreement dated January 1, 1993 with Robert B.
Dixon
10.8(3) Addendum to the Lease Agreement, dated as of January 1,
1994, with 711 Gallimore Partnership
10.9(3) Addendum to the Lease Agreement, dated as of January 1,
1996, with 711 Gallimore Partnership
10.10(3) Addendum to the Lease Agreement, dated as of April 1,
1996, with 711 Gallimore Partnership
E-1
<PAGE>
10.11(3) Addendum to the Lease Agreement, dated as of April 25,
1996, with 711 Gallimore Partnership
10.12(4) Stock Acquisition Agreement dated June 20, 1996 among
James Looman, Magazine Marketing, Inc. and The Source
Company
10.13(4) $8,700,000 Credit Agreement dated as of November 14,
1996 between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.14(4) Amendment to Credit Agreement dated December 19, 1996
by and between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.15(4) Amendment to Credit Agreement dated January 31, 1997 by
and between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.16(5) The Source Company Common Stock Award Plan.
10.17 The Source Company Amended and Restated 1995 Incentive
Stock Option Plan (filed herewith)
10.18* Employment Agreement, effective February 1, 1996, with
John P. Watkins
10.19* Employment Agreement dated as of August 30, 1995, with
Robert G. Shupe
10.20* Agreement with Dwight L. DeGolia.
10.21* Front End Management Agreement with Kmart Corporation.
10.22* Amendment to Credit Agreement dated July 31, 1997 by
and between The Source Company and Wachovia Bank, N.A.
10.23* Form of Financial Consulting Agreement with Donald &
Co. Securities, Inc. (to be filed by Amendment)
10.24 Amendment to Credit Agreement dated May 29, 1997 by and
between the Source Company and Wachovia Bank of North
Carolina, N.A. (filed herewith)
11.1 Statement Regarding Computation of Earnings Per Share (filed
herewith)
21.1* Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP (filed herewith)
23.3* Consent of Gallop, Johnson & Neuman, L.C.
(included in Exhibit 5.1)
24.1* Power of Attorney (included on signature page of initial filing)
27.1 Financial Data Schedule (filed herewith)
- ----------------------------
*Previously filed
E-2
<PAGE>
(1) Incorporated by reference to Form 8-K, filed on June 13, 1997.
(2) Incorporated by reference to Registration Statement on Form 10-SB (File
no. 0-26238) first filed on June 12, 1995.
(3) Incorporated by reference to Form 10-KSB for the fiscal year ended
January 31, 1996.
(4) Incorporated by reference to Form 10-KSB for the fiscal year ended
January 31, 1997.
(5) Incorporated by reference to Form S-8 (File No. 333-16039) filed on
November 13, 1996, as exhibit 4.4 thereof.
E-3
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH
SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR
OTHERWISE TRANSFERRED UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO
IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS,
OR (2) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF SUCH
SECURITIES, WHICH COUNSEL AND OPINION ARE REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR
TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS.
THIS WARRANT NOT TRANSFERABLE
THE SOURCE COMPANY
Warrant for the Purchase of Shares of Common Stock,
par value $0.01 per share
THIS WARRANT EXPIRES ON JULY 1, 2000
No. 2002-____ ____________ Shares
THIS CERTIFIES that, for value received, ______________
________________________ with an address at _____________________
________________________ (the "Holder"), is entitled to subscribe for and
purchase from The Source Company, a Missouri corporation (the "Company"), upon
the terms and conditions set forth herein, at any time or from time to time
before 5:00 P.M. on July 1, 2000, St. Louis time (the "Exercise Period"),
___________ shares of the Company's Common Stock, par value $0.01 per share
("Common Stock"), at a price equal to $2.48 per share (the "Exercise Price"). As
used herein the term "Warrant" shall mean and include this Warrant and any
Warrant or Warrants hereafter issued as a consequence of the exercise of this
Warrant in whole or in part.
The number of shares of Common Stock issuable upon exercise of
this Warrant (the "Warrant Shares") and the Exercise Price may be adjusted from
time to time as hereinafter set forth.
1. This Warrant may be exercised during the Exercise Period,
as to the whole or any less number of whole Warrant Shares, by the surrender of
this Warrant (with the election at the end hereof duly exercised) to the Company
at its office at 11644 Lilburn Park Road, St. Louis, Missouri 63146 or at such
other place as is designated in writing by the Company, together with a
certified or bank cashier's check payable to the order of the Company in an
amount equal to the Exercise Price multiplied by the number of Warrant Shares
for which this Warrant is being exercised.
<PAGE>
2. Upon each exercise of the Holder's rights to purchase
Warrant Shares, the Holder shall be deemed to be the holder of record of the
Warrant Shares issuable upon such exercise, notwithstanding that the transfer
books of the Company shall then be closed or certificates representing such
Warrant Shares shall not then have been actually delivered to the Holder. As
soon as practicable after each such exercise of this Warrant, the Company shall
issue and deliver to the Holder a certificate or certificates for the Warrant
Shares issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the right of the Holder to purchase the balance of the
Warrant Shares (or portions thereof) subject to purchase hereunder.
3. (a) Any Warrants issued upon the exercise in part of this
Warrant shall be numbered and shall be registered in a Warrant Register as they
are issued. The Company shall be entitled to treat the registered holder of any
Warrant on the Warrant Register as the owner in fact thereof for all purposes
and shall not be bound or recognize any equitable or other claim to or interest
in such Warrant on the part of any other person, and shall not be liable for any
registration of Warrants which are registered or to be registered in the name of
a fiduciary or the nominee of a fiduciary unless made with the actual knowledge
that a fiduciary or nominee is committing a breach of trust in requesting such
registration, or with the knowledge of such facts that its participation therein
amounts to bad faith. This Warrant is not transferable. This Warrant may be
exchanged, at the option of the Holder thereof, for another Warrant, or other
Warrants of different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of Warrant Shares (or portions
thereof), upon surrender to the Company or its duly authorized agent.
Notwithstanding the foregoing, the Company shall have no obligation to cause
Warrants to be transferred on its books to any person if, in the opinion of
counsel to the Company, such transfer does not comply with the provisions of the
Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations thereunder.
(b) The Holder acknowledges that it has been advised
by the Company that neither this Warrant nor the Warrant Shares have been
registered under the Securities Act, that this Warrant is being or has been
issued and the Warrant Shares may be issued on the basis of a statutory
exemption provided by the Securities Act relating to transactions not involving
a public offering. The Holder has been informed by the Company of, or is
otherwise familiar with, the nature of the limitations imposed by the Securities
Act and the rules and regulations thereunder on the transfer of securities. In
particular, the Holder agrees that no sale, assignment or transfer of the
Warrant Shares issuable upon exercise hereof shall be valid or effective, and
the Company shall not be required to give any effect to any such sale,
assignment or transfer, unless (i) the sale, assignment or transfer of this
2
<PAGE>
Warrant or such Warrant Shares is registered under the Securities Act, it being
understood that neither this Warrant nor such Warrant Shares are currently
registered for sale and that the Company has no obligation or intention to so
register this Warrant or such Warrant Shares, or (ii) such Warrant Shares are
sold, assigned or transferred in accordance with all the requirements and
limitations of Rule 144 under the Securities Act, it being understood that Rule
144 is not available at the time of the original issuance of this Warrant for
the sale of such Warrant Shares and that there can be no assurance that Rule 144
sales will be available at any subsequent time, or (iii) such sale, assignment,
or transfer is otherwise exempt from registration under the Securities Act.
4. The Company shall at all times reserve and keep available
out its authorized and unissued Common Stock, solely for the purpose of
providing for the exercise of the rights to purchase all Warrant Shares granted
pursuant to this Warrant, such number of shares of Common Stock as shall, from
time to time, be sufficient therefor. The Company covenants that all shares of
Common Stock issuable upon exercise of this covenant, upon receipt by the
Company of the full Exercise Price therefor, shall be validly issued, fully
paid, nonassessable, and free of preemptive rights.
5. (a) In case the Company shall at any time after the date
this Warrant is first issued (i) declare a dividend on the outstanding Common
Stock payable in shares of its capital stock, (ii) subdivide the outstanding
Common Stock, or (iii) combine the outstanding Common Stock into a smaller
number of shares, then, in each case, the Exercise Price, and the number of
Warrant Shares issuable upon exercise of this Warrant, in effect at the time of
the record date for such dividend or of the effective date of such subdivision,
or combination, shall be proportionately adjusted so that the Holder after such
time shall be entitled to receive the aggregate number and kind of shares which,
if such Warrant had been exercised immediately prior to such time, he would have
owned upon such exercise and been entitled to receive by virtue of such
dividend, subdivision, or combination. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) In case the Company shall issue or fix a record
date for the issuance to all holders of Common Stock of rights, options, or
warrants to subscribe for or purchase Common Stock (or securities convertible
into or exchangeable for Common Stock) at a price per share (or having a
conversion or exchange price per share, if a security convertible into or
exchangeable for Common Stock) less than the Exercise Price per share of Common
Stock on such record date, then, in each case, the Exercise Price shall be
adjusted by multiplying the Exercise Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the number of shares
of Common Stock outstanding on such record date plus the number of shares of
Common Stock which the aggregate offering price of the total number of shares of
3
<PAGE>
Common Stock so to be offered (or the aggregate initial conversion or exchange
price of the convertible or exchangeable securities so to be offered) would
purchase at such Exercise Price and the denominator of which shall be the number
of shares of Common Stock outstanding on such record date plus the number of
additional shares of Common Stock to be offered for subscription or purchase (or
into which the convertible or exchangeable securities so to be offered are
initially convertible or exchangeable); provided, however, that no such
adjustment shall be made which results in an increase in the Exercise Price.
Such adjustment shall become effective at the close of business on such record
date; provided, however, that, to the extent the shares of Common Stock (or
securities convertible into or exchangeable for shares of Common Stock) are not
delivered, the Exercise Price shall be readjusted after the expiration of such
rights, options, or warrants (but only with respect to Warrants exercised after
such expiration), to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights, options, or warrants been
made upon the basis of delivery of only the number of shares of Common Stock (or
securities convertible into or exchangeable for shares of Common Stock) actually
issued. In case any subscription price may be paid in a consideration part or
all of which shall be in a form other than cash, the value of such consideration
shall be as determined in good faith by the board of directors of the Company,
whose determination shall be conclusive absent manifest error. Shares of Common
Stock owned by or held for the account of the Company or any majority-owned
subsidiary shall not be deemed outstanding for the purpose of any such
computation.
(c) In case the Company shall distribute to all
holders of Common Stock (including any such distribution made to the
stockholders of the Company in connection with a consolidation or merger in
which the Company is the continuing corporation) evidences of its indebtedness,
cash (other than any cash dividend which, together with any cash dividends paid
within the 12 months prior to the record date for such distribution, does not
exceed 15% of the Exercise Price at the record date for such distribution) or
assets (other than distributions and dividends payable in shares of Common
Stock), or rights, options, or warrants to subscribe for or purchase Common
Stock, or securities convertible into or exchangeable for shares of Common Stock
(excluding those with respect to the issuance of which an adjustment of the
Exercise Price is provided pursuant to section 5(b) hereof), then, in each case,
the Exercise Price shall be adjusted by multiplying the Exercise Price in effect
immediately prior to the record date for the determination of stockholders
entitled to receive such distribution by a fraction, the numerator of which
shall be the Exercise Price per share of Common Stock on such record date, less
the fair market value (as determined in good faith by the board of directors of
the Company, whose determination shall be conclusive absent manifest error) of
the portion of the evidences of indebtedness or assets so to be distributed, or
4
<PAGE>
of such rights, options, or warrants or convertible or exchangeable securities,
or the amount of such cash, applicable to one share, and the denominator of
which shall be such Exercise Price per share of Common Stock. Such adjustment
shall become effective at the close of business on such record date.
(d) No adjustment in the Exercise Price shall be
required if such adjustment is less than $.25; provided, however, that any
adjustments which by reason of this Section 5 are not required to be made shall
be carried forward and taken into account in any subsequent adjustment. All
calculations under this Section 5 shall be made to the nearest cent or to the
nearest one thousandth of a share, as the case may be.
(e) In any case in which this Section 5 shall
require that an adjustment in the Exercise Price be made effective as of a
record date for a specified event, the Company may elect to defer, until the
occurrence of such event, issuing to the Holder, if the Holder exercised this
Warrant after such record date, the shares of Common Stock, if any, issuable
upon such exercise over and above the shares of Common Stock, if any, issuable
upon such exercise on the basis of the Exercise Price in effect prior to such
adjustment; provided, however, that the Company shall deliver to the Holder a
due bill or other appropriate instrument evidencing the Holder's right to
receive such additional shares upon the occurrence of the event requiring such
adjustment.
(f) Upon each adjustment of the Exercise Price as
a result of the calculations made in Sections 5(b) or 5(c) hereof, this Warrant
shall thereafter evidence the right to purchase, at the adjusted Exercise Price,
that number of shares (calculated to the nearest thousandth) obtained by
dividing (A) the product obtained by multiplying the number of shares
purchasable upon exercise of this Warrant prior to adjustment of the number of
shares by the Exercise Price in effect prior to adjustment of the Exercise Price
by (B) the Exercise Price in effect after such adjustment of the Exercise Price.
(g) Whenever there shall be an adjustment as
provided in this Section 5, the Company shall promptly cause written notice
thereof to be sent by certified mail, postage prepaid, to the Holder, at its
address as it shall appear in the Warrant Register, which notice shall be
accompanied by an officer's certificate setting forth the number of Warrant
Shares purchasable upon the exercise of this Warrant and the Exercise Price
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment and the computation thereof, which officer's certificate shall
be conclusive evidence of the correctness of any such adjustment absent manifest
error.
(h) The Company shall not be required to issue
fractions of shares of Common Stock or other capital stock of the Company upon
5
<PAGE>
the exercise of this Warrant. If any fraction of a share would be issuable on
the exercise of this Warrant (or specified portions thereof), the Company shall
purchase such fraction for an amount in cash equal to the same fraction of the
Exercise Price of such share of Common Stock on the date of exercise of this
Warrant.
6. (a) In case of any consolidation with or merger of the
Company with or into another corporation (other than a merger or consolidation
in which the Company is the surviving or continuing corporation), or in case of
any sale, lease, or conveyance to another corporation of the property and assets
of any nature of the Company as an entirety or substantially as an entirety,
such successor, leasing, or purchasing corporation, as the case may be, shall
(i) execute with the Holder an agreement providing that the Holder shall have
the right thereafter to receive upon exercise of this Warrant solely the kind
and amount of shares of stock and other securities, property, cash, or any
combination thereof receivable upon such consolidation, merger, sale, lease, or
conveyance by a holder of the number of shares of Common Stock for which this
Warrant might have been exercised immediately prior to such consolidation,
merger, sale, lease, or conveyance, and (ii) make effective provision in its
certificate of incorporation or otherwise, if necessary, to effect such
agreement. Such agreement shall provide for adjustments which shall be as nearly
equivalent as practicable to the adjustments in Section 5.
(b) In case of any reclassification or change of
the shares of Common Stock issuable upon exercise of this Warrant (other than a
change in par value or from no par value to a specified par value, or as a
result of a subdivision or combination, but including any change in the shares
into two or more classes or series of shares), or in case of any consolidation
or merger of another corporation into the Company in which the Company is the
continuing corporation and in which there is a reclassification or change
(including a change to the right to receive cash or other property) of the
shares of Common Stock (other than a change in par value, or from no par value
to a specified par value, or as a result of a subdivision or combination, but
including any change in the shares into two or more classes or series of
shares), the Holder shall have the right thereafter to receive upon exercise of
this Warrant solely the kind and amount of shares of stock and other securities,
property, cash, or any combination thereof receivable upon such
reclassification, change, consolidation, or merger by a holder of the number of
shares of Common Stock for which this Warrant might have been exercised
immediately prior to such reclassification, change, consolidation, or merger.
Thereafter, appropriate provision shall be made for adjustments which shall be
as nearly equivalent as practicable to the adjustments in Section 5.
6
<PAGE>
(c) The above provisions of this Section 6 shall
similarly apply to successive reclassifications and changes of shares of Common
Stock and to successive consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose to:
(a) pay any dividend or make any distribution on
shares of Common Stock in shares of Common Stock or make any other distribution
distribution to all holders of Common Stock; or
(b) issue any rights, warrants, or other
securities to all holders of Common Stock entitling them to purchase any
additional shares of Common Stock or any other rights, warrants or other
securities; or
(c) effect any reclassification or change of
outstanding shares of Common Stock, or any consolidation, merger, sale, lease,
or conveyance of property, described in Section 6 hereof; or
(d) effect any liquidation, dissolution, or
winding-up of the Company; or
(e) take any other action which would cause an
adjustment to the Exercise Price;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by certified mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Warrant Register, mailed at least 5
business days prior to (i) the date as of which the holders of record of shares
of Common Stock to be entitled to receive any such dividend, distribution,
rights, warrants, or other securities are to be determined, (ii) the date on
which any such reclassification, change of outstanding shares of Common Stock,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up is expected to become effective, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange their shares for securities or other property, if any,
deliverable upon such reclassification, change of outstanding shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding-up, or (iii) the date of such action which would require
an adjustment to the Exercise Price.
8. The issuance of any shares or other securities upon the
exercise of this Warrant, and the delivery of certificates or other instruments
representing such shares or other securities, shall be made without charge to
the Holder for any tax or other charge in respect of such issuance. The Company
shall not, however, be required to pay any tax which may be payable in respect
7
<PAGE>
of any transfer involved in the issue and delivery of any certificate in a name
other than that of the Holder and the Company shall not be required to issue or
deliver any such certificate unless and until the person or persons requesting
the issue thereof shall have paid to the company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
9. The Warrant Shares issued upon exercise of this Warrant
shall be subject to a stop transfer order and the certificate or certificates
evidencing such Warrant Shares shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND
NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE
OFFERED, SOLD, PLEDGED, ASSIGNED OR OTHERWISE TRANSFERRED
UNLESS (1) A REGISTRATION STATEMENT WITH RESPECT THERETO IS
EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS, OR (2) THE COMPANY RECEIVES AN OPINION OF
COUNSEL TO THE HOLDER OF SUCH SECURITIES, WHICH COUNSEL AND
OPINION ARE REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
SECURITIES MAY BE OFFERED, SOLD, PLEDGED, ASSIGNED OR
TRANSFERRED IN THE MANNER CONTEMPLATED WITHOUT AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE
STATE SECURITIES LAWS."
10. Upon receipt of evidence satisfactory to the Company of
the loss, theft, destruction, or mutilation of this Warrant (and upon surrender
of any Warrant if mutilated), including an affidavit of the Holder that this
Warrant has been lost, stolen, destroyed or mutilated, together with an
indemnity against any claim that may be made against the Company on account of
such lost, stolen, destroyed or mutilated Warrant, and upon reimbursement of the
Company's reasonable incidental expenses, the Company shall execute and deliver
to the Holder a new Warrant of like date, tenor, and denomination.
11. The Holder of this Warrant shall not have solely on
account of such status, any rights of a stockholder of the Company, either at
law or in equity, or to any notice of meetings of stockholders or of any other
proceedings of the Company, except as provided in this Warrant.
12. This Warrant shall be construed in accordance with the
laws of the State of Missouri applicable to contracts made and performed within
8
<PAGE>
such State, without regard to principles governing conflicts of law.
Dated: _________________, 1997
THE SOURCE COMPANY
By: ___________________________
S. Leslie Flegel, Chairman
[Seal]
___________________________
Alan G. Johnson, Secretary
9
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Warrant.)
FOR VALUE RECEIVED, _________________ hereby sells, assigns,
and transfers unto _________________ a Warrant to purchase __________ shares of
Common Stock, par value $0.01 per share, of The Source Company (the "Company"),
together with all right, title, and interest therein, and does hereby
irrevocably constitute and appoint ____________________________ attorney to
transfer such Warrant on the books of the Company, with full power of
substitution. Dated: _________________
Signature____________________________
_____________________________________
Signature Guarantee
NOTICE
The signature on the for going Assignment must correspond to
the name as written upon the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
10
<PAGE>
To: The Source Company
11644 Lilburn Park Road
St. Louis, Missouri 63146
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase
_________ Warrant Shares covered by the within Warrant and tenders payment
herewith in the amount of $_________ in accordance with the terms thereof, and
requests that certificates for such securities be issued in the name of, and
delivered to:
________________________________________________________________________________
________________________________________________________________________________
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Warrant Shares shall not be all the Warrant Shares
covered by the within Warrant, that a new Warrant for the balance of the Warrant
Shares covered by the within Warrant be registered in the name of, and delivered
to, the undersigned at the address stated below.
Dated: ________________ Name___________________________________
(Print)
Address:________________________________________________________________________
_______________________________________
(Signature)
_______________________________________
(Signature Guarantee)
11
THE SOURCE COMPANY
AMENDED AND RESTATED
1995 INCENTIVE STOCK OPTION PLAN
1. Purpose of the Plan
The Source Company 1995 Incentive Stock Option Plan ("Plan") is
intended to provide additional incentive to certain valued and trusted employees
of The Source Company, a Missouri corporation (the "Company"), by encouraging
them to acquire shares of the $.01 par value common stock of the Company (the
"Stock") through options to purchase Stock granted under the Plan ("Options").
The purpose for granting such Options and making the purchase of the Stock
possible is to increase the proprietary interest of such employees in the
business of the Company and provide them with an increased personal interest in
the continued success and progress of the Company. The intended result is to
promote the interests of both the Company and its shareholders.
Options granted under the Plan may be either Options intended to
qualify as "incentive stock options" ("ISOs") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified
stock options ("NQSOs"). Each employee granted an Option will receive and be
required to accept a Stock Option Agreement with the Company (the "Option
Agreement"), which sets forth the terms and conditions of the Option, in
accordance with this Plan.
2. Administration of Plan
The Plan will be administered by the Compensation Committee (the
"Committee") of the Board of Directors of the Company ("Board"), to be composed
of at least two (2) members. Each member of the Committee shall be a
"non-employee director" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rule or
regulation. Each member of the Committee shall serve at the pleasure of the
Board. Any vacancy occurring in the membership of the Committee shall be filled
by appointment by the Board. If there are less than two members of the Board who
qualify as "non-employee directors" within the meaning of Rule 16b-3 under the
Exchange Act, then the full Board shall be deemed to be the administrators of
the Plan and shall be endowed with all of the rights and responsibilities
attributed to the Committee herein:
The Committee shall have the sole power:
(a) subject to the provisions of the Plan, to grant Options; to
determine the type of Option (NQSO or ISO); to determine the terms and
conditions of all Options; to construe and interpret the Plan and Options
granted under it; to determine the time or times an Option may be exercised, the
number of shares as to which an Option may be exercised at any one time, and
when an Option may terminate; to establish, amend and revoke rules and
regulations relating to the Plan and its administration; and to correct any
defect, supply any omission, or reconcile any inconsistency in the Plan, or in
<PAGE>
any Option Agreement, in a manner and to the extent it shall deem necessary, all
of which determinations and interpretations made by the Committee shall be
conclusive and binding on all Optionees and on their legal representatives and
beneficiaries; and
(b) to determine all questions of policy and expediency that may arise
in the administration of the Plan and generally exercise such powers and perform
such acts as are deemed necessary or expedient to promote the best interests of
the Company.
The day-to-day administration of the Plan may be carried out by such
officers and employees of the Company as shall be designated from time to time
by the Committee. All expenses and liabilities incurred by the Committee in
connection with the administration of the Plan shall be borne by the Company.
The Committee may employ attorneys, consultants, accountants, appraisers,
brokers or other persons, and the Committee, the Board, the Company and the
officers and employees of the Company shall be entitled to rely upon the advice,
opinions or valuations of any such persons. The interpretation and construction
by the Committee of any provision of the Plan and any determination by the
Committee under any provision of the Plan shall be final and conclusive for all
purposes. Neither the Committee nor any member thereof shall be liable for any
act, omission, interpretation, construction or determination made in connection
with the Plan in good faith, and the members of the Committee shall be entitled
to indemnification and reimbursement by the Company in respect of any claim,
loss, damage or expense (including attorneys' fees) arising therefrom to the
fullest extent permitted by law.
3. Shares Subject to the Plan
Subject to the provisions of paragraph 13, the Stock that may be issued
pursuant to Options granted under the Plan shall not exceed in the aggregate Six
Hundred Thirty Thousand (630,000) shares of $.01 par value common stock of the
Company. If any Options granted under the Plan terminate, expire or are
surrendered without having been exercised in full, the number of shares of Stock
not purchased under such Options shall be available again for the purpose of the
Plan. The Stock to be offered for purchase upon the grant of an Option may be
authorized but unissued Stock or Stock previously issued and outstanding and
reacquired by the Company.
4. Persons Eligible for Options
All employees of the Company who are not members of the Committee shall
be eligible to receive the grant of Options under the Plan. The Committee shall
determine the employees to whom Options shall be granted, the time or times such
Options shall be granted, the number of shares to be subject to each Option and
the times when each Option may be exercised. The Committee shall seek
information, advice and recommendations from management to assist the Committee
in its independent determination as to the employees to whom Options shall be
granted. An employee who has been granted an Option (an "Optionee"), if he or
she is otherwise eligible, may be granted additional Options.
-2-
<PAGE>
5. Purchase Price
The purchase price of each share of Stock covered by each Option
("Purchase Price") shall not be less than one hundred percent (100%) of the Fair
Market Value Per Share (as defined below) of the Stock on the date the Option is
granted. However, if and when an ISO is granted the Optionee receiving the ISO
owns or will be considered to own, by reason of Section 424(d) of the Code, more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company, the purchase price of the Stock covered by the ISO shall
not be less than one hundred and ten percent (110%) of the Fair Market Value Per
Share of the Stock on the date the ISO is granted.
"Fair Market Value Per Share" of the Stock shall mean: (i) if the Stock
is traded only otherwise than on a securities exchange and is quoted on the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ"), the closing quoted selling price of the Stock on the date of grant
of the Option, as reported by the Wall Street Journal; (ii) if the Stock is
admitted to trading on a securities exchange, the closing quoted selling price
of the Stock on the date of grant of the Option, as reported in the Wall Street
Journal; or (iii) if the Stock is traded only otherwise than on a securities
exchange and is not quoted on NASDAQ, the closing quoted selling price of the
Stock on the date of grant of the Option as quoted in the "pink sheets"
published by the National Daily Quotation Bureau. In any case, if there were no
sales of the Stock on the date of the grant of an Option, the Fair Market Value
Per Share shall be determined by the Committee in accordance with Section
20.2031-2 of the Federal Estate Tax Regulations.
6. Duration of Options
Any outstanding Option and all unexercised rights thereunder shall
expire and terminate automatically upon the earliest of: (i) the cessation of
the employment or engagement of the Optionee by the Company for any reason other
than retirement (under normal Company policies), death or disability; (ii) the
date which is three months following the effective date of the Optionee's
retirement from the Company's service; (iii) the date which is one year
following the date on which the Optionee's service with the Company ceases due
to death or disability; (iv) the date of expiration of the Option determined by
the Committee at the time the Option is granted and specified in such Option; or
(v) the tenth (10th) annual anniversary date of the granting of the Option, or,
if and when an ISO is granted the Optionee owns (or would be considered to own
by reason of Section 424(d) of the Code) more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company, then on the
fifth (5th) such anniversary. However, the Committee shall have the right, but
not the obligation, to extend the expiration of the Options held by an Optionee
whose service with the Company has ceased for any reason to the end of their
original terms, notwithstanding that such Options may no longer qualify as ISOs
under the Code.
-3-
<PAGE>
7. Exercise of Options
(a) An Option may be exercisable in installments or otherwise upon such
terms as the Committee shall determine when the Option is granted.
(b) No Option will be exercisable (and any attempted exercise will be
deemed null and void) if such exercise would create a right of recovery for
"short-swing profits" under Section 16(b) of the Securities Exchange Act of
1934.
(c) No Option will become exercisable if the exercisability of such
Option would cause the aggregate fair market value (as determined at the time of
grant in accordance with the provisions of paragraph 5 hereof) of the Stock with
respect to which Option issued by the Company are first exercisable during such
calendar year to exceed $100,000. If the grant of an Option hereunder would
cause a violation of the foregoing limitation, the exercisability of the portion
of the Option granted hereunder shall be reduced to the extent necessary such
that no violation of the foregoing limitation will occur. Any Option with
respect to which exercisability has been deferred shall become first exercisable
on the first day of the calendar year in which such exercisability would not
cause a violation of the limitations contained in Section 422(b)(7) of the Code;
provided, however, if the exercisability is required to be deferred beyond the
expiration of such Option, the grant of such Option shall be null and void.
8. Method of Exercise
(a) When the right to purchase shares accrues, Options may be exercised
by giving written notice to the Company stating the number of shares for which
the Option is being exercised, accompanied by payment in full by cash or its
equivalent, as is acceptable to the Company, of the purchase price for the
shares being purchased. The Company shall issue a separate certificate or
certificates of Stock for each Option exercised by an Optionee.
(b) In the Committee's discretion, determined at the time an Option is
granted, payment of the purchase price for shares may be made in whole or in
part with other shares of Stock of the Company which are free and clear of all
liens and encumbrances. The value of the shares of Stock tendered in payment for
the shares being purchased shall be the Fair Market Value Per Share on the date
of the Optionee's notice of exercise.
(c) Notwithstanding the foregoing, the Company shall have the right to
postpone the time of delivery of any shares for such period as may be required
for the Company, with reasonable diligence, to comply with any applicable
listing requirements of any national securities exchange or the National
Association of Securities Dealers, Inc. or any Federal, state or local law. If
the Optionee, or other person entitled to exercise an Option, fails to timely
accept delivery of and pay for the shares specified in such notice, the
Committee shall have the right to terminate the Option and the exercise thereof
with respect to such shares.
-4-
<PAGE>
9. Nontransferability of Options
No Option granted under the Plan shall be assignable or transferable by
the Optionee, either voluntarily or by operation of law, other than by will or
the laws of descent and distribution, and, during the lifetime of the Optionee,
shall be exercisable only by the Optionee.
10. Continuance of Employment
Nothing contained in the Plan or in any Option granted under the Plan
shall confer upon any Optionee any rights with respect to the continuation of
employment by the Company or interfere in any way with the right of the Company
(subject to the terms of any separate employment agreement to the contrary) at
any time to terminate such employment or to increase or decrease the
compensation of the Optionee from the rate in existence at the time of the
granting of any Option.
11. Restrictions on Shares
If the Company shall be advised by counsel that certain requirements
under Federal or state securities laws must be met before Stock may be issued
under the Plan, the Company shall notify all persons who have been issued
Options, and the Company shall have no liability for the failure to issue Stock
under any exercise of Options because of any delay while such requirements are
being met or the inability of the Company to comply with such requirements.
12. Privilege of Stock Ownership
No person entitled to exercise any Option granted under the Plan shall
have the rights or privileges of a stockholder of the Company for any shares of
Stock issuable upon exercise of such Option until such person has become the
holder of record of such shares. No adjustment shall be made for dividends or
other rights for which the record date is prior to the date on which such person
becomes the holder of record, except as provided in paragraph 13.
13. Adjustment
(a) If the number of outstanding shares of Stock are increased or
decreased, or such shares are exchanged for a different number or kind of shares
or securities of the Company, through reorganization, merger, recapitalization,
reclassification, stock dividend, stock split, combination of shares, or other
similar transaction, the aggregate number of shares of Stock subject to the
Plan, as provided in paragraph 3, and the shares of Stock subject to issued and
outstanding Options under the Plan shall be appropriately and proportionately
adjusted by the Committee. Any such adjustment in an outstanding Option shall be
made without change in the aggregate purchase price applicable to the
unexercised portion of the Option but with an appropriate adjustment in the
price for each share or other unit of any security covered by the Option.
-5-
<PAGE>
(b) Notwithstanding paragraph (a), upon: (i) the dissolution or
liquidation of the Company, (ii) a reorganization, merger or consolidation of
the Company with one or more corporations in which the Company is not the
surviving corporation, (iii) a sale of substantially all of the assets of the
Company or (iv) the transfer of more than 80% of the then outstanding Stock of
the Company to another entity or person, in a single transaction or series of
transactions, the Board shall accelerate the time in which any outstanding
Options granted under the Plan may be exercised to a time prior to the
consummation of the transaction, and the Plan shall terminate upon such
consummation of the transaction. However, the acceleration of the time of
exercise of such Options and the termination of the Plan shall not occur if
provision is made in writing in connection with the transaction, in a manner
acceptable to the Board, for: (A) the continuance of the Plan and assumption of
outstanding Options, or (B) the substitution for such Options of new options to
purchase the stock of a successor corporation (or parent or subsidiary thereof),
with appropriate adjustments as to number and kind of shares and option price.
The Board of Directors shall have the authority to amend this paragraph to
provide for a requirement that a successor corporation assume any outstanding
Options.
(c) Adjustments under this paragraph 13 shall be made by the Committee,
whose determination as to what adjustments shall be made, and the extent thereof
shall be final, binding and conclusive. No fractional shares of Stock shall be
issued under the Plan or in connection with any such adjustment.
14. Investment Purpose
Each Option granted hereunder may be issued on the condition that any
purchase of Stock by the exercise of an Option which is not the subject of a
registration statement permitting the sale or other distribution thereof shall
be for investment purposes and not with a view to resale or distribution (the
"Restricted Stock"). If requested by the Company, each Optionee must agree, at
the time of the purchase of any Restricted Stock, to execute an "investment
letter" setting forth such investment intent in the form acceptable to the
Company and must consent to any stock certificate issued to him thereunder
bearing a restrictive legend setting forth the restrictions applicable to the
further resale, transfer or other conveyance thereof without registration under
the Securities Act of 1933, as amended, and under the applicable securities or
blue sky laws of any other jurisdiction (together, the "Securities Laws"), or
the availability of exemptions from registration thereunder and to the placing
of transfer restrictions on the records of the transfer agent for such stock. No
Restricted Stock may thereafter be resold, transferred or otherwise conveyed
unless:
(1) an opinion of the Optionee's counsel is received, in form and
substance satisfactory to counsel for the Company, that
registration under the Securities Laws is not required; or
(2) such Stock is registered under the applicable Securities Laws;
or
(3) A "no action" letter is received from the staff of the
Securities and Exchange Commission and from the administrative
-6-
<PAGE>
agencies administering all other applicable securities or blue
sky laws, based on an opinion of counsel for Optionee in form
and substance reasonably satisfactory to counsel for the
Company, advising that registration under the Securities Laws
is not required.
15. Amendment and Termination of Plan
(a) The Board of Directors of the Company may, from time to time, with
respect to any shares at the time not subject to Options, suspend or terminate
the Plan or amend or revise the terms of the Plan; provided that any amendment
to the Plan shall be approved by a majority of the shareholders of the Company
if the amendment would (i) materially increase the benefits accruing to
participants under the Plan; (ii) increase the number of shares of Stock which
may be issued under the Plan, except as provided under the provisions of
paragraph 13; or (iii) materially modify the requirements as to eligibility for
participation in the Plan.
(b) Subject to the provisions of paragraph 13, the Plan shall terminate
ten (10) years from the earlier of the adoption of the Plan by the Board of
Directors or its approval by the shareholders.
(c) Subject to the provisions of paragraph 13, no amendment, suspension
or termination of this Plan shall, without the consent of each Optionee, alter
or impair any rights or obligations under any Option granted to such Optionee
under the Plan.
16. Effective Date of Plan
The Plan shall become effective upon adoption by the Board of Directors
of the Company and approval by the Company's shareholders; provided, however,
that prior to approval of the Plan by the Company's shareholders but after
adoption by the Board of Directors, Options may be granted under the Plan
subject to obtaining such approval.
17. Term of Plan
No Option shall be granted under the Plan after ten (10) years from the
earlier of the date of adoption of the Plan by the Board of Directors of the
Company or the date of approval by the Company's shareholders.
Adopted by the Board of Directors as of the 26th day of June, 1997.
THE SOURCE COMPANY
By:/s/ S. Leslie Flegel
S. Leslie Flegel, Chairman
of the Board and Chief
Executive Officer
-7-
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT TO CREDIT AGREEMENT, made this 29th day of May, 1997, by and
between THE SOURCE COMPANY (the "Borrower") and WACHOVIA BANK OF NORTH CAROLINA,
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 promises and the mutual covenants herein
and in the Credit Agreement contained, the parties agree as follows:
I. Sub-section B of the Definition of "Tangible Net Worth" as shown on Page 12
of the Credit Agreement is hereby amended and restated to read as follows:
(B) All assets which would be treated as intangibles
under generally accepted accounting principles,
including without limitation goodwill (whether
representing the excess of cost over book value of
assets acquired, or otherwise, with the exception of
goodwill generated from any transaction occurring
after November 14, 1996 which is approved in writing
by the Bank), trademarks, tradenames, copyrights,
patents and technologies, and unamortized debt
discount and expenses.
Except as herein amended, the terms and provisions of 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 COMPANY
By: /s/ S. Leslie Flegel
Chairman and Chief Executive Officer
ATTEST:
[CORPORATE SEAL] By: /s/ W. Brian Rodgers
Assistant Secretary
WACHOVIA BANK, N.A.
By: /s/ John Stevens
Vice President
The Source Information Management Company
<TABLE>
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>
February 1, 1997 Balance
7,041,478 27 1,050,386
February 28, 1997 Stock dividend on preferred stock
7,721 7,049,199 75 2,920,939
May 15, 1997 Assumed conversion of stock
options 47,786 7,096,985 41 1,607,604
June 25, 1997 Assumed conversion of stock
options 51,170 7,148,155 7 276,448
July 1, 1997 Assumed conversion of warrants 40,330 7,188,485 28 1,112,031
July 29, 1997 Stock issued in payment of
services 2,132 7,190,617 2 79,454
July 31, 1997 Exchange of preferred stock for
common stock 225,867 7,416,484 1 40,975
July 31, 1997 Balance
7,416,484 7,087,838
</TABLE>
BDO Seidman, LLP
Accountants and Consultants
720 Olive Street, Suite 2300
St. Louis, MO 63101-2387
Consent of Independent Certified Public Accountants
The Source Information Management Company
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated March 27,
1997 relating to the financial statements of The Source Information Management
Company, which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
St. Louis, Missouri /s/ BDO Seidman, LLP
September 15, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Balance Sheet
at July 31, 1997 (Unaudited) and the Statement of Income for the Six Months
Ended July 31, 1997 (Unaudited) and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-30-1997
<CASH> 70,718
<SECURITIES> 0
<RECEIVABLES> 15,336,384
<ALLOWANCES> 374,289
<INVENTORY> 0
<CURRENT-ASSETS> 15,788,010
<PP&E> 2,030,361
<DEPRECIATION> 1,313,535
<TOTAL-ASSETS> 20,079,046
<CURRENT-LIABILITIES> 4,106,820
<BONDS> 0
0
0
<COMMON> 71,659
<OTHER-SE> 4,194,065
<TOTAL-LIABILITY-AND-EQUITY> 20,079,046
<SALES> 5,468,016
<TOTAL-REVENUES> 5,468,016
<CGS> 2,884,577
<TOTAL-COSTS> 1,062,128
<OTHER-EXPENSES> 26,963
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 415,750
<INCOME-PRETAX> 1,078,598
<INCOME-TAX> 489,000
<INCOME-CONTINUING> 589,598
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 589,598
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
