SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required). For the fiscal year ended January 31, 1997.
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required). For the transition period from
_____________ to ______________.
Commission file number 0-26238
THE SOURCE COMPANY
(Name of Small Business Issuer in its Charter)
Missouri 43-1710906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11644 Lilburn Park Road
St. Louis, Missouri 63146
(Address of Principal Executive Offices) (Zip Code)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Act: Common Stock $0.01 par
value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
The issuer's revenues for its most recent fiscal year are $7,298,447.
At March 31, 1997, the aggregate market value of the voting stock held by
non-affiliates of The Source Company (the "Company") was approximately
$5,715,304, based on the closing bid price of the Common Stock reported by the
Nasdaq SmallCap Market on March 31, 1997. At March 31, 1997, the Company had
outstanding 7,049,199 shares of Common Stock.
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TABLE OF CONTENTS
PART I
Page
ITEM 1. Description of Business
ITEM 2. Description of Property
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
ITEM 7. Financial Statements
ITEM 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation
ITEM 11. Security Ownership of Certain Beneficial Owners and
Management
ITEM 12. Certain Relationships and Related Transactions
ITEM 13. Exhibits and Reports on Form 8-K
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The information contained in this Form 10-KSB includes statements regarding
matters which are not historical facts (including statements as to The Source
Company's (the "Company") plans, beliefs or expectations) which are
forward-looking statements within the meaning of the federal securities law.
Because such forward-looking statements involve certain risks and uncertainties,
the Company's actual results and the timing of certain events could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in the
Sections captioned "Description of Business," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Certain
Relationships and Related Transactions," those discussed in Exhibit 99.1 and
those discussed in the Company's Form 10-SB/A filed with the Securities and
Exchange Commission on January 17, 1996.
PART I
Item 1. Description of Business.
The Source Company (the "Company") provides monitoring, documentation
and collection services required to obtain single copy magazine sales incentive
payments available from magazine publishers to magazine and periodical
retailers. The Company provides these services to approximately 50,000 mass
merchandise, grocery, convenience and pharmacy stores located throughout the
United States and in eastern Canada. It provides such services and related
merchandising services on a frequent basis, in many cases daily, and holds power
of attorney from its retailer clients to collect incentive payments from
publishers. The Company's integrated software system is designed to efficiently
and accurately monitor sales of low-cost, high volume consumer products,
allowing the Company's retailer clients to maximize sales incentive payments
offered by publishers and optimize the effectiveness of their marketing effort.
While the Company's software system was developed to aid retailers in the
merchandising of the more than 3,500 published magazine titles and the
collection of sales incentive payments, it has been used in connection with
integrated magazine and confections displays and is adaptable for use in
connection with most other consumer products, including high volume items such
as soft drinks and batteries. The Company has approximately 640 clients
(operating approximately 50,000 stores), many of which are among the country's
largest mass merchandise and grocery retailers.
Formation of the Company
The Company is a Missouri corporation which was organized and commenced
operations in 1995. The Company was formed to effect the combination of various
separate but compatible business entities.
Business Strategy
The Company has adopted a multi-faceted business strategy to achieve
its sales and profitability objectives, which consists of the following key
elements:
Increase Sales by Expanding Market. The Company intends to increasingly
expand its business activities beyond those markets and geographic regions in
which it is presently engaged. Management believes that many of its currently
offered services may be of value to retailers outside the United States.
Accordingly, the Company has established relationships with several Canadian
retailers and may explore opportunities to solicit new clients in certain
European countries.
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Aggressive Marketing of Additional Services to Existing Client Base.
Based on discussions with its clients, requests from clients for services, and
management's analysis of the retailing and product distribution industries, the
Company believes that many of its existing clients could benefit from additional
services presently offered or under development by the Company. In accordance
with applicable accounting principles, however, the Company has not recorded any
research and development expenses during the two most recently concluded fiscal
years. The Company intends to develop, introduce and aggressively market
programs and services to its client base, including:
(i) a uniform product code (UPC) program designed to assist
retailers in implementing price changes and collecting and reporting
information concerning sales and inventory of magazines and other
product categories which contain a large number of stock keeping units
(SKUs) and are subject to frequent changes in price, such as
confections and greeting cards. As currently envisioned, subscribers to
the Company's UPC program will receive frequent, on-line updating of
product information collected by the Company directly from the product
manufacturer. In addition, subscribers will receive reports generated
by the Company from data received by the Company through a computer
link to the retailers' check out systems; and
(ii) an incentive rebate, advance payment program which would
enable clients possessing the necessary point of sale computer systems
to receive advances equal to the discounted amounts of the incentive
payments otherwise due to the retailer from magazine publishers upon
quarterly submission and processing of claims for such payments.
Acquisition of Complementary Businesses and Technologies. The Company
actively explores opportunities to acquire 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.
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 3,500 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
volume of single copy sales historically is 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.
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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 essentially 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. A majority of
RDA and RDP programs are administered on behalf of the publishers by the
national distributors.
Publishers have implemented programs to encourage retailers to update
their checkout and mainline display fixtures by making one-time payments
("IPOs") and periodic payments ("ISAs"), based on the pockets allocated to their
respective titles. Similar to RDA and RDP, IPO and ISA 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.
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Alternatively, the Company offers 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. Approximately 83% of the Company's revenues in fiscal 1997 were derived
from the rendition of claim submission services.
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. Space Design services accounted for
approximately 9% of the Company's fiscal 1997 revenues.
Periodical Information Network (PIN). 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 also provides
access to static historical information for analysis purposes. PIN accounted for
approximately 2% of the Company's fiscal 1997 revenues.
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 or checkout displays and cross-promotions of magazines and
products of interest to the readers of such magazines. Such services are offered
to enhance single copy magazine sales by the Company's clients, and thereby
increase commission revenue due the Company in connection with the submission of
incentive payment claims; accordingly, no separate charge is made for these
services.
Administrative Support. Through projects such as its UPC program, the
Company assists retailers to more efficiently conduct their magazine sales
operations through computerized inventory control, automated pricing updates and
management reporting. Administrative Support services accounted for less than 1%
of the Company's fiscal 1997 revenues.
Under agreements with its retailer clients, the Company typically
receives a percentage of the aggregate incentive payment collected on the
retailer's behalf as compensation for its claim submission services; however, in
a small number of cases, such agreements provide for the payment to the Company
of a fixed sum or the combination of a fixed sum and percentage payment. Revenue
from claim submission services is recognized at the time claims for incentive
payments are submitted to the publishers based on the amount claimed, less a
reserve necessary to maintain an allowance for doubtful accounts of
approximately 2% of trade accounts receivables. However, invoices for services
rendered by the Company in connection with the claim process are not issued
until the Company receives settlement of the claim, typically 90-150 days
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following submission. Except in connection with its advance pay program the
Company does not guarantee to its retailer clients any payments due to the
clients 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. Invoices for Space Design
and Administrative Support services provided by the Company are typically issued
and payable monthly on the basis of a fixed sum agreement or hourly rates
established by the Company for the services performed.
Marketing and Sales
The Company markets its services through a variety of methods,
including its own direct sales force. The Company's sales group consists of
eight 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
While its competition is fragmented, the Company recognizes
approximately 50 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. There can be no assurance, however, that its present
competitors or companies that choose to enter its marketplace in the future will
not exert significant competitive pressures on the Company. 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. 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. However, the Company does not presently foresee this to any
significant or successful extent.
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.
Proprietary Software
The Company regards its information software system as a proprietary
trade secret and confidential information. The Company relies upon its own
security system, confidentiality procedures and employee confidentiality
agreements to maintain the trade secrecy of its systems; however, the Company's
software rights are not protected under copyright law and there can be no
assurance that the means of protection employed by the Company will be effective
against unauthorized reproduction.
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Employees
As of February 1, 1997, the Company had 100 employees, including 11 in
marketing and sales, and 81 in computer support, computer operation services and
administrative support. None of the Company's employees is represented by a
labor union and management believes that its employee relations are good.
Item 2. Description of Property.
The Company conducts its operations from 12 office facilities, located
in St. Louis, Missouri; High Point, North Carolina; New York, New York; Chicago
Heights, Illinois; Schaumburg, Illinois; Oklahoma City, Oklahoma; San Antonio,
Texas; Cranberry Township, Pennsylvania; Canton, Ohio; Phoenix, Arizona;
Valrico, Florida; and Mississauga, Ontario, Canada. These facilities contain an
aggregate of approximately 33,000 square feet of space. Of such facilities, the
Company's principal executive and operations facilities, located in St. Louis,
Missouri and High Point, North Carolina, contain approximately 11,667 and 13,900
square feet, respectively. 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
its existing facilities are adequate to support its present business strategies.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the security-holders during the
fourth quarter of fiscal 1997.
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PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
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 Market 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 on the Nasdaq OTC Bulletin
Board or Nasdaq SmallCap Market, as applicable.
Fiscal 1996 High Low
Second Quarter (beginning June 22, 1995) $7.00 $6.00
Third Quarter $8.50 $6.25
Fourth Quarter $7.50 $3.50
Fiscal 1997 High Low
First Quarter $5.75 $4.38
Second Quarter $4.75 $4.00
Third Quarter $4.75 $2.63
Fourth Quarter $3.25 $2.25
As of March 31, 1997, there were 184 holders of record of the Common
Stock.
During the last two years, the Company has not declared or paid any
cash dividends on its Common Stock. Prior to January 31, 1995, two of the
Company's predecessors were treated as Subchapter S corporations under the
Internal Revenue Code of 1986. 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.
Sales of Unregistered Shares
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. As of October 1, 1996, all 5,000 shares have been
converted to Common Stock.
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In a series of transactions taking place in August 1996 and September
1996, the Company issued a total of 5,082 shares of Common Stock to Financial
Power Network in exchange for $21,600 of marketing services. The transactions
were exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
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.
Also 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.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Company provides monitoring, documentation and collection services
required to obtain single copy magazine sales incentive payments available from
magazine publishers to magazine and periodical retailers. The Company has
developed a contractual relationship with approximately 50,000 mass merchandise,
grocery, convenience and pharmacy stores located throughout the United States
and in eastern Canada under which it provides such services and related
merchandising services on a frequent basis, in many cases daily, and holds power
of attorney from its retailer clients to collect incentive payments from
publishers.
The Company has engaged in several acquisitions in order to expand its
presence in the upper midwest and increase the number of its mid-sized chain
retailer clients. In June of 1995 the Company acquired all of the business and
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assets of Dixon's Modern Marketing Concepts, Inc. and Tri-State Stores, Inc.,
both of Chicago Heights, Illinois, in exchange for the issuance of an aggregate
of 300,000 shares of Common Stock (the "MMC/TSS Acquisition"). The MMC/TSS
Acquisition has been accounted for as a pooling of interests and, accordingly,
financial statements of the Company prepared as if the MMC/TSS Acquisition had
been consummated on February 1, 1995, have been included elsewhere in this
statement.
The Company has continued to expand its operations in the upper midwest
through the acquisitions of Magazine Marketing, Inc. and Readers Choice, Inc.,
formerly a wholly owned subsidiary of United Magazine Company. On June 28, 1996
the Company issued 100,000 shares of its common stock, cash of $275,000 and a
note payable totaling $80,000 payable quarterly over a two year period, in
exchange for all the stock of Magazine Marketing, Inc. This transaction has been
accounted for as a purchase and, accordingly, the financial statements reflect
the combined results of operations as of June 28, 1996. Assets have been
recorded at fair value and the purchase price in excess of fair value in the
amount of $704,748 has been recorded as goodwill.
On June 30, 1996 the Company issued 111,245 shares of its common stock
in exchange for all the stock of Readers Choice, Inc. This transaction has been
accounted for as a purchase, and, accordingly, the financial statements reflect
the combined results of operations as of June 30, 1996. Assets have been
recorded at fair value and the purchase price in excess of fair value in the
amount of $280,507 has been recorded as goodwill.
A majority of the Company's revenues are derived from commissions
earned in connection with the collection of incentive payments owed to the
Company's retailer clients from magazine publishers. Most such incentive payment
programs offer the retailer a cash rebate, equal to a percentage of the
retailer's actual net sales of the publisher's titles, which is payable
quarterly upon submission of a properly documented claim. Under agreements with
its retailer clients, the Company gathers sales data, submits claims for
payment, collects payments and receives a percentage of the aggregate payments
collected on the retailers' behalf. Claims for incentive payments are generally
submitted to the publishers quarterly based on actual net sales of the
publishers' titles recorded in the previous calendar quarter. Except in
connection with its Advance Pay Program, the Company does not guarantee to its
retailer clients any payments due to the client from magazine publishers, and
accordingly, does not assume any credit risk associated with such incentive
payments. In substantially all the contracts under the Advance Pay Program the
Company bears the risk of uncollectibility associated with collecting payments
from publishers.
Under both the standard arrangement and the Advance Pay Program
commission revenue is recognized at the time claims for incentive payments are
substantially completed for submission to the publishers based on the amount
claimed, less an estimated reserve necessary to maintain an allowance for
doubtful accounts of approximately of 2% of trade accounts receivable. However,
under the standard arrangement, invoices for services provided by the Company in
connection with the claim process are not issued until the Company receives
settlement of the claim. Under the Advance Pay Program, the customer is not
invoiced for the commission, which is the difference between the claim and the
advance amount.
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Results of Operations
The following table sets forth, for the periods presented, certain
information relating to the operations of the Company expressed as a percentage
of Total Revenue:
Fiscal Year Ended January 31,
1997 1996
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Commission Revenues 96.7% 88.6%
Merchandise Revenues 3.3% 11.4%
Total Revenues 100.0% 100.0%
Cost of Commission Revenues 66.6% 47.5%
Cost of Merchandise Sold 2.8% 6.8%
Gross Profit 30.6% 45.7%
Selling, General & Administrative Expense 39.8% 34.5%
Operating Income (Loss) (9.2)% 11.2%
Interest Expense, Net (3.9)% (1.2)%
Other Income (Expense), Net (0.4)% (2.7)%
Income (Loss) Before Income Taxes (13.4)% 7.4%
Net Income (Loss) (8.3)% 2.4%
Commission Revenues
Increased retailer participation in the Advance Pay Program, the
acquisitions of Magazine Marketing, Inc. and Readers Choice, Inc. and the
implementation of PIN during the third quarter of fiscal year 1997 contributed
to an increase in 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 Commission 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.
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
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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 Commission Revenues and Selling, General and Administrative Expense
("Total Costs")
Total Costs increased approximately $1,100,000. 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.
Interest Expense
Interest Expense increased $191,000 due to increased borrowings
necessary to fund the Advance Pay Program.
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.
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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 to report the
following restated amounts:
1997 1996
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Basic (.09) .03
Diluted (.09) .03
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 data entry expenses) incurred in connection with the solicitation of
new clients and the maintenance of existing accounts. Historically, the Company
has financed its business activities through short-term borrowings under
available lines of credit, cash flow from operations and through the issuance of
equity securities.
Cash advanced under the Advance Pay Program during 1997 was
approximately $14,057,000 versus $1,090,000 advanced during 1996. As a result of
increased participation in the Advance Pay Program, the Company's trade accounts
receivable increased approximately $8,764,000 since January 31, 1996. These
factors caused net cash used by operating activities to increase from $1,391,075
during 1996 to $6,543,297 during 1997.
The average collection period for 1997 was 153 days compared to 132
days for 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. During 1997, the
Company merged the operations of the once separate entities that now comprise
the Company. This process demanded resources which, now that the consolidation
is complete, may be utilized, in part, to improve the collection process.
Management plans to increase resources in the collection area with the goal of
reducing the average collection period to 90 to 150 days.
The Company is primarily engaged in the business of providing services
to its retailer clients; therefore, its capital expenditure requirements are
minimal. At January 31, 1997, the Company had no outstanding material
commitments for capital expenditures.
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In response to the increased cash requirements necessary to fund the
Advance Pay Program, the Company entered into a new credit agreement dated
November 14, 1996 with Wachovia Bank of North Carolina, N.A. The initial funding
took place on December 6, 1996 in the amount of $4,550,000 and was used to
retire then outstanding balances under a former credit facility.
The new credit agreement provides for revolving loans of up to
$12,500,000. The borrowing base calculation under this credit facility allows
for a higher percentage of the accounts receivable to be eligible than under the
former credit facility. The bank has the right to terminate the agreement upon
not less than thirteen months prior written notice. Borrowings bear interest at
a rate related to the monthly LIBOR index rate plus a percentage ranging from
2.5% to 3.5% depending upon the ratio of funded debt to earnings before
interest, taxes, depreciation and amortization. Borrowings are secured by
personal guarantees of Messrs. S. Leslie Flegel and William H. Lee and their
spouses and by a security interest in substantially all of the Company's assets
including receivables, inventory, equipment, goods and fixtures, software,
contract rights, notes, and general intangibles.
During March 1996, the Company sold an aggregate of 20,000 shares of
its 1996 Series 7% Convertible Preferred Stock, $0.01 par value per share (the
"Preferred Stock"), in a series of transactions exempt from the registration
requirements of the Securities Act of 1933, as amended. The Preferred Stock was
sold for an aggregate purchase price of $2,000,000, resulting in net cash
proceeds to the Company of $1,922,075 after deducting commissions and expenses
of $77,925. Additional broker fees of $60,000 were paid through the issuance of
another 600 shares of preferred stock. Of the 20,600 shares of Preferred Stock
issued, 15,000 share have been converted by the holders thereof to Common Stock
pursuant to the terms of the Certificate of Designations, Preferences and
Relative Rights of 1996 Series 7% Convertible Preferred Stock.
On February 28, 1996, the Company sold 8,000 shares of its Common Stock
in a private transaction in reliance on Section 4(2) of the Securities Act and
Regulation D promulgated thereunder. The transaction resulted in net proceeds to
the Company of $30,000.
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. 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,
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 Reader's Choice, Inc. in a transaction exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. 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 is less than $4.00 per share.
13
<PAGE>
At January 31, 1997, the Company's total long-term debt obligations
were $92,017. Of such amount, $69,203 matures in the next 12 months. The Company
anticipates that the funds necessary to satisfy these obligations will be
derived primarily from cash flows from operations.
At January 31, 1997, the Company had total deferred tax assets of
$143,000 and total deferred tax liabilities of $340,000 resulting in a net
deferred tax liability of $197,000 reflecting the net tax effects of temporary
differences between the carrying amount of the assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting. Of
this liability, $312,000 results from a change in accounting method from cash to
accrual by (i) the Company's predecessors in connection with the formation of
the Company and (ii) Magazine Marketing, Inc. The Company elected to pay its
deferred income tax liabilities related to the changes in accounting method in
four equal annual installments. The Company anticipates that the funds necessary
to satisfy this tax obligation will be derived primarily from cash flows from
operations.
During the year ended January 31, 1997, the Company experienced an
operating loss of $670,513. Expenses for the first two quarters were at levels
that anticipated revenues from space design commissions and merchandise revenues
in excess of revenues realized for those periods. Expense reduction initiatives
favorably impacted results of operations in the third and fourth quarters.
Additionally, commission revenues during the last half of the year have
increased due to the conversion of several of the Company's largest retail
customers to the Advance Pay Program and the introduction of the PIN program.
Net sales, gross profit and net income for the last two quarters combined were
$4,539,949, $1,837,707 and $302,223, respectively. Management expects these
trends to continue.
The Company believes that it will be necessary to raise additional
funds through the sale of its equity securities in order to achieve management's
goals with respect to (i) expanding the Company's business in new and existing
services, particularly the Advance Pay Program, products and geographic areas,
directly or by acquisition, and (ii) increasing its shareholder base and the
market and liquidity of its securities. Accordingly, the Company intends to
offer approximately 2,000,000 shares of its Common Stock to the public through
an underwriter on a firm commitment basis. The Company anticipates that the
offering will commence in September, 1997, and will provide the Company with
proceeds of approximately $7,000,000 after deducting underwriting discounts and
commissions and other offering expenses.
14
<PAGE>
Item 7. Financial Statements.
The Report of the Independent Certified Public Accountants
Board of Directors
The Source Company
St. Louis, Missouri
We have audited the balance sheet of The Source 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 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
15
<PAGE>
<TABLE>
THE SOURCE COMPANY
BALANCE SHEET
<CAPTION>
January 31, 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Assets (Note 4)
Current
Cash $ 284,921
Trade receivables (net of allowance for doubtful accounts of $323,587) 12,922,738
(Note 11)
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.
</TABLE>
16
<PAGE>
<TABLE>
THE SOURCE COMPANY
Balance Sheet
<CAPTION>
January 31, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
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
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
17
<PAGE>
<TABLE>
THE SOURCE COMPANY
Statements of Operations
<CAPTION>
Years Ended January 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commission Revenues $ 7,056,270 $ 7,195,176
Merchandise Revenues 242,177 926,008
- --------------------------------------------------------------------------------------------------------------------
7,298,447 8,121,184
- --------------------------------------------------------------------------------------------------------------------
Cost of Commission Revenues 4,862,207 3,859,409
Cost of Merchandise Sold 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) $ 314,706
- --------------------------------------------------------------------------------------------------------------------
Net Income per Share (unaudited) $ 0.05
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
18
<PAGE>
<TABLE>
The Source Company
Statements of Stockholders' Equity
<CAPTION>
Additional Total
Common Stock Paid - in Retained Stockholders'
---------------------------
Shares Amount Capital Earnings Equity
- --------------------------------------------------------------------------------------------------------------------
<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.
19
<PAGE>
<TABLE>
THE SOURCE 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
provided by 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)
- ---------------------------------------------------------------------------------------------------------------
Investment Activities
Acquisition of Magazine Marketing, Inc. (275,000)
-
Loans to officers (33,900)
-
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.
20
<PAGE>
<TABLE>
THE SOURCE 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 2,739,844
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>
21
<PAGE>
THE SOURCE COMPANY
Summary of Accounting Policies
Basis of Presentation The financial statements of The Source 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 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 commissions. 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 Commission 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.
22
<PAGE>
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.
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 options
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.
23
<PAGE>
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 reviewed 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.
24
<PAGE>
THE SOURCE 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.
25
<PAGE>
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.
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.
26
<PAGE>
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.
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.
27
<PAGE>
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:
Year Ending Capital Operating
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.
28
<PAGE>
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.
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
29
<PAGE>
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
9 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 stock-
based 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.
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,
30
<PAGE>
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
Cash Flow
Information Supplemental information on interest and income
taxes paid is as follows:
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).
31
<PAGE>
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)
--------------------------------------------------
(259,064) (59,000)
--------------------------------------------------
Total Income Tax
(Benefit)Expense $(377,188) $ 284,000
--------------------------------------------------
32
<PAGE>
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of the
assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The sources of the
temporary differences and their effect on deferred taxes are
as follows:
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 taxed 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
------------------------------------------------------------
33
<PAGE>
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 (4,600) 2,229
------------------------------------------------------------
Income Tax (Benefit) Expense $(377,188) $284,000
------------------------------------------------------------
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.
34
<PAGE>
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 Modern Marketing Concepts, Inc. and
Tri-State Stores, Inc. (MMC) in exchange for
300,000 shares of Common Stock of The Source
Company and the assumption by the Company of all
the liabilities of MMC. The transaction has been
accounted for as a pooling of interests and,
accordingly, the Company's financial statements
have been restated for all periods prior to the
acquisition to include the results of operations,
financial position, and cash flows of The Source
Company and MMC.
The S corporation retained earnings of MMC
totaling approxi-mately $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.
35
<PAGE>
Revenues and net income (loss) for the individual entities
and combined prior to the mergers were as follows:
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
36
<PAGE>
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 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.
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 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.
37
<PAGE>
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 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 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.
38
<PAGE>
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 commission
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 Reader's 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.
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.
39
<PAGE>
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
40
<PAGE>
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 to report the following restated amounts:
1997 1996
---- ----
Basic (.09) .03
Diluted (.09) .03
41
<PAGE>
16. Quarterly
Financial Data
(unaudited)
Quarters Ended
-------------------------------------------------------
1997 April 30 July 31 October 31 January 31
- --------------------------------------------------------------------------------
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
42
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures.
Not applicable.
43
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
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 Administration Officer
Dwight L. DeGolia 52 Executive Vice President
Robert B. Dixon 46 Senior 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 and President -
Display Group
Timothy A. Braswell 68 Director
Harry L. "Terry" Franc, III 61 Director
Aron Katzman 59 Director
Randall S. Minix 47 Director
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. From
January 1992 to June 1993, Mr. Flegel also served as the chief executive officer
of NationsMart Corporation, an operator and franchiser of dry cleaning, laundry,
shoe repair and formal wear service centers, prior to its December 1993 initial
public offering of securities.
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
44
<PAGE>
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 Administration Officer 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 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 10 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.
Robert B. Dixon became Senior 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,
LLP.
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 chief
financial officer of DISC, a predecessor of the Company. Jason S. Flegel is the
son of S. Leslie Flegel.
Robert G. Shupe has served as Senior Vice President since February 1996 and as
President - Display Group of the Company since commencement of its operations in
May 1995. 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. For more than 20 years, Mr. Franc has served
as a director and senior executive officer of Bridge Information Systems, Inc.,
a St. Louis, Missouri based provider of information services to the securities
industry. In addition, Mr. Franc has served as executive vice president of
Bridge Trading Company, a registered broker-dealer and member of the New York
Stock Exchange. Bridge Trading Company is a subsidiary of Bridge Information
Systems, Inc.
45
<PAGE>
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 April 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, Inc., a company listed on the American Stock Exchange.
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, LLP, an independent accounting firm
headquartered in Greensboro, North Carolina, and its predecessors.
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 terms of office of Messrs. Braswell and Franc will continue until the 1997
annual meeting of shareholders, the terms of Messrs. Flegel and Lee will
continue until the 1998 annual meeting of shareholders, and the terms of Messrs.
Katzman and Minix will continue until the 1999 annual meeting of shareholders.
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
comprised of two directors, Messrs. Franc and Katzman. 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.
46
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company during its most recent fiscal year and Form 5 and amendments
thereto, or written representations that no Form 5 is required, two persons,
Messrs. Jason S. Flegel and W. Brian Rodgers, each failed to timely file a Form
3, Initial Statement of Beneficial Ownership of Securities.
Item 10. 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
Position Year Salary Bonus Compensation(a)
<S> <C> <C> <C> <C>
S. Leslie Flegel 1997 $227,500 $176,398 $30,624
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 $4,773 $11,223
Executive Vice President 1996 $134,884 --- $16,739
1995 $97,358 --- $9,790
John P. Watkins 1997 $150,000 --- $11,891
Chief Administration Officer 1996 --- --- ---
1995 --- --- ---
Robert B. Dixon 1997 $150,000 --- $13,907
Senior Vice President and 1996 $114,000 $50,000 $5,458
President - Periodical 1995 $36,000 $128,500 $26,982
Information 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
47
<PAGE>
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.
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 $0,
respectively. No life insurance premiums were paid on behalf of the
officers in fiscal 1995.
</FN>
</TABLE>
<TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<CAPTION>
Number of Securities % of Total
Underlying Options/SARS Granted Exercise or
Options/SARS Granted to Employees in Fiscal Base Price Expiration
#(1) Year ($/Sh) Date
---- ---- ------ ----
<S> <C> <C> <C>
S. Leslie Flegel 0 0 0 -
William H. Lee 0 0 0 -
Dwight L. DeGolia 0 0 0 -
John P. Watkins 100,000 44% $4.63 2-01-01
Robert B. Dixon 0 0 0 -
- -------------------------
<FN>
(1) Options were granted February 1, 1996 and are exercisable 20% a year,
cumulatively, for a period of five years.
</FN>
</TABLE>
<TABLE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FYE OPTION/SAR VALUES
<CAPTION>
Value of Unexercised
Number of Unexercised In-the Money
Option/SARs at Fiscal Options/SARs at Fiscal
Shares Year End (#) Year End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
S. Leslie Flegel 0 0 0/0 0/0
William H. Lee 0 0 0/0 0/0
Dwight L. DeGolia 0 0 0/0 0/0
John P. Watkins 0 0 40,000/60,000 0/0
Robert B. Dixon 0 0 0/0 0/0
</TABLE>
48
<PAGE>
Director Compensation.
Under the Company's present policy, each director of the Company who is not also
an employee of the Company will receive $1,000 payable in Common Stock of the
Company, with the exception of Mr. Minix who will be paid in cash, 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.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 31, 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) each executive officer named in the
Summary Compensation Table contained in this Form 10-KSB, and (iii) 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:
Beneficial Ownership
--------------------
Name and Address
of Beneficial Owner Number of Shares Percent
- ------------------- ---------------- -------
S. Leslie Flegel 1,764,600 25.0
11644 Lilburn Park Road
St. Louis, Missouri 63146
William H. Lee 1,350,695 19.2
711 Gallimore Dairy Road
High Point, North Carolina 27265
Timothy A. Braswell 572,201 8.1
711 Gallimore Dairy Road
High Point, North Carolina 27265
Cameron Capital Ltd 440,713(a) 6.2
10 Cavendish Rd
Hamilton Hm 19
Bermuda
Robert B. Dixon 301,000 4.3
907 Park Drive
Flossmoor, Illinois 60422
49
<PAGE>
Dwight L. DeGolia 178,400 2.5
11644 Lilburn Park Road
St. Louis, Missouri 63146
Jason S. Flegel 177,400 2.5
711 Gallimore Dairy Road
High Point, North Carolina 27265
Aron Katzman 81,643 1.2
10 Layton Terrace
St. Louis, Missouri 63124
Robert G. Shupe 44,727 *
4109 Pheasant Run
Greensboro, North Carolina 27408
John P. Watkins 40,000(b) *
711 Gallimore Dairy Road
High Point, North Carolina 27265
Harry L. Franc, III 31,398 *
19 Briarcliff
St. Louis, Missouri 63124
Randall S. Minix 7,000 *
5502 White Blossom Drive
Greensboro, North Carolina 27410
All directors and executive 4,549,064 64.5
officers as a group (11 persons)
- ------------------------
*Less than 1%
50
<PAGE>
(a) Includes 142,857 shares of Common Stock which are or may become
issuable to Cameron Capital Ltd. upon conversion of 5,000 shares of
Preferred Stock calculated based on the Market Value (as defined) of
the Common Stock as of March 31, 1997.
(b) Includes exercisable options to acquire 40,000 shares of Common Stock
at an exercise price of $4.63 per share.
Item 12. Certain Relationships and Related Transactions.
From time to time, the Company has 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.
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 the Company. The largest aggregate amount of
such indebtedness outstanding at any time since February 1, 1995 was $270,675
and $14,618, 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.
The Company incurred a debt to Timothy A. Braswell on March 1, 1991 in
the amount of $300,000, which accrued interest at the rate of 10% per annum. The
indebtedness matured on January 1, 1996 and was paid in full on the maturity
date.
711 Gallimore Partnership, a North Carolina general partnership in
which William H. Lee and Robert G. Shupe are partners, provides the Company with
certain office space in Greensboro, North Carolina under the terms of a written
lease dated June 28, 1991. The lease, as amended in January 1996, provides for
annual rent of $150,300 and expires in 2012. In fiscal 1996 and 1997, the
Company paid 711 Gallimore Partnership $147,275 and $157,498, respectively, in
rent.
2532 Investments, Inc., a North Carolina corporation in which William
H. Lee and Robert G. Shupe are shareholders, had 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.
Data-Pros, Inc. ("Data-Pros"), a corporation in which William H. Lee
and Robert G. 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.
On June 15, 1995, the Company acquired all of the business and assets
of Dixon's Modern Marketing Concepts, Inc. and Tri-State Stores, Inc. in
exchange for the issuance of an aggregate of 300,000 shares of Common Stock.
Robert B. Dixon was the President and principal shareholder of each of these
corporations.
51
<PAGE>
Robert B. Dixon, Executive Vice President and President-Periodical
Information Management, provided the Company with office space in Chicago
Heights, Illinois under the terms of a written lease dated January 1, 1993. The
lease provided for annual rent of $36,000 and expired on December 31, 1996.
Currently, the space is leased on a month-to-month basis. In fiscal 1996 and
1997, the Company paid Mr. Dixon $36,000 and $36,000, respectively, in rent.
From time to time, 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.
FMG, Inc., a North Carolina corporation in which William H. Lee and
Robert G. Shupe are shareholders, has from time to time received cash advances
from the Company. There were no such outstanding advances at January 31, 1997.
On March 11, 1996, the Company sold an aggregate of 5,000 shares of its
Preferred Stock in transactions exempt from the registration requirements of the
Securities Act of 1933, as amended, to Messrs. Braswell, Franc and Katzman.
Messrs. Braswell, Franc and Katzman purchased 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. During the year Messrs. Braswell,
Franc and Katzman converted their Preferred Stock to 64,285, 13,698 and 64,643
shares of common stock, respectively.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See Exhibit Index.
(b) Reports on Form 8-K.
None
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE SOURCE COMPANY
Date: April , 1997 /s/ W. Brian Rodgers
_______________________________________
W. Brian Rodgers
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
April , 1997 /s/ S. Leslie Flegel
_______________________________________
S. Leslie Flegel
Chief Executive Officers and
Chairman of the Board
(Principal Executive Officer)
April , 1997 /s/ W. Brian Rodgers
_______________________________________
W. Brian Rodgers
Chief Financial Officer
(Principal Financial and Accounting
Officer)
April , 1997 /s/ William H. Lee
_______________________________________
William H. Lee
President, Chief Operating Officer
and Director
April , 1997
_______________________________________
Timothy A. Braswell
Director
<PAGE>
April , 1997 /s/ Harry L. "Terry" Franc, III
_______________________________________
Harry L. "Terry" Franc, III
Director
April , 1997 /s/ Aron Katzman
_______________________________________
Aron Katzman
Director
April , 1997 /s/ Randall S. Minix
_______________________________________
Randall S. Minix
Director
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
3.1* Articles of Incorporation of the Company
3.2* Bylaws of the Company
4.1* Form of Common Stock Certificate
4.2** Form of 1996 Series 7% Convertible Preferred Stock
Certificate
4.3** Certificate of and Designations, Preferences and Relative
Rights of 1996 Series 7% Convertible Preferred Stock
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
10.7** 1995 Incentive Stock Option Plan adopted as of
August 23, 1996
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
<PAGE>
10.12 Stock Acquisition Agreement dated as of June 20, 1996
among James Looman, the sole shareholder of Magazine
Marketing, Inc., Magazine Marketing, Inc. and The
Source Company, filed as exhibit 10.14 to the Company's
Form 8-K dated June 28, 1996, and incorporated herein
by this reference.
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.
10.16 The Source Company Common Stock Award Plan filed as
exhibit 4.4 to the Company's Registration Statement on Form
S-8 (File no. 333-16039) and incorporated herein by this
reference.
10.17 The Source Company 1995 Incentive Stock Option Plan filed as
exhibit 4.5 to the Company's Registration Statement on Form
S-8 (File no. 333-16039) and incorporated herein by this
reference.
11.1 Statement re: computation of per share earnings
21.1 Subsidiaries of the registrant
23.1 Consent of BDO Seidman, LLP
27.1 Financial Data Schedule (Filed in EDGAR version only)
99.1 Cautionary Statement Identifying Important Factors that
Could Cause the Company's Actual Results to Differ
from those Projected in Forward Looking Statements.
- -------------------------
* Incorporated by reference to Registration Statement on Form 10-SB
(Commission file no. 0-26238) first filed on June 12, 1995.
** Incorporated by reference to Form 10-KSB for the fiscal year ended
January 31, 1996.
Exhibit 10.13
$8,700,000.00
CREDIT AGREEMENT
DATED AS OF
NOVEMBER 14, 1996
BETWEEN
THE SOURCE COMPANY
AND
WACHOVIA BANK OF NORTH CAROLINA, N.A.
<PAGE>
TABLE OF CONTENTS
[Not a part of the Agreement]
ARTICLE I. DEFINITIONS......................................................1
SECTION 1.01. Definitions...................................................1
SECTION 1.02. Accounting Terms and Determinations..........................14
SECTION 1.03. Use of Defined Terms.........................................14
SECTION 1.04. Terminology..................................................14
SECTION 1.05. References...................................................14
ARTICLE II. THE CREDITS.....................................................14
SECTION 2.01. Commitment to Lend...........................................14
SECTION 2.02. Method of Borrowing..........................................15
SECTION 2.03. Note.........................................................15
SECTION 2.04. Payment of Advances..........................................15
SECTION 2.05. Interest Rates...............................................15
SECTION 2.06. Fees.........................................................16
SECTION 2.07. Optional Termination or Reduction of Commitment..............16
SECTION 2.08. Termination of Commitment....................................17
SECTION 2.09. Optional Prepayments.........................................17
SECTION 2.10. Mandatory Prepayments........................................17
SECTION 2.11. General Provisions Concerning Payments.......................17
SECTION 2.12. Computation of Interest......................................18
ARTICLE III. CHANGE IN CIRCUMSTANCES; COMPENSATION.........................18
SECTION 3.01. Basis for Determining Interest Rate Inadequate or Unfair.....18
SECTION 3.02. Illegality...................................................19
SECTION 3.03. Increased Cost and Reduced Return............................19
SECTION 3.04. Base Rate Loans Substituted for Affected Euro-Dollar Loans...21
SECTION 3.05. Compensation.................................................21
ARTICLE IV. CONDITIONS TO BORROWINGS.......................................21
SECTION 4.01. Conditions to First Borrowing................................21
SECTION 4.02. Conditions to All Borrowings.................................23
ARTICLE V. REPRESENTATIONS AND WARRANTIES..................................24
SECTION 5.01. Corporate Existence and Power................................24
SECTION 5.02. Corporate and Governmental Authorization; Contravention......24
<PAGE>
SECTION 5.03. Binding Effect...............................................24
SECTION 5.04. Financial Information........................................24
SECTION 5.05. Litigation...................................................25
SECTION 5.06. Compliance with ERISA........................................25
SECTION 5.07. Taxes........................................................25
SECTION 5.08. Subsidiaries.................................................25
SECTION 5.09. Not an Investment Company....................................25
SECTION 5.10. Ownership of Property; Liens.................................25
SECTION 5.11. No Default...................................................25
SECTION 5.12. Full Disclosure..............................................26
SECTION 5.13. Environmental Matters.......................................26
SECTION 5.14. Compliance with Laws.........................................26
SECTION 5.15. Capital Stock................................................26
SECTION 5.16. Margin Stock.................................................26
SECTION 5.17. Insolvency...................................................27
SECTION 5.18. Insurance....................................................27
ARTICLE VI. COVENANTS......................................................27
SECTION 6.01. Information..................................................27
SECTION 6.02. Inspection of Property, Books and Records....................29
SECTION 6.03. Ratio of EBILT to Interest Expense and Lease Obligations.....29
SECTION 6.04. Ratio of Funded Debt to EBITDA...............................29
SECTION 6.05. Ratio of Funded Debt to Total Capitalization.................29
SECTION 6.06. Minimum Tangible Net Worth...................................29
SECTION 6.07. Accounts Receivable..........................................29
SECTION 6.08. Restricted Payments..........................................30
SECTION 6.09. Loans or Advances............................................30
SECTION 6.10. Investments..................................................30
SECTION 6.11. Negative Pledge..............................................30
SECTION 6.12. Maintenance of Existence.....................................30
SECTION 6.13. Dissolution..................................................30
SECTION 6.14. Consolidations, Mergers and Sales of Assets..................30
SECTION 6.15. Use of Proceeds..............................................31
SECTION 6.16. Compliance with Laws; Payment of Taxes.......................31
SECTION 6.17. Insurance....................................................31
SECTION 6.18. Change in Fiscal Year........................................32
SECTION 6.19. Maintenance of Property......................................32
SECTION 6.20. Environmental Notices........................................32
SECTION 6.21. Environmental Matters........................................32
SECTION 6.22. Environmental Release........................................32
SECTION 6.23. Transactions with Affiliates.................................33
SECTION 6.24. Collateral...................................................33
<PAGE>
SECTION 6.25. Interest Rate Protection.....................................33
ARTICLE VII. DEFAULTS......................................................34
SECTION 7.01. Events of Default............................................34
SECTION 7.02. Remedies on Default..........................................36
SECTION 7.03. Security Interest; Offset....................................37
ARTICLE VIII. MISCELLANEOUS................................................37
SECTION 8.01. Notices......................................................37
SECTION 8.02. No Waivers...................................................38
SECTION 8.03. Expenses; Documentary Taxes; Indemnification.................38
SECTION 8.04. Amendments and Waivers.......................................39
SECTION 8.05. Successors and Assigns.......................................39
SECTION 8.06. Confidentiality..............................................40
SECTION 8.07. Interest Limitation..........................................41
SECTION 8.08. Survival of Certain Obligations..............................41
SECTION 8.09. Governing Law................................................41
SECTION 8.10. Counterparts.................................................41
SECTION 8.11. Consent to Jurisdiction......................................41
SECTION 8.12. Severability.................................................41
SECTION 8.13. Captions.....................................................42
EXHIBIT A Form of Note
EXHIBIT B Form of Opinion of Counsel for the Borrower
EXHIBIT C Form of Assignment and Acceptance
EXHIBIT D Form of Closing Certificate
EXHIBIT E Form of Officer's Certificate
EXHIBIT F Form of Receivables Certification
EXHIBIT G Location of Collateral
EXHIBIT H Form of Compliance Certificate
Schedule 1.01 Canadian Companies
Schedule 5.05 Litigation Disclosure
Schedule 5.10 List of Patents, Tradenames, Trademarks and Applications
<PAGE>
CREDIT AGREEMENT
THIS CREDIT AGREEMENT, made as of the 14th day of November 1996, by and
between THE SOURCE COMPANY, a Missouri corporation (together with its
successors, the "Borrower"), and WACHOVIA BANK OF NORTH CAROLINA, N.A., a
national banking association (together with endorsees, successors and assigns,
the "Bank").
BACKGROUND
The Borrower desires to establish with the Bank a credit facility
providing for revolving loans of up to $8,700,000.00 in the aggregate maximum
principal amount at any time outstanding, and the Bank is willing to establish
such a credit facility on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the promises
herein contained, and each intending to be legally bound hereby, the parties
agree as follows:
ARTICLE I. DEFINITIONS
SECTION 1.01. Definitions. The terms as defined in this Section 1.01
shall, for all purposes of this Agreement and any amendment hereto (except as
herein otherwise expressly provided or unless the context otherwise requires),
have the meanings set forth herein:
"Accounts," "Chattel Paper," "Contracts," "Documents," "Equipment,"
"General Intangibles," "Goods," "Instruments," "Fixtures," and "Inventory" shall
have the same respective meanings as are given to those terms in the Uniform
Commercial Code of North Carolina.
"Adjusted Monthly Libor Index Rate" means a rate per annum (rounded
upward, if necessary, to the next higher 1/10,000th of 1%) determined by the
Bank pursuant to the following formula:
Adjusted Monthly Libor = Monthly Libor Index Rate + Applicable Margin
-----------------------------
Index Rate 1.0 - Euro-Dollar Reserve Percentage for Euro-Dollar Loan
"Advance" means any advance by the Bank under the Commitment.
"Affiliate" of any Person means (i) any other Person which directly, or
indirectly through one or more intermediaries, controls such Person, (ii) any
other Person which directly, or indirectly through one or more intermediaries,
is controlled by or is under common control with such Person, or (iii) any other
Person of which such Person owns, directly or indirectly, 20% or more of the
common stock or equivalent equity interests. As used herein, the term "control"
means possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of a Person, whether through the
ownership of voting securities, by contract or otherwise.
"Agreement" means this Credit Agreement, together with all amendments
and supplements hereto.
<PAGE>
"Applicable Margin" means, for any Base Rate Loan for any day and for
any Euro-Dollar Loan, a positive number equal to the percentages set forth below
during the Borrower's fiscal periods that the ratio of Funded Debt to EBITDA,
based upon the financial information submitted to the Bank pursuant to Section
6.01, is as follows:
Ratio of Funded Applicable Margin Applicable Margin
Debt to EBITDA for Base Rate Loan for Euro-Dollar Loan
- -------------- ------------------ --------------------
greater than 3.00 to 1.00 1.00% 3.50%
greater than 2.25 to 1.00 0.50% 3.00%
greater than 1.50 to 1.00 0.25% 2.75%
less than or equal to
1.50 to 1.00 0.00% 2.50%
"Assignee" has the meaning set forth in Section 8.05(c).
"Assignment and Acceptance" means an Assignment and Acceptance executed
in accordance with Section 8.05(c) in the form attached hereto as Exhibit C.
"Authority" has the meaning set forth in Section 3.02.
"Base Rate" means for any Base Rate Loan for any day, the rate per
annum equal to the higher as of such day of (i) the Prime Rate, and (ii)
one-half of one percent above the Federal Funds Rate for such day, plus the
Applicable Margin for Base Rate Loan. For purposes of determining the Base Rate
for any day, changes in the Prime Rate shall be effective on the date of each
such change.
"Base Rate Loan" means an Advance made or to be made as a Base Rate
Loan pursuant to Article III.
"Borrowing" shall mean a borrowing under the Commitment consisting of
an Advance by the Bank. A Borrowing is a "Euro-Dollar Borrowing" if the Advance
is made as a Euro-Dollar Loan, and a "Base Rate Borrowing" if the Advance is
made as a Base Rate Loan.
"Borrowing Base" means, based on the most recent Quarterly Receivables
Certification, which as of the date of a determination of the Borrowing Base has
been received by the Bank, the aggregate of: (a) 85% of the aggregate net amount
of Tier I Eligible Receivables; and (b) 70% of the aggregate net amount of Tier
II Eligible Receivables.
"Capital Leases" means all leases reflected on a balance sheet of the
Borrower or a lease that should be so reflected in accordance with generally
accepted accounting principles consistently applied.
<PAGE>
"Capital Stock" means any nonredeemable capital stock of the Borrower
(to the extent issued to a Person other than the Borrower), whether common or
preferred.
"CERCLA" means the Comprehensive Environmental Response Compensation
and Liability Act.
"CERCLIS" means the Comprehensive Environmental Response Compensation
and Liability Inventory System established pursuant to CERCLA.
"Change of Law" shall have the meaning set forth in Section 3.02.
"Closing Certificate" has the meaning set forth in Section 4.01(d).
"Closing Date" means ____________________________.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor Federal tax code. Any reference to any provision of the Code shall
also be deemed to be a reference to any successor provision or provisions
thereof.
"Collateral" has the meaning set forth in the Security Agreement.
"Collateral Documents" shall mean, collectively, (i) the Security
Agreement; (ii) the FMA Agreement; and (iii) the Guaranty Agreement; as any of
the foregoing may be amended, modified, or supplemented.
"Commitment" shall have the meaning assigned to it in Section 2.01.
"Compliance Certificate" has the meaning set forth in Section 6.01(c).
"Controlled Group" means all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower, are treated as a single
employer under Section 414 of the Code.
"Convertible Preferred Stock" of any Person means any nonredeemable
preferred stock issued by such Person which is at any time prior to the
Termination Date convertible to Capital Stock at the option of the holder
thereof.
"Debt" of the Borrower or of any other Person means at any date,
without duplication, (i) all obligations of the Borrower or such Person for
borrowed money, (ii) all obligations of the Borrower or such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
the Borrower or such Person to pay the deferred purchase price of property or
services, except trade accounts payable arising in the ordinary course of
business, (iv) all obligations of the Borrower or such Person as lessee under
Capital Leases, (v) all obligations of the Borrower or such Person to reimburse
<PAGE>
any bank or other Person in respect of amounts payable under a banker's
acceptance, (vi) all Redeemable Preferred Stock of the Borrower or such Person
(in the event such Person is a corporation), (vii) all obligations of the
Borrower or such Person to reimburse any bank or other Person in respect of
amounts paid under a letter of credit or similar instrument, (viii) all Debt of
others secured by a Lien on any asset of the Borrower or such Person, whether or
not such Debt is assumed by the Borrower or such Person, and (ix) all Debt of
others Guaranteed by the Borrower or such Person.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Default Rate" means, with respect to any Advance, on any day, the sum
of 2% plus the higher of (x) the Adjusted Monthly Libor Index Rate or (y) the
Base Rate.
"Depreciation" means for any period the sum of all depreciation
expenses of the Borrower for such period, as determined in accordance with
generally accepted accounting principles consistently applied.
"Dollars" or "$" means dollars in lawful currency of the United States
of America.
"Domestic Business Day" means any day on which the Bank is open to the
public for the conduct of banking business at its principal office in
Winston-Salem, North Carolina.
"EBILT" means, without duplication, for any fiscal period, as applied
to the Borrower, the sum of the amounts for such fiscal period of: (i) Net
Income (Loss) of the Borrower, (ii) Interest Expense, (iii) Lease Obligations
actually paid or incurred by the Borrower during such period, and (iv) taxes
based on income of the Borrower and actually paid by the Borrower during such
period, all as determined and computed in accordance with generally accepted
accounting principles consistently applied.
"EBITDA" means, without duplication, for any fiscal period, as applied
to the Borrower, the sum of the amounts for such fiscal period of: (i) Net
Income (Loss) of the Borrower, (ii) Interest Expense, (iii) taxes based on
income of the Borrower and actually paid by the Borrower during such period,
(iv) Depreciation, and (v) amortization expense, all as determined and computed
in accordance with generally accepted accounting principles consistently
applied.
"Eligible Receivables" means those Receivables of the Borrower, each of
which meets the following requirements: (i) such Receivable arose in the
ordinary course of the Borrower's business; (ii) the right to payment has been
fully earned by completed performance and, if Goods are involved, the Goods have
been shipped by the Borrower (or if not shipped by the Borrower, are held by the
Borrower under a "bill and hold" arrangement satisfactory to the Bank in its
sole discretion); (iii) the Receivable includes only that portion thereof not
subject to any offset, defense, counterclaim, credit, allowance or adjustment;
(iv) the Borrower's title to such Receivable is absolute and is subject to no
prior assignment, claim, lien or security interest; (v) the full amount
reflected on the Borrower's books and on any invoice or statement delivered to
the Bank related to such Receivable is owing to the Borrower and no partial
payment has been made thereon; (vi) such Receivable is currently due and payable
and is not past due beyond the requirements set forth in the definitions for
<PAGE>
Tier I and Tier II Eligible Receivables; (vii) such Receivable did not arise out
of a contract or purchase order containing provisions prohibiting assignment
thereof or the creation of a security interest therein, and the Borrower has
received no note, trade acceptance, draft or other instrument with respect to
such Receivable or in payment thereof; (viii) the Borrower has received no
notice of the death of the account debtor or of the dissolution, termination of
existence, insolvency, bankruptcy, appointment of receiver for any part of the
property of, or assignment for the benefit of creditors made by, the account
debtor; (ix) such Receivable is not payable by any Affiliate of the Borrower;
(x) such Receivable is not payable by any foreign Person except those foreign
persons located in Canada and identified on Schedule 1.01 attached hereto, which
Schedule 1.01 may be supplemented from time to time at their discretion
(provided that Persons present in possessions of the United States of America
shall not be considered foreign Persons), unless such Receivable is payable in
the full amount of the face value of such Receivable in United States dollars
and is supported by an irrevocable letter of credit in form and substance
acceptable to the Bank, in its sole discretion, and issued by a bank
satisfactory to the Bank, in its sole discretion (and, if requested by the Bank,
such letter of credit or the proceeds thereof, as the Bank, in its sole
discretion, shall require, have been assigned to the Bank); (xi) such Receivable
is not payable by the United States of America or any political subdivision or
agency thereof, unless the Bank and the Borrower have complied with the
Assignment of Claims Act with respect to such Receivable; (xii) the account
debtor for such Receivable is not located in the State of New Jersey unless the
Borrower has filed a Notice of Business Activities Report with the New Jersey
Division of Taxation for the then current year; and (xiii) such Receivable is
not payable by any Person who is the account debtor for other Receivable and who
is past due (as provided in (vi) above) with regard to fifty percent (50%) or
more of the aggregate amount of such other Receivables.
"Environmental Authorizations" means all licenses, permits, orders,
approvals, notices, registrations or other legal prerequisites for conducting
the business of the Borrower required by any Environmental Requirement.
"Environmental Authority" means any foreign, federal, state, local or
regional government that exercises any form of jurisdiction or authority under
any Environmental Requirement.
"Environmental Judgments and Orders" means all judgments, decrees or
orders arising from or in any way associated with any Environmental
Requirements, whether or not entered upon consent or written agreements with an
Environmental Authority or other entity arising from or in any way associated
with any Environmental Requirement, whether or not incorporated in a judgment,
decree or order.
"Environmental Liabilities" means any liabilities, whether accrued,
contingent or otherwise, arising from and in any way associated with any
Environmental Requirements.
"Environmental Notices" means notice from any Environmental Authority
or by any other person or entity, of possible or alleged noncompliance with any
Environmental Requirement, including without limitation any complaints,
citations, demands or requests from any Environmental Authority or from any
other person or entity for correction of any violation of any Environmental
Requirement or any investigations concerning any violation of any Environmental
Requirement.
<PAGE>
"Environmental Proceedings" means any judicial or administrative
proceedings arising from or in any way associated with any Environmental
Requirement.
"Environmental Releases" means releases as defined in CERCLA or under
any applicable state or local environmental law or regulation.
"Environmental Requirements" means any legal requirement relating to
health, safety or the environment and applicable to the Borrower or the
Properties, including but not limited to any such requirement under CERCLA or
similar state legislation.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, or any successor law, including any rules or
regulations promulgated thereunder. Any reference to any provision of ERISA
shall also be deemed to be a reference to any successor provision or provisions
thereof.
"Euro-Dollar Business Day" means any Domestic Business Day on which
dealings in Dollar deposits are carried out in the London interbank market.
"Euro-Dollar Loan" means an Advance made or to be made (pursuant to
this Agreement and the FMA Agreement) as a Euro-Dollar Loan based on the
Adjusted Monthly Libor Index Rate.
"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in respect of "Eurocurrency liabilities" (or in respect of any
other category of liabilities which includes deposits by reference to which the
interest rate on Euro-Dollar Loans is determined or any category of extensions
of credit or other assets which includes loans by a non-United States office of
the Bank to United States residents). The Adjusted Monthly Libor Index Rate
shall be adjusted automatically on and as of the effective date of any change in
the Euro-Dollar Reserve Percentage.
"Event of Default" shall have the meaning assigned to such term in
Section 7.01.
"Facility Fee" shall have the meaning assigned to it in Section 2.06.
"Facility Fee Payment Date" means the first day of each February, May,
August, and November, commencing February 1, 1997; provided that if any such day
is not a Domestic Business Day, the Facility Fee Payment Date shall be on the
next succeeding Domestic Business Day.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the next higher 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if the day for which such rate is to
be determined is not a Domestic Business Day, the Federal Funds Rate for such
day shall be such rate on such transactions on the next preceding Domestic
<PAGE>
Business Day as so published on the next succeeding Domestic Business Day, and
(ii) if such rate is not so published for any day, the Federal Funds Rate for
such day shall be the average rate charged to Wachovia on such day on such
transactions.
"Fiscal Quarter" means any fiscal quarter of the Borrower.
"Fiscal Year" means any fiscal year of the Borrower.
"FMA Agreement" means that certain Financial Management Account Master
Agreement dated November 14, 1996, between the Borrower and the Bank, together
with and as amended by that certain Financial Management Account
Investment/Commercial Loan Access Agreement dated November 14, 1996, between the
Borrower and the Bank, together with all supplements, amendments, additions, and
schedules thereto from time to time.
"Funded Debt" means, at any date, any Debt of the Borrower.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to secure, purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt or other obligation (whether arising by virtue
of partnership arrangements, by agreement to keep-well, to purchase assets,
goods, securities or services, to provide collateral security, to take-or-pay,
or to maintain financial statement conditions or otherwise) or (ii) entered into
for the purpose of assuring in any other manner the obligee of such Debt or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part), provided that the term Guarantee shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Guarantors" shall have the meaning set forth in Section 4.01(h).
"Guaranty Agreement" shall have the meaning set forth in Section 4.01
(h).
"Hazardous Materials" includes, without limitation, (a) solid or
hazardous waste, as defined in the Resource Conservation and Recovery Act of
1980, or in any applicable state or local law or regulation, (b) hazardous
substances, as defined in CERCLA, or in any applicable state or local law or
regulation, (c) gasoline, or any other petroleum product or by-product, (d)
toxic substances, as defined in the Toxic Substances Control Act of 1976, or in
any applicable state or local law or regulation or (e) insecticides, fungicides,
or rodenticides, as defined in the Federal Insecticide, Fungicide, and
Rodenticide Act of 1975, or in any applicable state or local law or regulation,
as each such Act, statute or regulation may be amended from time to time.
"Interest Expense" for any period means interest, whether expensed or
capitalized, in respect of Debt of the Borrower outstanding during such period.
<PAGE>
"Investment" means any investment in any Person, whether by means of
purchase or acquisition of obligations or securities of such Person, capital
contribution to such Person, loan or advance to such Person, making of a time
deposit with such Person, Guarantee or assumption of any obligation of such
Person or otherwise.
"Lease Obligations" means, for any period, as applied to the Borrower,
all Debt and payment obligations of the Borrower for such period under operating
leases and rental agreements.
"Lending Office" means the Bank's office located at its address set
forth on the signature pages hereof (or identified on the signature pages hereof
as its Lending Office) or such other office as the Bank may hereafter designate
as its Lending Office by notice to the Borrower.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, the Borrower shall be deemed to own subject
to a Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, Capital Lease or other
title retention agreement relating to such asset.
"Loan Documents" means this Agreement, the Note, the Collateral
Documents, and any other document evidencing, relating to or securing the
Advances, and any other document or instrument delivered from time to time in
connection with this Agreement, the Note, the Collateral Documents, or the
Advances, as such documents and instruments may be amended or supplemented from
time to time.
"Long-Term Debt" means, at any date, any Debt which matures (or the
maturity of which may at the option of the Borrower be extended such that it
matures) more than one year after such date.
"Margin Stock" means "margin stock" as defined in Regulations G, T, U
or X of the Board of Governors of the Federal Reserve System, as in effect from
time to time, together with all official rulings and interpretations issued
thereunder.
"Material Adverse Effect" means, with respect to any event, act,
condition or occurrence of whatever nature (including any adverse determination
in any litigation, arbitration, or governmental investigation or proceeding),
whether singly or in conjunction with any other event or events, act or acts,
condition or conditions, occurrence or occurrences, whether or not related, a
material adverse change in, or a material adverse effect upon, any of (a) the
financial condition, business, investments, assets, or properties of the
Borrower, (b) the rights and remedies of the Bank under the Loan Documents, or
the ability of the Borrower to perform its obligations under the Loan Documents,
or (c) the legality, validity or enforceability of any Loan Document.
The "Monthly Libor Index Rate" applicable to any Euro-Dollar Loan means
the rate per annum designated by the Bank in its sole discretion on each Rate
Determination Date as the Bank's Monthly Libor Index Rate, taking into account
the offered rate for deposits in Dollars for a term of one month, which appears
on the display designated as Page "3750" of the Telerate Service (or such other
<PAGE>
page as may replace page 3750 of that service or such other service or services
as may be nominated by the British Bankers' Association for the purpose of
displaying London interbank offered rates for U.S. dollar deposits), determined
as of 11:00 a.m. (London time), on each such Rate Determination Date, and such
other factors as the Bank shall deem relevant.
"Multiemployer Plan" shall have the meaning set forth in Section
4001(a)(3) or ERISA.
"Net Income (Loss)" means, as applied to the Borrower or any other
Person, for any period, gross revenues and other proper income of the Borrower
or such other Person during such period less the aggregate during such period of
(i) cost of merchandise sold, (ii) selling, administrative and general expenses,
(iii) taxes, (iv) Depreciation, depletion and amortization of assets, and (v)
any other items that are treated as expenses under generally accepted accounting
principles consistently applied, all as computed in accordance with generally
accepted accounting principles consistently applied.
"Net Income of the Borrower" means, for any period, the Net Income
(Loss) of the Borrower, but excluding any equity interests of the Borrower in
the unremitted earnings of any Person.
"Note" shall mean a promissory note of the Borrower payable to the
order of the Bank, in substantially the form of Exhibit A hereto, evidencing the
maximum principal indebtedness of the Borrower to the Bank under the Commitment,
either as originally executed or as it may be from time to time supplemented,
modified, amended, renewed or extended.
"Obligations" means all indebtedness, obligations and liabilities to
the Bank existing on the date of this Agreement or arising thereafter, direct or
indirect, joint or several, absolute or contingent, matured or unmatured,
liquidated or unliquidated, secured or unsecured, arising by contract, operation
of law or otherwise, of the Borrower under this Agreement or any other Loan
Document.
"Officer's Certificate" has the meaning set forth in Section 4.01(e).
"Operating Profits" means, as applied to any Person (including the
Borrower) for any period, the operating income of such Person for such period,
as determined in accordance with generally accepted accounting principles
consistently applied.
"Participant" has the meaning set forth in Section 8.05(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Permitted Encumbrances" means:
(a) Liens for taxes, assessments, or similar charges, incurred in the
ordinary course of business that are not yet due and payable;
(b) Pledges or deposits made in the ordinary course of business to
secure payment of workers' compensation, or to participate in any fund in
connection with workers' compensation, unemployment insurance, old-age pensions
or other social security programs;
<PAGE>
(c) Liens of mechanics, materialmen, warehousemen, carriers, or other
like liens, securing obligations incurred in the ordinary course of business
that are not yet due and payable;
(d) Good faith pledges or deposits made in the ordinary course of
business to secure performance of bids, tenders, contracts (other than for the
repayment of borrowed money) or leases, not in excess of twenty percent (20%) of
the aggregate amount due thereunder, or to secure statutory obligations, or
surety, appeal, indemnity, performance or other similar bonds required in the
ordinary course of business;
(e) Liens in favor of the Bank pursuant to the Loan Documents; and
(f) Any Lien on any equipment of the Borrower securing Debt of the
Borrower incurred for the purpose of financing all of the cost of acquiring such
equipment, provided that (i) such Lien attaches to such equipment concurrently
with the acquisition thereof, and (ii) such Liens shall not exceed, in the
aggregate, $100,000.00 in any Fiscal Year.
"Person" means any individual, joint venture, corporation, company,
voluntary association, partnership, trust, joint stock company, unincorporated
organization, association, government, or any agency, instrumentality, or
political subdivision thereof, or any other form of entity or organization.
"Plan" means at any time an employee pension benefit plan which is
covered by Title IV of ERISA or subject to the minimum funding standards under
Section 412 of the Code and is either (i) maintained by a member of the
Controlled Group for employees of any member of the Controlled Group or (ii)
maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
a member of the Controlled Group is then making or accruing an obligation to
make contributions or has within the preceding five plan years made
contributions.
"Prime Rate" refers to that interest rate so denominated and set by
Wachovia from time to time as an interest rate basis for borrowings. The Prime
Rate is but one of several interest rate bases used by Wachovia. Wachovia lends
at interest rates above and below the Prime Rate. A change in the Prime Rate
shall be effective on the date of such change.
"Properties" means all real property owned, leased or otherwise used or
occupied by the Borrower, wherever located.
"Quarterly Receivables Certification" means a certification in the form
attached hereto as Exhibit F and otherwise satisfactory to the Bank, certified
by the chief financial officer or other authorized officer of Borrower regarding
the Receivables of the Borrower.
"Rate Determination Date" means each day that is two Euro-Dollar
Business Days prior to the first day of each calendar month, and if such day is
not a Domestic Business Day, then on the immediately preceding Domestic Business
Day which is also a Euro-Dollar Business Day.
<PAGE>
"Receivables" means all obligations of every kind at any time owing to
Borrower (whether now existing or hereafter arising, and whether classified
under the Uniform Commercial Code as Accounts, Instruments, Contract Rights,
Chattel Paper, Contracts, General Intangibles, or otherwise), all proceeds
thereof, all security therefor and all of the Borrower's rights to Goods or
other property sold or leased which may be represented thereby.
"Redeemable Preferred Stock" of any Person means any preferred stock
issued by such Person which is at any time prior to the Termination Date either
(i) mandatorily redeemable (by sinking fund or similar payments or otherwise) or
(ii) redeemable at the option of the holder thereof.
"Reportable Event" has the meaning given such term in Section 4043(b)
of Title V of ERISA.
"Reported Net Income" means, for any period, the Net Income (Loss) of
the Borrower.
"Restricted Payment" means (i) any dividend or other distribution on
any shares of the Borrower's capital stock (except dividends payable solely in
shares of its capital stock) or (ii) any payment on account of the purchase,
redemption, retirement or acquisition of (a) any shares of the Borrower's
capital stock (except shares acquired upon the conversion thereof into other
shares of its capital stock) or (b) any option, warrant or other right to
acquire shares of the Borrower's capital stock.
"Security Agreement" shall have the meaning set forth in Section 4.01
(g).
"Stockholders' Equity" means, at any time, the shareholders' equity of
the Borrower, as set forth or reflected on the most recent balance sheet of the
Borrower prepared in accordance with generally accepted accounting principles
consistently applied, excluding any Redeemable Preferred Stock of the Borrower,
and including any Convertible Preferred Stock. Shareholders' Equity would
generally include, but not be limited to (i) the par or stated value of all
outstanding Capital Stock, (ii) capital surplus, (iii) retained earnings, and
(iv) various deductions such as (A) purchases of treasury stock, (B) valuation
allowances, (C) receivables due from an employee stock ownership plan, (D)
employee stock ownership plan debt guarantees, and (E) translation adjustments
for foreign currency transactions.
"Subsidiary" any corporation or other entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are at the
time directly or indirectly owned by the Borrower.
"Tangible Net Worth" means, at any time, Stockholders' Equity, less the
sum of the value, as set forth or reflected on the most recent balance sheet of
the Borrower, prepared in accordance with generally accepted accounting
principles consistently applied, of
(A) Any surplus resulting from any write-up of assets subsequent to
July 31, 1996;
<PAGE>
(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), trademarks, tradenames, copyrights, patents and technologies, and
unamortized debt discount and expense;
(C) To the extent not included in (B) of this definition, any amount at
which shares of capital stock of the Borrower appear as an asset on the balance
sheet of the Borrower;
(D) Loans or advances to stockholders, directors, officers or
employees; and
(E) To the extent not included in (B) of this definition, deferred
expenses.
"Taxes" has the meaning set forth in Section 2.11.
"Termination Date" has the meaning set forth in Section 2.07.
"Third Parties" means all lessees, sublessees, licenses and other users
of the Properties, excluding those users of the Properties in the ordinary
course of the Borrower's business and on a temporary basis.
"Tier I Eligible Receivables" means those Receivables of the Borrower,
each of which meets the following requirements: (i) such Receivable meets all of
the requirements set forth in the definition of the term "Eligible Receivables",
and (ii) such Receivable is currently due and payable and no more than 90 days
have elapsed from the date the claim evidencing such Receivable was filed with
the publisher for payment, or alternatively, as may be applicable, from invoice
date, and (iii) such Receivable is not a Tier II Eligible Receivable.
"Tier II Eligible Receivables" means those Receivables of the Borrower,
each of which meets the following requirements: (i) such Receivable meets all of
the requirements set forth in the definition of the term "Eligible Receivables",
(ii) such Receivable is not a Tier I Eligible Receivable, and (iii) such
Receivable is currently due and payable and more than 90 days have elapsed from
the date the claim evidencing such Receivable was filed with the publisher for
payment, or alternatively, as may be applicable, from invoice date, but no more
than 365 days have elapsed from the date the claim evidencing such Receivable
was filed with the publisher for payment, or alternatively, as may be
applicable, from invoice date.
"Total Assets" means, at any time, the total assets of the Borrower as
set forth or reflected on the most recent balance sheet of the Borrower,
prepared in accordance with generally accepted accounting principles
consistently applied.
"Total Capitalization" means, at any time, the sum of (i) Stockholders'
Equity, and (ii) Funded Debt.
"Transferee" has the meaning set forth in Section 8.05(d).
<PAGE>
"Unused Commitment" means at any date an amount equal to the Commitment
less the aggregate outstanding principal amount of the Advances.
"Wachovia" means Wachovia Bank of North Carolina, N.A., a national
banking association, together with its successors.
SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all terms of an accounting character used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with generally accepted accounting principles as in effect from time
to time, applied on a basis consistent (except for changes concurred in by the
Borrower's independent public accountants) with the most recent audited
financial statements of the Borrower delivered to the Bank.
SECTION 1.03. Use of Defined Terms. All terms defined in this Agreement
shall have the same meanings when used in any of the other Loan Documents,
unless otherwise defined therein or unless the context shall otherwise require.
SECTION 1.04. Terminology. All personal pronouns used in this
Agreement, whether used in the masculine, feminine or neuter gender, shall
include all other genders; the singular shall include the plural and the plural
shall include the singular. Titles of Articles and Sections in this Agreement
are for convenience only, and neither limit nor amplify the provisions of this
Agreement.
SECTION 1.05. References. Except as otherwise expressly provided in
this Agreement: the words "herein," "hereof," "hereunder" and other words of
similar import refer to this Agreement as a whole, including any Schedule hereto
which is a part hereof, and not to any particular Section, Article, paragraph or
other subdivision; the singular includes the plural and the plural includes the
singular; "or" is not exclusive; the words "include," "includes" and "including"
are not limiting; a reference to any agreement or other contract includes past
and future permitted supplements, amendments, modifications and restatements
thereto or thereof; a reference to an Article, Section, paragraph or other
subdivision is a reference to an Article, Section, paragraph or other
subdivision of this Agreement; a reference to any law includes any amendment or
modification to such law and any rules and regulations promulgated thereunder; a
reference to a Person includes its permitted successors and assigns; any right
may be exercised at any time and from time to time; and, except as otherwise
expressly provided therein, all obligations under any agreement or other
contract are continuing obligations throughout the term of such agreement or
contract.
ARTICLE II. THE CREDITS
SECTION 2.01. Commitment to Lend. The Bank agrees, on the terms and
conditions set forth herein and in the FMA Agreement, to make Advances to the
Borrower from time to time before the Termination Date; provided that,
immediately after each such Advance is made, the aggregate principal amount of
outstanding Advances shall not exceed the lesser of (i) the Borrowing Base, or
<PAGE>
(ii) $8,700,000.00 (as such figure may be reduced from time to time as provided
in this Agreement, the "Commitment"). Within the foregoing limits, the Borrower
may borrow under this Section, repay or, to the extent permitted by Section
2.09, prepay Advances and reborrow under this Section at any time before the
Termination Date. The Bank shall have no obligation to advance funds in excess
of the lesser of (i) the Borrowing Base, or (ii) the amount of the Commitment.
SECTION 2.02. Method of Borrowing. (a) Advances to the Borrower shall
be made in accordance with the Bank's Financial Management Account service as
set forth in the FMA Agreement, the terms and provisions of which are
incorporated herein by reference; provided that all Advances shall be subject to
the terms, covenants, conditions, restrictions and provisions of this Agreement.
(b) Notwithstanding anything to the contrary contained in this
Agreement or the FMA Agreement, the Bank shall have no obligation to make an
Advance if there shall have occurred a Default or an Event of Default, which
Default or Event of Default shall not have been cured or waived.
SECTION 2.03. Note. The Advances shall be evidenced by a single Note
payable to the order of the Bank in an amount equal to the original principal
amount of the Bank's Commitment. The Bank may, at its option, record on any
schedule forming a part of the Note appropriate notations to evidence, the date,
amount and maturity of, and effective interest rate for, each Advance made by
it, the date and amount of each payment of principal made by the Borrower with
respect thereto, and such recordations and endorsements shall constitute
rebuttable presumptive evidence of the principal amount owing and unpaid on the
Note; provided that the failure of the Bank to make any such recordation shall
not affect the obligation of the Borrower hereunder, under the Loan Documents or
under the Note. The Note shall bear interest and be repaid in accordance with
the terms and provisions of the FMA Agreement and Sections 2.04 and 2.05 of this
Agreement.
SECTION 2.04. Payment of Advances. The principal amount of all
outstanding Advances together with all accrued and unpaid interest thereon,
shall be due and payable in full, on the Termination Date; provided, however,
that the aggregate outstanding principal amount of all Advances at any one time
outstanding shall not exceed the lesser of: (i) the Commitment; or (ii) the
Borrowing Base. In addition, the Borrower has authorized and directed the Bank
to effect periodic payments of principal and interest on Advances under the FMA
Agreement.
SECTION 2.05. Interest Rates. (a) Subject to the provisions of Article
III, each Advance shall bear interest on the outstanding principal amount
thereof at a rate per annum equal to the current Adjusted Monthly Libor Index
Rate. The Adjusted Monthly Libor Index Rate will change as of the first (1st)
day of each calendar month following a change in the Monthly Libor Index Rate as
of the immediately preceding Rate Determination Date. Such interest shall be
payable on the first (1st) Domestic Business Day of each calendar month in
accordance with the FMA Agreement. Any overdue principal of and, to the extent
permitted by law, overdue interest on any Euro-Dollar Loan shall bear interest,
payable on demand, for each day until paid at a rate per annum equal to the
higher of (i) the sum of 2% plus the Adjusted Monthly Libor Index Rate
applicable to such Euro-Dollar Loan or (ii) the Default Rate.
<PAGE>
(b) The Bank shall determine the interest rate applicable to each
Advance hereunder and under the FMA Agreement, and shall, if requested by the
Borrower, give prompt notice to the Borrower by telephone or telecopy of the
rate of interest so determined, and its determination thereof shall be
conclusive in the absence of manifest error.
(c) After the occurrence and during the continuance of a Default, the
principal amount of Advances (and, to the extent permitted by applicable law,
all accrued interest thereon) may, at the election of the Bank, bear interest at
the Default Rate. The Advances shall bear interest at a rate per annum equal to
the Default Rate following any judgment in favor of the Bank on the Note.
SECTION 2.06. Fees. (a) From and after the date hereof up to and
including the Termination Date, the Borrower shall pay to the Bank a facility
fee at the rate of three-eighths of one percent (0.375%) per annum (calculated
from the date hereof on the basis of a year of 360 days and paid for the actual
number of days elapsed) on the average daily balance of the Unused Commitment
(the "Facility Fee"). The Facility Fee shall be payable by the Borrower
quarterly in arrears on each Facility Fee Payment Date and on the Termination
Date, provided that should the Commitment be terminated at any time prior to the
Termination Date (whether by termination of the Commitment as provided in
Section 2.07 or Section 2.08, refinancing of the Advances or otherwise), the
entire accrued and unpaid Facility Fee shall be paid on the date of such
termination.
(b) The Borrower shall pay to the Bank on or prior to the Closing Date
a Commitment Fee in the amount of $8,700.00 (the "Commitment Fee").
SECTION 2.07. Optional Termination or Reduction of Commitment. (a) The
Borrower may, upon at least three Domestic Business Days' notice to the Bank,
terminate the Commitment at any time, or reduce the Commitment from time to time
by an aggregate minimum amount of at least $1,000,000 or an integral multiple of
$100,000 in excess thereof. If the Commitment is so reduced, such reduction
shall be accounted for in determining the Facility Fees due under Section 2.06.
If the Commitment is so terminated in its entirety, (i) all accrued fees (as
provided under Section 2.06) shall be payable on the effective date of such
termination, and (ii) the Borrower shall pay to the Bank on the effective date
of such termination a termination fee equal to one tenth of one percent (0.10%)
of the Commitment. A notice of reduction or termination of the Commitment
hereunder, once given, shall not thereafter be revocable by the Borrower.
(b) NOTWITHSTANDING ANYTHING HEREIN OR IN THE FMA AGREEMENT TO THE
CONTRARY, the Bank shall have the right, in its sole and absolute discretion, to
terminate the Commitment and the Bank's obligation to extend the Commitment to
the Borrower hereunder, upon not less than thirteen (13) months prior written
notice. Such termination shall become effective on the date specified in the
written notice which the Bank delivers to the Borrower exercising the Bank's
option under this Section 2.07 to terminate the Commitment (the termination date
specified in said written notice being referred to herein as the "Termination
Date").
SECTION 2.08. Termination of Commitment. The Commitment shall terminate
and the unpaid principal balance and all accrued and unpaid interest on the Note
<PAGE>
will be due and payable upon the first of the following dates or events to
occur: (i) acceleration of the maturity of the Note in accordance with the
remedies contained in Section 7.02; (ii) the Borrower's termination of the
Commitment pursuant to Section 2.07(a); or (iii) upon expiration of the
Commitment on the Termination Date as provided for in Section 2.07(b). From and
after the date of such termination, no Advances shall be made.
SECTION 2.09. Optional Prepayments. Optional prepayments of Advances
shall be permitted only as provided for in the FMA Agreement.
SECTION 2.10. Mandatory Prepayments. (a) On each date on which the
Commitment is reduced pursuant to Section 2.07, the Borrower shall repay or
prepay such principal amount of the outstanding Advances, if any (together with
interest accrued thereon), as may be necessary so that after such payment the
aggregate unpaid principal amount of the outstanding Advances does not exceed
the aggregate amount of the Commitment as then reduced. Each such payment or
prepayment shall be applied to Advances outstanding on the date of such payment
(in direct order of maturity).
(b) In the event that the aggregate principal amount of all Advances at
any one time outstanding shall at any time exceed the lesser of: (i) the
Borrowing Base; or (ii) the aggregate amount of the Commitment, the Borrower
shall immediately repay (in the inverse order of maturity) so much of the
Advances as is necessary in order that the aggregate principal amount of the
Advances thereafter outstanding shall not exceed the lesser of: (i) the
Borrowing Base; or (ii) the Commitment.
SECTION 2.11. General Provisions Concerning Payments. (a) All payments
of principal of, or interest on, the Note, and of the Facility Fee or any other
fees due hereunder, shall be made in Federal or other funds immediately
available to the Bank at its office in Greensboro, North Carolina not later than
1:00 p.m., Greensboro, North Carolina time. Funds received after 1:00 p.m. shall
be deemed to have been paid on the next following Domestic Business Day.
(b) Whenever any payment of principal, or interest or fees, shall be
due on a day which is not a Domestic Business Day, the date for payment thereof
shall be extended to the next succeeding Domestic Business Day. If the date for
any payment of principal is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.
(c) All payments of principal, interest and fees and all other amounts
to be made by the Borrower pursuant to this Agreement shall be paid without
deduction for, and free from, any tax, imposts, levies, duties, deductions, or
withholdings of any nature now or at anytime hereafter imposed by any
governmental authority or by any taxing authority thereof or therein excluding
in the case of the Bank, taxes imposed on or measured by its net income, and
franchise taxes imposed on it, by the jurisdiction under the laws of which the
Bank is organized or any political subdivision thereof (all such non-excluded
taxes, imposts, levies, duties, deductions or withholdings of any nature being
"Taxes"). In the event that the Borrower is required by applicable law to make
any such withholding or deduction of Taxes with respect to Advances or fee or
other amount, the Borrower shall pay such deduction or withholding to the
applicable taxing authority, shall promptly furnish to the Bank all receipts and
other documents evidencing such payment and shall pay to the Bank additional
amounts as may be necessary in order that the amount received by the Bank after
the required withholding or other payment shall equal the amount the Bank would
<PAGE>
have received had no such withholding or other payment been made. If no
withholding or deduction of Taxes are payable in respect of any Advance or fee
relating thereto, the Borrower shall furnish, at the Bank's request, a
certificate from each applicable taxing authority or an opinion of counsel
acceptable to the Bank, in either case stating that such payments are exempt
from or not subject to withholding or deduction of Taxes. If the Borrower fails
to provide such original or certified copy of a receipt evidencing payment of
Taxes or certificate(s) or opinion of counsel of exemption, the Borrower hereby
agrees to compensate the Bank for, and indemnify the Bank with respect to, the
tax consequences of the Borrower's failure to provide evidence of tax payments
or tax exemption.
In the event the Bank receives a refund of any Taxes paid by the
Borrower pursuant to this Section 2.11, it will pay to the Borrower the amount
of such refund promptly upon receipt thereof; provided, however, if at any time
thereafter the Bank is required to return such refund, the Borrower shall
promptly repay to the Bank the amount of such refund.
Without prejudice to the survival of any other agreement of the
Borrower hereunder, the agreements and obligations of the Borrower contained in
this Section 2.11 shall be applicable with respect to any Participant, Assignee
or other Transferee, and any calculations required by such provisions (i) shall
be made based upon the circumstances of such Participant, Assignee or other
Transferee, and (ii) constitute a continuing agreement and shall survive the
termination of this Agreement and the payment in full or cancellation of the
Note.
SECTION 2.12. Computation of Interest. Interest shall be calculated on
the basis of a year of 360 days for the actual number of days
for the actual number of days in each interest period.
ARTICLE III. CHANGE IN CIRCUMSTANCES; COMPENSATION
SECTION 3.01. Basis for Determining Interest Rate Inadequate or Unfair.
If at any time:
(i) the Bank determines that deposits in Dollars (in the applicable
amounts) are not being offered in the relevant market for such one month period
or otherwise determines in its reasonable judgment that it is not possible to
determine the Monthly Libor Index Rate, or
(ii) the Bank determines that the Monthly Libor Index Rate will not
adequately and fairly reflect the cost to the Bank of funding Euro-Dollar Loans,
the Bank shall give notice thereof to the Borrower, whereupon until the Bank
notifies the Borrower that the circumstances giving rise to such suspension no
longer exist, the obligations of the Bank to make or maintain Euro-Dollar Loans
shall be suspended.
SECTION 3.02. Illegality. If, after the date hereof, the adoption of
any applicable law, rule or regulation, or any change therein, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof (any such authority, bank or agency being referred to as
<PAGE>
an "Authority" and any such event being referred to as a "Change of Law"), or
compliance by the Bank (or its Lending Office) with any request or directive
(whether or not having the force of law) of any Authority shall make it unlawful
or impossible for the Bank (or its Lending Office) to make, maintain or fund its
Euro-Dollar Loans and the Bank shall so notify the Borrower, whereupon until the
Bank notifies the Borrower that the circumstances giving rise to such suspension
no longer exist, the obligation of the Bank to make Euro-Dollar Loans shall be
suspended. If the Bank shall determine that it may not lawfully continue to
maintain and fund any of its outstanding Euro-Dollar Loans to maturity and shall
so specify in such notice, the Borrower shall immediately prepay in full the
then outstanding principal amount of each Euro-Dollar Loan, together with
accrued interest thereon. Concurrently with prepaying each such Advance, the
Borrower shall borrow an Advance as a Base Rate Loan in an equal principal
amount from the Bank and the Bank shall make such an Advance.
SECTION 3.03. Increased Cost and Reduced Return. (a) If after the date
hereof, a Change of Law or compliance by the Bank (or its Lending Office) with
any request or directive (whether or not having the force of law) of any
Authority:
(i) shall subject the Bank (or its Lending Office) to any tax, duty or
other charge with respect to its Euro-Dollar Loans, the Note or its obligation
to make or maintain Euro-Dollar Loans, or shall change the basis of taxation of
payments to the Bank (or its Lending Office) of the principal of or interest on
its Euro-Dollar Loans or any other amounts due under this Agreement in respect
of its Euro-Dollar Loans or its obligation to make or maintain Euro-Dollar Loans
(except for changes in the rate of tax on the overall net income of the Bank or
its Lending Office imposed by the jurisdiction in which the Bank's principal
executive office or Lending Office is located); or
(ii) shall impose, modify or deem applicable any reserve, special
deposit or similar requirement (including, without limitation, any such
requirement imposed by the Board of Governors of the Federal Reserve System, but
excluding any such requirement included in an applicable Euro-Dollar Reserve
Percentage) against assets of, deposits with or for the account of, or credit
extended by, the Bank (or its Lending Office); or
(iii) shall impose on the Bank (or its Lending Office) or the London
interbank market any other condition affecting its Euro-Dollar Loans, its Note
or its obligation to make or maintain Euro-Dollar Loans;
and the result of any of the foregoing is to increase the cost to the Bank (or
its Lending Office) of making or maintaining any Euro-Dollar Loan, or to reduce
the amount of any sum received or receivable by the Bank (or its Lending Office)
under this Agreement or under the Note with respect thereto, by an amount deemed
by the Bank to be material, then, within 15 days after demand by the Bank, the
Borrower shall pay to the Bank such additional amount or amounts as will
compensate the Bank for such increased cost or reduction.
(b) If the Bank shall have determined that after the date hereof the
adoption of any applicable law, rule or regulation regarding capital adequacy,
or any change therein, or any change in the interpretation or administration
thereof, or compliance by the Bank (or its Lending Office) with any request or
<PAGE>
directive regarding capital adequacy (whether or not having the force of law) of
any Authority, has or would have the effect of reducing the rate of return on
the Bank's capital as a consequence of its obligations under this Agreement with
respect to any Advance to a level below that which the Bank could have achieved
but for such adoption, change or compliance (taking into consideration the
Bank's policies with respect to capital adequacy) by an amount deemed by the
Bank to be material, then from time to time, within 15 days after demand by the
Bank, the Borrower shall pay to the Bank such additional amount or amounts as
will compensate the Bank for such reduction.
(c) The Bank will promptly notify the Borrower of any event of which it
has knowledge, occurring after the date hereof, which will entitle the Bank to
compensation pursuant to this Section and will designate a different Lending
Office if such designation will avoid the need for, or reduce the amount of,
such compensation and will not, in the judgment of the Bank, be otherwise
disadvantageous to the Bank. A certificate of the Bank claiming compensation
under this Section and setting forth the additional amount or amounts to be paid
to it hereunder shall be conclusive in the absence of manifest error. In
determining such amount, the Bank may use any reasonable averaging and
attribution methods.
(d) The provisions of this Section shall be applicable with respect to
any Participant in, or Assignee or other Transferee of, the obligations of the
Borrower hereunder to the Bank, and any calculations required by such provisions
shall be made based upon the circumstances of such Participant, Assignee or
other Transferee.
SECTION 3.04. Base Rate Loans Substituted for Affected Euro-Dollar
Loans. If (i) the obligation of the Bank to make or maintain Euro-Dollar Loans
has been suspended pursuant to Section 3.01 or Section 3.02, or (ii) the Bank
has demanded compensation under Section 3.03 and the Borrower, by at least one
Domestic Business Day's prior notice to the Bank, shall have elected that the
provisions of this Section shall apply, then, unless and until the Bank notifies
the Borrower that the circumstances giving rise to such suspension or demand for
compensation no longer apply:
(a) all Advances which would otherwise be made by the Bank as
Euro-Dollar Loans shall be made instead as Base Rate Loans, and
(b) after each of its Euro-Dollar Loans has been repaid, all payments
of principal which would otherwise be applied to repay such Euro-Dollar Loans
shall be applied to repay its Base Rate Loans instead.
SECTION 3.05. Compensation. Upon the request of the Bank, delivered to
the Borrower, the Borrower shall pay to the Bank such amount or amounts as shall
compensate the Bank for any loss, cost or expense incurred by the Bank as a
result of:
(a) any optional or mandatory payment or prepayment (pursuant to
Section 3.02, the FMA Agreement or otherwise) of a Euro-Dollar Loan on a date
other than (i) the first day of a calendar month, or (ii) an approved date for
payment or prepayment as provided for in or pursuant to the FMA Agreement; or
<PAGE>
(b) any failure by the Borrower to prepay a Euro-Dollar Loan on the
date for such prepayment specified in the relevant notice of prepayment of or
notice of reduction of the Commitment hereunder, as the case may be.
ARTICLE IV. CONDITIONS TO BORROWINGS
SECTION 4.01. Conditions to First Borrowing. The obligation of the Bank
to make an Advance on the occasion of the first Borrowing is subject to the
satisfaction of the conditions set forth in Section 4.02 and the following
additional conditions:
(a) receipt by the Bank from the Borrower of a duly executed
counterpart of this Agreement signed by the Borrower;
(b) receipt by the Bank of the duly executed Note complying with the
provisions of Section 2.03;
(c) receipt by the Bank of an opinion of counsel of Gallop, Johnson &
Neuman, L.C., counsel for the Borrower and Guarantors, substantially in the form
of Exhibit B hereto, and covering such additional matters relating to the
transactions contemplated hereby as the Bank may reasonably request;
(d) receipt by the Bank of a certificate, dated the Closing Date and
substantially in the form attached hereto at Exhibit D (the "Closing
Certificate"), signed by a principal financial officer of the Borrower to the
effect that (i) no Default hereunder has occurred and is continuing on the
Closing Date and (ii) the representations and warranties of the Borrower
contained in Article V are true on and as of the Closing Date; and if the first
Advance is made by the Bank after the Closing Date, receipt by the Bank of a
certificate, dated the date of the first Advance, signed by a principal
financial officer of the Borrower to the effect that (i) no Default hereunder
has occurred and is continuing on the date of the first Advance and (ii) the
representations and warranties of the Borrower contained in Article V are true
on and as of the date of the first Advance hereunder;
(e) receipt by the Bank of all documents which the Bank may reasonably
request relating to the existence of the Borrower, the corporate authority for
and the validity of this Agreement, the Note and the other Loan Documents to
which the Borrower is a party, and any other matters relevant hereto, all in
form and substance satisfactory to the Bank, including without limitation a
certificate of incumbency of the Borrower, signed by the Secretary or an
Assistant Secretary of the Borrower and substantially in the form of Exhibit E
hereto (the "Officer's Certificate"), certifying as to the names, true
signatures and incumbency of the officer or officers of the Borrower authorized
to execute and deliver the Loan Documents, and certified copies of the following
items: (i) the Borrower's Certificate of Incorporation, (ii) the Borrower's
Bylaws, (iii) a certificate of the Secretary of State (or other appropriate
office) of the jurisdiction of the Borrower's incorporation as to the good
<PAGE>
standing of the Borrower as a corporation of such jurisdiction, (iv) a
certificate of the Secretary of State of North Carolina as to the good standing
of the Borrower as a foreign corporation under the laws of the State of North
Carolina, and (v) the action taken by the Board of Directors of the Borrower
authorizing the Borrower's execution, delivery and performance of this
Agreement, the Note and the other Loan Documents to which the Borrower is a
party;
(f) receipt by the Bank of the duly executed FMA Agreement, together
with all Schedules and supplements thereto;
(g) duly executed UCC financing statements and a duly executed Security
Agreement (the "Security Agreement") from the Borrower granting to or for the
benefit of the Bank a first priority lien on and security interest in the
Collateral;
(h) receipt by the Bank of a Guaranty Agreement satisfactory in form
and substance to the Bank (the "Guaranty Agreement"), and duly executed by S.
Leslie Flegel, Elynor Flegel, William H. Lee, Jr., and Theresa O. Lee (herein
collectively referred to as the "Guarantors") to and in favor of the Bank;
(i) policies of insurance or certificates evidencing such policies
(with loss payable clauses satisfactory to the Bank) as required pursuant to the
Security Agreement;
(j) a Quarterly Receivables Certification dated as of July 31, 1996 and
the financial information required in Sections 6.01(b) and (c) with respect to
the Fiscal Quarter ending July 31,1996;
(k) Uniform Commercial Codes searches confirming the Bank's first lien
position with respect to the Collateral;
(l) receipt by the Bank of payment of the Commitment Fee; and
(m) such other documents or items as the Bank or its counsel may
reasonably request.
SECTION 4.02. Conditions to All Borrowings. The obligation of the Bank
to make an Advance on the occasion of each Borrowing is subject to the
satisfaction of the following conditions:
(a) the fact that, immediately after such Borrowing, no Default shall
have occurred and be continuing;
(b) the fact that the representations and warranties of the Borrower
contained in Article V shall be true on and as of the date of such Borrowing;
and
<PAGE>
(c) the fact that, immediately after such Borrowing, the aggregate
outstanding principal amount of the Advances will not exceed the lesser of (i)
the amount of the Commitment, or (ii) the Borrowing Base.
Each Advance hereunder and under the FMA Agreement shall be deemed to be a
representation and warranty by the Borrower on the date of such Advance as to
the facts specified in clauses (a), (b) and (c) of this Section; provided that
such Advance shall not be deemed to be such a representation and warranty to the
effect set forth in Section 5.04(b) as to any event, act or condition having a
Material Adverse Effect which has theretofore been disclosed in writing by the
Borrower to the Bank if the aggregate outstanding principal amount of the
Advances immediately after such Borrowing will not exceed the aggregate
outstanding principal amount of Advances immediately before such Borrowing.
ARTICLE V. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants that:
SECTION 5.01. Corporate Existence and Power. The Borrower is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation, is duly qualified to transact business
in every jurisdiction where, by the nature of its business, such qualification
is necessary, and has all corporate powers and all governmental licenses,
authorizations, consents and approvals required to carry on its business as now
conducted.
SECTION 5.02. Corporate and Governmental Authorization; Contravention.
The execution, delivery and performance by the Borrower of this Agreement, the
Note and the other Loan Documents (i) are within the Borrower's corporate
powers, (ii) have been duly authorized by all necessary corporate action, (iii)
require no action by or in respect of, or filing with, any governmental body,
agency or official, (iv) do not contravene, or constitute a default under, any
provision of applicable law or regulation or of the certificate of incorporation
or by-laws of the Borrower or of any agreement, judgment, injunction, order,
decree or other instrument binding upon the Borrower, and (v) do not result in
the creation or imposition of any Lien on any asset of the Borrower.
SECTION 5.03. Binding Effect. This Agreement constitutes a valid and
binding agreement of the Borrower enforceable in accordance with its terms, and
the Note and the other Loan Documents, when executed and delivered in accordance
with this Agreement, will constitute valid and binding obligations of the
Borrower enforceable in accordance with their respective terms, provided that
the enforceability hereof and thereof is subject in each case to general
principles of equity and to bankruptcy, insolvency and similar laws affecting
the enforcement of creditors' rights generally.
SECTION 5.04. Financial Information. (a) The balance sheet of the
Borrower as of January 31, 1996 and the related consolidated statements of
income, shareholders' equity and cash flows for the Fiscal Year then ended,
reported on by BDO Seidman LLP, copies of which have been delivered to the Bank,
and the unaudited financial statements of the Borrower for the interim period
<PAGE>
ended July 31, 1996, copies of which have been delivered to the Bank, fairly
present, in conformity with generally accepted accounting principles, the
financial position of the Borrower as of such dates and its results of
operations and cash flows for such periods stated.
(b) Since July 31, 1996 there has been no event, act, condition or
occurrence having a Material Adverse Effect.
(c) The Borrower's federal taxpayer identification number is
43-1710906.
SECTION 5.05. Litigation. Except as disclosed in Schedule 5.05, there
is no action, suit or proceeding pending, or to the knowledge of the Borrower
threatened, against or affecting the Borrower before any court or arbitrator or
any governmental body, agency or official which could have or cause a Material
Adverse Effect, or which in any manner draws into question the validity of, or
could impair the ability of the Borrower to perform its obligations under, this
Agreement, the Note or any of the other Loan Documents.
SECTION 5.06. Compliance with ERISA. (a) The Borrower does not have any
employee pension benefit plan which is covered by Title IV of ERISA or that is
subject to the minimum funding standards under Section 412 of the Code.
(b) The Borrower and each member of the Controlled Group have fulfilled
their obligations under the minimum funding standards of ERISA and the Code with
respect to any Plan and are in compliance in all material respects with the
presently applicable provisions of ERISA and the Code, and have not incurred any
liability to the PBGC or any Plan under Title IV of ERISA.
(c) Neither the Borrower nor any member of the Controlled Group is or
ever has been obligated to contribute to any Multiemployer Plan.
SECTION 5.07. Taxes. There have been filed on behalf of the Borrower
all Federal, state and local income, excise, property and other tax returns
which are required to be filed by it and all taxes due pursuant to such returns
or pursuant to any assessment received by or on behalf of the Borrower have been
paid. The charges, accruals and reserves on the books of the Borrower in respect
of taxes or other governmental charges are, in the opinion of the Borrower,
adequate. United States income tax returns of the Borrower have been examined
and closed through the Fiscal Year ended January 31, 1996.
SECTION 5.08. Subsidiaries. The Borrower has no Subsidiaries.
SECTION 5.09. Not an Investment Company. The Borrower is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
SECTION 5.10. Ownership of Property; Liens. The Borrower has title to
its Properties and assets sufficient for the conduct of its business, and none
of such Properties or assets is subject to any Lien except for Permitted
Encumbrances. All patents, trademarks, tradenames, copyrights, technologies and
applications for such owned by or requested in the name of the Borrower are
shown on Schedule 5.10 hereto.
<PAGE>
SECTION 5.11. No Default. The Borrower is not in default under or with
respect to any agreement, instrument or undertaking to which it is a party or by
which it or any of its property is bound which could have or cause of Material
Adverse Effect. No Default has occurred and is continuing.
SECTION 5.12. Full Disclosure. All information heretofore furnished by
the Borrower to the Bank for purposes of or in connection with this Agreement or
any transaction contemplated hereby is, and all such information hereafter
furnished by the Borrower to the Bank will be, true, accurate and complete in
every material respect or based on reasonable estimates on the date as of which
such information is stated or certified. The Borrower has disclosed to the Bank
in writing any and all facts which could have or cause a Material Adverse
Effect.
SECTION 5.13. Environmental Matters. (a) The Borrower is not subject to
any Environmental Liability which could have or cause a Material Adverse Effect
and the Borrower has not been designated as a potentially responsible party
under CERCLA or under any state statute similar to CERCLA. None of the
Properties have been identified on any current or proposed (i) National
Priorities List under 40 C.F.R. ss. 300, (ii) CERCLIS list or (iii) any list
arising from a state statute similar to CERCLA.
(b) No Hazardous Materials have been or are being used, produced,
manufactured, processed, generated, stored, disposed of, managed at, or shipped
or transported to or from the Properties or are otherwise present at, on, in or
under the Properties, or, to the best of the knowledge of the Borrower, at or
from any adjacent site or facility, except for Hazardous Materials, such as
cleaning solvents, pesticides and other materials used, produced, manufactured,
processed, generated, stored, disposed of, and managed in the ordinary course of
business in compliance with all applicable Environmental Requirements.
(c) The Borrower, and each of its Affiliates, has procured all
Environmental Authorizations necessary for the conduct of its business, and is
in compliance with all Environmental Requirements in connection with the
operation of the Properties and the Borrower's, and each of its Affiliate's,
respective businesses.
SECTION 5.14. Compliance with Laws. The Borrower is in compliance with
all applicable laws, including, without limitation, all Environmental Laws,
except where any failure to comply with any such laws would not, alone or in the
aggregate, have a Material Adverse Effect.
SECTION 5.15. Capital Stock. All Capital Stock, debentures, bonds,
notes and all other securities of the Borrower presently issued and outstanding
are validly and properly issued in accordance with all applicable laws,
including, but not limited to, the "Blue Sky" laws of all applicable states and
the federal securities laws.
SECTION 5.16. Margin Stock. The Borrower is not engaged principally, or
as one of its important activities, in the business of purchasing or carrying
any Margin Stock, and no part of the proceeds of any Advance will be used to
<PAGE>
purchase or carry any Margin Stock or to extend credit to others for the purpose
of purchasing or carrying any Margin Stock, or be used for any purpose which
violates, or which is inconsistent with, the provisions of Regulation X.
SECTION 5.17. Insolvency. After giving effect to the execution and
delivery of the Loan Documents and the making of the Advances under this
Agreement and under the FMA Agreement, the Borrower will not be "insolvent,"
within the meaning of that term as defined in ss. 101 of Title 11 of the United
States Code or Section 2 of the Uniform Fraudulent Transfer Act, or as
contemplated in N.C.G.S. ss. 39-15, et. seq. or any other applicable state law
pertaining to fraudulent transfers, as each may be amended from time to time, or
be unable to pay its debts generally as such debts become due, or have an
unreasonably small capital to engage in any business or transaction, whether
current or contemplated.
SECTION 5.18. Insurance. The Borrower maintains (in its own name), with
financially sound and reputable insurance companies, insurance on all of its
Properties, Equipment, Fixtures, and Inventory, in at least such amounts and
against at least such risks as are usually insured against in the same general
area by companies of established repute engaged in the same or similar business.
ARTICLE VI. COVENANTS
The Borrower agrees that, so long as the Commitment is in effect
hereunder or any amount payable under the Note, this Agreement or the FMA
Agreement remains unpaid:
SECTION 6.01. Information. The Borrower will deliver to the Bank:
(a) as soon as available and in any event within 90 days after the end
of each Fiscal Year, a balance sheet of the Borrower as of the end of such
Fiscal Year and the related statements of income, shareholders' equity and cash
flows for such Fiscal Year, setting forth in each case in comparative form the
figures for the previous fiscal year, all certified by BDO Seidman LLP or other
independent public accountants of nationally recognized standing, with such
certification to be free of exceptions and qualifications not acceptable to
Bank;
(b) as soon as available and in any event within 60 days after the end
of each of the first three quarters of each Fiscal Year, a balance sheet of the
Borrower as of the end of such quarter and the related statement of income and
statement of cash flows for such quarter and for the portion of the Fiscal Year
ended at the end of such quarter, setting forth in each case in comparative form
the figures for the corresponding quarter and the corresponding portion of the
previous Fiscal Year, all certified (subject to normal year-end adjustments) as
to fairness of presentation, generally accepted accounting principles and
consistency by the chief financial officer or the chief accounting officer of
the Borrower;
(c) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate substantially
in the form of Exhibit H attached hereto (the "Compliance Certificate"), of the
<PAGE>
chief financial officer or the chief accounting officer of the Borrower (i)
setting forth in reasonable detail the calculations required to establish
whether the Borrower was in compliance with the requirements of Sections 6.03
through 6.07, inclusive on the date of such financial statements and (ii)
stating whether any Default exists on the date of such certificate and, if any
Default then exists, setting forth the details thereof and the action which the
Borrower is taking or proposes to take with respect thereto;
(d) simultaneously with the delivery of each set of annual financial
statements referred to in clause (a) above, a statement of the firm of
independent public accountants which reported on such statements to the effect
that nothing has come to their attention to cause them to believe that any
Default existed on the date of such financial statements;
(e) within five Domestic Business Days after the Borrower becomes aware
of the occurrence of any Default, a certificate of the chief financial officer
or the chief accounting officer of the Borrower setting forth the details
thereof and the action which the Borrower is taking or proposes to take with
respect thereto;
(f) promptly upon the mailing thereof to the shareholders of the
Borrower generally, copies of all financial statements, reports and proxy
statements so mailed;
(g) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and annual, quarterly or monthly reports which the
Borrower shall have filed with the Securities and Exchange Commission;
(h) if and when any member of the Controlled Group (i) gives or is
required to give notice to the PBGC of any Reportable Event with respect to any
Plan which might constitute grounds for a termination of such Plan under Title
IV of ERISA, or knows that the plan administrator of any Plan has given or is
required to give notice of any such Reportable Event, a copy of the notice of
such Reportable Event given or required to be given to the PBGC; (ii) receives
notice of complete or partial withdrawal liability under Title IV of ERISA, a
copy of such notice; or (iii) receives notice from the PBGC under Title IV of
ERISA of an intent to terminate or appoint a trustee to administer any Plan, a
copy of such notice;
(i) as soon as available and in any event within forty-five (45) days
after the end of each Fiscal Quarter of each Fiscal Year, a Quarterly
Receivables Certification, dated as of the last day of the applicable Fiscal
Quarter; and
(j) from time to time such additional information regarding the
financial position or business of the Borrower as the Bank may reasonably
request.
SECTION 6.02. Inspection of Property, Books and Records. The Borrower
will keep proper books of record and account which fairly state the financial
position of the Borrower in all material respects in conformity with generally
<PAGE>
accepted accounting principles with respect to all dealings and transactions in
relation to its business and activities; and will permit representatives of the
Bank at the Bank's expense prior to the occurrence of an Event of Default and at
the Borrower's expense after the occurrence of an Event of Default to visit and
inspect any of their respective properties, to examine and make abstracts from
any of their respective books and records and to discuss their respective
affairs, finances and accounts with their respective officers, employees and
independent public accountants. The Borrower agrees to cooperate and assist in
such visits and inspections, in each case at such reasonable times and as often
as may reasonably be desired.
SECTION 6.03. Ratio of EBILT to Interest Expense and Lease Obligations.
As of January 31, 1997, the ratio of EBILT for the Fiscal Quarter then ending
and the immediately preceding three Fiscal Quarters to the sum of (i) Interest
Expense and (ii) Lease Obligations, actually paid during such Fiscal Quarters,
will not be less than 2.00 to 1.00; and as of the end of each Fiscal Quarter
thereafter, the ratio of EBILT for the Fiscal Quarter then ending and the
immediately preceding three Fiscal Quarters to the sum of (i) Interest Expense
and (ii) Lease Obligations, actually paid during such Fiscal Quarters, will not
be less than 2.50 to 1.00.
SECTION 6.04. Ratio of Funded Debt to EBITDA. As of July 31, 1997 and
as of the end of each Fiscal Quarter thereafter, the ratio of Funded Debt for
the Fiscal Quarter then ending to EBITDA for such Fiscal Quarter and for the
immediately preceding three Fiscal Quarters, will not be less than 4.00 to 1.00.
SECTION 6.05. Ratio of Funded Debt to Total Capitalization. From the
Closing Date through the Fiscal Quarter ending July 31, 1997, the ratio of
Funded Debt to Total Capitalization shall not exceed 65.0%; from August 1, 1997
through January 31, 1998, the ratio of Funded Debt to Total Capitalization shall
not exceed 60.0%; from February 1, 1998 through July 31, 1998, the ratio of
Funded Debt to Total Capitalization shall not exceed 55.0%; and from and after
August 1, 1998, the ratio of Funded Debt to Total Capitalization shall not
exceed 50.0%.
SECTION 6.06. Minimum Tangible Net Worth. Tangible Net Worth will at no
time be less than $3,600,000.00 plus the sum of 50.0% of the cumulative Reported
Net Income of the Borrower during any period after July 31, 1996 (taken as one
accounting period), calculated quarterly but excluding from such calculations
any quarter in which the Net Income of the Borrower is negative.
SECTION 6.07. Accounts Receivable. Tier I Eligible Receivables shall at
all times comprise more than fifty percent (50%) of the Borrower's Receivables.
At no time shall total Receivables to the Canadian companies identified on
Schedule 1.01 attached hereto exceed in the aggregate ten percent (10%) of
Eligible Receivables.
SECTION 6.08. Restricted Payments. The Borrower will not declare or
make any Restricted Payment during any Fiscal Year except from Net Income and
then only after providing for payment of all current principal payments on
Long-Term Debt; provided that after giving effect to the payment of any such
Restricted Payments, the Borrower will be in full compliance with all of the
provisions of this Agreement.
<PAGE>
SECTION 6.09. Loans or Advances. The Borrower shall not make loans or
advances to any Person except: (i) the existing loans to officers of the
Borrower as reflected on the financial information submitted by the Borrower to
the Bank under Section 6.01(b) and (c) of this Agreement for the Fiscal Quarter
ending July 31, 1996; and (ii) deposits required by government agencies or
public utilities; provided that after giving effect to the making of any loans,
advances or deposits permitted by clause (i) or (ii) of this Section, the
Borrower will be in full compliance with all the provisions of this Agreement.
SECTION 6.10. Investments. The Borrower shall not make Investments in
any Person except investments in (i) direct obligations of the United States
Government maturing within one year, (ii) certificates of deposit issued by a
commercial bank whose credit is satisfactory to the Bank, (iii) commercial paper
rated A-1 or the equivalent thereof by Standard & Poor's Corporation or P-1 or
the equivalent thereof by Moody's Investors Service, Inc. and in either case
maturing within 6 months after the date of acquisition, and/or (iv) tender bonds
the payment of the principal of and interest on which is fully supported by a
letter of credit issued by a United States bank whose long-term certificates of
deposit are rated at least AA or the equivalent thereof by Standard & Poor's
Corporation and Aa or the equivalent thereof by Moody's Investors Service, Inc.
SECTION 6.11. Negative Pledge. The Borrower shall not create, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired by it,
except for Permitted Encumbrances.
SECTION 6.12. Maintenance of Existence. The Borrower shall maintain its
corporate existence and carry on its business in substantially the same manner
and in substantially the same fields as such business is now carried on and
maintained.
SECTION 6.13. Dissolution. The Borrower shall not suffer or permit
dissolution or liquidation either in whole or in part or redeem or retire any
shares of its own stock.
SECTION 6.14. Consolidations, Mergers and Sales of Assets. The Borrower
will not consolidate or merge with or into, or sell, lease or otherwise transfer
all or any substantial part of its assets to, any other Person, or create or
acquire any Subsidiary, or discontinue or eliminate any business line or
segment, provided that
(a) the Borrower may merge with another Person if (i) such Person was
organized under the laws of the United States of America or one of its states,
(ii) the Borrower is the corporation surviving such merger and (iii) immediately
after giving effect to such merger, no Default shall have occurred and be
continuing,
(b) the foregoing limitation on the sale, lease or other transfer of
assets and on the discontinuation or elimination of a business line or segment
shall not prohibit, during any Fiscal Quarter, a transfer of assets or the
discontinuance or elimination of a business line or segment (in a single
transaction or in a series of related transactions) unless the aggregate assets
to be so transferred or utilized in a business line or segment to be so
discontinued, when combined with all other assets transferred, and all other
assets utilized in all other business lines or segments discontinued, during
<PAGE>
such Fiscal Quarter and the immediately preceding seven Fiscal Quarters, either
(x) constituted more than 10% of Total Assets at the end of the eighth Fiscal
Quarter immediately preceding such Fiscal Quarter, or (y) contributed more than
10% of Operating Profits during the eight Fiscal Quarters immediately preceding
such Fiscal Quarter.
SECTION 6.15. Use of Proceeds. No portion of the proceeds of the
Advances will be used by the Borrower (i) in connection with any tender offer
for, or other acquisition of, stock of any corporation with a view towards
obtaining control of such other corporation, (ii) directly or indirectly, for
the purpose, whether immediate, incidental or ultimate, of purchasing or
carrying any Margin Stock, or (iii) for any purpose in violation of any
applicable law or regulation.
SECTION 6.16. Compliance with Laws; Payment of Taxes. The Borrower
will, and will cause each member of the Controlled Group to, comply with
applicable laws (including but not limited to ERISA), regulations and similar
requirements of governmental authorities (including but not limited to PBGC),
except where the necessity of such compliance is being contested in good faith
through appropriate proceedings diligently pursued. The Borrower will pay
promptly when due all taxes, assessments, governmental charges, claims for
labor, supplies, rent and other obligations which, if unpaid, might become a
lien against the property of the Borrower, except liabilities being contested in
good faith by appropriate proceedings diligently pursued and against which, if
requested by the Bank, the Borrower will set up reserves satisfactory to the
Bank.
SECTION 6.17. Insurance. The Borrower will maintain, or cause to be
maintained, public liability insurance and fire and extended coverage insurance
on all assets owned by it, all in such form and amounts as are consistent with
industry practices and satisfactory to the Bank and with such insurers as may be
satisfactory to the Bank. The Borrower will maintain, or cause to be maintained,
business interruption insurance in such form and amounts as are satisfactory to
the Bank and with insurers as may be satisfactory to the Bank. Such policies of
insurance or certificates evidencing such policies shall be deposited with the
Bank, or the Borrower will furnish to the Bank such evidence of insurance as the
Bank may require. All such policies insuring Collateral shall contain a loss
payable clause, in a form satisfactory to the Bank, in its sole discretion,
naming the Bank as loss payee as its interests may appear. Each such policy of
insurance or endorsement shall contain a clause requiring the insurer to give
the Bank not less than thirty (30) days written notice before any such policy
shall be altered or cancelled or the coverage thereunder reduced or restricted.
Unless written consent to the contrary is first obtained from the Bank, all
proceeds payable under any such policy shall be payable in any event to the Bank
(regardless of whether an Event of Default has occurred hereunder), and the
insurer named therein is hereby authorized and directed by the Borrower to make
payment for any loss under any such policy of insurance to the Bank as its
interests may appear, rather than to the Borrower and the Bank jointly. The Bank
may act as the Borrower's agent in adjusting or compromising any loss under any
such insurance policy and in collecting and receiving the proceeds from any such
policy, and the Bank is hereby appointed the Borrower's attorney-in-fact
(without requiring the Bank to act as such) to endorse any check which may be
payable to the Borrower and to collect such returned or unearned premiums or the
proceeds of such insurance, and any amount so collected may be applied toward
satisfaction of any of the liabilities, indebtedness or obligations of the
Borrower evidenced by the Note or arising from or in connection with this
Agreement. The Borrower hereby agrees that, if the Borrower shall default in its
<PAGE>
obligation hereunder to insure the Collateral in a manner satisfactory to the
Bank, or in the event the Borrower fails to pay or cause to be paid the premium
on any insurance required hereunder, then the Bank shall have the right (but not
the obligation), in its sole discretion, to procure such insurance and/or pay
any premium on such insurance, and to charge the costs of same to the Borrower,
and the Bank may, at its option, demand reimbursement by the Borrower for such
amounts so paid with interest thereon at the Default Rate, or the Bank may, at
its option, add all such costs and expenses incurred by the Bank to the unpaid
principal amount of the liabilities, indebtedness and obligations of the
Borrower evidenced by the Note and arising from or in connection with this
Agreement (which costs and expenses shall become a part thereof and shall bear
interest at the Default Rate or the highest contract rate permitted by
applicable law whichever is less); and all of the foregoing shall be secured by
the Collateral.
SECTION 6.18. Change in Fiscal Year. The Borrower will not change its
Fiscal Year without the consent of the Bank.
SECTION 6.19. Maintenance of Property. The Borrower shall maintain all
of its Properties and assets in good condition, repair and working order,
ordinary wear and tear excepted, and will pay and discharge or cause to be paid
and discharged when due, the cost of repairs to or maintenance of the same, and
will pay or cause to be paid all rental or mortgage payments due on such real
estate. The Borrower hereby agrees that, in the event it fails to pay or to
cause to be paid any such payment which failure continues for five (5) days
(unless the validity or amount of such payment is being contested in good faith,
by appropriate proceedings diligently pursued and the amount thereof is
adequately reserved), the Bank may (but shall have no obligation to) do so and
shall be reimbursed by the Borrower therefor on demand with interest thereon at
the Default Rate. The Borrower will comply with all obligations under the leases
to which the Borrower is a party with regard to the Properties.
SECTION 6.20. Environmental Notices. The Borrower shall furnish to the
Bank prompt written notice of all Environmental Liabilities, pending, threatened
or anticipated Environmental Proceedings, Environmental Notices, Environmental
Judgments and Orders, and Environmental Releases at, on, in, under or in any way
affecting the Properties or any adjacent property, and all facts, events, or
conditions that could lead to any of the foregoing.
SECTION 6.21. Environmental Matters. The Borrower will not, and will
not permit any Third Party to, use, produce, manufacture, process, generate,
store, dispose of, manage at, or ship or transport to or from the Properties any
Hazardous Materials except for Hazardous Materials such as cleaning solvents,
pesticides and other similar materials used, produced, manufactured, processed,
generated, stored, disposed or managed in the ordinary course of business in
compliance with all applicable Environmental Requirements.
SECTION 6.22. Environmental Release. The Borrower agrees that upon the
occurrence of an Environmental Release it will act immediately to investigate
the extent of, and to take appropriate remedial action to eliminate, such
Environmental Release, whether or not ordered or otherwise directed to do so by
any Environmental Authority.
<PAGE>
SECTION 6.23. Transactions with Affiliates. The only transactions with
Affiliates of Borrower to which the Borrower is a party are those transactions
with Affiliates disclosed in the Borrower's Form 10-K annual report for the
Fiscal Year ending January 31, 1996 and the Borrower's Form 10-Q quarterly
report for July 31, 1996, copies of which have been provided to the Bank; and
otherwise, the Borrower shall not enter into, or be a party to, any transaction
with any Affiliate of the Borrower (which Affiliate is not the Borrower), except
as permitted by law and in the ordinary course of business and pursuant to
reasonable terms which are disclosed to the Bank, consented to in writing by the
Bank, and are no less favorable to Borrower than would be obtained in a
comparable arm's length transaction with a Person which is not an Affiliate.
SECTION 6.24. Collateral. (a) The Borrower will collect its Accounts
and sell its Inventory only in the ordinary course of its business.
(b) The Borrower will keep accurate and complete records of its
Accounts, Inventory and Equipment, consistent with sound business practices.
(c) The Borrower will notify the Bank ten (10) days in advance of any
change in the location of any of its places of business or of the establishment
of any new, or the discontinuance of any existing, place of business or of the
locations at which any of the Collateral is kept; and all locations of the
Borrower's places of business and all locations at which any of the Collateral
is kept are listed on Exhibit G attached hereto.
(d) If requested by the Bank in writing, the Borrower will furnish to
the Bank written reports, in addition to the other reports and certificates
required of Borrower under this Agreement, detailing the aging of the
Receivables and collections thereof, and containing such information with
respect thereto as the Bank may specify. Such reports shall be furnished by the
Borrower daily, if required by the Bank.
(e) If requested by the Bank in writing from time to time and at
intervals designated by the Bank, Borrower shall provide the Bank with
schedules, in addition to the other reports and certificates required of
Borrower under this Agreement, of all of Borrower's Inventory, itemizing and
describing the kind, type, quality and quantity of such Inventory, Borrower's
cost therefor and selling price thereof, together with such support documents as
the Bank may request, including, without limitation, invoices relating to
Borrower's purchase of goods listed in said schedule; and the Borrower shall not
sell Inventory on consignment.
SECTION 6.25. Interest Rate Protection. The Borrower will obtain and
maintain interest rate protection (for example, without limitation, an interest
rate swap, cap, floor or collar), satisfactory to the Bank on at least fifty
percent (50%) of the Commitment. The Borrower agrees that it will, from time to
time, execute and deliver to the Bank, or cause to be executed and delivered,
such further instruments, documents, contracts and agreement as may reasonably
be required by the Bank for carrying out the requirements for interest rate
protection or facilitating the performance by the Borrower of its obligations
under this Section 6.25.
<PAGE>
ARTICLE VII. DEFAULTS
SECTION 7.01. Events of Default. The occurrence of any one or more of
the following events shall constitute an Event of Default by the Borrower under
this Agreement:
(a) the Borrower shall fail to pay when due any principal of any
Advance, or shall fail to pay any interest on any Advance within five (5)
Domestic Business Days after such interest shall become due, or shall fail to
pay any fee or other amounts payable hereunder within five (5) Domestic Business
Days after such fee or other amount becomes due; or
(b) the Borrower shall fail to observe or perform any covenant
contained in Sections 6.03 through 6.15, inclusive, and Sections 6.17 and 6.24;
or
(c) the Borrower shall fail to observe or perform any covenant or
agreement contained in this Agreement (other than those covered by clause (a) or
(b) above) for thirty (30) days after the earlier of (i) the first day on which
a responsible officer of the Borrower has knowledge of such failure, or (ii)
written notice thereof has been given to the Borrower by the Bank; or
(d) any representation, warranty, certification or statement made by
the Borrower in Article V, or deemed made by the Borrower or any Guarantor, in
any certificate, financial statement or other document delivered pursuant to
this Agreement or the Guaranty Agreement shall prove to have been incorrect in
any material respect when made (or deemed made); or
(e) the Borrower shall fail to make any payment when due or within any
applicable grace period in respect of Debt outstanding (other than the Note),
which Debt in the aggregate exceeds $100,000.00; or
(f) any event or condition shall occur which results in the
acceleration of the maturity of Debt outstanding of the Borrower or any
Guarantor which in the aggregate exceeds $100,000.00 or the purchase of such
Debt by the Borrower (or its designee) or by such Guarantor (or his designee)
prior to the scheduled maturity thereof or enables (or, with the giving of
notice or lapse of time or both, would enable) the holders of such Debt or any
Person acting on such holders' behalf to accelerate the maturity thereof or
require the purchase thereof by the Borrower (or its designee) or by such
Guarantor (or his designee) prior to the scheduled maturity thereof, without
regard to whether such holders or other Person shall have exercised or waived
their right to do so;
(g) the Borrower or any Guarantor shall commence a voluntary case or
other proceeding seeking liquidation, reorganization or other relief with
respect to itself or its debts under any bankruptcy, insolvency or other similar
<PAGE>
law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an involuntary case
or other proceeding commenced against it, or shall make a general assignment for
the benefit of creditors, or shall fail generally to pay its debts as they
become due, or shall take any corporate action to authorize any of the
foregoing; or
(h) an involuntary case or other proceeding shall be commenced against
the Borrower or any Guarantor seeking liquidation, reorganization or other
relief with respect to it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of 60 days; or an order for
relief shall be entered against the Borrower or any Guarantor under the federal
bankruptcy laws as now or hereafter in effect; or
(i) the Borrower or any member of the Controlled Group shall fail to
pay when due any material amount which it shall have become liable to pay to the
PBGC or to any Plan under Title IV of ERISA; or the PBGC shall institute
proceedings under Title IV of ERISA to terminate or to cause a trustee to be
appointed to administer any such Plan or Plans or a proceeding shall be
instituted by a fiduciary of any such Plan or Plans to enforce Section 515 or
4219(c)(5) of ERISA and such proceeding shall not have been dismissed within 30
days thereafter; or a condition shall exist by reason of which the PBGC would be
entitled to obtain a decree adjudicating that any such Plan or Plans must be
terminated; or the Borrower or any other member of the Controlled Group shall
enter into, contribute or be obligated to contribute to, terminate or incur any
withdrawal liability with respect to, a Multiemployer Plan; or
(j) one or more judgments or orders for the payment of money in an
aggregate amount in excess of $100,000.00 shall be rendered against the Borrower
or any Guarantor and such judgment or order shall continue unsatisfied and
unstayed for a period of 30 days; or
(k) a federal tax lien shall be filed against the Borrower or any
Guarantor under Section 6323 of the Code or a lien of the PBGC shall be filed
against the Borrower under Section 4068 of ERISA and in any case such lien shall
remain undischarged for a period of 25 days after the date of filing; or
(l) (i) any Person or two or more Persons (other than S. Leslie Flegel
and William H. Lee, Jr.) acting in concert shall have acquired beneficial
ownership (within the meaning of Rule 13d-3 of the Securities and Exchange
Commission under the Securities Exchange Act of 1934) of 20% or more of the
outstanding shares of the voting stock of the Borrower; or (ii) as of any date a
majority of the Board of Directors of the Borrower consists of individuals who
<PAGE>
were not either (A) directors of the Borrower as of the corresponding date of
the previous year, (B) selected or nominated to become directors by the Board of
Directors of the Borrower of which a majority consisted of individuals described
in clause (A), or (C) selected or nominated to become directors by the Board of
Directors of the Borrower of which a majority consisted of individuals described
in clause (A) and individuals described in clause (B); or
(m) a judgment creditor of the Borrower shall lawfully obtain and
retain for at least five (5) days possession of any material portion of the
Collateral by any lawful means, including, but without limitation, levy,
distraint, replevin or self-help; or
(n) the Guarantors (or any one of them) shall fail to observe or
perform any obligation under the Guaranty Agreement or any other document to
which any Guarantor is a party relating to the Advances or the Guaranty
Agreement; or
(o) a default or an event of default under any of the Loan Documents or
Collateral Documents shall occur and be continuing; or
(p) the occurrence of any event, act or condition which the Bank
determines either does or has a reasonable probability of causing a Material
Adverse Effect; or
(q) a breach, violation, failure of performance, default or event of
default shall occur and be continuing under the FMA Agreement or the FMA
Agreement is terminated.
SECTION 7.02. Remedies on Default. Upon the occurrence of an Event of
Default, the Bank may, by notice to the Borrower, terminate the Commitment which
shall thereupon terminate, and by notice to the Borrower declare the Note
(together with accrued interest thereon) to be, and the Note and all outstanding
Advances shall thereupon become, immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower; provided that if any Event of Default specified
in clause (g) or (h) above occurs with respect to the Borrower, without any
notice to the Borrower or any other act by the Bank, the Commitment shall
thereupon terminate and the Note and all outstanding Advances (together with
accrued interest thereon) and fees shall become immediately due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Borrower. In addition and upon the occurrence of an
Event of Default, the Bank may exercise any rights, powers or remedies under any
of the Loan Documents. Notwithstanding the foregoing, the Bank shall have
available to it all rights and remedies provided under the Loan Documents
(including, without limitation, the Collateral Documents) and in addition
thereto, all other remedies at law or in equity, and may exercise any one or all
of them.
SECTION 7.03. Security Interest; Offset. In addition to, and not in
limitation of, all rights of offset that the Bank or other holder of the Note
may have under applicable law, the Borrower hereby grants to the Bank, and to
each Participant, Assignee or other Transferee, as security for the full and
punctual payment and performance of the obligations to pay to the Bank the
principal of and interest on the Advances and other amounts due hereunder, a
<PAGE>
continuing lien on and security interest in all deposits and other sums credited
by or due from the Bank (or such Participant, Assignee or other Transferee) to
the Borrower or subject to withdrawal by the Borrower; and regardless of the
adequacy of any collateral or other means of obtaining repayment of the
Obligations, the Bank (and each such Assignee and, to the extent permitted by
applicable law, each such Participant and other Transferee) may, at any time
after the occurrence of an Event of Default and without notice to the Borrower,
set off the whole or any portion or portions of any or all such deposits and
other sums against the amounts owing under this Agreement and the Note, whether
or not any other Person or Persons could also withdraw money therefrom.
ARTICLE VIII. MISCELLANEOUS
SECTION 8.01. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including facsimile transmission or
similar writing) and shall be given to such party at its address or facsimile
number set forth below or such other address or facsimile number as such party
may hereafter specify for the purpose by notice to the other party:
(a) If to the Borrower:
The Source Company
11644 Lilburn Park Road
St. Louis, Missouri 63146
Attention: Mr. S. Leslie Flegel
Fax number: (314) 995-9022
(b) If to the Bank:
Wachovia Bank of North Carolina, N.A.
Post Office Box 21048
Greensboro, North Carolina 27420-1048
[230 North Elm Street - 27401-2429]
Attention: John K. Stephens
Fax number: 910-412-7100
Each such notice, request or other communication shall be effective (i) if given
by facsimile transmission, when such facsimile is transmitted to the fax number
specified in this Section and the facsimile machine used by the sender provides
a written confirmation that such facsimile has been so transmitted or receipt of
such facsimile transmission is otherwise confirmed, (ii) if given by mail, 72
hours after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other means,
when delivered at the address specified in this Section; provided that notices
to the Bank under Article II or Article III shall not be effective until
received.
SECTION 8.02. No Waivers. No failure or delay by the Bank in exercising
any right, power or privilege hereunder or under the Note or any other Loan
Documents shall operate as a waiver thereof nor shall any single or partial
<PAGE>
exercise thereof preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. The rights and remedies herein provided
shall be cumulative and not exclusive of any rights or remedies provided by law.
SECTION 8.03. Expenses; Documentary Taxes; Indemnification. (a) The
Borrower shall pay (i) all out-of-pocket expenses of the Bank, including without
limitation, reasonable attorneys' fees and all disbursements of attorneys for
the Bank, in connection with the preparation of this Agreement and the other
Loan Documents, any waiver or consent hereunder or any amendment hereof or any
actual or alleged Default hereunder and (ii) if an Event of Default occurs, all
out-of-pocket expenses incurred by the Bank, including fees and disbursements of
counsel, in connection with such Event of Default and collection and other
enforcement proceedings resulting therefrom, including out-of-pocket expenses
incurred in enforcing this Agreement and the other Loan Documents.
(b) The Borrower shall indemnify the Bank against any transfer taxes,
documentary taxes, assessments or charges made by any Authority by reason of the
execution and delivery of this Agreement or the other Loan Documents.
(c) The Borrower shall indemnify the Bank and each Affiliate thereof
and their respective directors, officers, employees and agents from, and hold
each of them harmless against, any and all losses, liabilities, claims or
damages to which any of them may become subject, insofar as such losses,
liabilities, claims or damages arise out of or result from any actual or
proposed use by the Borrower of the proceeds of any extension of credit by the
Bank hereunder or breach by the Borrower of this Agreement or any other Loan
Document or from investigation, litigation (including, without limitation, any
actions taken by the Bank to enforce this Agreement or any of the other Loan
Documents) or other proceeding (including, without limitation, any threatened
investigation or proceeding) relating to the foregoing, and the Borrower shall
reimburse the Bank, and each Affiliate thereof and their respective directors,
officers, employees and agents, upon demand for any expenses (including, without
limitation, reasonable attorneys' fees and all disbursements of attorneys for
the Bank, any Affiliate thereof, or any such other Person) incurred in
connection with any such investigation or proceeding; but excluding any such
losses, liabilities, claims, damages or expenses incurred by reason of the gross
negligence or willful misconduct of the Person to be indemnified.
SECTION 8.04. Amendments and Waivers. Any provision of this Agreement,
the Note or any other Loan Documents may be amended or waived if, but only if,
such amendment or waiver is in writing and is signed by the Borrower and the
Bank.
SECTION 8.05. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns; provided that the Borrower may not
assign or otherwise transfer any of its rights under this Agreement.
(b) The Bank may at any time sell to one or more Persons (each a
"Participant") participating interests in any Advance, the Note, the Commitment
hereunder or any other interest of the Bank hereunder. In the event of any such
sale by the Bank of a participating interest to a Participant, the Bank's
obligations under this Agreement shall remain unchanged, the Bank shall remain
solely responsible for the performance thereof, the Bank shall remain the holder
<PAGE>
of any the Note for all purposes under this Agreement, and the Borrower shall
continue to deal solely and directly with the Bank in connection with the Bank's
rights and obligations under this Agreement. In no event shall the Bank be
obligated to the Participant to take or refrain from taking any action hereunder
except that the Bank may agree that it will not (except as provided below),
without the consent of the Participant, agree to (i) the change of any date
fixed for the payment of principal of or interest on the related Advance or
Advances, (ii) the change of the amount of any principal, interest or fees due
on any date fixed for the payment thereof with respect to the related Advance or
Advances, (iii) the change of the principal of the related Advance or Advances,
(iv) any change in the rate at which either interest is payable thereon or (if
the Participant is entitled to any part thereof) commitment fee is payable
hereunder from the rate at which the Participant is entitled to receive interest
or commitment fee (as the case may be) in respect of such participation, (v) the
release or substitution of all or any substantial part of the Collateral held as
security for the Advances, or (vi) the release of the Guaranty Agreement given
to support payment of the Advances. The Bank shall, within ten Domestic Business
Days after selling a participating interest in any Advance, the Note, the
Commitment or other interest under this Agreement, provide the Borrower with
written notification stating that such sale has occurred and identifying the
Participant and the interest purchased by such Participant. The Borrower agrees
that each Participant shall be entitled to the benefits of Article III and
Section 7.03 with respect to its participation in Advances outstanding from time
to time.
(c) The Bank may at any time assign to one or more banks or financial
institutions (each an "Assignee") all, or a proportionate part of all, of its
rights and obligations under this Agreement and the Note, and such Assignee
shall assume all such rights and obligations, pursuant to an Assignment and
Acceptance in the form attached hereto as Exhibit C executed by such Assignee,
the Bank and the Borrower; provided that (i) no interest may be sold by the Bank
pursuant to this paragraph (c) unless the Assignee shall agree to assume ratably
equivalent portions of the Commitment, and (ii) no interest may be sold by the
Bank pursuant to this paragraph (c) to any Assignee which is not an Affiliate of
the Bank without the consent of the Borrower, which consent shall not be
unreasonably withheld or delayed. Upon (A) execution of the Assignment and
Acceptance by the Bank, such Assignee, and the Borrower, (B) delivery of an
executed copy of the Assignment and Acceptance to the Borrower, and (C) payment
by such Assignee to the Bank of an amount equal to the purchase price agreed
between the Bank and such Assignee, such Assignee shall for all purposes be a
Bank party to this Agreement and shall have all the rights and obligations of a
Bank under this Agreement to the same extent as if it were an original party
hereto with a Commitment as set forth in such instrument of assumption, and the
Bank shall be released from its obligations hereunder to a corresponding extent,
and no further consent or action by the Borrower or the Bank shall be required.
Upon the consummation of any transfer to an Assignee pursuant to this paragraph
(c), the Bank and the Borrower shall make appropriate arrangements so that, if
required, a new Note is issued to such Assignee.
(d) Subject to the provisions of Section 8.06, the Borrower authorizes
the Bank to disclose to any Participant, Assignee or other transferee (each a
"Transferee") and any prospective Transferee any and all financial information
in the Bank's possession concerning the Borrower which has been delivered to the
Bank by the Borrower pursuant to this Agreement or which has been delivered to
<PAGE>
the Bank by the Borrower in connection with the Bank's credit evaluation prior
to entering into this Agreement.
(e) No Transferee shall be entitled to receive any greater payment
under Section 3.03 than the transferor Bank would have been entitled to receive
with respect to the rights transferred, unless such transfer is made with the
Borrower's prior written consent or by reason of the provisions of Section 3.03
requiring the Bank to designate a different Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
(f) Anything in this Section 8.05 to the contrary notwithstanding, the
Bank may assign and pledge all or any Advances and/or obligations owing to it to
any Federal Reserve Bank or the United States Treasury as collateral security
pursuant to Regulation A of the Board of Governors of the Federal Reserve System
and Operating Circular issued by such Federal Reserve Bank, provided that any
payment in respect of such assigned Advances and/or obligations made by the
Borrower to the Bank in accordance with the terms of this Agreement shall
satisfy the Borrower's obligations hereunder in respect of such assigned
Advances and/or obligations to the extent of such payment. No such assignment
shall release the Bank from its obligations hereunder.
SECTION 8.06. Confidentiality. The Bank agrees to exercise its best
efforts to keep any information delivered or made available by the Borrower to
it which is clearly indicated to be confidential information, confidential from
any one other than persons employed or retained by the Bank who are or are
expected to become engaged in evaluating, approving, structuring or
administering the Advances; provided, however, that nothing herein shall prevent
the Bank from disclosing such information (i) upon the order of any court or
administrative agency, (ii) upon the request or demand of any regulatory agency
or authority having jurisdiction over the Bank, (iii) which has been publicly
disclosed, (iv) to the extent reasonably required in connection with any
litigation to which the Bank or their respective Affiliates may be a party, (v)
to the extent reasonably required in connection with the exercise of any remedy
hereunder, (vi) to the Bank's legal counsel and independent auditors and (vii)
to any actual or proposed Participant, Assignee or other Transferee of all or
part of its rights hereunder which has agreed in writing to be bound by the
provisions of this Section.
SECTION 8.07. Interest Limitation. Notwithstanding any other term of
this Agreement, the Note or any other Loan Document, the maximum amount of
interest which may be charged to or collected from any person liable hereunder
or under the Note by the Bank shall be absolutely limited to, and shall in no
event exceed, the maximum amount or interest which could lawfully be charged or
collected under applicable law (including, to the extent applicable, the
provisions of section 5197 of the Revised Statutes of the United States of
America, as amended, 12 U.S.C. ss.85, as amended), so that the maximum of all
amounts constituting interest under applicable law, howsoever computed, shall
never exceed as to any Person liable therefor such lawful maximum, and any term
of this Agreement, the Note or any other Loan Document which could be construed
as providing for interest in excess of such lawful maximum shall be and hereby
is made expressly subject to and modified by the provisions of this paragraph.
SECTION 8.08. Survival of Certain Obligations. Article III and the
obligations of the Borrower thereunder, and Section 8.03 and the obligations of
the Borrower thereunder, shall survive, and shall continue to be enforceable
notwithstanding, the termination of this Agreement and the Commitment and the
payment in full of the principal of and interest on the Advances.
<PAGE>
SECTION 8.09. Governing Law. This Agreement and the Note shall be
construed in accordance with and governed by the law of the State of North
Carolina. This Agreement and the Note are intended to be effective as
instruments executed under seal.
SECTION 8.10. Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
SECTION 8.11. Consent to Jurisdiction. The Borrower (a) submits to
personal jurisdiction in the State of North Carolina, the courts thereof and the
United States District Courts sitting therein, for the enforcement of this
Agreement, the Note and the other Loan Documents, (b) waives any and all
personal rights under the law of any jurisdiction to object on any basis
(including, without limitation, inconvenience of forum) to jurisdiction or venue
within the State of North Carolina for the purpose of litigation to enforce this
Agreement, the Note or the other Loan Documents, and (c) agrees that service of
process may be made upon it in the manner prescribed in Section 8.01 for the
giving of notice to the Borrower. Nothing herein contained, however, shall
prevent the Bank from bringing any action or exercising any rights against any
security and against the Borrower personally, and against any assets of the
Borrower, within any other state or jurisdiction.
SECTION 8.12. Severability. If any provisions of this Agreement shall
be held invalid under any applicable laws, such invalidity shall not affect any
other provision of this Agreement that can be given effect without the invalid
provision, and, to this end, the provisions hereof are severable.
SECTION 8.13. Captions. Captions in this Agreement are for the
convenience of reference only and shall not affect the meaning or interpretation
of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the year and day first above written.
BORROWER:
THE SOURCE COMPANY
ATTEST:
____________________________ By:________________________________________
Assistant Secretary Title: Chairman and Chief Executive Officer
[CORPORATE SEAL]
<PAGE>
BANK:
Lending Office WACHOVIA BANK OF NORTH CAROLINA, N.A.
Wachovia Bank of North
Carolina, N.A. By:_________________________________________
230 N. Elm Street Title:______________________________________
Greensboro, North Carolina 27401
Exhibit 10.14
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT TO CREDIT AGREEMENT, made this Nineteenth day of December, 1996,
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 premises and the mutual covenants herein
and in the Credit Agreement contained, the parties agree as follows:
Section 6.06 contained on Page 29 of the Credit Agreement is hereby
amended and restated to read as follows:
Minimum Tangible Net Worth. From January 31, 1997 and at all times
thereafter, Tangible Net Worth will at no time be less than $2,500,000.00 plus
the sum of 50.0% of the cumulative Reported Net Income of the Borrower during
any period after January 31, 1997 (taken as one accounting period), calculated
quarterly but excluding from such calculations any quarter in which the Net
Income of the Borrower is negative.
Except as herein amended, the terms and provision 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:__________________________________
Chairman and Chief Executive Officer
ATTEST:
[CORPORATE SEAL] By:__________________________________
Secretary
WACHOVIA BANK OF NORTH CAROLINA, N.A.
By:__________________________________
Vice President
Exhibit 10.15
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT TO CREDIT AGREEMENT, made this Thirty First day of January, 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 premises and the mutual covenants herein
and in the Credit Agreement contained, the parties agree as follows:
The first sentence of Section 2.01 (a) of The Credit Agreement is
deleted in its entirety and the following is substituted therefor:
Subject to the terms and conditions set forth herein, you agree to make loans
and advances to us from time to time; provided, however, (i) the aggregate
outstanding principal amount of Receivable Based Advances shall at no time,
without your consent, exceed eighty-five percent (85%) of the net amount of
Eligible Current Receivables, plus seventy percent (70%) of the net amount of
Eligible Non-Current Receivables (as defined in the General Security Agreement);
and (ii) in no event shall the aggregate principal amount of Receivable Based
Advances at any time exceed Twelve Million, Five Hundred Thousand dollars
($12,500,000.00).
Except as herein amended, the terms and provision 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:__________________________________
Chairman and Chief Executive Officer
ATTEST:
[CORPORATE SEAL] By:__________________________________
Secretary
WACHOVIA BANK OF NORTH CAROLINA, N.A.
By:__________________________________
Vice President
Exhibit 11.1
<TABLE>
The Source Company
Calculation for Weighted Average Number of
Common Shares Outstanding
<CAPTION>
Weighted
Weighted Average
Common Common Average Number
Share Shares Days Number of Shares
Date Description Activity Outstanding Outstanding of Shares Outstanding
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
January 31, 1996 Balance 6,374,389 28 487,658
February 18, 1996 Issuance of 8,000 shares 8,000 6,382,389 96 1,674,069
June 3, 1996 Conversion of preferred stock 140,714 6,523,103 25 445,567
June 28, 1996 Issuance of 100,000 shares 100,000 6,623,103 31 560,973
July 29, 1996 Conversion of preferred stock 75,341 6,698,444 12 219,621
August 10, 1996 Issuance of 3,388 shares 3,388 6,701,832 20 366,220
August 30, 1996 Stock dividend on preferred stock 9,515 6,711,347 11 201,707
September 10, 1996 Issuance of 1,694 shares 1,694 6,713,041 1 18,342
September 11, 1996 Conversion of preferred stock 142,857 6,855,898 11 206,052
September 22, 1996 Conversion of preferred stock 64,285 6,920,183 66 1,247,902
November 27, 1996 Issuance of 10,050 shares 10,050 6,930,233 65 1,230,780
January 31, 1997 Balance 6,930,233 6,658,891
</TABLE>
Note: The effect of options granted under the 1995 Incentive Stock Option Plan
and the effect of the possible conversion of the 1996 Series 7% Convertible
Preferred Stock have not been reflected on this schedule due to their
anti-dilutive effect.
Exhibit 21.1
Subsidiaries of The Source Company
Subsidiary Incorporated in:
- ---------- ----------------
K-Sub, Incorporated Missouri
L-Sub, Incorporated Missouri
Magazine Marketing, Incorporated Ohio
Readers Choice, Incorporated Ohio
The Source-Canada Corporation Ontario, Canada
Consent of Independent Certified Public Accountants
The Source Company
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-16039) of The Source Company (the Company) of our
report dated March 27, 1997, relating to the consolidated financial statements
of the Company appearing in the Company's Annual Report on Form 10-KSB as of and
for the year ended January 31, 1997.
/s/ BDO Seidman, LLP
St. Louis, Missouri
April 29, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 284,921
<SECURITIES> 0
<RECEIVABLES> 12,922,738
<ALLOWANCES> 323,587
<INVENTORY> 0
<CURRENT-ASSETS> 13,524,665
<PP&E> 1,823,004
<DEPRECIATION> (1,191,668)
<TOTAL-ASSETS> 15,569,649
<CURRENT-LIABILITIES> 11,201,887
<BONDS> 0
0
0
<COMMON> 69,302
<OTHER-SE> 3,076,320
<TOTAL-LIABILITY-AND-EQUITY> 15,569,649
<SALES> 7,298,447
<TOTAL-REVENUES> 7,298,447
<CGS> 5,064,588
<TOTAL-COSTS> 2,904,372
<OTHER-EXPENSES> (1,745)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 311,737
<INCOME-PRETAX> (980,505)
<INCOME-TAX> 377,188
<INCOME-CONTINUING> (603,317)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (603,317)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
Exhibit 99.1
Cautionary Statement Identifying Important Factors that Could Cause the
Company's Actual Results to Differ from those Projected in Forward Looking
Statements
The following factors could affect The Source Company's actual results,
including its commission revenues, merchandising revenues, expenses and net
income, and could cause them to differ from any forward-looking statements made
by or on behalf of the Company:
o Competition among providers of many of the Company's products and services,
particularly the processing of incentive payment claims, is highly
competitive. The Company recognizes approximately 50 direct competitors,
all of which are closely held private companies. 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. Such innovations could materially and adversely affect the
Company's sales. Moreover, many of the 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.
Although, at present, the Company believes that it will experience only
limited competition from such sources, the Company believes that potential
competitors, particularly distributors, may be devoting resources to the
development of such services, which if successfully developed, could have a
material adverse effect on the Company's business.
o The Company is currently experiencing a period of rapid sales growth that
has placed, and could continue to place, a significant strain on the
Company's capital and human resources. [Moreover, the Company intends to
continue to pursue its expansion strategy which may include additional
acquisitions of companies which offer products and services compatible to
those of the Company. The Company maintains broad discretion to engage in
virtually any business transaction in virtually any manner it deems
appropriate. There can be no assurance that the Company's sales growth will
continue or that the Company will be able to adequately manage its
expansion or integrate any business which it may acquire, the failure of
either of which could have a material adverse effect on the Company.
o Substantially all of the Company's revenues are derived from the
commissions 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. There can be no assurance that magazine publishers will not
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.
<PAGE>
o The trading of the Company's securities on the Nasdaq SmallCap Market is
conditioned on the Company meeting certain asset, capital and surplus,
earnings and stock price tests. If the Company fails any of these tests,
the Common Stock may be delisted from trading on the Nasdaq SmallCap
Market. The effects of delisting include the limited release of the market
prices of the Company's securities and more limited news coverage of the
Company. Delisting may restrict investors' interest in the Company's
securities and materially adversely affect the trading market and prices
for such securities and the Company's ability to issue securities or to
secure financing. In addition to the risk of volatility of stock prices in
general, and possible delisting, low price stocks are subject to risks of
additional federal and state regulatory requirements and the potential loss
of effective trading markets. In particular, if the Common Stock were
delisted from trading on the Nasdaq SmallCap Market and the trading price
of the Common Stock was less than $5.00 per share, the Common Stock could
be subject to Rule 15g-9 under the Securities Exchange Act of 1934, as
amended, 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 Company's securities were delisted
and the trading price was less than $5.00 per share, the Company's
securities could also be deemed penny stocks under the Securities
Enforcement and Penny Stock Reform Act of 1990 which would require
additional disclosure in connection with trades in the Company's
securities, including the delivery of a disclosure schedule explaining the
nature and risk of the penny stock market. Such requirements could severely
limit the liquidity of the Company's securities and the ability of
stockholders to sell their securities in the secondary market.
o The Company's executive officers and directors beneficially own
approximately 65% of the outstanding shares of Common Stock. As a result,
those shareholders have voting control of the Company and are able 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.
o The Company's success depends on its ability to attract and retain
qualified managerial and technical personnel. Competition for such
personnel is keen and there can be no assurance that the Company will be
able to attract and retain the personnel necessary for the full development
of this business. Although the Company believes that the loss of no single
executive or employee will have a material adverse effect on the Company,
the Company relies on a number of key individuals for its continued
success, and the loss of such individuals could result in material adverse
effects on the Company's operations.
