AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1997
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under the
SECURITIES ACT OF 1933
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Name of Small Business Issuer in Its Charter)
Missouri 7374 43-1710906
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Identification Number)
Classification
Code Number)
W. Brian Rodgers
Chief Financial Officer
11644 Lilburn Park Road 11644 Lilburn Park Road 11644 Lilburn Park Road
St. Louis, Missouri 63146 St. Louis, Missouri 63146 St. Louis, Missouri 63146
(314) 995-9040 (314) 995-9040 (Address of Principal
(Address and Telephone (Name, Address and Telephone Place of Business
of Principal Number of Agent for Service) or Intended Place
Executived Offices) of Business)
Copies of all correspondence to:
Douglas J. Bates, Esq. Michael D. DiGiovanna, Esq.
Gallop, Johnson & Neuman, L.C. Parker Duryee Rosoff & Haft
101 South Hanley Road 529 Fifth Avenue
St. Louis, Missouri 63105 New York, New York 10017
(314) 862-1200 (212) 599-0500
Approximate Date of Proposed Sale to the Public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
<TABLE>
<PAGE>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
<CAPTION>
Amount Proposed maximum Proposed maximum
to be offering price aggregate offering Amount of
Title of each class of securities to be registered registered per share(a) price(a) registration fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value per share 2,300,000(b) $4.00 $9,200,000 $2,788
- ------------------------------------------------------------------------------------------------------------------------------------
Warrants to purchase Common Stock issued to 200,000 $4.40 $ 880,000 $ 267
Representative
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Common Stock $0.01 par value per share issuable 200,000 -- -- (d)
upon the exercise of the Representative's Warrants(c)
====================================================================================================================================
<FN>
(a) Estimated solely for purposes of calculating the amount of the
registration fee pursuant to Rule 457 promulgated under the Securities
Act of 1933, as amended.
(b) Includes 300,000 shares issuable upon exercise of the Representative's
over-allotment option.
(c) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares of Common Stock as may become issuable
as a result of any future anti-dilution adjustments made in accordance
with the terms of the Representative's Warrants.
(d) No separate registration fee required pursuant to Rule 457 promulgated
under the Securities Act of 1933, as amended.
</FN>
</TABLE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS [LOGO]
2,000,000 Shares
THE SOURCE INFORMATION MANAGEMENT COMPANY
Common Stock
--------------
The Source Information Management Company, a Missouri corporation (the
"Company"), is offering hereby 2,000,000 shares of its common stock (the "Common
Stock"). If the option granted to the Representative to cover over-allotments is
exercised, certain shareholders of the Company (the "Selling Shareholders") will
also offer shares of Common Stock pursuant to this Prospectus. The Company will
not receive any of the proceeds from the sale of Common Stock by the Selling
Shareholders.
The Common Stock is quoted on The Nasdaq SmallCap Market ("Nasdaq
SmallCap") under the symbol "SORC." On July 29, 1997, the last sale price of the
Common Stock, as reported on Nasdaq SmallCap, was $2.50 per share. See "PRICE
RANGE OF COMMON STOCK".
The securities offered hereby involve a high degree of risk. See "RISK
FACTORS" commencing on page 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price to Underwriting Proceeds to
Public Discounts(1) Company(2)
------ ------------ ----------
Per Share $ $ $
Total(3) $ $ $
(1) Does not include additional compensation payable to Donald & Co.
Securities Inc., acting as representative (the "Representative") of the
several underwriters identified elsewhere herein (the "Underwriters"),
in the form of a non-accountable expense allowance equal to 2% of the
gross proceeds of this offering. The Company has also agreed to sell
the Representative warrants to purchase up to 200,000 shares of Common
Stock at an exercise price of $ per share, subject to adjustment,
exercisable over a period of four years commencing one year from the
date hereof (the "Representative's Warrants") and to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). See
"UNDERWRITING."
(2) Before deducting expenses estimated to be $450,000, payable by the
Company, including the Representative's nonaccountable expense
allowance.
<PAGE>
(3) The Company and the Selling Shareholders have granted the
Representative an option exercisable within 45 days after the date of
this Prospectus (the "Over-Allotment Option") to purchase up to 300,000
additional shares of Common Stock, on the same terms and conditions as
set forth above, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to Public, Underwriting
Discounts, Proceeds to Company and Proceeds to Selling Shareholders
will be $ , $ , $ and $ , respectively. The Company will not receive
any of the proceeds from the sale of Common Stock by the Selling
Shareholders. See "PRINCIPAL AND SELLING SHAREHOLDERS" and
"UNDERWRITING."
The Common Stock is being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and subject
to approval of certain legal matters by their counsel and subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify this offering and to reject any order in whole or in part. It is expected
that delivery of the certificates evidencing the Common Stock will be made
against payment therefor on or about _____________, 1997 at the offices of
Donald & Co. Securities Inc., New York, New York or through the facilities of
the Depository Trust Company.
DONALD & CO. SECURITIES INC.
The date of this Prospectus is , 1997
<PAGE>
[MAP]
The Company is currently a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and furnishes its
stockholders with annual reports containing audited financial statements after
the close of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING TRANSACTIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
(IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ SMALL-CAP MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the notes related thereto, appearing
elsewhere in this Prospectus. Except as otherwise indicated, all information in
this Prospectus (other than the historical financial statements contained
herein) reflects the formation of the Company and subsequent acquisitions, as if
such transactions had occurred on February 1, 1995. See "BUSINESS Formation of
the Company." All share and per share data in this Prospectus (other than the
historical financial statements contained herein) (i) have been adjusted to give
effect to a 1-to-1.21 reverse stock split to occur as of the date of this
Prospectus and (ii) assume that the Representative's Over-Allotment Option, the
Representative's Warrants and all other options and warrants outstanding on the
date of this Prospectus will not be exercised.
The Company
For more than 20 years, The Source Information Management Company (the
"Company") and its predecessors have provided information gathering, consulting
and other information based services to operators of mass merchandise, grocery,
convenience and pharmacy stores located throughout the United States and eastern
Canada. Currently, the Company provides monitoring and documentation services to
approximately 730 retailers, such as Wal-Mart Stores, Inc., Kmart Corporation,
Target Stores, Inc., Food Lion, Inc., and W.H. Smith, Inc., in connection with
processing and collection of incentive payments from magazine publishers on
single copy sales of approximately 6,000 magazine titles offered in
approximately 70,000 stores. As an extension of this service, the Company
established its Advance Pay Program, under which the Company advances an agreed
upon percentage of the incentive payments due to the retailer from magazine
publishers. It then directly collects from the publishers the claims due to the
retailer. In fiscal 1996 and 1997, the Company advanced approximately $1,783,000
and $16,743,000 under the Advance Pay Program, respectively. In October, 1996,
the Company expanded its services and potential client base with the
introduction of the Periodical Information Network ("PIN"), an information
service in which the Company provides subscribing magazine publishers with
industry-wide, single copy magazine sales information in a user friendly format.
Based on conversations with representatives of magazine publishers, the Company
believes that publishers and advertisers perceive that PIN provides a valuable
basis on which to formulate marketing, distribution, advertising and other
policies.
The Company intends to continue to capitalize on its retailing
experience and extensive database of single copy magazine sales information.
Since the introduction of PIN, several leading publishers have subscribed,
including Time Distribution Services, ICD/The Hearst Corp. and Globe Marketing
Services. In addition, the Company is currently preparing to launch a new
administrative support service enabling publishers and retailers to efficiently
verify and correct price changes and other information contained in the
magazine's uniform product code ("UPC"). The Company also intends to introduce
services, comparable to those currently offered, in connection with
merchandising of high volume consumer products other than magazines, and the
processing and collection of incentive payments and cooperative advertising
payments offered with respect thereto. In June, 1997, the Company reached a
preliminary agreement to acquire a business engaged in the documentation,
processing and collection of sales incentive and cooperative advertising
payments offered to retailers of books.
3
<PAGE>
The Company's integrated software system is designed to efficiently and
accurately accumulate and manage sales data with respect to sales of low-cost,
high volume consumer products, allowing the Company's retailer clients to
optimize the effectiveness of their marketing effort. While the Company's
software system was developed to aid retailers in the collection of sales
incentive payments and the merchandising of magazines, it has been used in
connection with integrated magazine and confections displays and may be
adaptable for use in connection with most other consumer products, including
high volume items such as soft drinks and batteries. Such capability enables the
Company to provide consulting services to retailers, such as Kmart Corporation
which has engaged the Company to provide services with respect to the
reconfiguration of display fixtures in the checkout area of its stores,
including fixture design, product selection, plan-o- gramming, vendor
negotiation, vendor billing and collection, fixture prototype review and
supervision of fixture installation.
The Company was formed by the consolidation of two significant
providers, Display Information Systems Corporation ("DISC") and Periodical
Management and Marketing, Inc. ("PMM"), of information services to retailers of
magazines. The Company has expanded, and intends to continue to expand, through
the acquisition of businesses and technologies that address additional services
or products, market segments or geographic regions in which the Company is not
currently active and which would allow the Company to expand the services
offered to its clients, or its ability to support existing or planned services.
4
Client Services
The Company is dedicated to providing full information services to its
clients. Such services include the following:
Claim Submission. Through its software system, the Company offers to
assist retailers in accurately monitoring, documenting, claiming and
collecting publisher incentive payments. Based on information gathered
with respect to the titles and number of copies actually sold, the
Company prepares publisher supplied claim forms and submits the
documented claim for payment to the appropriate national distributor,
which acts as payment agent for the publisher. Typically, the Company
receives payment to the order of the retailer, records the payment and
forwards it to the retailer. The Company charges the retailer a
negotiated percentage of the cash collected. As an extension of its
claim submission service, the Company has established an Advance Pay
Program. Under this program, the Company advances an agreed upon
percentage of the incentive payments due the retailer from magazine
publishers. It then directly collects from the publishers the claims
due to the retailer. Service revenues earned under the Advance Pay
Program generally exceed those charged under the traditional method.
Periodical Information Network. The Company's large and sophisticated
database of magazine industry information has resulted in it becoming a
magazine information center which many companies in the magazine
industry use to formulate their publishing and distribution strategies.
PIN is a comprehensive system designed to use current computer
technologies, including CD ROM, to effectively manage all elements of
its database including information packaging and efficient inbound,
outbound access. The network provides access to periodically updated
historical information concerning the titles and quantity of each title
sold by retailer's for analysis purposes. Several leading publishers
have subscribed to PIN.
Space Design. Through its Display Group, the Company offers to assist
retailers in the placement of displays and the selection of titles to
optimize available display space, and thereby to maximize sales and
incentive payment revenues. Based on its knowledge of local consumer
preferences and the terms and conditions of publisher incentive payment
programs, the Company analyzes the retailer's store layout, customer
traffic patterns and available display alternatives. Thereafter, the
Company consults with its retailer client to develop an appropriate
display program.
5
<PAGE>
Marketing and Promotional Program. As part of its full-service
philosophy, the Company offers its clients advice and suggestions
concerning specialized marketing and promotional programs which may
include, for example, special mainline and checkout displays and
cross-promotions of magazines and products of interest to readers of
such magazines. Such services are offered to enhance single copy
magazine sales by the Company's clients, and thereby increase service
revenue due the Company in connection with the submission of incentive
payment claims; accordingly, no separate charge is made for these
services.
Administrative Support. The Company assists retailers to more
efficiently conduct their magazine sales operations through
computerized inventory control, automated pricing updates and
management reporting. For example, the Company is currently preparing
to launch a new administrative support service enabling publishers and
retailers to efficiently verify and correct price changes and other
information contained in the magazine's uniform product code ("UPC").
6
<PAGE>
The Offering
Securities Offered hereby........ 2,000,000 shares of Common Stock, $0.01 par
value per share
Common Stock Outstanding
Prior to the Offering(a)....... 5,825,784 shares of Common Stock, $0.01 par
value per share
Common Stock Outstanding
After the Offering............. 7,825,784 shares of Common Stock, $0.01 par
value per share
Use of Proceeds.................. To fund the expansion of the Company's
Advance Pay Program, the development of new
or enhanced products and services, the
acquisition by the Company of one or more
businesses and to fund working capital and
other general corporate activities
including the continued upgrade of the
Company's computer systems. See "USE OF
PROCEEDS."
Risk Factors..................... This offering involves a high degree of
risk. See "RISK FACTORS" beginning on page
7.
Nasdaq SmallCap Trading Symbol: SORC
- ----------
(a) Based on shares outstanding as of June 17, 1997, after giving
retroactive effect to the proposed reverse stock split. Includes 91,938
shares of Common Stock with respect to which the holder thereof has
been granted an option to sell such shares to the Company at a price of
$4.84 per share subject to adjustment. Excludes shares reserved for
issuance under the Company's stock option and other stock based plans,
upon conversion of the Company's 1996 Series 7% Cumulative Convertible
Preferred Stock, and upon exercise of the Over-Allotment Option, the
Representative's Warrants and certain options granted to financial
advisors of the Company. See "CAPITALIZATION" and "UNDERWRITING."
Any forward-looking statements set forth in this Prospectus are
necessarily subject to significant uncertainties and risks, including, but not
limited to those set forth in "RISK FACTORS." When used in this Prospectus, the
words "believes," "anticipates," "intends," "expects," and similar expressions
are intended to identify forward-looking statements. Actual results could be
materially different as a result of various possibilities, including increased
competition, significant changes in the marketing strategies of publishers, the
inability of the Company to successfully manage its expansion and the
availability of suitable acquisition candidates. Readers are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
7
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data should be read in conjunction with the
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
Fiscal Year Ended Three Months Ended
January 31, April 30,
----------- ---------
Statements of Operations Data: 1997 1996 1997 1996
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Service Revenue................................ $7,056,270 $7,195,176 $2,519,531 $1,424,030
Merchandise Revenue............................ 242,177 926,008 8,348 29,938
---------- --------- --------- ---------
Total Revenue................................ $7,298,447 $8,121,184 $2,527,879 $1,453,968
---------- ---------- --------- ---------
Gross Profit................................. $2,233,859 $3,711,962 $1,233,933 $ 249,130
Selling, General &
Administrative Expenses...................... 2,904,372 2,799,841 527,786 876,902
---------- ---------- --------- ----------
Operating Income (Loss)...................... $(670,513) $ 912,121 $ 706,147 $(627,772)
Other Expense, Net ............................ 309,992 314,127 215,020 39,321
---------- ---------- --------- ----------
Income (Loss) Before Income Taxes.............. $(980,505) $ 597,994 $ 491,127 $(667,093)
Net Income (Loss)............................ $(603,317) $ 191,994 $ 256,127 $(470,229)
Earnings (Loss) Per Share...................... $ (0.09) $ 0.03 $ 0.04 $ (0.07)
Weighted Average
Outstanding Shares........................... 6,658,891 6,084,542 7,154,635 6,379,900
Pro Forma(1) Earnings (Loss) Per Share......... $ (0.10) $ 0.04 $ 0.04 $ (0.09)
Pro Forma(1) Weighted Average
Outstanding Shares........................... 5,503,215 5,028,547 5,912,921 5,272,644
<CAPTION>
April 30, 1997
--------------
Balance Sheet Data: Actual Pro Forma(1) As Adjusted
- ------------------- ------ ------------ -----------
<S> <C> <C> <C>
Working Capital................................ $12,313,532 $12,313,532 $12,313,532
Total Assets................................... 15,890,358 15,890,358 15,890,358
Long-term debt, less current portion........... 9,701,166 9,701,166 2,801,166
Redeemable Preferred Stock..................... 522,506 0 0
Redeemable Common Stock ....................... 503,820 503,820 503,820
Stockholders' Equity........................... 3,401,746 3,924,252 10,824,252
<FN>
(1) Pro forma to reflect the proposed 1-to-1.21 reverse stock split and the
conversion of 5,600 shares of the Company's 1996 Series 7% Cumulative
Convertible Preferred Stock into 186,666 shares of Common Stock.
</FN>
</TABLE>
8
<PAGE>
RISK FACTORS
Prospective Investors should consider carefully the following factors,
in addition to the other information contained in this Prospectus, in evaluating
an investment in the Common Stock offered hereby.
Dependence on the Marketing and Distribution Strategy of Publishers
Substantially all of the Company's revenues are currently derived from
the service revenues earned in connection with the collection of payments owed
to the Company's retailer clients from magazine publishers under programs
designed by publishers to provide magazine retailers with an incentive to
increase single copy magazine sales. Although these incentive programs have been
offered as part of the publishers' overall marketing strategy for more than 20
years, the incentive programs are governed by short-term contracts and,
accordingly, magazine publishers are under no long-term contractual obligation
to continue the incentive programs in their present form or otherwise. Certain
magazine publishers have entered into experimental contracts with magazine
retailers under which selected magazines and other periodicals are distributed
directly to such retailers rather than indirectly though independent magazine
distributors. Such arrangements replace the traditional incentive payment
programs with discounted sale pricing. If magazine publishers increase the use
of direct retail distribution without incentive payment programs or otherwise
discontinue or significantly modify the incentive programs to which the
Company's services relate in a manner which is not compatible with the Company's
services, the Company's results of operations and financial condition may be
materially and adversely affected. See "BUSINESS-The Magazine Industry."
Risk Associated with the Advance Pay Program
The recent increases in revenue and profitability recorded by the
Company result, in part, from the admission of existing retailer clients to the
Advance Pay Program. The profitability of the Advance Pay Program is dependent,
in part, on (a) the difference between the service revenues collected by the
Company with respect to the Advance Pay Program and the interest paid by the
Company for borrowed funds advanced thereunder and (b) the length of the
collection period of the trade accounts receivable associated with the Advance
Pay Program. Interest rates applicable to borrowings made by the Company are
subject to fluctuation and any decrease in the spread between service revenues
collected and interest paid would have a negative effect on the Company's
results of operations and financial condition. The availability of funds under
the Company's credit facility is conditioned on the maintenance of certain
financial ratios. There can be no assurance that the Company will be able to
satisfy such conditions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital Resources."
Additionally, any increase in the average collection period for trade accounts
receivable associated with the Advance Pay Program will increase the Company's
interest expense and have a negative effect on the Company's results of
operations and financial condition.
9
<PAGE>
Furthermore, in connection with the Advance Pay Program, the Company
assumes the risk otherwise borne by the retailer client that magazine publishers
will refuse or be unable to pay the amount of incentive payments claimed. Based
on historical experience, the Company maintains a reserve of 2% of all claims
submitted against such refusal or inability to pay. However, if a prominent
magazine publisher files a petition in bankruptcy or otherwise seeks protection
from its creditors, such reserve may be inadequate and the results of operations
and financial condition of the Company could be materially and adversely
affected.
Possible Need for Additional Financing
To date, the Company has met its liquidity requirements through the
private sale of its equity securities and borrowings under existing credit
facilities. However, the Company will not be able to expand its Advance Pay
Program, in accordance with the Company's current plan without additional
financing. If the proceeds of this offering together with the Company's
currently available funds and internally generated cash flows are not sufficient
to satisfy its financing needs, the Company likely will seek additional funding
through increased bank borrowings and/or the public or private sale of debt or
equity securities. There can be no assurance that additional funds will be
available on a timely basis, on acceptable terms or at all, or that such funds,
if raised, would be sufficient to permit the Company to continue its expansion
as planned. If the proceeds of this offering and funding through any additional
public or private sales of debt or equity securities are inadequate, and
borrowings under the existing credit facility or a comparable replacement
thereof are not available, the Company may be required to curtail the Advance
Pay Program. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS-Liquidity and Capital Resources."
10
<PAGE>
Risk of Increased Competition
Competition among providers of many of the Company's products and
services, particularly the processing of incentive payment claims, is highly
competitive. While such competition is fragmented, the Company recognizes
approximately 32 direct competitors, all of which are closely-held private
companies. Based on its review of the industry and informal discussions with
magazine publishers and retailers, the Company believes that none of its direct
competitors have greater financial, technological, marketing and sales resources
than the Company. However, it is possible that certain services offered by the
Company could be performed directly by its retail customers or otherwise offered
or performed in the future by publishers, distributors or other organizations,
such as Nielsen IRI and Audit Bureau of Circulation. Many of such organizations
have greater financial, technological, marketing and sales resources than the
Company. Additionally, competitors may develop new or different service programs
which are perceived by customers to be of similar or superior quality at the
same or lower prices than the Company's services. There can be no assurance that
its present competitors or companies that choose to enter its marketplace in the
future will not exert significant competitive pressures on the Company resulting
in a deterioration of the business environment in which the Company operates,
including a decrease in the number of clients served by the Company and a
decrease in the service revenues chargeable by the Company. See
"BUSINESS-Competition."
Management of Expansion
The Company intends to continue to implement its expansion strategy
through the acquisition of one or more companies which offer products and
services compatible to those of the Company, some of which may involve products
or services with which management of the Company has little or no experience.
Such acquisitions also could continue to place a significant strain on the
Company's capital and human resources. There can be no assurance that the
Company will be able to adequately manage its expansion successfully, introduce
new services or products, or integrate any business which it may acquire, the
failure of any of which could have a material adverse effect on the Company.
Need to Manage New Service Introduction
The Company believes that its future growth is dependent, in part, on
its ability to anticipate the informational needs of existing and potential
clients and develop and introduce, in a timely manner, new services that
adequately address such needs. There can be no assurance that the Company will
be successful in developing, introducing and marketing new services. If the
Company is unable to introduce new services or if the Company's new services do
not receive sufficient market acceptance, the Company's revenues and results of
operations may be adversely affected.
Limited Trading Volume for Common Stock.
Although the Company's Common Stock is quoted on Nasdaq SmallCap, the
volume of shares of Common Stock actually traded, as reported by Nasdaq
SmallCap, averaged approximately 27,200 shares per week during the four-week
period ended July 18, 1997. There can be no assurance that a public market
having the desirable characteristics of depth, liquidity and orderliness, over
which neither the Company, its affiliates, nor any marketmaker has control will
develop or, if developed, will be sustained. Persons purchasing the securities
offered hereby may be unable to readily sell such securities at such time or
price as the security holder may desire.
Shares Eligible for Future Sale; Registration Rights
Of the 5,825,784 shares of Common Stock outstanding on June 17, 1997,
2,019,813 shares are currently eligible for sale to the public by persons who
are not "affiliates" of the Company without restriction except, in certain
cases, volume limitation. All of the remaining shares of Common Stock
outstanding are "restricted" within the meaning of Rule 144 under the Act, and
11
<PAGE>
may not be sold in the absence of registration under the Act or the exemption
therefrom. However, the Company, its executive officers and directors and
certain other of its shareholders, who as of June 17, 1997 held an aggregate of
4,037,537 shares of Common Stock, have agreed that they will not without the
prior consent of the Representative, sell or otherwise dispose of any shares of
Common Stock beneficially owned by them for a period of one year from the date
of this Prospectus. Thereafter, such persons are entitled to sell, without the
consent of the Representative, an increasing portion of the shares beneficially
owned by them, subject in some cases to the volume and other conditions of Rule
144.
Pursuant to authority granted by its Articles of Incorporation, the
Company has issued, and may issue additional shares of Common Stock or one or
more series of Preferred Stock. In addition, the Company has filed a
registration statement under the Securities Act to register an aggregate of
520,661 shares of Common Stock issued or reserved for issuance under the
Company's 1995 Employee Stock Option Plan and 41,322 shares issued or reserved
for issuance under the Company's Stock Award Plan. The holders of approximately
476,000 shares of Common Stock have the right to require the Company to file a
registration statement with respect to the sale of such shares. No prediction
can be made as to the effect, if any, that future sales of Common Stock or the
availability of such shares for sale will have on the market price of the Common
Stock prevailing from time to time. Sales of substantial amounts of Common
Stock, or the perception that such sales might occur, could adversely effect the
prevailing market price of the Common Stock. See "CAPITALIZATION" and "SHARES
ELIGIBLE FOR FUTURE SALE."
Continued Control By Management
Upon completion of this offering, the Company's executive officers and
directors will beneficially own approximately 48% (45% if the Over-Allotment
Option is exercised in full) of the outstanding shares of Common Stock. As a
result, the Company's executive officers and directors will have effective
voting control of the Company and the practical ability to elect all of the
Company's directors and determine the vote on any matter being voted on by the
Company's shareholders, including any merger, sales of assets or other change of
control of the Company. The Company's Articles of Incorporation and Bylaws do
not provide for cumulative voting in the election of directors. See "PRINCIPAL
AND SELLING SHAREHOLDERS" and "CERTAIN PROVISIONS OF THE ARTICLES OF
INCORPORATION AND BYLAWS."
Dependence on Key and Other Personnel
The Company believes that its success is dependent, in part, on the
efforts of its key executives, including S. Leslie Flegel and William H. Lee.
The Company has entered into employment agreements with all of its key
executives except W. Brian Rodgers and Messrs. Flegel and Lee. Although the
Company believes that the loss of no single executive will have a material
adverse effect on the Company, certain events, many of which are beyond the
control of the Company, could result in the loss of the services of such
executives. The Company has procured and intends to maintain policies of
insurance on the lives of certain members of its senior management, including
Messrs. Flegel and Lee. See "MANAGEMENT."
12
<PAGE>
No Dividends With Respect to Common Stock
The Company currently anticipates that it will retain all of its future
earnings, if any, for use in the expansion and operation of its business, and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. There can be no assurance that the Company will pay cash
dividends at any time with respect to the Common Stock, or that the failure to
pay dividends for a period of time will not adversely affect the market price
for the Company's Common Stock. See "PRICE RANGE OF COMMON STOCK AND DIVIDEND
POLICY."
Anti-Takeover Affects of Articles of Incorporation and Bylaws
The Company's Board of Directors has authority to issue up to 2,000,000
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions thereof, including voting rights, without any
further vote or action by the Company's shareholders. The voting and the rights
of the holders of Common Stock will be subject to and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with obtaining necessary capital resources and other corporate
purposes, could have the affect of delaying, deferring or preventing a change in
control of the Company. The Company has no current arrangements to issue any
additional shares of preferred stock. See "DESCRIPTION OF CAPITAL STOCK." In
addition, the Company's Articles of Incorporation and Bylaws include certain
provisions providing for the staggered election of directors and restrictions on
the ability of shareholders to call special meetings of shareholders. See
"CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS." The Company is
also subject to the Missouri Takeover Bid Disclosure Act, which under certain
circumstances may prohibit a business combination between the Company and a
shareholder owning 20% or more of the outstanding voting power of the Company.
Such provisions could have the affect of delaying, deferring or preventing a
change in control of the Company.
13
<PAGE>
Representative's Warrants
The Company will sell to the Representative and/or its designees, for
nominal consideration, the Representative's Warrants to purchase from the
Company up to 200,000 shares of Common Stock. The Representative's Warrants are
exercisable for a period of four years commencing on the first anniversary of
the date of this Prospectus, at an exercise price equal to $_____________ per
share. For the life of the Representative's Warrants, the holders are given, at
nominal cost, the opportunity to profit from a rise in the market price for the
securities of the Company without assuming the risk of ownership, with a
resulting dilution in the interest of other security holders. As long as the
Representative's Warrants remain unexercised, the terms under which the Company
could obtain additional capital may be adversely affected. Moreover, the holders
of the Representative's Warrants may be expected to exercise them at a time when
the Company would, in all likelihood, be able to obtain any needed capital by a
new offering of its securities on terms more favorable than those provided by
the Representative's Warrants. Additionally, if the holders of the
Representative's Warrants should exercise their registration rights to effect a
distribution of the Representative's Warrants or underlying securities, the
Representative, prior to and during such distribution, will be unable to make a
market in the Company's securities and will be required to comply with other
limitations on trading set forth in Rules 101, 103, and 104 of Regulation M
promulgated under the Exchange Act. Such rules restrict the solicitation of
purchasers of a security when a person is interested in the distribution of such
security and also limit market making activities by an interested person until
the completion of the distribution. If the Representative must cease making a
market, the market and market price for such securities may be adversely
affected and the holders of such securities may be unable to sell such
securities. See "UNDERWRITING."
Representative's Influence on the Market
A significant amount of the Common Stock offered hereby may be sold to
customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of shares of Common Stock through or with
Representative. If it participates in the market, the Representative may exert a
dominating influence on the market for the shares of Common Stock offered
hereby. Such market making activity may be discontinued at any time. The price
and liquidity of the shares may be significantly effected by the degree, if any,
of the Representative's participation in such market. See "DESCRIPTION OF
CAPITAL STOCK" and "UNDERWRITING."
14
<PAGE>
USE OF PROCEEDS
After deducting the estimated expenses of this offering, the net
proceeds from the sale by the Company of the shares of Common Stock offered
hereby are estimated to be approximately $6.9 million ($8.0 million if the
Representative's Over-Allotment Option is exercised in full). Of these net
proceeds approximately $5.0 million will be used to expand the Company's Advance
Pay Program, approximately $1.4 million will be used for the development of new
or enhanced products and services, approximately $0.5 million will be made
available to fund the Company's acquisition of one or more businesses, and the
balance will be used for working capital and general corporate purposes,
including the continued upgrade of the Company's computer systems. Pending the
use of the net proceeds from the sale of the shares of Common Stock as described
above such funds will be used to temporarily reduce the principal balance under
the Company's credit facility. Such credit facility provides for the
availability of up to $12,500,000 of borrowings until termination by Wachovia
Bank on not less than 13 months prior notice. At April 30, 1997, the outstanding
principal balance under this credit facility was $9,696,000, the effective
interest rate thereon was 9.1875% and the unused availability thereunder was
approximately $2,804,000. After application of the net proceeds of this offering
to the temporary repayment of the outstanding principal balance on its credit
facility, the Company intends to make additional borrowings under the credit
facility for the foregoing purposes.
The foregoing represents the Company's present intentions for the use
of the proceeds of this offering based on its currently contemplated operations,
business plan and currently prevailing economic and industry conditions. The
Company's business plan contemplates that the Company may acquire businesses or
introduce additional products and services. Although the Company has had and
will continue to have discussions with potential acquisition candidates it does
not have any present agreements or understandings with respect to any
significant acquisitions. Changes in the proposed expenditures may be made in
response to, among other things, changes in the Company's plans and its future
revenues and expenditures, as well as changes in general industry conditions and
technology.
The Company believes that the net proceeds of this offering, cash flow
from operations, trade credit and existing lines of credit will be sufficient to
meet its immediate cash needs and finance its plans for expansion for the
indefinite future, and in any case for not less than twelve months from the date
of this Prospectus. This belief is based upon certain assumptions regarding the
Company's business and cash flow as well as prevailing industry and economic
conditions. The Company's capital requirements may vary significantly, depending
on how rapidly management seeks to expand the business and the expansion
strategies elected. Accordingly, the Company may, in the future, require
additional financing to continue to expand its business. There is no assurance
15
<PAGE>
that the Company will be successful in obtaining additional financing, if
required, on favorable terms, or at all. If the Company were unable to obtain
additional financing, its ability to meet its current plan for expansion could
be materially and adversely affected. See "CAPITALIZATION," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
PRICE RANGE OF COMMON STOCK
From June 22, 1995 until February 12, 1996, the Company's Common Stock
was quoted on the Nasdaq OTC Bulletin Board. Beginning on February 12, 1996, the
Common Stock was quoted on the Nasdaq SmallCap under the symbol "SORC." The
following table sets forth, for the periods indicated, the high and low closing
bid prices for the Common Stock as reported by the OTC Bulletin Board and the
Nasdaq SmallCap, as applicable.
<TABLE>
<CAPTION>
Actual Pro forma(1)
------ ------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Fiscal 1996
Second Quarter (beginning June 22, 1995) $7.00 $6.00 $ 8.47 $7.26
Third Quarter $8.50 $6.25 $10.29 $7.56
Fourth Quarter $7.50 $3.50 $ 9.08 $4.24
Fiscal 1997
First Quarter $5.75 $4.38 $ 6.96 $5.30
Second Quarter $4.75 $4.00 $ 5.75 $4.84
Third Quarter $4.75 $2.63 $ 5.75 $3.18
Fourth Quarter $3.25 $2.25 $ 3.93 $2.72
Fiscal 1998
First Quarter $2.88 $2.13 $ 3.48 $2.58
<FN>
(1) Pro forma to reflect the proposed 1-to-1.21 reverse stock split.
</FN>
</TABLE>
On July 29, 1997, the last sale price for the Common Stock as reported
by the Nasdaq SmallCap was $2.50 per share. As of June 17, 1997, there were 183
holders of record of the Common Stock.
DIVIDEND POLICY
During the last two years, the Company has not declared or paid any
cash dividends on its Common Stock. The Board of Directors presently intends to
retain all of its earnings, if any, for the development of the Company's
business for the foreseeable future. The declaration and payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon a number of factors, including among others,
future earnings, operations, capital requirements, the general financial
condition of the Company and such other factors that the Board of Directors may
deem relevant.
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as
of April 30, 1997, (ii) pro forma to reflect the conversion of 5,600 shares of
the Company's 1996 7% Convertible Preferred Stock into 186,666 shares of Common
Stock, effected in July, 1997 and the proposed 1-to-1.21 reverse stock split as
if such transactions had occurred on April 30, 1997, and (iii) pro forma as
adjusted to reflect the sale by the Company of the shares of Common Stock
offered hereby and the application of the estimated net proceeds therefrom. This
table should be read in conjunction with the financial statements of the
Company, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "DESCRIPTION OF CAPITAL STOCK" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
April 30, 1997
--------------
Pro Forma
Actual Pro Forma As Adjusted
------ --------- -----------
<S> <C> <C> <C>
Long-term debt (less current portion)................................. 9,701,166 9,701,166 2,801,166(a)
1996 Series 7% Cumulative Convertible Preferred Stock,
par value $0.01 per share, 5,600 shares outstanding
actual and zero pro forma and pro forma as adjusted .................. 522,506 - -
Redeemable Common Stock, par value $0.01 per share
111,245 shares outstanding actual, 91,938 shares pro
forma and pro forma as adjusted....................................... 503,820 503,820 503,820
Stockholders' equity:
Common Stock, par value $0.01 per share 6,937,954 shares
outstanding actual, 5,888,116 shares pro forma, and
7,888,116 shares outstanding pro forma as adjusted ................... 69,379 58,881 78,881
Additional paid-in capital ........................................... 2,764,646 3,297,650 10,177,650
Retained earnings ................................................... 567,721 567,721 567,721
Total stockholders' equity .................................. 3,401,746 3,924,252 10,824,252
Total capitalization ................................................. 14,129,238 14,129,238 14,129,238
<FN>
(a) Assumes the net proceeds of this offering will be applied to the temporary
reduction in the outstanding principal balance of the Company's credit
facility resulting in total availability thereunder of $9,704,000.
</FN>
</TABLE>
17
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data as of and for the periods presented below have been
derived from the financial statements of the Company. The financial statements
of the Company as of and for the fiscal years ended January 31, 1997 and 1996
have been audited by BDO Seidman, LLP, and its report thereon is included
elsewhere herein. The balance sheet data as of April 30, 1997 and the statement
of operations data as of and for the three months ended April 30, 1997 and 1996
have been derived from unaudited financial statements, which have been prepared
on the same basis as the audited financial statements and in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the information set forth herein.
Results of operations for the three months ended April 30, 1997 are not
necessarily indicative of the results to be expected for the year ending January
31, 1998. The selected financial data should be read in conjunction with the
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
18
<TABLE>
<CAPTION>
Fiscal Year Ended Three Months Ended
January 31, April 30,
Statements of Operations Data: 1997 1996 1997 1996
--------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Service Revenues............................ $7,056,270 $7,195,176 $2,519,531 $1,424,030
Merchandise Revenues........................ 242,177 926,008 8,348 29,938
--------- ---------- ------- ---------
$7,298,447 $8,121,184 $2,527,879 $1,453,968
Cost of Service Revenues.................... 4,862,207 3,859,409 1,261,226 1,204,838
Cost of Merchandise Sold.................... 202,381 549,813 32,720 -
--------- --------- -------- ----------
$2,233,859 $3,711,962 $1,233,933 $249,130
Selling, General & Administrative
Expenses ............................. 2,904,372 2,799,841 527,786 876,902
--------- ---------- --------- ----------
Operating Income (Loss)................... $ (670,513) $ 912,121 $ 706,147 $ (627,772)
Other Income (Expense)...................... (309,992) (314,127) (215,020) (39,321)
----------- ---------- ----------- ----------
Income (Loss) Before Income Taxes......... $ (980,505) $ 597,994 $ 491,127 $ (667,093)
Income Tax (Benefit) Expense.............. (377,188) 406,000 235,000 (196,864)
------------ ---------- --------- ----------
Net Income (Loss)......................... $ (603,317) $ 191,994 $ 256,127 $ (470,229)
Earnings (Loss) per Share................... $(0.09) $0.03 $0.04 $0.07
Pro Forma(1) Net Income per Share.......... N/A $0.05 N/A N/A
<CAPTION>
January 31, April 30, 1997
----------- --------------
Balance Sheet Data: 1997 1996 Actual Pro Forma(2) As Adjusted
-------- -------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Working Capital............................. $ 2,322,778 $ 1,305,679 $12,313,532 $12,313,532 $12,313,532
Total Assets ............................. 15,569,649 5,346,384 15,890,358 15,890,358 15,890,358
Revolving Line of Credit.................... 7,124,000 1,713,715 - - -
Long-term debt, less current portion........ 22,814 32,341 9,701,166 9,701,166 2,801,166
Redeemable Stock............................ 1,026,326 - 1,026,326 503,820 503,820
Stockholders' Equity........................ 3,145,622 2,017,626 3,401,746 3,924,252 10,824,252
<FN>
(1) Pro forma data is presented to reflect a provision for income taxes as if
DISC, a S Corporation prior to the merger between DISC and PMM, had not
been a S Corporation.
(2) Pro forma to reflect the proposed 1-to-1.21 reverse stock split and the
conversion of 5,600 shares of the Company's 1996 Series 7% Cumulative
Convertible Preferred Stock into 186,666 shares of Common Stock.
</FN>
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
For more than 20 years, The Source Information Management Company (the
"Company") and its predecessors have provided information gathering, consulting
and other information based services to operators of mass merchandise, grocery,
convenience and pharmacy stores located throughout the United States and eastern
Canada. Currently, the Company provides monitoring and documentation services to
approximately 730 retailers, such as Wal-Mart Stores, Inc., Kmart Corporation,
Target Stores, Inc., Food Lion, Inc., and W.H. Smith, Inc., in connection with
processing and collection of incentive payments from magazine publishers on
single copy sales of approximately 6,000 magazine titles offered in
approximately 70,000 stores. As an extension of this service, the Company
established its Advance Pay Program, under which the Company advances an agreed
upon percentage of the incentive payments due to the retailer from magazine
publishers. It then directly collects from the publishers the claims due to the
retailer. In fiscal 1996 and 1997, the Company advanced approximately $1,783,000
and $16,743,000 under the Advance Pay Program, respectively. In October, 1996,
the Company expanded its services and potential client base with the
introduction of the Periodical Information Network ("PIN"), an information
service in which the Company provides subscribing magazine publishers with
industry-wide, single copy magazine sales information in a user friendly format.
Based on conversations with representatives of magazine publishers, the Company
believes that publishers and advertisers perceive that PIN provides a valuable
basis on which to formulate marketing, distribution, advertising and other
policies.
A majority of the Company's revenues are derived from service fees
earned in connection with the collection of incentive payments owed to the
Company's retailer clients from magazine publishers. Most such incentive payment
programs offer the retailer a cash rebate, equal to a percentage of the
retailer's actual net sales of the publisher's titles, which is payable
quarterly upon submission of a properly documented claim. Under agreements with
its retailer clients, the Company gathers sales data, submits claims for
payment, collects payments and receives a percentage of the aggregate payments
collected on the retailers' behalf. Claims for incentive payments are generally
submitted to the publishers quarterly based on actual net sales of the
publishers' titles recorded in the previous calendar quarter. Except in
connection with its Advance Pay Program, the Company does not guarantee to its
retailer clients any payments due to the client from magazine publishers, and
accordingly, does not assume any credit risk associated with such incentive
payments. In substantially all the contracts under the Advance Pay Program the
Company bears the risk of uncollectibility associated with collecting payments
from publishers. To date, the reserve maintained by the Company as an allowance
for doubtful accounts in the amount of approximately 2% of accounts receivable
has been adequate to satisfy any losses incurred by the Company from
uncollectible accounts receivable.
Under both the standard arrangement and the Advance Pay Program,
service revenues are recognized at the time claims for incentive payments are
substantially completed for submission to the publishers based on the amount
claimed, less an estimated reserve necessary to maintain all allowance for
doubtful accounts of approximately 2% of trade accounts receivable. However,
under the standard arrangement, invoices for services provided by the Company in
connection with the claim process are not issued until the Company receives
settlement of the claim. Under the Advance Pay Program, the customer is not
invoiced for the service fee, which is the difference between the claim and the
advance amount.
20
<PAGE>
Results of Operations
The following table sets forth, for the periods presented, certain
information relating to the operations of the Company expressed as a percentage
of Total Revenues:
<TABLE>
<CAPTION>
Three Months Ended April 30, Fiscal Year Ended January 31,
---------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service Revenues 99.7% 97.9% 96.7% 88.6%
Merchandise Revenues 0.3% 2.1% 3.3% 11.4%
100.0% 100.0% 100.0% 100.0%
Cost of Service Revenues 49.9% 82.9% 66.6% 47.5%
Cost of Merchandise Sold 1.3% 0.0% 2.8% 6.8%
48.8% 17.1% 30.6% 45.7%
Selling, General &
Administrative Expense 20.9% 60.3% 39.8% 34.5%
Operating Income (Loss) 27.9% (43.2)% (9.2)% 11.2%
Interest Expense, Net (7.7)% (2.3)% (3.9)% (1.2)%
Other Income (Expense), Net (0.8)% (0.4)% (0.4)% (2.7)%
Income (Loss) Before
Income Taxes 19.4% (45.9)% (13.4)% 7.4%
Net Income (Loss) 10.1% (32.3)% (8.3)% 2.4%
</TABLE>
Three Months Ended April 30, 1997 Compared to Three Months Ended April 30, 1996
Service Revenues
Increased retailer participation in the Advance Pay Program, the
acquisitions of Magazine Marketing, Inc. and Readers Choice, Inc. and the
implementation of PIN during the third quarter of fiscal year 1997 contributed
to an increase in service revenue of approximately $1,095,000 during the first
quarter of fiscal 1998. The increase consisted of approximately $817,000 of
claims, PIN and Advance Pay Program revenue over the comparable period in fiscal
1997. Also, space design revenue increased from $32,000 for the quarter ended
April 30, 1996 to $310,000 for the quarter ended April 30, 1997. Currently, the
Company is negotiating flat fee arrangements; however, historically, space
design revenues have been recognized as front end display manufacturers ship the
displays to the retailers, the timing of which is not within the Company's
control. Space design revenues have historically fluctuated significantly
depending upon a variety of factors including the number and magnitude of
reconfiguration programs undertaken by the Company's retailer client and the
timely shipping of displays by manufacturers. As a result, variations in the
timing and amounts of space design revenues could have a material adverse effect
on the Company's quarterly operating results.
21
<PAGE>
Merchandise Revenues and Cost of Merchandise Sold
As a result of its relationships with the leading retailers in the
United States, the Company has had opportunities from time to time to purchase
merchandise, such as gift and greeting cards, caps and other leisure time
products for resale to its retailer clients. However, management has decided to
de-emphasize this portion of its business in order to dedicate more resources to
its core services. The revenues derived from merchandising sales are declining
while the inventory is being liquidated.
Cost of Service Revenues and Selling, General and Administrative Expense ("Total
Costs")
Total Costs decreased approximately $293,000. Bad debt expense
decreased $151,000 causing the largest decrease in Total Costs. Travel and
entertainment expenses decreased $23,000 and $16,000, respectively. Life
insurance expense decreased $26,000 due to the surrender of certain policies
during the fourth quarter of fiscal year 1997. Contract labor and data entry
costs decreased $120,000 as a result of permanent hirings. However, these
decreases were partially offset by increased labor costs. Depreciation and
amortization increased $32,000 due to business acquisitions and capital
expenditures that occurred subsequent to the first quarter of fiscal 1997.
Interest Expense
Interest Expense increased $160,000 due to increased borrowings
necessary to fund the Advance Pay Program.
Income Tax Expense (Benefit)
The effective income tax rate for the quarter ended April 30, 1997 was
47.8%. This rate varied from the statutory rate due to expenses not deductible
for income tax purposes. Such non-deductible expenses include meals and
entertainment, goodwill amortization, and officers' life insurance premiums.
Fiscal 1997 Compared to Fiscal 1996
Service Revenues
Increased retailer participation in the Advance Pay Program, the
acquisition of Magazine Marketing, Inc. and Readers Choice, Inc. and the
implementation of PIN during the third quarter of fiscal year 1997 contributed
to an increase in revenue from claims submission services of approximately
$468,000. However, space design revenue decreased from $1,243,000 in 1996 to
$636,000 in 1997 causing an overall decrease in Service Revenues of $139,000.
Currently, the Company is negotiating flat fee arrangements; however,
historically, space design revenues have been recognized as front end display
manufacturers ship the displays to the retailers, the timing of which is not
within the Company's control. Based on management's understanding of the
anticipated shipment dates for proposed and planned programs expected to occur
during the next year, space design revenue should exceed both 1996 and 1997
levels.
Merchandise Revenues
As a result of its relationships with the leading retailers in the
United States, The Company has had opportunities from time to time to purchase
merchandise, such as gift and greeting cards, caps and other leisure time
products for resale to its retailer clients. However, management has decided to
de-emphasize this portion of its business in order to dedicate more resources to
its core services. Thus, Merchandise Revenues decreased $684,000 from $926,000
in 1996 to $242,000 in 1997.
Cost of Merchandise Sold
The Cost of Merchandise Sold decreased primarily as a result of
de-emphasizing this portion of the business as noted above. Comparing the gross
profit percentage associated with Merchandise Revenues to the prior year is not
considered meaningful by management since a wide variety of items with varying
profit margins have been purchased and resold.
22
<PAGE>
Cost of Service 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.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128). The new standard simplifies the standards for computing earnings per
share and requires presentation of two new amounts, basic and diluted earnings
per share. The Company will be required to retroactively adopt this standard
when it reports its operating results for the fiscal quarter and year ending
January 31, 1998. When the Company adopts SFAS No. 128, it expects no changes in
its previously reported Primary and Fully Diluted earnings per share. In
addition, SFAS No. 128 is expected to have no effect on earnings per share for
the three months ended April 30, 1997 and 1996 if it had been adopted.
Liquidity and Capital Resources
The Company's primary cash requirements are for funding the Advance Pay
Program and selling, general and administrative expenses (particularly salaries
and travel) incurred in connection with the solicitation of new clients and the
maintenance of existing accounts. Historically, the Company has financed its
business activities through short-term borrowings under available lines of
credit, cash flow from operations and through the issuance of equity securities.
Net cash used by operating activities increased from $872,000 during
the quarter ended April 30, 1996 to $2,692,000 during the quarter ended April
30, 1997. During the quarter ended April 30, 1997, $2,432,000 was used to cover
checks drawn against future deposits at January 31, 1997 and net cash used for
the Advance Pay Program was approximately $287,000.
The average collection period for the three month period ended April
30, 1997 was 127 days compared to 122 days for the three month period ended
April 30, 1996. The collection periods were calculated as follows: 365
days/(Revenues/Average Accounts Receivable), where accounts receivable includes
all trade accounts receivable, but only the commission portion of amounts due
from publishers in association with the Advance Pay Program.
23
<PAGE>
The Company is primarily engaged in the business of providing services
to its retailer clients; therefore, its capital expenditure requirements are
minimal. At April 30, 1997, the Company had no outstanding material commitments
for capital expenditures.
The Company has a credit agreement that provides for a revolving loan
of up to $12,500,000 with Wachovia Bank of North Carolina, N.A. ("Wachovia
Bank"). Wachovia Bank has the right to terminate the agreement upon not less
than thirteen months prior written notice. Borrowings bear interest at a rate
related to the monthly LIBOR index rate plus a percentage ranging from 2.5% to
3.5% depending upon the ratio of funded debt to earnings before interest, taxes,
depreciation and amortization. Borrowings are secured by personal guarantees of
Messrs. S. Leslie Flegel and William H. Lee and their spouses and by a security
interest in substantially all of the Company's assets including receivables,
inventory, equipment, goods and fixtures, software, contract rights, notes, and
general intangibles. Under the Credit Agreement, the Company is required to
maintain certain financial ratios. Although the Company was not in compliance at
January 31, 1997, with the requisite ratio of Earnings Before Interest, Lease
Obligations and Taxes to Interest Expense and Lease Obligations ("EBILT/IELO")
or the requisite ratio of Funded Debt to Total Capitalization ("Debt/Cap"), it
received a written temporary waiver of such ratios from Wachovia Bank.
Subsequently, the Credit Agreement was amended to provide the Company with
greater flexibility with respect to the maintenance of certain financial ratios
including the EBILT/IELO and Debt/Cap ratios. At April 30, 1997, the Company was
in compliance with all financial ratios imposed by the Credit Agreement, as
amended, and expects to remain in compliance through October 31, 1997. After
October 31, 1997, the financial ratios become increasingly more stringent and
there can be no assurance that the Company will be able to meet such financial
ratios after such date. Although the Company believes it is unlikely, Wachovia
Bank may decide to enforce any or all of its remedies, including declaring the
loan immediately due and payable, if the financial ratios are not maintained.
Such action would have a material adverse effect on the financial condition of
the Company and would require the Company to curtail the Advance Pay Program.
At April 30, 1997, the Company's total long-term debt obligations were
$9,772,000. Of such amount, $71,000 matures in the next 12 months. The Company
anticipates that the funds necessary to satisfy these obligations will be
derived primarily from cash flows from operations.
On May 30, 1997, the Company acquired all of the stock of Mike Kessler
and Associates, Inc. ("MKA") for $2,500,000 of which $350,000 was paid upon
closing. The balance, which is due January 5, 1998 with interest at 6.25%, is
expected to be financed by operations and/or an additional loan from Wachovia
Bank. Wachovia Bank issued a standby letter of credit for $2,231,912 for the
benefit of the former owner of MKA covering the period from May 30, 1997 through
January 31, 1998. The seller operated MKA as a business engaged in the
collection of retail display allowances for retail store chains. The Company
intends to continue the operation of such business and believes it can continue
servicing the current customer base.
The Company will not be able to expand its operations, particularly its
Advance Pay Program, in accordance with the Company's current plan without
additional financing. If the proceeds of this offering together with the
Company's currently available funds and internally generated cash flows are not
sufficient to satisfy its financing needs, the Company likely will seek
additional funding through increased bank borrowings and/or the public or
private sale of debt or equity securities. There can be no assurance that
additional funds will be available on a timely basis, on acceptable terms or at
all, or that such funds, if raised, would be sufficient to permit the Company to
continue its expansion as planned. If the proceeds of this offering and funding
through additional public or private sale of debt or equity securities are
inadequate, and borrowings under the existing credit facility or a comparable
replacement thereof are not available, the Company may be required to curtail
the Advance Pay Program.
24
<PAGE>
BUSINESS
Overview
For more than 20 years, The Source Information Management Company (the
"Company") and its predecessors have provided information gathering, consulting
and other information based services to operators of mass merchandise, grocery,
convenience and pharmacy stores located throughout the United States and eastern
Canada. Currently, the Company provides monitoring and documentation services to
approximately 730 retailers, such as Wal-Mart Stores, Inc., Kmart Corporation,
Target Stores, Inc., Food Lion, Inc., and W.H. Smith, Inc., in connection with
processing and collection of incentive payments from magazine publishers on
single copy sales of approximately 6,000 magazine titles offered in
approximately 70,000 stores. As an extension of this service, the Company
established its Advance Pay Program, under which the Company advances an agreed
upon percentage of the incentive payments due to the retailer from magazine
publishers. It then directly collects from the publishers the claims due to the
retailer. In fiscal 1996 and 1997, the Company advanced approximately $1,783,000
and $16,743,000 under the Advance Pay Program, respectively. In October, 1996,
the Company expanded its services and potential client base with the
introduction of the Periodical Information Network ("PIN"), an information
service in which the Company provides subscribing magazine publishers with
industry-wide, single copy magazine sales information in a user friendly format.
Based on conversations with representatives of magazine publishers, the Company
believes that publishers and advertisers perceive that PIN provides a valuable
basis on which to formulate marketing, distribution, advertising and other
policies.
Formation of the Company
The Company was organized in 1995 by the consolidation of two
significant providers of services to retailers of magazines and other
periodicals. Since its organization the Company has expanded through the
acquisition of businesses and technologies that address additional services or
products, market segments or geographic regions in which the Company is not
currently active and which would allow the Company to expand the services
offered to its clients, or its ability to support existing or planned services.
In 1995, the Company acquired the business of Dixon's Modern Marketing Concepts,
Inc. and Tri-State Stores, Inc., both of Chicago Heights, Illinois. In 1996, the
Company again expanded its presence in the upper Midwest by acquiring the
businesses of Magazine Marketing, Inc. of Canton, Ohio and Readers Choice, Inc.,
a subsidiary of United Magazine Company located in Columbus, Ohio. In May 1997,
the Company acquired the business of Mike Kessler and Associates, Inc. of Fair
Lawn, New Jersey.
25
<PAGE>
The Magazine Industry
Based on its knowledge of the industry and discussions with magazine
publishers and retailers, management of the Company believes that magazine
publishers are placing an increasing degree of importance on revenues derived
from single copy newsstand sales and that the emphasis placed on single copy
sales by publishers will continue to increase as: (i) mailing costs continue to
rise with respect to subscription distribution; and (ii) magazine advertisers
continue to value the increased target market accuracy achieved through single
copy sales.
The distribution of the approximately 6,000 magazine titles currently
published for single copy sales on a national basis is dominated by six national
distributors, which distribute to over 200 local independent distributors, which
in turn supply copies to magazine retailers. Although the nature of the
businesses in which magazine retailers are engaged is wide ranging, the largest
volumes of single copy sales historically are achieved by grocery retailers and
mass merchandise stores. The primary function of the retailer is the display of
available titles in two store locations, at a dedicated section called a
"mainline display" and at displays located within the merchandise checkout area.
Because magazines are frequently purchased on impulse, publishers increasingly
compete for display spaces, referred to as "pockets," at the checkout.
National distributors receive a brokerage fee based on sales and
distribution to local independent distributors. Local independent distributors
purchase copies at a discount to the suggested retail price and resell to
retailers, also at a discount to the suggested retail price. All unsold copies
are returnable by the retailer for full credit to all parties in the
distribution chain, such that payments are made only with respect to copies
actually sold. All accounting for copies is done by the local independent
distributors which invoice for distributed copies, credit retailers for returns
and credit national distributors for sales through a computer-assisted single
entry information system.
26
<PAGE>
To provide further incentives to retailers to prominently display their
respective titles, publishers typically enter into Retail Display Allowance
("RDA") programs under which the retailer is entitled to receive, on a quarterly
basis, a cash rebate directly from the publisher equal to a percentage of the
retailer's actual net sales of the publisher's titles upon submission of a
properly documented claim. Conversely, certain publishers of high volume
magazines rent "pocket" space from retailers for the display and sale of
specific titles. Such rent, referred to as "pocket payments" (or "RDP"
payments), is a fixed amount per pocket, per store based on the verified
location and other criteria of the pocket, and is paid quarterly. The national
distributors administer a majority of RDA and RDP programs on behalf of the
publishers.
Publishers have also implemented programs to encourage retailers to
upgrade their checkout and mainline display fixtures by making one-time
incentive payments, based on the pockets allocated to their respective titles.
Similar to RDA and RDP, such payments are made only upon submission of a
properly documented claim.
Client Services
The Company is dedicated to providing full information services to its
clients. Such services include the following:
Claim Submission. Through its software system, the Company offers to
assist retailers in accurately monitoring, documenting, claiming and collecting
publisher incentive payments. The claim submission process begins at the end of
each calendar quarter when the Company obtains information from the local
independent distributors detailing the titles and number of copies actually sold
by the client retailer. Based on this information, the Company prepares
publisher supplied claim forms and submits the documented claim to the
appropriate national distributor, which acts as payment agent for the publisher.
After verification of the claim, the national distributor remits payment to the
order of the retailer in care of the Company, which records the payment and
forwards it to the retailer. The Company charges the retailer a negotiated
percentage of the cash collected.
27
<PAGE>
As an extension of its claim submission service, the Company has
established an Advance Pay Program. Under the provisions of the written
agreement signed by each participating retailer, the Company acquires the right
to collect the incentive payments otherwise due the retailer directly from
magazine publishers with respect to the sale and display of magazines. In
return, the Company pays to the retailer a negotiated fixed percentage of the
total incentive payments otherwise due the retailer with respect to each
calendar quarter generally not later than ninety days after the end of each such
quarter. The funds necessary to make such payments are derived from cash flow
from operations and borrowings under the Company's existing $12,500,000 credit
facility. Typically, the agreement provides for a minimum term of one year and
thereafter is terminable by either party on not less than ninety days notice.
This service relieves the retailer from the burdensome administrative task of
processing multitudes of small publisher checks. Service fees earned under the
Advance Pay Program generally exceed those charged under the traditional method;
however the Company generally assumes the risk of uncollectibility of the
incentive payments. Based on historical experience, the Company maintains a
reserve for doubtful accounts equal to approximately 2% of outstanding accounts
receivable. The Company believes such reserve will be adequate.
Space Design. Through its Display Group, the Company offers to assist
retailers in the placement of displays and the selection of titles to optimize
available display space, and thereby to maximize sales and incentive payment
revenues. Based on its knowledge of local consumer preferences and the terms and
conditions of publisher incentive payment programs, the Company analyzes the
retailer's store layout, customer traffic patterns and available display
alternatives. Thereafter, the Company consults with its retailer client to
develop an appropriate display program.
Generally, retailers undertake a comprehensive redesign of the checkout
display space on three-year cycles. As a result of its marketing experience, the
Company is frequently engaged to provide services with respect to the entire
redesign process including, fixture design and assisting the retailer in product
selection, plan-o-gramming and vendor negotiations. The Company provides
additional services to retailers including vendor billing and collection,
fixture prototype reviews and supervision of fixture installation in the stores.
In June 1997, K-Mart Corporation contracted with the Company to provide such
services with respect to the reconfiguration of display fixtures in the checkout
area of its stores. The new merchandising units which display magazines,
confections and selected general merchandise illustrates the applicability of
the Company's existing services beyond magazines to other high volume consumer
products.
Periodical Information Network. The Company's large and sophisticated
database of magazine industry information has resulted in it becoming a magazine
information center which many companies in the magazine industry use to
28
<PAGE>
formulate their publishing and distribution strategies. PIN is a comprehensive
system designed to use current computer technologies, including CD-ROM, to
effectively manage all elements of its database including information packaging
and efficient inbound, outbound access. The network provides access to
periodically updated historical information concerning the titles and quantity
of each title sold by retailers for analysis purposes. Several leading
publishers have subscribed to PIN. The PIN subscription agreement provides that
the Company will furnish each subscriber with a historical database of sales
information and quarterly updates capable of generating three general types of
reports: total sales, sales by class of trade, and sales by retailer. Each
report ranks titles in order of sales volume, and provides other sales related
information, including sales efficiencies, category contributions and total
sales ranking. For such database, subscribers pay service fees equal to a
one-time enrollment fee and quarterly update fees. PIN subscriptions have a term
of one year, which is automatically renewed for successive one-year terms unless
either party terminates by notice to the other not later than ninety days before
commencement of the next renewal term.
Marketing and Promotional Program. As part of its full-service
philosophy, the Company offers its clients advice and suggestions concerning
specialized marketing and promotional programs which may include, for example,
special mainline and checkout displays and cross-promotions of magazines and
products of interest to readers of such magazines. Such services are offered to
enhance single copy magazine sales by the Company's clients, and thereby
increase service revenues due the Company in connection with the submission of
incentive payment claims; accordingly, no separate charge is made for these
services.
Administrative Support. The Company assists retailers to more
efficiently conduct their magazine sales operations through computerized
inventory control, automated pricing updates and management reporting. During
the fourth quarter of fiscal 1998, the Company intends to introduce a new
administrative support service enabling publishers and retailers to efficiently
verify and correct price changes and other information contained in the
magazine's uniform product code ("UPC").
29
<PAGE>
Growth Opportunities
Expansion of Services to New Product Categories. The Company's
information services have been designed to efficiently and accurately accumulate
and manage sales data with respect to sales of low cost, high volume consumer
products. While the Company's services, including PIN and the Advance Pay
Program, were developed for use in the magazine industry, the Company intends to
adapt its services for use in connection with other consumer products, such as
confections, soft drinks and batteries. To capitalize on this growth
opportunity, the Company signed a preliminary agreement with Associated
Services, Inc., a small provider of documentation, processing and collection of
sales incentive and cooperative advertising payments and merchandising
consulting with respect to books sold by retail store chains. If consummated,
the Company believes that this acquisition will supplement the Company's sales
force with experience in a market not previously served by the Company.
Development of New and Enhanced Products and Services. The Company was
founded and believes that its future success will be dependent upon its ability
to anticipate the informational needs of existing and potential clients and to
develop and introduce, in a timely manner, new products and services which
address such needs. The Company encourages creativity and originality in its
sales personnel and believes that one of the keys to the growth of the Company
has been the willingness of senior management to implement product and service
solutions suggested by the Company's personnel to address the needs of customers
with whom they interact. In addition, Messrs. Flegel and Lee, as well as various
members of the Company's senior management and sales personnel, periodically
meet with consumers to discuss industry trends and informational requirements.
After identifying an unsatisfied consumer need, members of the Company's senior
management and sales team meet to design new or enhanced products and services
addressing such consumer need. Thereafter, a team is appointed to develop such
products and services for introduction to the market.
Marketing and Sales
The Company markets its services through its own direct sales force.
The Company's sales group consists of seven regional managers and three
divisional vice presidents. Each manager is assigned to a specific geographic
territory and is responsible for the preparation of quotations, program
presentations and the general development of sales, as well as maintenance of
existing accounts, within his or her assigned territory.
Competition
Competition among providers of many of the Company's products and
services, particularly the processing of incentive payment claims, is highly
competitive. While such competition is fragmented, the Company recognizes
approximately 32 direct competitors, all of which are closely held private
companies. The Company believes that, in virtually all cases, it is the sole
30
<PAGE>
provider of magazine incentive payment claim services to its clients and the
Company's clients do not perform such services on their own behalf. Based on its
review of the industry and informal discussions with magazine publishers and
retailers, the Company believes that none of its direct competitors have greater
financial, technological, marketing and sales resources than the Company.
However, it is possible that certain services offered by the Company could be
performed directly by its retail customers or otherwise offered or performed in
the future by publishers, distributors or other organizations, such as Nielsen,
IRI and Audit Bureau of Circulation. Many of such organizations have greater
financial, technological, marketing and sales resources than the Company.
Additionally, competitors may develop new or different service programs which
are perceived by customers to be of similar or superior quality at the same or
lower prices than the Company's services.
Management further believes that the principal competitive factors in
the retail information industry include information access, technological
support, accuracy, system flexibility, financial stability, customer service and
reputation. The Company believes it competes effectively with respect to each of
the above factors.
Properties
The Company conducts its operations from 11 office facilities, located
in St. Louis, Missouri; New York, New York; Chicago Heights, Illinois;
Schaumburg, Illinois; Oklahoma City, Oklahoma; San Antonio, Texas; Cranberry
Township, Pennsylvania; Canton, Ohio; Fair Lawn, New Jersey; Woodstock, Georgia;
and Mississauga, Ontario, Canada. These facilities contain an aggregate of
approximately 19,000 square feet of space. Each of the facilities is occupied by
the Company under short-term leases containing terms and conditions believed to
be comparable to those prevailing in the market in which the facility is
located. The Company believes that each of such facilities may be relocated
without material expense or delay, and that suitable alternative office
facilities are available in each market on comparable terms, if required.
In addition, the Company's data processing center, located in High
Point, North Carolina, contains approximately 13,900 square feet and is occupied
under a written lease with 711 Gallimore Partnership, a North Carolina general
partnership ("711 Partnership"), expiring in 2012. Such lease provides for the
payment of monthly rent of approximately $14,000, subject to adjustment for
taxes, insurance and utilities. See "MANAGEMENT-Certain Relationships and
Related Transactions."
Management Information Systems
The Company uses a customized software system to accumulate and manage
sales data in connection with its processing of claims and maintenance of the
PIN database under a license from a third party which has been retained by the
Company to service and upgrade the Company's software system. This sophisticated
software system is of a type used by several companies engaged in the collection
of sales incentive payments in the magazine industry. Although the Company uses
several service marks in connection with its business, it believes that its
business is not dependent on the strength of its service marks or any of its
intellectual property rights.
Legal Proceedings
The Company is not a party to any legal proceedings, other than routine
claims and lawsuits arising in the ordinary course of business. The Company does
not believe that such claims and lawsuits, individually or in the aggregate,
will have a material adverse effect on the Company's business.
Employees
As of May 31, 1997, the Company employed 105 persons, of whom 94 were
employed on a full-time basis and 11 were employed on a part-time basis. The
Company's employees are not subject to a collective bargaining agreement. The
Company considers its relations with its team members to be good.
31
<PAGE>
MANAGEMENT
The following table sets forth certain information concerning the
directors and executive officers of the Company:
Name Age Position
S. Leslie Flegel 59 Director, Chairman and Chief
Executive Officer
William H. Lee 46 Director, President and Chief
Operating Officer
John P. Watkins 41 Chief Administrative Officer and
President-Retail Services
Dwight L. DeGolia 52 Executive Vice President
Robert B. Dixon 46 Executive Vice President and
President-Periodical Information
Management
W. Brian Rodgers 31 Assistant Secretary and Chief
Financial Officer
Jason S. Flegel 31 Sr. Vice President of RDA Operations
Robert G. Shupe 50 Sr. Vice President 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
Each of the Executive Officers is a full-time employee of the Company.
Non-employee directors of the Company devote such time to the affairs of the
Company as is necessary and appropriate. Set forth below are descriptions of the
backgrounds of the Executive Officers and Directors of the Company:
S. Leslie Flegel has been a director, Chairman and Chief Executive Officer of
the Company since its inception in April 1995. For more than 14 years prior
thereto, Mr. Flegel was the principal owner and chief executive officer of
Display Information Systems Company ("DISC"), a predecessor of the Company.
William H. Lee has been a director, President and Chief Operating Officer of the
Company since its inception in April 1995. For approximately 14 years prior
thereto, Mr. Lee was the principal owner and chief executive officer of
Periodical Marketing and Management, Inc. ("PMM"), a predecessor of the Company.
John P. Watkins has served as Chief Administrative Officer and President-Retail
Services since February 1, 1996. For more than 16 years prior thereto, Mr.
Watkins served in several senior management positions with Food Lion, Inc., a
seven billion dollar retail grocery chain. From September 1992 to July 1995, Mr.
Watkins served as Senior Vice President and Chief Operating Officer and 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.
32
<PAGE>
Robert B. Dixon became Executive Vice President and President - Periodical
Information Management in June 1995. For more than 13 years prior thereto, Mr.
Dixon served as President and was the principal shareholder of Dixon's Modern
Marketing Concepts, Inc. and related entities.
W. Brian Rodgers has served as Assistant Secretary of the Company and Chief
Financial Officer since October 1996. Prior to joining the Company, Mr. Rodgers
practiced for seven years as a Certified Public Accountant with BDO Seidman,
L.L.P.
Jason S. Flegel has served as Senior Vice President of RDA Operations since June
1996. Prior thereto, and since the Company's inception in April 1995, Mr. Flegel
served as Vice President - Western Region. Mr. Flegel was an owner and the Chief
Financial Officer of DISC. Jason S. Flegel is the son of S. Leslie Flegel.
Robert G. Shupe has served as Senior Vice President since February 1996 and 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. Mr. Franc is one of the founders of Bridge
Information Systems, Inc., a St. Louis, Missouri-based provider of information
services to the securities industry ("BIS") and of BIS's subsidiary, Bridge
Trading Company, a registered broker-dealer and member of the New York Stock
Exchange ("BTC"). For more than 20 years, Mr. Franc has served as a director and
an Executive Vice President of BIS and an Executive Vice President of BTC.
Aron Katzman has served as a director of the Company since it commenced
operations in May 1995. Mr. Katzman is the President of New Legends, Inc., one
of St. Louis' leading country club/residential communities. For more than five
years prior to 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, an American Stock Exchange listed company.
Randall S. Minix has served as a director of the Company since it commenced
operations in May 1995. For more than five years, Mr. Minix has been the
managing partner of Minix, Morgan & Company, L.L.P., an independent accounting
firm headquartered in Greensboro, North Carolina.
The Board of Directors of the Company consists of six members, each of
whom serve in such capacity for a three year term or until a successor has been
elected and qualified, subject to earlier resignation, removal or death. The
number of directors comprising the Board of Directors may be increased or
decreased by resolution adopted by the affirmative vote of a majority of the
Board of Directors. The Company's Articles of Incorporation and Bylaws provide
for three classes of directorships serving staggered three year terms such that
one-third of the directors are elected at each annual meeting of shareholders.
The term of office of Messrs. Flegel and Lee will continue until the 1998 annual
meeting of shareholders, the terms of Messrs. Katzman and Minix will continue
until the 1999 annual meeting of shareholders and the terms of Messrs. Braswell
and Franc will continue until the 2000 annual meeting of shareholders.
33
<PAGE>
The Board of Directors of the Company has established an Audit
Committee, a Compensation Committee, a Finance Committee and an Acquisition
Committee. The Audit Committee is comprised of two non-employee directors,
presently Messrs. Minix and Katzman, and has the responsibility of recommending
the firm that will serve as the Company's independent auditors, reviewing the
scope and results of the audit and services provided by the Company's
independent accountants, and meeting with the financial staff of the Company to
review accounting procedures and policies. The Compensation Committee is
comprised of three non-employee directors, presently Messrs. Katzman, Braswell
and Franc, and has been given the responsibility of reviewing the financial
records of the Company to determine overall compensation and benefits for
executive officers of the Company and to establish and administer the policies
which govern employee salaries and benefit plans. The Finance Committee is to be
comprised of two directors. Presently, Mr. Franc serves as one member and the
other position is vacant. The Finance Committee has been given the
responsibility of monitoring the Company's capital structure, reviewing
available alternatives to satisfy the Company's liquidity and capital
requirements and recommending the firm or firms which will provide investment
banking and financial advisory services to the Company. The Company's
Acquisition Committee is comprised of three directors, presently Messrs. Franc,
Braswell and Katzman, and has been given the responsibility of monitoring the
Company's search for attractive acquisition opportunities, consulting with
members of management to review plans and strategies for the achievement of the
Company's external growth objectives and recommending the firm or firms that
will serve as advisors to the Company in connection with the evaluation of
potential business combinations.
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.
34
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation
-------------------
Name of Principal Other Annual All Other
Position Year Salary Bonus Compensation(a) Compensation
-------- ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
S. Leslie Flegel 1997 $227,500 $78,856 $30,624 $97,542(b)
Chairman and Chief Executive 1996 200,000 26,543 30,995 -
Officer 1995 171,875 - 22,425 -
William H. Lee 1997 $224,830 $30,000 $13,944 -
President and Chief Operating 1996 192,646 - 19,006 -
Officer 1995 145,000 60,000 25,937 -
Dwight L. DeGolia 1997 $140,000 - $11,223 $4,773(b)
Executive Vice President 1996 134,884 - 16,739 -
1995 97,358 - 9,790 -
John P. Watkins 1997 $150,000 - $11,891 -
Chief Administrative Officer and 1996 - - - -
President-Retail Services 1995 - - - -
Robert B. Dixon 1997 $150,000 - $13,907 -
Executive Vice President and 1996 114,000 $ 50,000 5,458 -
President-Periodical Information 1995 36,000 128,500 26,982 -
Management
<FN>
(a) Reflects personal benefits derived by Messrs. Flegel, Lee, DeGolia,
Watkins and Dixon primarily in connection with personal use of Company
automobiles, country club membership dues and life insurance premiums.
In fiscal 1997 the estimated incremental cost to the Company of the use
by Messrs. Flegel, Lee, DeGolia, Watkins and Dixon of Company
automobiles was $10,339, $8,650, $6,090, $7,800 and $8,597,
respectively. In fiscal 1996, such cost was $11,444, $6,234, $6,360,
$-0- and $3,158, respectively. In fiscal 1995, such cost was $10,417,
$8,753, $5,728, $-0- and $-0-, respectively.
In fiscal 1997, the estimated incremental cost to the Company of the
membership dues paid on behalf of Messrs. Flegel, Lee, DeGolia, Watkins
and Dixon was $11,192, $2,239, $5,133, $3,330 and $5,310, respectively.
In fiscal 1996, such cost was $11,503, $4,738, $4,751, $-0- and $2,300,
respectively. In fiscal 1995, such cost was $8,212, $4,356, $4,751,
$-0-, and $2,300, respectively.
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<PAGE>
In fiscal 1997, the estimated incremental cost to the Company of life
insurance premiums paid on behalf of Messrs. Flegel, Lee, DeGolia,
Watkins and Dixon was $9,093, $3,056, $-0-, $761 and $-0-,
respectively. In fiscal 1996, such cost was $8,048, $8,033, $5,628,
$-0-, and $-0-, respectively. No life insurance premiums were paid on
behalf of the officers in fiscal 1995.
(b) Represents compensation awarded by the Company and used to repay
certain indebtedness of the named executive officer to a predecessor of
the Company incurred in connection with subchapter S earnings of such
predecessor. If the Over-Allotment Option is exercised, the first
82,000 shares sold as a result thereof will be sold by Mr. Flegel and
the proceeds used to retire the balance of Mr. Flegel's indebtedness to
the Company which is in the amount of approximately $245,000.
Accordingly, the Company expects that compensation of similar type will
not be paid in the future. See "MANAGEMENT-Certain Relationships and
Related Transactions."
</FN>
</TABLE>
Director Compensation
With the exception of Mr. Minix, who will be paid in cash, 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 shares of Common Stock,
for each meeting of the Board of Directors attended. Directors are also entitled
to be reimbursed for expenses incurred by them in attending meetings of the
Board of Directors and its committees.
Employment Agreements with Named Executive Officers.
Pursuant to an agreement effective February 1, 1996, John P. Watkins is
to be employed by the Company for a minimum period of two years as President of
the Retail Services Group and Chief Administrative Officer. As compensation for
services rendered to the Company, the agreement provides for Mr. Watkins to
receive an annual base salary of $150,000. In addition, Mr. Watkins is eligible
to receive a pay performance bonus of up to 50% of his base salary in an amount
which is determined by reference to specified criteria including total revenue,
net income and stock performance. Mr. Watkins has agreed to refrain from
disclosing information confidential to the Company or engaging, directly or
indirectly, in activities competitive to the Company during the term of his
employment and for two years thereafter.
36
<PAGE>
The Company has entered into an employment agreement dated as of August
30, 1995 with Robert G. Shupe. Under the terms of the agreement, Mr. Shupe will
be employed by the Company subject to termination of not less than 30 days
notice, in exchange for an annual base salary equal to $110,000. Mr. Shupe has
also agreed to refrain from disclosing information confidential to the Company
or engaging directly or indirectly in activities competitive to the Company
during the term of his employment and for two years thereafter.
Under the terms of a written agreement with the Company, Dwight L.
DeGolia has agreed to refrain from disclosing information confidential to the
Company or engaging directly or indirectly, in any activity which is competitive
with the business of the Company during the term of his employment and for two
years thereafter.
Certain Relationships and Related Transactions.
From time to time, the Company and its predecessors have engaged in
various transactions with its directors, executive officers and other affiliated
parties. The following paragraphs summarize certain information concerning such
transactions and relationships which have occurred during the past two fiscal
years or which are presently proposed.
Predecessor Transactions
S. Leslie Flegel, Chairman and Chief Executive Officer of the Company
and Dwight L. DeGolia, Executive Vice President of the Company, have from time
to time received cash advances from DISC, a subchapter S predecessor of the
Company with respect to distribution of the Subchapter S earnings of such
corporation. The largest aggregate amount of such indebtedness outstanding at
any time since February 1, 1996 was $248,675 and $14,618 and at June 30, 1997,
such outstanding balances were $221,485 and $12,093, respectively. All such
advances are evidenced by promissory notes in favor of the Company. Such notes
bear interest at the rate of 7.34% per annum, and are payable in five equal
annual installments.
PMM, a predecessor of the Company incurred a debt to Timothy A.
Braswell, a director of the Company, on March 1, 1991 in the amount of $300,000,
which accrued interest at the rate of 10.00% per annum. The indebtedness matured
on January 1, 1996 and was paid in full on the maturity date.
On June 28, 1991, PMM entered into a written lease with 711
Partnership, in which Mr. William H. Lee, President and Chief Operating Officer
of the Company, and Robert G. Shupe, Senior Vice President of the Company, are
partners, whereby 711 Partnership leases to the Company certain office space in
High Point, North Carolina. The lease, as amended in January 1996, provides for
annual rent of $168,072 and expires in 2012. In fiscal 1996 and fiscal 1997, the
Company paid rent to 711 Partnership of $147,275 and $157,498, respectively.
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<PAGE>
2532 Investments, Inc., a North Carolina corporation in which Mr. Lee
is a shareholder, has occasionally provided the Company with the use of an
airplane. In fiscal 1996, the Company paid 2532 Investments $57,926 in
consideration for the use of the airplane.
Under the terms of a written lease entered into prior to the Company's
acquisition of Dixon's Modern Marketing Concepts, Inc., Robert B. Dixon,
Executive Vice President and President-Periodical Information Management of the
Company, provides the Company with office space in Chicago Heights, Illinois.
The lease provides for annual rent of $36,000 and expired on December 31, 1996.
In fiscal 1996 and 1997, the Company paid Mr. Dixon $36,000 and $36,000,
respectively, in rent.
Company Transactions
Data-Pros, Inc. ("Data-Pros"), a corporation in which Messrs. Lee and
Shupe are shareholders, provided the Company with data processing services. In
fiscal 1996 and 1997, the Company paid Data-Pros $306,751 and $274,893,
respectively, for such services. On January 1, 1997, the Company purchased the
assets of Data-Pros for $45,000.
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, to Mr. Braswell, Harry L. Franc, a director of the Company, and
Aron Katzman, a director of the Company. 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.
James Looman, a shareholder and employee of the Company, provides the
Company with office space in Canton, Ohio, under the terms of a written lease
dated June 1, 1996. The lease provides for annual rent of $24,000. In fiscal
1997, the Company paid Mr. Looman $14,000 in rent.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of June 17, 1997,
concerning the beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to be the beneficial owner of more than five percent
of the outstanding Common Stock, (ii) all directors, (iii) each executive
officer named in the Summary Compensation Table contained in this Prospectus,
and (iv) all directors and executive officers of the Company as a group. Each
person named has sole voting and investment power with respect to the shares
indicated, except as otherwise stated in the notes to the table:
<TABLE>
<CAPTION>
Beneficial Ownership Number of Shares Beneficial Ownership
Prior to Offering Being Offered(a) After the Offering(a)
----------------- ---------------- ---------------------
Name and Address
of Beneficial Owner Amount Percent Amount Percent
- ------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
S. Leslie Flegel 1,443,471 24.8 82,000(b) 1,361,471 17.1
11644 Lilburn Park Road
St. Louis, Missouri 63146
William H. Lee 1,095,616 18.8 - 1,095,616 13.8
711 Gallimore Dairy Road
High Point, North Carolina 27265
Timothy A. Braswell 472,893 8.1 - 472,893 6.0
711 Gallimore Dairy Road
High Point, North Carolina 27265
Cameron Capital Ltd. 383,902(c) 6.4 - 383,902(c) 4.8
10 Cavendish Road
Hamilton, HM 19, Bermuda
Robert B. Dixon 248,760 4.3 100,000 148,760 1.9
907 Park Drive
Flossmoor, Illinois 60422
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<PAGE>
Dwight L. DeGolia 149,917 2.6 - 149,917 1.9
11644 Lilburn Park Road
St. Louis, Missouri 63146
Aron Katzman 129,044 2.2 - 129,044 1.6
10 Layton Terrace
St. Louis, Missouri 63124
John P. Watkins 33,058(d) * - 33,058(d) *
711 Gallimore Dairy Road
High Point, North Carolina 27265
Harry L. Franc, III 29,255 * - 29,255 *
19 Briarcliff
St. Louis, Missouri 63124
Randall S. Minix 5,785 * - 5,785 *
5502 White Blossom Drive
Greensboro, North Carolina 27410
All directors and 3,791,375 65.1 182,000 3,609,375 45.4
executive officers
as a group (11 persons)
<FN>
*Less than 1%
(a) These shares will be sold only upon exercise of the Over-Allotment
Option. If the Over-Allotment Option is not exercised in full, the
first shares offered will be sold by Mr. Flegel and any additional
shares subject to the Over-Allotment Option will be sold
proportionately by the remaining Selling Shareholders and the Company.
(b) All of the proceeds from the sale of such shares will be used to retire
the indebtedness of Mr. Flegel to the Company. Accordingly, the Company
will receive the proceeds from the sale of these shares.
(c) Includes 137,740 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 June 17, 1997.
(d) Includes exercisable options to acquire 33,057 shares of Common Stock
at an exercise price of $5.60 per share.
</FN>
</TABLE>
40
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
The Company's Articles of Incorporation (the "Articles") provide for
authorized capital of 22,000,000 shares, consisting of 20,000,000 shares of
Common Stock, $0.01 par value per share and 2,000,000 shares of preferred stock,
$0.01 par value per share. Prior to consummation of this offering, 5,825,784
shares of Common Stock and 5,600 shares of Preferred Stock were outstanding. The
following summary description of the capital stock of the Company is qualified
in its entirety by reference to the Articles.
Common Stock
The holders of Common Stock are entitled to cast one vote for each
share of record on all matters to be voted on by shareholders, including the
election of directors. The Company's Articles (and Bylaws) provide for a
classified Board of Directors with three classes serving staggered three year
terms so that approximately one-third of the directors will be elected at each
annual meeting. This provision could have the effect of delaying, deferring or
preventing a change in control of the Company. Subject to payment or provision
for full cumulative dividends in respect of any outstanding shares of preferred
stocks, the holders of Common Stock are entitled to receive dividends when and
if declared by the Board of Directors out of legally available funds. In the
event of liquidation, dissolution or winding up of the affairs of the Company,
the holders of the Common Stock are entitled to share ratably in all remaining
assets available for distribution to them after the payment of liabilities and
after provision has been made for each class of stock, including the Preferred
Stock, having preference over the Common Stock. Holders of shares of Common
Stock, as such, have no conversion, preemptive or other subscription rights, and
there are no redemption provisions generally applicable to the Common Stock. A
holder of 91,938 shares of Common Stock has been granted an option to sell such
shares to the Company at a purchase price of $4.84 per share subject to
adjustment.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of Preferred
Stock. The Board of Directors has the authority to issue Preferred Stock in one
or more series and to fix the number of shares constituting any such series, the
voting powers, designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions thereof,
including the dividend rights, dividend rate, terms of redemption, redemption
price or prices, conversion and voting rights and liquidation preferences of the
shares constituting any series, without any further vote or action by the
shareholders of the Company. The issuance of Preferred Stock by the Board of
Directors could adversely affect the rights of holders of Common Stock. For
example, issuance of Preferred Stock could result in a series of securities
outstanding that would have preferences over the Common Stock with respect to
dividends and in liquidation and that could (upon conversion or otherwise) enjoy
all of the rights appurtenant to the Common Stock.
41
<PAGE>
The authority possessed by the Board of Director to issue Preferred
Stock could potentially be used to discourage attempts by others to obtain
control of the Company through merger, tender offer, proxy or consent
solicitation or otherwise by making such attempt more difficult to achieve or
more costly. The Board of Directors may issue Preferred Stock without
shareholder approval and with voting rights that could adversely affect the
voting power of holders of Common Stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Preferred Stock and the Common
Stock is ChaseMellon Shareholder Services, L.L.C.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
The Articles and Bylaws of the Company contain certain provisions
regarding the rights and privileges of stockholders, some of which may have the
effect of discouraging certain types of transactions that involve an actual or
threatened change of control of the Company, diminishing the opportunities for a
stockholder to participate in tender offers, including tender offers at a price
above the then current market value of the Common Stock or over a stockholder's
cost basis in the Common Stock, and inhibiting fluctuations in the market price
of the Common Stock that could result from takeover attempts. These provisions
of the Articles and Bylaws are summarized below.
Size of Board, Election of Directors and Classified Board
The Articles provide that the number of Directors shall be fixed from
time to time as provided in the Bylaws. The Bylaws provide for a minimum of
three and a maximum of nine persons to serve on the Board, with an initial board
of three directors. The number of Directors may be increased or decreased by a
resolution adopted by the affirmative vote of a majority of the Board. The
Articles further provide that the Board may amend the Bylaws by action taken in
accordance with such Bylaws, except to the extent that any matters under the
Articles or applicable law are specifically reserved to the shareholders.
The Bylaws provide that the Board will be divided into three classes of
Directors, with the classes to be as nearly equal in number as possible, and one
of each such classes shall be elected each year to serve for a three-year term.
42
<PAGE>
Shareholder Nominations and Proposals
The Company's Bylaws provide for advance notice requirements for
shareholder nominations and proposals at annual meetings of the Company.
Shareholders may nominate Directors or submit other proposals only upon written
notice to the Company not less than 120 days nor more than 150 days prior to the
date of the notice to shareholders of the previous year's annual meeting. A
shareholder's notice also must contain certain additional information, as
specified in the Bylaws. The Board may reject any proposals that are not made in
accordance with the procedures set forth in the Bylaws or that are not proper
subjects of shareholder action in accordance with the provisions of applicable
law.
Calling Shareholder Meetings; Action by Shareholders Without a Meeting
Matters to be acted upon by the shareholders at special meetings are
limited to those which are specified in the notice thereof. A special meeting of
shareholders may be called by the Board of Directors, the Chairman or the
President of the Company. As required by Missouri law, the Bylaws provide that
any action by written consent of shareholders in lieu of a meeting must be
signed by the holders of all outstanding shares of Common Stock.
The foregoing provisions contained in the Articles and Bylaws are
designed in part to make it more difficult and time consuming to obtain majority
control of the Board of Directors or otherwise to bring a matter before
shareholders without the Board's consent, and therefore to reduce the
vulnerability of the Company to an unsolicited takeover proposal. These
provisions are designed to enable the Company to develop its business in a
manner which will foster its long-term growth without the threat of a takeover
not deemed by the Board to be in the best interests of the Company and its
shareholders, and to reduce, to the extent practicable, the potential disruption
entailed by such a threat. However, these provisions may have an adverse effect
on the ability of shareholders to influence the governance of the Company and
the possibility of shareholders receiving a premium above the market price for
their securities from a potential acquirer who is unfriendly to management.
43
<PAGE>
Indemnification of Directors and Officers
Sections 351.355(1) and (2) of The General and Business Corporation Law
of the State of Missouri provide that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful, except that, in the case of an action or suit by or in the right of
the corporation, the corporation may not indemnify such persons against
judgments and fines and no person shall be indemnified as to any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of the person's duty to the
corporation, unless and only to the extent that the court in which the action or
suit was brought determines upon application that such person is fairly and
reasonably entitled to indemnity for proper expenses. Section 351.355(3)
provides that, to the extent that a director, officer, employee or agent of the
corporation has been successful in the defense of any such action, suit or
proceeding or in defense of any claim, issue or matter therein, the person shall
be indemnified against expenses, including attorney's fees, actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Section 351.355(7) provides that a corporation may provide
additional indemnification to any person indemnifiable under subsection (1) of
(2), provided such additional indemnification is authorized by the corporation's
articles of incorporation or an amendment thereto or by a shareholder-approved
bylaw or agreement, and provided further that no person shall thereby be
indemnified against conduct which was finally adjudged to have been knowingly
fraudulent, deliberately dishonest or willful misconduct or which involves an
accounting for profits pursuant to Section 16(b) of the Exchange Act. Paragraph
9 of the Articles of Incorporation of the Company permits the Company to enter
into agreements with its directors, officers, employees and agents to provide
such indemnification as deemed appropriate. Paragraph 9 also provides that the
Company may extend to its directors and executive officers such indemnification
and additional indemnification.
The Company has entered into an indemnification agreements with certain
of its directors and officers. The form of indemnity agreement provides that
each such person will be indemnified to the full extent permitted by applicable
law against all expenses (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement of any threatened, pending or completed
action, suit or proceeding, on account of his services as a director and officer
44
<PAGE>
of the Company or any other company or enterprise in which he is serving at the
request of the Company, or as a guarantor of any debt of the Company. To the
extent the indemnification provided under the agreement exceeds that permitted
by applicable law, indemnification may be unenforceable or may be limited to the
extent it is found by a court of competent jurisdiction to be contrary to public
policy.
The Company may procure and maintain a policy of insurance under which
the directors and officers of the Company will be insured, subject to the limits
of the policy, against certain losses arising from claims made against such
directors and officers by reason of any acts or omissions covered under such
policy in their respective capacities as directors or officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
7,825,784 of Common Stock. Of the shares, approximately 4,019,813 shares,
including those offered for sale in this offering, will be tradeable without
restriction under the Securities Act. The remaining 3,805,971 shares of Common
Stock held by existing shareholders are "restricted" within the meaning of Rule
144. Subject to compliance with the provisions of Rule 144, all of such shares
presently are eligible for sale to the public, notwithstanding the fact that
such shares have not been registered under the Securities Act.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one year but less than two
years, will be entitled to sell in any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
common stock (approximately 78,258 shares immediately after this offering) or
(ii) the average weekly trading volume during the four calendar weeks
immediately preceding the date on which notice of the sales filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale and who has beneficially
owned his or her shares for at least three years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
45
<PAGE>
In accordance with the provisions of an agreement which each director,
executive officer or holder of more than 5% of the Common Stock must execute and
deliver to the Representative as a condition to the consummation of this
offering, certain restrictions prohibiting the sale of the 4,037,534 shares of
Common Stock held by such persons will be imposed. The restrictions imposed by
these agreements will remain in effect for a period of 12 months following the
date of this Prospectus, after which the restrictions on resale will lapse as to
25% of such shares each successive quarter. The agreements to be executed by the
existing directors, officers, and shareholders of the Company will have no
effect on the date on which shares become eligible for sale pursuant to Rule
144.
UNDERWRITING
The Underwriters named below, for whom Donald & Co. Securities Inc. is
acting as representative (the "Representative"), have severally agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase from the
Company a total of 2,000,000 shares of Common Stock. The number of shares of
Common Stock that each Underwriter has agreed to purchase is set forth opposite
its name:
Number of
Underwriter Shares
Donald & Co. Securities Inc.
Total 2,000,000
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain legal matters by counsel to the
Underwriters and various other conditions precedent, and that the Underwriters
are obligated to purchase all of the shares of Common Stock offered by this
Prospectus (other than the shares of Common Stock covered by the over-allotment
option described below), if any are purchased.
The Company has been advised by the Representative that the
Underwriters propose to offer the shares of Common Stock to the public at the
initial offering price set forth on the cover page of this Prospectus and to
certain dealers (who may include Underwriters) at that price less a concession
not in excess of $ _____ per share of Common Stock. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $_____ per share of
Common Stock to certain other dealers. After the initial public offering, the
offering price and other selling terms may be changed by the Representative.
The Representative has informed the Company that the Underwriters do
not intend to confirm sales to accounts over which they exercise discretionary
authority.
The Company has granted to the Representative an option, exercisable
during the 45-day period after the date of this Prospectus, to purchase from the
Company at the offering price, less underwriting discounts and the
nonaccountable expense allowance, up to an aggregate of 150,000 additional
shares of Common Stock for the sole purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
46
<PAGE>
The Company has also agreed to pay to the Representative an expense
allowance on a nonaccountable basis equal to 2% of the gross proceeds derived
from the sale of the shares of Common Stock underwritten (including the sale of
any shares of Common Stock subject to the Representative's over-allotment
option), $25,000 of which has been paid to date.
The Company has granted the Representative for a period of three years
from the date hereof the right to have the Representative's designee present at
all meetings of the Company's Board of Directors and each of its committees.
Such designee will be entitled to the same notices and communications sent by
the Company to its directors and to attend directors' and committees' meetings,
but will not be entitled to vote thereat. Such designee will also be entitled to
receive the same compensation payable to directors as members of the Board and
its committees and all reasonable expenses in attending such meetings. The
Representative has not named such designee as of the date of this Prospectus.
In connection with this offering, the Company has agreed to sell to the
Representative, for nominal consideration, the right to purchase up to an
aggregate of 200,000 shares of Common Stock (the "Representative's Warrants").
The Representative's Warrants are exercisable initially at $_____ per share of
Common Stock (the "Exercise Price") for a period of four years commencing one
year from the date hereof. The Representative's Warrants contain antidilution
provisions providing for adjustment of the Exercise Price upon the occurrence of
certain events, including (i) the issuance of Common Stock, or securities
exercisable or convertible into Common Stock, at a price less than the Exercise
Price and (ii) any recapitalization, reclassification, stock dividend, stock
split, stock combination or similar transaction. In addition, the
Representative's Warrants grant to the holders thereof certain demand and "piggy
back" rights for periods of four and six years, respectively, commencing one
year from the date of this Prospectus with respect to the registration under the
Securities Act of the Common Stock issuable upon exercise of the
Representative's Warrants.
The Company has agreed that, upon the consummation of this offering, it
will enter into a two year consulting agreement with the Representative. The
consulting agreement will not require the Representative to devote a specific
47
<PAGE>
amount of time in the performance of its duties thereunder. Pursuant to such
agreement, the Representative will provide the Company with investment banking
and financial consulting services at the rate of $3,000 per month for the
twenty-four months subsequent to the consummation of this offering (an aggregate
of $72,000). Such services will include, among other matters, consulting with
the Company's management with respect to stockholder relations, corporate
expansion and long-term financing. In the event that the Representative
originates a financing or a merger, acquisition, joint venture or other
transaction to which the Company is a party, the Representative will be entitled
to receive a fee in consideration for the origination of such transaction.
The Company has granted the Representative for a period of two years
from the date hereof the right of first refusal with respect to its public and
private securities offerings.
The offering price of the Common Stock was determined by negotiations
among the Company and the Representative, based in part upon the market price
for the Common Stock as reported on the Nasdaq SmallCap.
In connection with this offering, certain Underwriters and selling
group members (if any) who are qualified market makers on The Nasdaq Stock
Market may engage in passive market making transactions in the Common Stock on
The Nasdaq Stock Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the [5] business day[s]
prior to the pricing of the offering before the commencement of offers or sales
of the Common Stock. Passive market makers must comply with applicable volume
and price limitations and must be identified as such. In general, a passive
market maker must display its bid at a price not in excess of the highest
independent bid for such security; if all independent bids are lowered below the
passive market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids or effecting syndicate covering
transactions. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
common stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. Such transactions may
be effected on The Nasdaq Stock Market, in the over-the-counter market, or
otherwise. Such stabilizing, if commenced, may be discontinued at any time.
48
<PAGE>
LEGAL MATTERS
The validity of the Securities offered hereby and certain other legal
matters in connection with the sale of the shares of Securities offered hereby
will be passed upon for the Company by Gallop, Johnson & Neuman, L.C., St.
Louis, Missouri. Certain legal matters relating to this offering will be passed
upon for the Underwriters by Parker Duryee Rosoff & Haft.
EXPERTS
The financial statements of the Company as of January 31, 1997 and for
the fiscal years ending January 31, 1996 and 1997 included in the Prospectus and
the Registration Statement and the financial schedules included in the
Registration Statement have been so included in reliance on the report of BDO
Seidman, LLP, independent certified public accountants given on the authority of
said Firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange of 1934 as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy or information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy or information statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following Regional Offices of the Commission: 7 World Trade Center, Suite
1500, New York, New York 10048; and Northwestern Atrium Center, Suite 1400, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can be
obtained at prescribed rates from the public reference section of the Commission
at 450 Fifth Street N.W., Washington, D.C. 20549 or retrieved electronically via
the internet at the Commission's web site (http://www.sec.gov). In addition,
reports, proxy statements and other information concerning the Company may be
inspected at the offices of the Nasdaq Stock Market, 1735 K Street N.W.,
Washington, D.C. 20549 on which the Common Stock is quoted. The Company has
filed with the Commission a registration statement on Form SB-2 herein,
(together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended, with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents and each such statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
Commission.
49
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
INDEX TO FINANCIAL STATEMENTS
Page
Unaudited Interim Financial Statements
Unaudited Balance Sheet as of April 30, 1997
Unaudited Statements of Operations for the three
months ended April 30, 1997 and 1996
Unaudited Statements of Cash Flows for the three
months ended April 30, 1997 and 1996
Notes to Financial Statements
Audited Financial Statements
Independent Auditors' Report
Balance Sheet as of January 31, 1997
Statements of Operations for the fiscal years
ended January 31, 1997 and 1996
Statements of Cash Flows for the fiscal years
ended January 31, 1997 and 1996
Summary of Accounting Policies
Notes to Financial Statements
F-1
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Balance Sheet
April 30, 1997
- --------------------------------------------------------------------------------
Assets (Note 3)
Current
Cash $ 78,816
Trade receivables (net of allowance for doubtful
accounts of $312,940) (Note 5) 13,559,544
Notes receivable - officers (Note 2) 108,530
Other current assets 182,762
- --------------------------------------------------------------------------------
Total Current Assets 13,929,652
- --------------------------------------------------------------------------------
Office equipment and furniture 1,888,713
Less accumulated depreciation and amortization 1,250,554
- --------------------------------------------------------------------------------
Net Office Equipment and Furniture 638,159
- --------------------------------------------------------------------------------
Other Assets
Notes receivable - officers (Note 2) 125,048
Goodwill, net of accumulated amortization
of $90,325 1,004,708
Other 192,791
- --------------------------------------------------------------------------------
Total Other Assets 1,322,547
- --------------------------------------------------------------------------------
$ 15,890,358
See accompanying notes to financial statements
F-2
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Balance Sheet
April 30, 1997
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current
Checks issued against future deposits 793,358
Accounts payable and accrued expenses 389,177
Due to retailers (Note 6) 188,303
Income tax payable (Note 7) 154,466
Deferred income taxes (Note 7) 20,000
Current maturities of long-term debt (Note 3) 70,816
- --------------------------------------------------------------------------------
Total Current Liabilities 1,616,120
- --------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 3) 9,701,166
- --------------------------------------------------------------------------------
Deferred Income Taxes (Note 7) 145,000
- --------------------------------------------------------------------------------
Total Liabilities 11,462,286
- --------------------------------------------------------------------------------
Commitments and Contingencies
- --------------------------------------------------------------------------------
Redeemable Preferred Stock, $.01 par - shares authorized,
2,000,000; outstanding, 5,600 (Note 8) 522,506
Redeemable Common Stock
111,245 shares outstanding 503,820
- -------------------------------------------------------------------------------
1,026,326
Stockholders' Equity
Common Stock, $.01 par - shares authorized,
20,000,000; outstanding 6,937,954 69,379
Additional paid-in-capital 2,764,646
Retained earnings 567,721
- --------------------------------------------------------------------------------
Total Stockholders' Equity 3,401,746
- --------------------------------------------------------------------------------
$15,890,358
See accompanying notes to financial statements
F-3
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Statements of Operations
Three Months Ended April 30, 1997 1996
- --------------------------------------------------------------------------------
Service Revenues $ 2,519,531 $ 1,424,030
Merchandise Revenues 8,348 29,938
- --------------------------------------------------------------------------------
2,527,879 1,453,968
- --------------------------------------------------------------------------------
Cost of Service Revenues 1,261,226 1,204,838
Cost of Merchandise Sold 32,720 0
- --------------------------------------------------------------------------------
1,293,946 1,204,838
- --------------------------------------------------------------------------------
1,233,933 249,130
Gross Profit
Selling, General and Administrative Expense 527,786 876,902
- --------------------------------------------------------------------------------
Operating Income (Loss) 706,147 (627,772)
- --------------------------------------------------------------------------------
Other Income (Expense)
Interest income 6,258 8,956
Interest expense (202,136) (42,322)
Other (19,142) (5,955)
- --------------------------------------------------------------------------------
Total Other Income (Expense) (215,020) (39,321)
- --------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 491,127 (667,093)
Income Tax Expense (Benefit) (Note 7) 235,000 (196,864)
- --------------------------------------------------------------------------------
Net Income (Loss) $ 256,127 $ (470,229)
- --------------------------------------------------------------------------------
Earnings (Loss) per Share - Primary
and Fully Diluted $ 0.04 $ (0.07)
- --------------------------------------------------------------------------------
Weighted Average of Shares Outstanding -
Primary and Fully Diluted 7,154,635 6,379,900
- --------------------------------------------------------------------------------
See accompanying notes to financial statements
F-4
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Statements of Cash Flows
<CAPTION>
Three Months Ended April 30, 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 256,127 $ (470,229)
Adjustments to reconcile net income to
cash used in operating activities:
Depreciation and amortization 77,165 44,566
Provision for losses on accounts receivable (10,647) (16,376)
Impairment of investment in limited partnership 5,000 5,000
Increase in cash surrender value of life insurance (21,027) -
Deferred income taxes (32,000) (41,000)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (626,159) 327,263
Decrease (increase) in other assets 119,365 (307,540)
Decrease in checks issued against future deposits (2,432,310) -
Decrease in accounts payable and accrued expenses (15,798) (525,698)
(Decrease) increase in amounts due customers (11,272) 111,571
- --------------------------------------------------------------------------------------------------------------------------
Cash Used in Operating Activities (2,691,556) (872,443)
- --------------------------------------------------------------------------------------------------------------------------
Investment Activities
Loan to affiliate (9,843) -
Loans to officers - (54,034)
Collections on notes receivable - 3,417
Proceeds from surrender of life insurance policies 83,959 -
Capital expenditures (115,079) (53,559)
- --------------------------------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (40,963) (104,176)
- --------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of Common Stock - 30,000
Proceeds from issuance of Preferred Stock - 1,922,075
Borrowings under credit facility 9,740,000 -
Principal payments on credit facility (7,168,000) (19,714)
Borrowings under short-term debt agreements - 311,000
Repayments under short-term debt agreements (16,035) (217,000)
Registration costs (29,548) -
Preferred Stock dividends (3) -
- --------------------------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 2,526,414 2,026,361
- --------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash (206,105) 1,049,742
Cash, beginning of period 284,921 23,828
- --------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 78,816 $ 1,073,570
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements
</TABLE>
F-5
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
1. Unaudited Financial
Statements In the opinion of management, the unaudited
financial information as of April 30, 1997
contained herein reflects all adjustments
(consisting only of normal recurring adjustments)
necessary to fairly present such information in
accordance with generally accepted accounting
principles. The results of operations for the
three months ended April 30, 1997 are not
necessarily indicative of the results to be
expected for the entire year.
2. Related Party
Transactions The Company purchased $110,000 in data processing
services from an employment service company owned
by certain officers of the Company during the
three months ended April 30, 1996. The Company
acquired this employment service company for
$45,000 on January 1, 1997.
One of the Company's stockholders also owns a
majority of the stock of FMG, Inc., primarily an
investing company. At April 30, 1996, the Company
had a receivable from FMG of $53,171 at prime
plus .5%. The receivable was collected in full on
November 5, 1996.
The Company currently leases certain office space
from businesses controlled by stockholders of the
Company. Amounts paid for the office space were
approximately $57,300 and $46,600 for the three
months ended April 30, 1997 and 1996,
respectively. The Company occasionally charters
an airplane owned by a partnership in which one
of the Company's stockholders owns an interest.
Amounts paid to the partnership were $2,700 and
$0 for the three months ended April 30, 1997 and
1996, respectively.
Certain officers of the company, have from time
to time, received cash advances from the Company.
The officers executed promissory notes in favor
of the Company in the aggregate amounts of
$233,578. Such notes bear interest at the rate of
7.34% per annum.
3. Long-term Long-term debt consists of:
Debt and
Revolving Credit
Facility April 30, 1997
-------------------------------------------------
Revolving Credit Facility $9,696,000
Unsecured note payable to
stockholder (former owner of
Magazine Marketing, Inc.),
non-interest bearing, payable in
eight quarterly installments of
$10,000, discounted based on the
Company's effective borrowing rate 37,790
Obligations under capital lease 38,192
-------------------------------------------------
Total Long-term Debt 9,771,982
Less current maturities 70,816
-------------------------------------------------
Long-term Debt $9,701,166
-------------------------------------------------
F-6
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
The Company has an agreement providing for a
revolving loan up to $12,500,000. The bank has
the right to terminate the agreement upon not
less than thirteen months prior written notice.
Borrowings bear interest at a rate related to the
monthly LIBOR index rate plus a percentage
ranging from 2.5% to 3.5%, depending upon the
ratio of funded debt to earnings before interest,
taxes, depreciation and amortization (effectively
9.1875% at April 30, 1997). Borrowings are
secured by personal guarantees of Messrs. S.
Leslie Flegel and William H. Lee and their
spouses and by a security interest in
substantially all the Company's assets including
receivables, inventory, equipment, goods and
fixtures, software, contract rights, notes, and
general intangibles.
The revolving loan agreement requires the Company
to maintain certain ratios and a specified level
of net worth, restricts payment of dividends, and
limits additional indebtedness. The Company was
in compliance with such ratios at April 30, 1997.
4. Supplemental Cash
Flow Information Supplemental information on interest and income
taxes paid is as follows:
Three Months Ended
April 30, 1997 1996
-------------------------------------------------
Interest Paid $ 173,000 $ 41,000
Income Taxes Paid
(Refunded) $ (59,000) $ 222,000
-------------------------------------------------
On February 28, 1997, 7,721 shares of Common
Stock were issued as a dividend to the Preferred
Stockholders as of that date.
5. Advance Pay
Program The Company has established an Advance Pay
Program. Under this program the Company advances
an agreed upon percentage of the incentive
payments otherwise due the retailer from magazine
publishers upon quarterly submission of claims
for such payments. The claims otherwise due the
retailer become due the Company. Included in
trade receivables at April 30, 1997 is
$11,821,316 due the Company under the Advance Pay
Program (net of $2,682,766 due the program
participants). Income from the program was
approximately $809,000 and $277,000 during the
three months ended April 30, 1997 and 1996,
respectively.
F-7
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
6. Due to Retailers The Company has arrangements with certain of its
customers whereby the Company is authorized to
collect and deposit in its own accounts, checks
payable to its customers for incentive payments.
The Company retains the service revenue related
to such payments and pays the customer the
difference. The Company owes retailers $188,303
at April 30, 1997 under such arrangements.
7. Income Taxes Provision for federal and state income taxes
(benefit) in the statements of operations consist
of the following components:
Quarter Ended
April 30, 1997 1996
-------------------------------------------------
Current
Federal $ 213,000 $ (113,488)
State 54,000 (42,376)
-------------------------------------------------
Total Current 267,000 (155,864)
-------------------------------------------------
Deferred
Federal (26,000) (36,000)
State (6,000) (5,000)
-------------------------------------------------
(32,000) (41,000)
-------------------------------------------------
Total Income Tax
(Benefit) Expense $ 235,000 $ (196,864)
Deferred income taxes reflect the net tax effects
of temporary differences between the carrying
amount of the assets and liabilities for
financial reporting purposes and the amounts used
for income tax purposes. The sources of the
temporary differences and their effect on
deferred taxes are as follows:
April 30, 1997
-------------------------------------------------
Deferred Tax Assets
Allowance for doubtful accounts $ 122,000
Deferred compensation 18,000
Other 12,000
-------------------------------------------------
Total Deferred Tax Assets 152,000
-------------------------------------------------
Deferred Tax Liabilities
Income not previously taxed
under cash basis of accounting
for income tax purposes 274,000
Depreciation 26,000
Other 17,000
-------------------------------------------------
Total Deferred Tax Liabilities 317,000
-------------------------------------------------
Net Deferred Tax Liability 165,000
-------------------------------------------------
F-8
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
Classified as:
Current 20,000
Non-current 145,000
-------------------------------------------------
Net Deferred Tax Liability $ 165,000
-------------------------------------------------
The following summary reconciles income taxes at
the maximum federal statutory rate with the
effective rate for the first quarters of fiscal
1998 and 1997:
Quarter Ended April 30, 1997 1996
-------------------------------------------------
Income tax expense
(benefit) at statutory
rate $167,000 $(226,000)
State income tax expense
(benefit), net of
federal income tax
benefit 36,000 (27,000)
Non-deductible meals
and entertainment 10,000 15,000
Non-deductible goodwill
amortization 10,000 1,000
Non-deductible officers'
life insurance 4,000 10,000
Other, net 8,000 30,136
-------------------------------------------------
Income Tax Expense
(Benefit) $235,000 $(196,864)
F-9
<PAGE>
8. Subsequent Events On May 30, 1997, the Company acquired all of the
stock of Mike Kessler and Associates, Inc. (MKA)
for $2,500,000 of which $350,000 was paid upon
closing. The balance is due January 5, 1998 with
interest at 6.25%. Wachovia Bank of North
Carolina, N.A. issued a standby letter of credit
for $2,231,912 for the benefit of the former
owner of MKA covering the period from May 30,
1997 through January 31, 1998. The seller
operated MKA as a business engaged in the
collection of retail display allowances for
retail store chains. The Company intends to
continue the operation of such business.
Subsequent to April 30, 1997, the Company began
the process of filing a preliminary registration
statement with the Securities and Exchange
Commission. This statement is being filed for the
purpose of selling approximately 2,300,000 shares
of Common Stock. The Company anticipates the
aggregate selling price of all the securities to
approximate $9,200,000. The proposed issue date
of these securities is expected to be in
September, 1997.
On July 1, 1997, the Company's shareholders
approved a plan which gave the Board of Directors
the authority to execute a 1 for 1.21 reverse
stock split. As of the financial statement report
date, the Board of Directors have not effected
the reverse stock split.
In July, 1997, the Company exchanged all
outstanding shares of the Company's 1996 Series
7% Cumulative Convertible Preferred Stock for an
aggregate of 225,866 shares of Common Stock.
F-10
<PAGE>
Independent Auditors' Report
Board of Directors
The Source Information Management Company
St. Louis, Missouri
We have audited the balance sheet of The Source Information Management Company
as of January 31, 1997 and the related statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended January 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Source Information
Management Company at January 31, 1997 and the results of its operations and its
cash flows for each of the two years in the period ended January 31, 1997 in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
St. Louis, Missouri
March 27, 1997
F-11
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Balance Sheet
January 31, 1997
- --------------------------------------------------------------------------------
Assets (Note 4)
Current
Cash $ 284,921
Trade receivables (net of allowance for doubtful
accounts of $323,587) (Note 11) 12,922,738
Income taxes receivable (Note 8) 171,305
Notes receivable - officers (Notes 1 and 2) 58,395
Other current assets 87,306
- --------------------------------------------------------------------------------
Total Current Assets 13,524,665
- --------------------------------------------------------------------------------
Office equipment and furniture (Note 5) 1,823,004
Less accumulated depreciation and amortization 1,191,668
- --------------------------------------------------------------------------------
Net Office Equipment and Furniture 631,336
- --------------------------------------------------------------------------------
Other Assets
Notes receivable - officers (Notes 1 and 2) 175,183
Goodwill, net of accumulated amortization of
$72,209 (Note 9) 1,022,824
Cash surrender value of life insurance 104,358
Other 111,283
- --------------------------------------------------------------------------------
Total Other Assets 1,413,648
- --------------------------------------------------------------------------------
$ 15,569,649
- --------------------------------------------------------------------------------
See accompanying summary of accounting
policies and notes to financial statements
F-11
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Balance Sheet
January 31, 1997
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current
Revolving Line of Credit (Note 4) $ 7,124,000
Checks issued against future deposits 3,225,668
Accounts payable and accrued expenses 559,441
Due to retailers (Note 12) 199,575
Deferred income taxes (Note 8) 24,000
Current maturities of long-term debt (Note 3) 69,203
- -----------------------------------------------------------------------------
Total Current Liabilities 11,201,887
- -----------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 3) 22,814
- -----------------------------------------------------------------------------
Deferred Income taxes (Note 8) 173,000
- -----------------------------------------------------------------------------
Total Liabilities 11,397,701
- -----------------------------------------------------------------------------
Commitments (Note 5 and 6)
- -----------------------------------------------------------------------------
Redeemable Preferred Stock, $.01 par - shares authorized,
2,000,000; outstanding, 5,600 (Note 10) 522,506
Redeemable Common Stock
111,245 shares outstanding (Note 13) 503,820
- -----------------------------------------------------------------------------
1,026,326
- -----------------------------------------------------------------------------
Stockholders' Equity
Common Stock, $.01 par - shares authorized,
20,000,000; outstanding, 6,930,233 69,302
Additional paid-in-capital 2,745,180
Retained earnings 331,140
- -----------------------------------------------------------------------------
Total Stockholders' Equity 3,145,622
- -----------------------------------------------------------------------------
$ 15,569,649
See accompanying summary of accounting
policies and notes to financial statements
F-13
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Statements of Operations
Years Ended January 31, 1997 1996
- --------------------------------------------------------------------------------
Service Revenues $ 7,056,270 $ 7,195,176
Merchandise Revenues 242,177 926,008
- --------------------------------------------------------------------------------
7,298,447 8,121,184
- --------------------------------------------------------------------------------
Cost of Service Revenues 4,862,207 3,859,409
Cost of Merchandise 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) $ 313,994
- --------------------------------------------------------------------------------
Net Income per share (unaudited) $ 0.05
- --------------------------------------------------------------------------------
See accompanying summary of accounting
policies and notes to financial statements
F-14
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Statements of Stockholders' Equity
<CAPTION>
Common Stock Additional Total
Paid-in Retained Stockholders'
Capital Earnings Equity
--------------------------------------
Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, February 1, 1995 5,340,000 $ 53,400 $ 195,520 $ 1,377,587 $ 1,626,507
Issuance of Common Stock
(Note 9) 959,389 9,594 (9,594) - -
Issuance of Common Stock 75,000 750 225,375 - 226,125
Reclassification of Subchapter S
retained earnings, net of tax, net
of distributions to stockholders
(Note 9) - - 565,657 (592,657) (27,000)
Net income for the year - - - 191,994 191,994
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1996 6,374,389 $ 63,744 $ 976,958 $ 976,924 $2,017,626
Issuance of Common Stock 8,000 80 29,920 - 30,000
Conversion of 7% Preferred Stock
to Common Stock 423,197 4,232 1,395,337 - 1,399,569
Issuance of Common Stock to
purchase Magazine Marketing,
Inc. (Note 9) 100,000 1,000 249,000 - 250,000
Issuance of Common Stock in
payment of services 15,132 151 51,599 - 51,750
Dividend on Preferred Stock 9,515 95 42,366 (42,467) (6)
Net loss for the year - - - (603,317) (603,317)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1997 6,930,233 $ 69,302 $ 2,745,180 $ 331,140 $3,145,622
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements
F-15
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Statements of Cash Flows
<CAPTION>
Years Ended January 31, 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ (603,317) $ 191,994
Adjustments to reconcile net cash
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 - (33,990)
Collections on notes receivable 29,715 483
Collections from related party 53,171 280,884
Capital expenditures (276,729) (197,331)
- --------------------------------------------------------------------------------------------------
Cash (Used in) Provided by Investing Activities (468,843) 50,136
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements
F-16
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Statements of Cash Flows
<CAPTION>
Years Ended January 31, 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Financing Activities
Proceeds from issuance of Common Stock 30,000 226,125
Proceeds from issuance of Preferred Stock 1,922,075 -
Borrowings under long-term debt agreements 9,791,000 -
Principal payments on long-term debt (2,756,121) (183,387)
Borrowings under short-term debt agreements 2,836,366 2,739,884
Repayments under short-term debt agreements (4,550,081) (1,670,370)
Preferred Stock dividends (6) -
- ------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 7,273,233 1,112,212
- ------------------------------------------------------------------------------------------
Increase (Decrease) in Cash 261,093 (228,727)
Cash, beginning of period 23,828 252,555
- ------------------------------------------------------------------------------------------
Cash Provided by Financing Activities $ 284,921 $ 23,828
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements
F-17
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Basis of
Presentation The financial statements of The Source Information
Management Company reflect the accounts of companies
formerly known as Display Information Systems
Corporation (DISC), Periodical Management & Marketing,
Inc. (PMM) and Dixon's Modem Marketing Concepts, Inc.
and Tri-State Stores, Inc. (MMC). DISC and PMM merged
on February 1, 1995 and the net assets of MMC were
merged on June 15, 1995, as discussed in Note 9.
Business The Source Information Management Company (the Company)
is a provider of merchandise management information and
related services primarily in connection with the
display and marketing of magazines and other
periodicals. The Company assists retailers in
monitoring, documenting, claiming and collecting
incentive payments, primarily from publishers of
periodicals, and performs consulting and other services
in exchange for service revenues. The Company obtains
merchandising revenue from (a) consulting and other
services rendered to clients on other than a commission
basis and (b) the sale, as principal or broker, of
merchandise to the Company's retailer clients for
resale by them.
Concentrations of
Credit Risk Services are provided to mass merchandise, grocery,
convenience and pharmacy stores throughout the United
States and in Eastern Canada. Management periodically
performs credit evaluations of its customers and
generally does not require collateral. At the balance
sheet date, the Company had no concentrated credit risk
with any individual customer.
Revenue
Recognition Service revenues are recognized during the period in
which services are performed. Merchandising revenues
are recognized in the period in which the merchandising
services are provided.
Equipment and
Furniture Equipment and furniture are stated at cost.
Depreciation is computed using the straight-line method
for financial reporting and accelerated methods for
income tax purposes over the estimated useful lives of
5 to 7 years.
Income Taxes Income taxes are calculated using the asset and
liability method specified by Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes."
Goodwill Goodwill represents the excess of the cost of a company
acquired over the fair value of the net assets acquired
which is amortized over 15 years.
Pro Forma
Information Pro forma data is presented for 1996 which reflects a
provision for income taxes as if DISC, an S corporation
prior to the merger discussed in Note 9, had not been
an S corporation in 1996. Pro forma net income per
share for 1996 has been determined by dividing pro
forma net income by the weighted average number of
common shares outstanding during the year.
Stock-Based
Compensation The Company grants stock options for a fixed number of
shares to employees with an exercise price greater than
or equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB
Opinion No. 25). That Opinion requires that
compensation cost related to fixed stock option plans
be recognized only to the extent that the fair value of
F-18
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Summary of Accounting Policies
- --------------------------------------------------------------------------------
the shares at the grant date exceeds the exercise
price. Accordingly, the Company recognizes no
compensation expense for its stock option grants.
In October 1995, the Financial Accounting Standards
Board, issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 allows
companies to continue to account for their stock option
plans in accordance with APB Opinion No. 25, but
encourages the adoption of a new accounting method
based on the estimated fair value of employee stock
option. Pro forma net loss and loss per share,
determined as if the Company had applied the new
method, are disclosed within Note 6.
Accounting
Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Long-Lived
Assets In March 1995, Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets Disposed
Of" ("SFAS No. 121) was issued. SFAS No. 121 requires
that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an
entity be received for impairment whenever events or
changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. During
fiscal 1997, the Company adopted this statement and
determined that no impairment loss need be recognized
for applicable assets of continuing operations.
Reclassifications Certain 1996 amounts have been reclassified to conform
to the 1997 presentation.
F-19
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Related Party
Transactions The Company purchased data processing services from an
employment service company owned by certain officers of
the Company. There were approximately $275,000 and
$307,000 of such purchases made during 1997 and 1996,
respectively. The Company purchased this employment
service company for $45,000 on January 1, 1997.
One of the Company's stockholders also owns a majority
of the stock of FMG, Inc., primarily an investing
company. At January 31, 1996, the Company had a
receivable from FMG of $53,171 at prime plus .5%. The
receivable was collected in full on November 5,1996.
The Company has been engaged by Specialty Marketing
Co., Inc., a corporation in which Robert B. Dixon is
the principal shareholder, to provide consulting
services. In fiscal 1996 Specialty Marketing Co., Inc.
paid the Company $85,611 in consideration for the
Company's services.
The Company currently leases certain office space and
has, in the past, leased an airplane from partnerships
controlled by stockholders of the Company. Amounts paid
for the office space were $207,498 and $183,275 for
1997 and 1996, respectively. Amounts paid for the
airplane were $0 and $57,926 for 1997 and 1996,
respectively.
Certain officers of the company, have from time to
time, received cash advances from the Company. The
officers executed promissory notes in favor of the
Company in the aggregate amounts of $233,578. Such
notes bear interest at the rate of 7.34% per annum and
are payable in five equal installments which began
April 1996.
2. Notes Receivable Officers
The notes receivable relate to advances to certain
officers of the Company. The notes bear interest at
7.34% and are payable in five equal annual payments of
$69,489 which began April 1996. These notes are current
and the Company is unaware of any circumstances that
would negatively impact the collectibility of these
notes.
Other
The Company had a $120,000 unsecured, non-interest
bearing note from a non-affiliated company which
required quarterly installments of $6,000 through June
2000. The note was stated net of discount of $27,454
which was computed using a 10% imputed interest rate.
On March 31, 1996 the debtor defaulted on the note.
Based on the financial condition of the debtor, the
note was written off resulting in a charge to selling,
general and administrative expenses during the year
ended January 31, 1996 of $92,063.
F-20
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. Long-term Long-term debt consists of:
Debt
January 31, 1997
-------------------------------------------------------
Unsecured note payable to stockholder
(former owner of Magazine Marketing,
Inc.), non-interest bearing, payable
in eight quarterly installments of
$10,000, discounted based on the
Company's effective borrowing rate $ 46,710
-------------------------------------------------------
Obligations under capital lease (Note 5) 45,307
-------------------------------------------------------
Total Long-term Debt 92,017
Less current maturities 69,203
-------------------------------------------------------
Long-term Debt $ 22,814
-------------------------------------------------------
Annual maturities of long-term debt are as follows:
1998 - $69,203; 1999 - $22,814.
4. Revolving
Line of Credit The Company has an agreement providing for revolving
loans up to $12,500,000. The bank has the right to
terminate the agreement upon not less than thirteen
months prior written notice. Borrowings bear interest
at a rate related to the monthly LIBOR index rate plus
a percentage ranging from 2.5% to 3.5%, depending upon
the ratio of funded debt to earnings before interest,
taxes, depreciation and amortization (effectively
8.0039% at January 31, 1997). Borrowings are secured by
personal guarantees of Messrs. S. Leslie Flegel and
William H. Lee and their spouses and by a security
interest in substantially all the Company's assets
including receivables, inventory, equipment, goods and
fixtures, software, contract rights, notes, and general
intangibles.
The revolving loan agreement requires the Company to
maintain certain ratios and a specified level of net
worth, restricts payment of dividends, and limits
additional indebtedness. The Company was not in
compliance with certain ratios at January 31, 1997,
and, consequently, the debt has been classified as
current. However, the Company has received a waiver
from the bank stating that noncompliance with these
ratios is not considered a default at January 31, 1997.
5. Commitments Leases
The Company leases office space, an apartment, computer
equipment, and vehicles under leases that expire over
the next five years. The Company also leases an
administrative facility from a related party under an
operating lease that expires over the next 16 years. In
most cases, management expects that in the normal
course of business, leases will be renewed or replaced
with other leases. Rent expense was approximately
$427,000 and $410,000 for the years ended January 31,
1997 and 1996, respectively. Amounts paid to related
parties included in total rent expense were
approximately $207,000 and $240,000 for 1997 and 1996,
respectively.
F-21
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Office equipment and furniture includes $71,066 at
January 31, 1997 for equipment leases which have been
capitalized. Accumulated amortization was $35,148 at
January 31, 1997. Lease amortization is included in
depreciation and amortization expense.
Future minimum payments, by year and in the aggregate,
under capital leases and noncancelable operating leases
with initial or remaining terms of one year or more
consisted of the following at January 31, 1997:
Capital Operating
Year Ending January 31, leases leases
------------------------------------------------------
1998 $37,481 $ 458,791
1999 13,688 261,300
2000 -- 184,600
2001 -- 163,891
2002 -- 155,215
Thereafter -- 1,477,950
------------------------------------------------------
Total minimum lease
payments 51,169 $2,701,747
----------
Amount representing
interest 5,862
------------------------------------------------------
Present Value of Net
Minimum Lease Payments $45,307
------------------------------------------------------
Litigation
The Company has pending certain legal actions and
claims incurred in the normal course of business and is
actively pursuing the defense thereof. In the opinion
of management, these actions and claims are either
without merit or are covered by insurance and will not
have a material adverse effect on the Company's
financial position.
6. Employee Profit Sharing and 401(k) Plan
Benefit Plans
The Company has a combined profit sharing and 401(k)
Plan. Annual contributions to the profit sharing
portion of the Plan are determined by the Board of
Directors and may not exceed the amount that may be
deducted for federal income tax purposes. Profit
sharing contributions charged against operations were
$0 and $10,000 for the years ended January 31, 1997 and
1996, respectively.
Under the 401(k) portion of the Plan, all eligible
employees may elect to contribute 2% to 20% of their
compensation up to the maximum allowed under the
Internal Revenue Code. The Company matches one half of
an employee's contribution, not to exceed 5% of the
employee's salary. The amounts matched by the Company
during the years ended January 31, 1997 and 1996
pursuant to this Plan were approximately $50,000 and
$40,000, respectively.
F-22
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Deferred Compensation Plan
During the current year, the Company established an
unfunded deferred compensation plan for certain
officers, who elect to defer a percentage of their
current compensation. The Company does not make
contributions to the plan and is responsible only for
the administrative costs associated with the plan.
Benefits are payable to the participating officers upon
their death or termination of employment. From the
deferred funds, the Company has purchased certain life
insurance policies. However, the proceeds and surrender
value of these policies are not restricted to pay
deferred compensation benefits when they are due.
Stock Option Plan
In August 1995, the Company established The Source
Company 1995 Incentive Stock Option Plan for key
employees and reserved 630,000 shares of common stock
for such plan. Under the plan, the Stock Option
Committee may grant stock options to key employees at
not less than one hundred percent (100%) of the fair
market value of the Company's Common Stock at the date
of grant. The durations and exercisability of the
grants vary according to the individual options
granted. During 1997 the Company granted options for
225,000 shares, but had 125,000 shares forfeited. As of
January 31, 1997, options with a remaining contractual
life of 5 years to purchase 100,000 shares at a price
of $4.63 were outstanding, 20,000 of which were
exercisable.
As discussed in the Summary of Accounting Policies, the
Company applies APB Opinion No. 25 and related
interpretations in accounting for this plan.
Accordingly, no compensation cost has been recognized
for its incentive stock option plan. Had compensation
cost for the Company's stockbased compensation plan
been determined based on the fair value at the grant
dates for awards under the plan consistent with the
method of SFAS No. 123, the Company' net loss and loss
per share would have been reduced to the pro forma
amounts indicated below:
Year Ended January 31, 1997
-------------------------------------------------------
Net loss As reported (603,317)
Pro forma (611,369)
Primary loss per share As reported (0.09)
Pro forma (0.09)
Fully diluted loss per share As reported (0.09)
Pro forma (0.09)
-------------------------------------------------------
The fair value of each option granted in 1996 is
estimated on the date of grant using the Black-Scholes
option-pricing model with the following
weighted-average assumptions used: dividend yield of 0
percent; risk-free interest rate of 4.88 percent;
volatility of .3; and expected lives of 1 year. The
fair value of options granted during the year is $.66.
F-23
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Stock Award Plan
In September 1996, the Company adopted The Source
Company Stock Award Plan for all employees and reserved
50,000 shares of Common Stock for such plan. Under the
plan, the stock award committee, appointed by the board
of directors of the Company, shall determine the
employees to whom awards shall be granted.
On September 18, 1996, 10,050 shares of Common Stock
were awarded to certain employees under the plan.
7. Supplemental Supplemental information on interest and income taxes
Cash Flow paid is as follows:
Information
Years Ended January 31, 1997 1996
-------------------------------------------------------
Interest $ 285,000 $ 109,000
Income Taxes $ 264,000 $ 254,000
-------------------------------------------------------
Capital lease obligations of $15,687 and $59,095 were
incurred in 1997 and 1996, respectively, when the
Company entered into leases for new office equipment.
On August 30, 1996, 9,515 shares of common stock were
issued as a dividend to the preferred stockholders as
of that date.
During 1997 the Company issued 100,000 shares and
111,245 shares of common stock in connection with the
acquisitions of Magazine Marketing, Inc. and Readers
Choice, Inc. (Note 9). During 1996 the Company issued
959,389 shares of common stock in connection with the
acquisition of the Company by Periodico, Inc. (Note 9).
8. Income Taxes Provision for federal and state income taxes (benefit)
in the statements of operations consist of the
following components:
Year Ended January 31, 1997 1996
-------------------------------------------------------
Current
Federal $(102,768) $355,000
State (15,356) 110,000
-------------------------------------------------------
Total Current (118,124) 465,000
-------------------------------------------------------
Pro Forma (Unaudited)
Federal (105,000)
State (17,000)
-------------------------------------------------------
Total Pro Forma (122,000)
-------------------------------------------------------
Deferred
Federal (225,386) (46,000)
State (33,678) (13,000)
-------------------------------------------------------
(259,064) (59,000)
-------------------------------------------------------
Total Income Tax (Benefit)
Expense $(377,188) $284,000
-------------------------------------------------------
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of
the assets and liabilities for financial reporting
F-24
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
purposes and the amounts used for income tax purposes.
The sources of the temporary differences and their
effect on deferred taxes are as follows:
January 31, 1997 1996
-------------------------------------------------------
Deferred Tax Assets
Allowance for doubtful
accounts $ 126,000 $ 38,000
Deferred compensation 14,000 -
Other 3,000 -
-------------------------------------------------------
Total Deferred Tax Assets 143,000 38,000
-------------------------------------------------------
Deferred Tax Liabilities
Income not previously taxes
under cash basis of
accounting for income tax
purposes 312,000 446,000
Depreciation 28,000 28,000
-------------------------------------------------------
Total Deferred Tax Liabilities 340,000 474,000
-------------------------------------------------------
Net Deferred Tax Liability 197,000 436,000
-------------------------------------------------------
Classified as:
Current 24,000 110,000
Non-current 173,000 326,000
-------------------------------------------------------
Net Deferred Tax Liability $ 197,000 $436,000
-------------------------------------------------------
The following unaudited summary reconciles income taxes
at the maximum federal statutory rate with the
effective rate for 1997 and the pro forma effective
rate for 1996:
Year Ended January 31, 1997 1996
-------------------------------------------------------
Income tax (benefit) expense
at statutory rate $(333,372) $ 204,000
State income tax (benefit)
expense, net of federal
income tax benefit (80,421) 52,000
Non-deductible meals and
entertainment 35,320 26,000
Non-deductible officers'
life insurance (3,250) 4,300
Non-deductible goodwill
amortization 2,306 2,300
Other, net (4,600) 2,229
-------------------------------------------------------
Income Tax (Benefit) Expense $(377,188) $284,000
-------------------------------------------------------
F-25
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. Business Pooling of Interests of DISC and PMM
Combinations
On February 1, 1995 DISC and PMM merged into The Source
Company. DISC stockholders exchanged all of their
shares of common stock for 2,520,000 shares of Common
Stock of The Source Company, and PMM stockholders
exchanged all of their shares of common stock for
2,520,000 shares of Common Stock of The Source Company.
The merger has been accounted for as a pooling of
interests and, accordingly, the Company's financial
statements have been restated for all periods prior to
the merger to include the results of operations,
financial position, and cash flows of DISC and PMM.
The S corporation retained earnings of DISC totaling
$462,389 representing undistributed earnings on
February 1, 1995 has been credited to additional
paid-in capital net of deferred taxes of approximately
$122,000 which has been recognized through a charge to
income tax expense.
Acquisition of the Company by Periodico, Inc.
On May 1, 1995 Periodico, Inc. (formerly Garner
Investments, Inc.) acquired the Company through an
exchange of stock. Periodico then changed its name to
The Source Company.
Since Periodico had no significant assets or operations
at the transaction date, the transaction was accounted
for as an issuance of 959,389 shares of common stock by
the Company in exchange for the net assets of
Periodico, which were recorded at Periodico's cost
basis and amounted to $0 at the transaction date.
Acquisition of Dixon's Modern Marketing
Concepts, Inc. and Tri-State Stores, Inc.
On June 15, 1995 the Company acquired the assets of
Dixon's Modem Marketing Concepts, Inc. and Tri-State
Stores, Inc. (MMC) in exchange for 300,000 shares of
Common Stock of The Source Company and the assumption
by the Company of all the liabilities of MMC. The
transaction has been accounted for as a pooling of
interests and, accordingly, the Company's financial
statements have been restated for all periods prior to
the acquisition to include the results of operations,
financial position, and cash flows of The Source
Company and MMC.
The S corporation retained earnings of MMC totaling
approximately $225,000, representing undistributed
earnings on June 15, 1995 net of $27,000 distributed in
lieu of taxes to shareholders, has been credited to
additional paid-in capital.
Revenues and net income (loss) for the individual
entities and combined prior to the mergers were as
follows:
F-26
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
The
Source
Company MMC Combined
-------------------------------------------------------------------
February 1 to June 15, 1995
Revenues $2,175,383 $ 435,529 $2,610,912
Net income (loss) $ 96,829 $ (5,609) $ 91,220
-------------------------------------------------------------------
Acquisition of Magazine Marketing, Inc.
On June 28, 1996 the Company acquired all of the stock
of Magazine Marketing, Inc. in exchange for 100,000
shares of Common Stock of the Company and $275,000 in
cash. In addition, the Company shall pay $10,000 at the
end of each quarter for a two year period following the
closing date (or a total of $80,000).
The transaction has been accounted for as a purchase
and, accordingly, the assets and liabilities have been
recorded at fair market value. Results of operations
have been included as of the effective date of the
transaction. The purchase price of the transaction
exceeded the fair value of the assets acquired in the
amount of $704,748 and is being amortized over 15
years.
Acquisition of Readers Choice, Inc.
On June 30, 1996 the Company acquired all of the issued
and outstanding shares of Readers Choice, Inc., a
wholly owned subsidiary of United Magazine Company, in
exchange for 111,245 shares of Common Stock of the
Company. This transaction has been accounted for as a
purchase and accordingly, the assets and liabilities
have been recorded at fair market value. Results of
operations have been included as of the effective date
of the transaction. This transaction did not meet any
of the conditions to be considered a significant
business combination. The purchase price of the
transaction exceeded the fair value of the assets
acquired in the amount of $280,507 and is being
amortized over 15 years.
10. Redeemable
Preferred
Stock The Company has authorized 2,000,000 shares of $.01 par
Preferred Stock. On March 13, 1996 65,000 shares were
designated as 1996 Series 7% Convertible Preferred
Stock. Rights and restrictions on the remaining shares
will be established if, and when, any shares are
issued.
Each share of the 1996 Series 7% Convertible Preferred
Stock entitles its holder to receive an annual
dividend, when and as declared by the Board of
Directors, of $7 per share payable in shares of the
Company's Common Stock; to convert it into shares of
Common Stock; to receive $100 per share in the event of
dissolution, liquidation, or winding up of the Company,
whether voluntary or involuntary; and subject to
certain conditions in the Certificate of Designations,
Preferences and Relative Rights of 1996 Series 7%
Convertible Preferred Stock, may be redeemed at the
option of the 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.
F-27
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Each share of the 1996 Series 7% Convertible Preferred
Stock shall be convertible, at the option of the holder
thereof, into shares of the Common Stock of the
Company, at the conversion price equal to 80% of the
current market price of the Common Stock, provided,
however, the conversion price shall not be less than
$3.50 nor more than $5.50 per share of Common Stock.
For purposes of such conversion, each share of the 1996
Series 7% Convertible Preferred Stock shall be accepted
by the Company for surrender at its Liquidation Amount
of $100 per share.
During March 1996 the Company issued 20,000 shares of
1996 Series 7% Convertible Preferred Stock for $100 per
share. Commissions and expenses totalling $137,925 were
incurred in connection with the stock issuances of
which $77,925 was paid in cash and $60,000 was paid by
issuance of another 600 shares of preferred stock.
On June 3, 1996 an investor converted 5,000 shares of
the Company's 1996 Series 7% Convertible Preferred
Stock into common Stock of the Company. The conversion
price was $3.55 per share, which resulted in the
issuance of 140,714 shares of Common Stock. This
conversion also resulted in the issuance to certain of
the Company's financial advisors of options to purchase
an additional 2,814 shares of the Common Stock of the
Company. This option to purchase is exercisable for a
two year period at an exercise price equal to $4.26 per
share.
During March 1996 the Company issued 20,000 shares of
1996 Series 7% Convertible Preferred Stock for $100 per
share. Commissions and expenses totaling $137,925 were
incurred in connection with the stock issuances of
which $77,925 was paid in cash and $60,000 was paid by
issuance of another 600 shares of preferred stock.
On June 3, 1996 an investor converted 5,000 shares of
the Company's 1996 Series 7% Convertible Preferred
Stock into Common Stock of the Company. The conversion
price was $3.55 per share, which resulted in the
issuance of 140,714 shares of Common Stock. This
conversion also resulted in the issuance to certain of
the Company's financial advisors of options to purchase
an additional 2,814 shares of the Common Stock of the
Company. This option to purchase is exercisable for a
two year period at an exercise price equal to $4.26 per
share.
On July 29, 1996 two investors converted 2,250 and 500
shares of the Company's 1996 Series 7% Convertible
Preferred Stock into Common Stock of the Company. The
conversion price was $3.65 per share, which resulted in
the issuance of 61,643 and 13,698 shares, respectively,
of Common Stock.
On August 30, 1996 the Company issued a common stock
dividend to investors who held the Company's 1996
Series 7% Convertible Preferred Stock. At this date
there were 12,850 shares of such stock outstanding. The
7% dividend resulted in a common stock dividend of
9,515 shares based on an issuance price of $4.46 per
share.
On September 11, 1996 an investor converted 5,000
shares of the Company's 1996 Series 7% Convertible
Preferred Stock into Common Stock of the Company. The
conversion price was $3.50 per share, which resulted in
the issuance of 142,857 shares of Common Stock. This
conversion also resulted in the issuance to certain of
the Company's financial advisors of options to purchase
F-28
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
an additional 2,857 shares of the Common Stock of the
Company. This option to purchase is exercisable for a
two year period at an exercise price equal to $4.20 per
share.
On September 22, 1996 an investor converted 2,250
shares of the Company's 1996 Series 7% Convertible
Preferred Stock into Common Stock of the Company. The
conversion price was $3.50 per share, which resulted in
the issuance of 64,285 shares of Common Stock.
11. Advance Pay
Program The Company has established an Advance Pay Program.
Under this program the the Company advances an agreed
upon percentage of the incentive payments otherwise due
the retailer from magazine publishers upon quarterly
submission of claims for such payments. The claims
otherwise due the retailer become due the Company.
Included in trade receivables at January 31, 1997 is
$11,206,666 due the Company under the Advance Pay
Program (net of $2,314,727 due the program
participants). Income from the program was
approximately $1,150,000 during 1997 and was not
material in 1996.
12. Due to
Retailers The Company has arrangements with certain of its
customers whereby the Company is authorized to collect
and deposit in its own accounts, checks payable to its
customers for incentive payments. The Company retains
the service revenue related to such payments and pays
the customer the difference. The Company owes retailers
$199,575 at January 31, 1997 under such arrangements.
13. Redeemable
Common Stock During June 1996, the Company issued 100,000 shares of
Common Stock to James W. Looman in connection with the
purchase of Magazine Marketing, Inc. (Note 9). Pursuant
to the terms of the Purchase Agreement, Mr. Looman was
granted an option to sell his shares to the Company at
a price of $1.00 per share if, at any time during the
two year period following the acquisition date (June
28, 1996) the market value of all shares acquired in
the transaction becomes less than $100,000 for ten
consecutive trading days.
Also during June 1996, the Company issued 111,245
shares of Common Stock to United Magazine Company
("United Magazine") in connection with the purchase of
Readers Choice, Inc. (Note 9). Pursuant to the terms of
the Purchase Agreement, United Magazine was granted an
option to sell its shares to the Company at a price of
$4.00 per share if the Company's stock price for the
last five days of any calendar quarter during the two
year period following the acquisition date (June 30,
1996) is less than $4.00 per share.
The stock which was issued in each of the foregoing
transactions is recorded at the value which was
assigned in each of the respective transactions.
F-29
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
14. Fair Values of
Financial
Instruments The following methods and assumptions were used to
estimate the fair values of each class of financial
instruments for which it is practicable to estimate
that value:
Trade Receivables and Cash Surrender Value of Life
Insurance
The carrying amounts approximate fair value because of
the short maturity of those instruments.
Notes Receivable - Officers
The fair value is estimated by discounting the future
cash flows using the current interest rates at which
similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Accounts Payable and Accrued Expenses, and Amounts Due
to Retailers
Carrying amounts are reasonable estimates of fair value
due to the relatively short period between origination
and expected repayment of these instruments.
Long-term Debt (Excluding
Obligations Under Capital Leases)
The carrying amount approximates the fair value because
the financial instrument was originally recorded at its
discounted value.
Revolving Line of Credit
It is presumed that the carrying amount is a reasonable
estimate of fair value because the financial instrument
bears a variable interest rate.
The estimated fair values of the Company's financial
instruments are as follows:
Carrying Fair
January 31, 1997 value value
---------------------------------------------------------------
Financial Assets
Trade receivables $ 12,922,738 $ 12,922,738
Notes Receivable - officers $ 233,578 $ 207,600
Cash surrender value of life
insurance $ 104,358 $ 104,358
Financial Liabilities
Accounts payable and
Accrued expenses $ 559,441 $ 559,441
Due to retailers $ 199,575 $ 199,575
Long-term debt (excluding
obligations under capital
leases) $ 46,710 $ 46,710
Revolving line of credit $ 7,124,000 $ 7,124,000
---------------------------------------------------------------
F-30
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
15. Earnings Per
Share In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS No. 128).
The new standard simplifies the standards for computing
earnings per share and requires presentation of two new
amounts, basic and diluted earnings per share. The
Company will be required to retroactively adopt this
standard when it reports its operating results for the
fiscal quarter and year ending January 31, 1998. When
the Company adopts SFAS No. 128, it expects no changes
in its previously reported Primary and Fully Diluted
earnings per share.
F-31
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
16. Quarterly
Financial Data
(unaudited)
<CAPTION>
- -------------------------------------------------------------------------------------------
1997 April 30 July 31 October 31 January 31
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $1,453,968 $1,304,530 $2,100,190 $2,439,759
Gross Profit 249,130 147,022 795,390 1,042,317
Net Income (Loss) (470,229) (435,311) 62,410 239,813
Earnings (loss) per
common share (0.07) (0.07) 0.01 0.04
Weighted average
number of common
shares outstanding 6,379,900 6,508,607 6,793,267 6,879,147
1996
Net Sales $2,032,637 $1,887,799 $2,487,985 $1,712,763
Gross Profit 1,101,895 1,086,215 1,064,531 459,321
Net Income (Loss) 80,435 155,726 187,845 (232,012)
Earnings (loss) per
common share 0.02 0.02 0.03 (0.04)
Weighted average
number of common
shares outstanding 5,340,000 6,299,389 6,324,389 6,374,389
</TABLE>
F-32
<PAGE>
No underwriter, dealer, salesperson or
other pers n has been authorized to give
any information or to make any
representations other than those
contained in this prospectus and, if
given or made, such other information or THE SOURCE INFORMATION
representations must not be relied upon MANAGEMENT COMPANY
as having been authorized by the Company
or any Underwriter. Neither the delivery
of this Prospectus nor any sale made
hereunder shall, under any
circumstances, create any implication
that there has been no change in the
affairs of the Company since the date
hereof or that the information contained 2,000,000 SHARES
herein is correct as of any date
subsequent to the date hereof. This
Prospectus does not constitute an offer COMMON STOCK
to sell or a solicitation of an offer to
buy any securities offered hereby by
anyone in any jurisdiction in which such
offer or solicitation is not authorized
or in which the person making such offer
or solicitation is not qualified to do
so or to anyone to whom it is unlawful
to make such offer or solicitation.
--------------------------------
TABLE OF CONTENTS
Page
Prospectus Summary .............
Risk Factors.................... ---------
Use of Proceeds ................ P R O S P E C T U S
Price Range of Common Stock..... ---------
Dividend Policy.................
Capitalization .................
Selected Consolidated Financial
Data ..........................
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations ....................
Business .......................
Management .....................
Principal and Selling
Shareholders ..................
Description of Capital
Stock ......................... DONALD & CO.
Certain Provisions of the SECURITIES, INC.
Articles of Incorporation
and Bylaws.....................
Shares Eligible for Future
Sale ..........................
Underwriting ...................
Legal Matters ..................
Experts .......................
Available Information ..........
Index to Consolidated
Financial Statements ..........
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Sections 351.355(1) and (2) of The General and Business Corporation Law
of the State of Missouri provide that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful, except that, in the case of an action or suit by or in the
right of,the corporation, the corporation may not indemnify such persons against
judgments and fines and no person shall be indemnified as to any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of the person's duty to the
corporation, unless and only to the extent that the court in which the action or
suit was brought determines upon application that such person is fairly and
reasonably entitled to indemnity for proper expenses. Section 351.355(3)
provides that, to the extent that a director, officer, employee or agent of the
corporation has been successful in the defense of any such action, suit or
proceeding or in defense of any claim, issue or matter therein, the person shall
be indemnified against expenses, including attorney's fees, actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Section 351.355(7) provides that a corporation may provide
additional indemnification to any person indemnifiable under subsection (1) of
(2), provided such additional indemnification is authorized by the corporation's
articles of incorporation or an amendment thereto or by a shareholder-approved
bylaw or agreement, and provided-further that no person shall thereby be
indemnified against conduct which was finally adjudged to have been knowingly
fraudulent, deliberately dishonest or willful misconduct or which involves
an-accounting-for profits pursuant to Section 16(b) of the Exchange Act.
Paragraph 9 of the Articles of Incorporation of the Company permits the Company
to enter into agreements with its directors, officers, employees and agents to
provide such indemnification as deemed appropriate. Paragraph 9 also provides
that the Company may extend to its directors and executive officers such
indemnification and additional indemnification.
The Company has entered into an indemnification agreement with its
directors and certain of its executive officers. The form of indemnity agreement
provides that such persons will be indemnified to the full extent permitted by
applicable law against all expenses (including attorneys' fees), judgments,
fines, penalties and amounts paid in settlement of any threatened, pending or
completed action, suit or proceeding, on account of such person's services as a
director or executive officer of the Company or any other company or enterprise
in which he is serving at the request of the Company, or as a guarantor of any
debt of the Company. To the extent the indemnification provided under the
agreement exceeds that permitted by applicable law, indemnification may be
unenforceable or may be limited to the extent it is found by a court of
competent jurisdiction to be contrary to public policy.
The Company has procured and intends to maintain a policy of insurance
under which the directors and officers of the Company will be insured, subject
to the limits of the policy, against certain losses arising from claims made
against such directors and officers by reason of any acts or omissions covered
under such policy in their respective capacities as directors or officers.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the shares of Preferred Stock offered
hereby, all of which will be paid by the Company:
SEC Registration fee..................................... $ 3,477
NASD Filing fee.......................................... 1,508
State securities law compliance.......................... 30,000
Listing fees............................................. 7,500
Transfer agent fees and expenses......................... 5,000
Printing and engraving................................... 75,000
Legal fees and expenses.................................. 100,000
Accounting fees and expenses............................. 50,000
Non-accountable expense allowance........................ 160,000
Miscellaneous............................................ 17,515
Total................................................ $450,000
=======
- ---------------------------
Item 26. Recent Sales of Unregistered Securities
Explanatory Note: The following share and per share data does not
reflect the proposed 1-to-1.21 reverse stock split.
During February of 1996, the Company issued 8,000 shares of Common
Stock to Dennis Mensch for $3.75 per share in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
During March of 1996, the Company issued 2,250, 2,250 and 500 shares of
1996 Series 7% Convertible Preferred Stock for $100 per share to Messrs. Aron
Katzman, Timothy A. Braswell and Harry L. Franc, III pursuant to Section 4(2) of
the Securities Act of 1933. Each share of the 1996 Series 7% Convertible
Preferred Stock entitles its holder to receive an annual dividend, when and as
declared by the Board of Directors, of $7 per share payable in shares of the
Company's Common Stock; to convert it into shares of common stock subject to the
conversion rights described in the Certificate of Designations, Preferences and
Relative Rights of 1996 Series 7% Convertible Preferred Stock (the Certificate);
to receive $100 per share in the event of dissolution, liquidation, or winding
up of the Company, whether voluntary or involuntary; and subject to certain
conditions in the Certificate, may be redeemed at the option of the Company at a
price of $100 per share within 30 days following the effective date of a merger
or consolidation in which the Company is not the surviving entity.
In a series of transactions, taking place in August 1996 and September
1996, exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, the Company issued 5,082 shares of Common Stock to Financial Power Network
in exchange for $21,600 of marketing services.
During June 1996, the Company issued 100,000 shares of Common Stock to
James W. Looman in connection with the purchase of Magazine Marketing, Inc. in a
transaction exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933.
II-2
<PAGE>
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 27. Exhibits
Exhibit
Number Description
1.1 Form Underwriting Agreement
2.1 Stock Purchase Agreement dated as of April 24, 1997 among
Michael Kessler, Mike Kessler and Associates, Inc., The
Source Company and K-Sub, Inc.
2.2 First Amendment to Stock Purchase Agreement dated as of
May 19, 1997, among Michael and Loretta B. Kessler, Mike
Kessler and Associates, Inc. and The Source Company
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
3.3 Amendment to Articles of Incorporation of the Company
4.1 Form of Common Stock Certificate
4.4 Form of Representative's Warrants
5.1 Opinion of Gallop, Johnson & Neuman, L.C.
10.1 Form of Promissory Notes with S. Leslie Flegel and
Dwight DeGolia
10.2 Form of Indemnity Agreement with Officers and Directors
10.3 Lease Agreement dated June 28, 1991 with 711 Gallimore
Partnership
10.6 Lease Agreement dated January 1, 1993 with Robert B. Dixon
10.8 Addendum to the Lease Agreement, dated as of
January 1, 1994, with 711 Gallimore Partnership
10.9 Addendum to the Lease Agreement, dated as of
January 1, 1996, with 711 Gallimore Partnership
10.10 Addendum to the Lease Agreement, dated as of
April 1, 1996, with 711 Gallimore Partnership
10.11 Addendum to the Lease Agreement, dated as of
April 25, 1996, with 711 Gallimore Partnership
10.12 Stock Acquisition Agreement dated June 20, 1996
among James Looman, Magazine Marketing, Inc. and
The Source Company
10.13 $8,700,000 Credit Agreement dated as of November 14,
1996 between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.14 Amendment to Credit Agreement dated December 19, 1996
by and between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.15 Amendment to Credit Agreement dated January 31, 1997
by and between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.16 The Source Company Common Stock Award Plan.
II-3
<PAGE>
10.17 The Source Company 1995 Incentive Stock Option Plan.
10.18 Employment Agreement, effective February 1, 1996, with
John P. Watkins
10.19 Employment Agreement dated as of August 30, 1995, with
Robert G. Shupe
10.20 Agreement with Dwight L. DeGolia
10.21 Front End Management Agreement with Kmart Corporation
10.22 Amendment to Credit Agreement dated July 31, 1997 by and
between The Source Company and Wachovia Bank, N.A.
10.23 Form of Financial Consulting Agreement with Donald & Co.
Securities, Inc. (to be filed by Amendment)
11.1 Statement Regarding Computation of Earnings Per Share
21.1 Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
23.3 Consent of Gallop, Johnson & Neuman, L.C.
(included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule (Filed in EDGAR version only)
Item 28. Undertakings
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
(b) If the issuer relies on Rule 430A under the Securities Act, that
the small business issuer will:
(1) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the small business issuer under Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it
Effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at the time
as the initial bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Registration
Statement to be signed on its behalf by the undersigned, in the County of St.
Louis, State of Missouri, on the 31st day of July, 1997.
THE SOURCE INFORMATION MANAGEMENT COMPANY
By: /s/ S. Leslie Flegel
--------------------------------------
S. Leslie Flegel
Chairman and Chief Executive Officer
Each of the undersigned hereby appoints S. Leslie Flegel and W. Brian
Ro gers, and each of them (with full power to act alone), as attorneys and
agents for the undersigned, with full power of substitution, for and in the
name, place and stead of the undersigned, to sign and file with the Securities
and Exchange Commission under the Securities Act of 1933 any and all amendments
and exhibits to the Registration Statement and any and all applications,
instruments and other documents to be filed with the Securities and Exchange
Commission pertaining to the registration of the securities covered hereby, with
full power to do and perform any and all acts and things whatsoever requisite or
desirable.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ S. Leslie Flegel Chief Executive Officer July 31, 1997
- ------------------------------- and Chairman of the Board
S. Leslie Flegel (principal executive officer)
/s/ W. Brian Rodgers Chief Financial Officer July 31, 1997
- ------------------------------- (principal financial and
W. Brian Rodgers accounting officer)
/s/ William H. Lee President, Chief Operating July 31, 1997
- ------------------------------- Officer and Director
William H. Lee
/s/ Timothy A. Braswell Director July 14, 1997
- -------------------------------
Timothy A. Braswell
/s/ Harry L. "Terry" Franc, III Director July 31, 1997
- -------------------------------
Harry L. "Terry" Franc, III
/s/ Aron Katzman Director July 31, 1997
- -------------------------------
Aron Katzman
II-5
<PAGE>
/s/ Randall Minix Director July 31, 1997
- -------------------------------
Randall Minix
II-6
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
1.1 Form of Underwriting Agreement
2.1(1) Stock Purchase Agreement dated as of April 24, 1997
among Michael Kessler, Mike Kessler and Associates,
Inc., The Source Company and K-Sub, Inc.
2.2(1) First Amendment to Stock Purchase Agreement dated as
of May 19, 1997, among Michael and Loretta B. Kessler,
Mike Kessler and Associates, Inc. and The Source Company
3.1(2) Articles of Incorporation of the Company
3.2(2) Bylaws of the Company
3.3 Amendment to Articles of Incorporation of the Company
4.1 Form of Common Stock Certificate
4.4 Form of Representative's Warrants
5.1 Opinion of Gallop, Johnson & Neuman, L.C.
10.1(2) Form of Promissory Notes with S. Leslie Flegel and
Dwight DeGolia
10.2(2) Form of Indemnity Agreement with Officers and Directors
10.3(2) Lease Agreement dated June 28, 1991 with 711 Gallimore
Partnership
10.6(2) Lease Agreement dated January 1, 1993 with Robert B.
Dixon
10.8(3) Addendum to the Lease Agreement, dated as of
January 1, 1994, with 711 Gallimore Partnership
10.9(3) Addendum to the Lease Agreement, dated as of
January 1, 1996, with 711 Gallimore Partnership
10.10(3) Addendum to the Lease Agreement, dated as of
April 1, 1996, with 711 Gallimore Partnership
10.11(3) Addendum to the Lease Agreement, dated as of
April 25, 1996, with 711 Gallimore Partnership
10.12(4) Stock Acquisition Agreement dated June 20, 1996
among James Looman, Magazine Marketing, Inc. and
The Source Company
E-1
<PAGE>
10.13(4) $8,700,000 Credit Agreement dated as of November
14, 1996 between The Source Company and Wachovia
Bank of North Carolina, N.A.
10.14(4) Amendment to Credit Agreement dated December 19,
1996 by and between The Source Company and Wachovia
Bank of North Carolina, N.A.
10.15(4) Amendment to Credit Agreement dated January 31, 1997
by and between The Source Company and Wachovia Bank
of North Carolina, N.A.
10.16(5) The Source Company Common Stock Award Plan
10.17(5) The Source Company 1995 Incentive Stock Option Plan
10.18 Employment Agreement, effective February 1, 1996, with
John P. Watkins
10.19 Employment Agreement dated as of August 30, 1995, with
Robert G. Shupe
10.20 Agreement with Dwight L. DeGolia
10.21 Front End Management Agreement with Kmart Corporation
10.22 Amendment to Credit Agreement dated July 31, 1997 by
and between The Source Company and Wachovia Bank, N.A.
10.23 Form of Financial Consulting Agreement with Donald & Co.
Securities, Inc. (to be filed by Amendment)
11.1(4) Statement Regarding Computation of Earnings Per Share
21.1 Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
23.3 Consent of Gallop, Johnson & Neuman, L.C.
(included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
27.1(6) Financial Data Schedules
- ----------------------------
(1) Incorporated by reference to Form 8-K, filed on June 13, 1997.
(2) Incorporated by reference to Registration Statement on Form 10-SB (File
no. 0-26238) first filed on June 12, 1995.
(3) Incorporated by reference to Form 10-KSB for the fiscal year ended
January 31, 1996.
E-2
<PAGE>
(4) Incorporated by reference to Form 10-KSB for the fiscal year ended
January 31, 1997.
(5) The Source Company Common Stock Award Plan and The Source Company 1995
Incentive Stock Option Plan incorporated by reference to Form S-8 (File
No. 333-16039) filed on November 13, 1996, as exhibits 4.4 and 4.5
thereof, respectively.
(6) Incorporated by reference to Form 10-KSB for the fiscal year ended
January 31, 1997 and to Form 10-QSB for the period ended April 30,
1997.
E-3
2,000,000 Shares
The Source Information Management Company
Common Stock
UNDERWRITING AGREEMENT
___________, 1997
Donald & Co. Securities Inc.
As Representative of the Underwriters
named in Schedule I hereto
65 East 55th Street
New York, New York 10022
Dear Sirs:
The Source Information Management Company, a Missouri corporation (the
"Company"), hereby confirms its agreement with Donald & Co. Securities Inc.
(being referred to herein variously as "you" or the "Representative") and the
other underwriters named in Schedule I hereto (the "Representative" and the
other underwriters being collectively called the "Underwriters") as follows:
1. Introductory. Pursuant to the terms of this Underwriting Agreement (this
"Agreement"), the Company proposes to issue and sell, severally and not jointly,
to the Underwriters 2,000,000 shares of Common Stock, $.01 par value, of the
Company (the "Common Stock"). In addition, solely for the purpose of covering
over-allotments, the shareholders of the Company named in Schedule II hereto
(the "Selling Shareholders") propose to grant to the Representative the option
to purchase up to an additional 300,000 shares of
<PAGE>
Common Stock ("Additional Stock"). The Common Stock to be sold by the Company,
excluding the Additional Stock, is herein called the "Firm Stock". The Common
Stock is more fully described in the Prospectus referred to below.
2. Representations and Warranties
The Company represents and warrants to the Underwriters that:
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, and amendments thereto, on Form SB-2
(File No. 333-___), including any related preliminary prospectus ("Preliminary
Prospectus"), for the registration of the Firm Stock and the Additional Stock
under the Securities Act of 1933, as amended (the "Act"). The Company will not,
before the registration statement becomes effective (the "Effective Date"), file
any other amendment to said registration statement to which you shall reasonably
object in writing after being furnished with a copy thereof. Copies of such
registration statement and all amendments thereto, and all forms of the related
Preliminary Prospectus contained therein, previously filed by the Company with
the Commission, have heretofore been delivered to you. Except as the context may
otherwise require, such registration statement, as amended, on file with the
Commission at the time the registration statement becomes effective (including
the prospectus, financial statements, exhibits and all other documents filed as
a part thereof and all information deemed to be a part thereof as of such time
pursuant to paragraph (b) of Rule 430A of the General Rules and Regulations of
the Commission under the Act (the "Regulations")) is herein called the
"Registration Statement". The prospectus in the form filed with the Commission
pursuant to Rule 424(b) of the Regulations is herein called the "Prospectus".
(1) Neither the Commission nor any "Blue Sky" or securities authority
of any jurisdiction has issued an order preventing or suspending the use of any
Preliminary Prospectus relating to the proposed offering of the Stock and
Additional Stock or has instituted proceedings for that purpose. Each
Preliminary Prospectus, at the time of filing with the Commission, contained all
material statements which are required to be stated therein in accordance with
the Act and the Regulations, and conformed in all material respects with the
requirements of the Act and the Regulations and did not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Registration
Statement at the time it becomes effective and the Prospectus at the time it is
filed with the Commission pursuant to Rule 424(b) and on the Closing Date (and
the Additional Closing Date, if any, determined as hereinafter provided in
Section 3) will contain all material statements which are required to be stated
<PAGE>
therein in accordance with the Act and the Regulations, and will in all material
respects conform to the requirements of the Act and the Regulations, and the
Registration Statement and the Prospectus will not, on such dates, include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that no
representations or warranties are made with respect to statements or omissions
made in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through the Representative
expressly for use in the Registration Statement or Prospectus or any amendment
or supplement thereto.
(2) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware. Each of
K-Sub, Inc., L- Sub, Inc., Readers Choice, Inc., Magazine Marketing, Inc., The
Source-Canada Corp. and Mike Kessler and Associates, Inc. is a subsidiary of the
Company (collectively, the "Subsidiaries") and has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation. The Company owns, directly or indirectly, all
of the capital stock of each of the Subsidiaries. All such shares of capital
stock so owned are validly issued and outstanding, fully paid and nonassessable
and are owned free and clear of any liens, encumbrances or other restrictions.
The Company and each of the Subsidiaries are duly qualified and in good standing
as foreign corporations in all jurisdictions where the character or location of
their properties (owned or leased) or the nature of their business makes such
qualification necessary, except where the failure so to qualify would not have a
material adverse effect on the business, properties, results of operations,
condition (financial or otherwise), affairs or prospects of the Company and the
Subsidiaries, taken as a whole (a "Material Adverse Effect"). The Company and
each of the Subsidiaries have all requisite corporate power and authority, and
all necessary authorizations, approvals, orders, licenses, certificates and
permits of and from all governmental regulatory officials and bodies, to own
their respective properties and conduct their respective businesses as described
in the Prospectus, and the Company has all such power, authority,
authorizations, approvals, orders, licenses, certificates and permits to enter
into this Agreement and to carry out the provisions and conditions hereof. The
Company and each of the Subsidiaries own, or possess adequate rights to use, all
patents, trademarks, service marks and other rights necessary for the conduct of
their business as described in the Prospectus and neither the Company, nor any
of the Subsidiaries nor any officer or director of the Company or any of the
Subsidiaries has received any notice of conflict with the asserted rights of
others in any respect which would have a Material Adverse Effect, and none knows
any basis therefor. The Company has no subsidiaries other then the Subsidiaries.
(3) The Company and the Subsidiaries have either good and marketable
title in fee simple to, or valid and enforceable leasehold estates in, all items
of real property and personal property which are stated in the Prospectus to be
<PAGE>
owned or leased by it, in each case free and clear of all liens, encumbrances,
claims, security interests, subleases and defects, other than those referred to
in the Prospectus and those which do not have a Material Adverse Effect. Each of
the Company and the Subsidiaries has the right to operate all of its facilities
in their present locations and the operation of such facilities does not violate
in any material respect the provisions of any lease with respect thereto which
the Company, any of the Subsidiaries or any third party is a party.
(4) There is no litigation or governmental proceeding pending or, to
the knowledge of the Company or any of the Subsidiaries, threatened against, or
involving the properties or business of, the Company or any of the Subsidiaries,
nor are there any actions, suits or proceedings related to environmental matters
or related to discrimination on the basis of age, sex, religion or race and no
labor disturbance by the employees of the Company exist, which could have a
Material Adverse Effect, except as referred to in the Prospectus.
(5) All contracts, agreements, documents and other instruments
required to be filed as exhibits to the Registration Statement have been filed
with the Commission as exhibits thereto.
(6) The consolidated financial statements together with the related
notes of the Company and the Subsidiaries included in the Registration Statement
and Prospectus present fairly the consolidated financial position and the
consolidated results of operations of the Company and the Subsidiaries at the
respective dates and for the respective periods to which they apply; and such
financial statements and related schedules have been prepared in conformity with
generally accepted accounting principles, consistently applied throughout the
periods involved. The capitalization of the Company, as set forth under the
caption "Capitalization" in the Prospectus, was as so described on the date of
which it is set forth therein.
(7) BDO Seidman, LLP, whose reports are filed with the Commission as a
part of the Registration Statement, are independent accountants as required by
the Act and the Regulations.
(8) Except for the shares of capital stock of the Subsidiaries,
neither the Company nor any of the Subsidiaries owns, directly or indirectly,
any shares of stock or any other securities of any corporation nor does the
Company or any of the Subsidiaries have any equity interest in any firm,
partnership, joint venture, association or other entity, except as referred to
in the Prospectus.
(9) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and the Prospective, there has been no
material adverse change in the business, properties, results of operations,
<PAGE>
condition (financial or otherwise), affairs or prospects of the Company and the
Subsidiaries, taken as a whole, except as referred to therein; and the
outstanding debt, the property and the business of the Company and each of the
Subsidiaries conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(10) No default exists, and no event has occurred which with notice or
lapse of time, or both, would constitute a default, in the due performance and
observance of any term, covenant or condition of any indenture, mortgage, deed
of trust, note, bank loan or credit agreement or any other agreement or
instrument to which the Company or any of the Subsidiaries is a party or by
which any of them or any of their property may be bound or affected, which
default would have a Material Adverse Effect.
(11) Neither the Company nor any of the Subsidiaries is in breach of
any term or provision of its Certificate of Incorporation, by-laws or other
charter documents and in violation of any franchise, license, permit, judgment,
decree, order, statute, rule or regulation, which violation is a Material
Adverse Effect. Neither the Company nor any of the Subsidiaries is in violation
of any laws, ordinances, governmental rules or regulations to which any of them
is subject, which violation is a Material Adverse Effect. Neither the Company
nor any of the Subsidiaries has not failed to obtain any licenses, permits,
franchises or other governmental authorizations materially necessary to the
ownership of its property or to the conduct of its business.
(12) Neither the execution and delivery of this Agreement, the
Representative's Warrant Agreement (as defined in Section 3(h) hereof) and the
Financial Consulting Agreement (as defined in Section 5(t) hereof), the
consummation of the transactions herein or therein contemplated, nor compliance
with the terms and provisions hereof or thereof will conflict with, or result in
a breach of any of the terms, provisions or conditions of the Certificate of
Incorporation, by-laws or other charter documents of the Company or any of the
Subsidiaries. The execution and delivery of this Agreement, the Representative's
Warrant Agreement and the Financial Consulting Agreement, the consummation of
the transactions herein or therein contemplated, and compliance with the terms
and provisions hereof or thereof will not conflict with, or result in a breach
of, or constitute a default under any of the terms, provisions or conditions of
any agreement or instrument to which the Company or any of the Subsidiaries is a
party or by which any of them or any of their properties is bound, except where
such conflict, breach or default would not have a Material Adverse Effect, or
violate any franchise, license, permit, judgment, decree, order, statute, rule
or regulation of any government, governmental authority or court having
jurisdiction over the Company or any of its Subsidiaries, except where such
violation would not have a Material Adverse Effect.
(13) The Company has all requisite corporate power and authority to
<PAGE>
execute, deliver and perform its obligations under this Agreement, the
Representative's Warrant Agreement and the Financial Consulting Agreement and
this Agreement, the Representative's Warrant Agreement and the Financial
Consulting Agreement have been duly authorized, executed and delivered by the
Company and constitute legal, valid and binding agreements of the Company and
are enforceable against the Company in accordance with their respective terms
except as enforceability may be limited by bankruptcy, insolvency,
reorganization or other similar laws affecting creditors' rights generally, and
except insofar as the enforceability of the indemnification and contribution
terms may be limited by applicable law or public policy.
(14) All of the issued shares of Common Stock, including the
Additional Stock, have been duly authorized and validly issued and are fully
paid and nonassessable and free of preemptive rights; the Firm Stock has been
duly authorized and, when issued and delivered in accordance with this
Agreement, will be validly issued, fully paid and nonassessable and free of
preemptive rights. The Company's capital stock conforms in all material respects
to all statements in relation thereto contained in the Registration Statement
and Prospectus. The holders of all outstanding preferred stock of the Company
have agreed to convert such preferred stock into Common Stock prior to the
Effective Date. Any provision in the Certificate of Incorporation, the by-laws,
any contract or other instrument regarding the preemptive rights of the Common
Stock has been waived and will be terminated as of the Closing Date.
(15) The warrants that will be issued pursuant to the terms of the
Representative's Warrant Agreement (the "Representative's Warrants") have been
duly and validly authorized by the Company and upon delivery to you against
payment therefore and otherwise in accordance with this Agreement and the
Representative's Warrant Agreement will be duly issued and legal, valid and
binding obligations of the Company enforceable against the Company in accordance
with their terms except as enforceability may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting creditors' rights
generally.
(16) The Common Stock underlying the Representative's Warrants (the
"Representative's Warrant Stock") has been duly authorized and reserved for
issuance upon exercise of the Representative's Warrants, and, when issued upon
payment of the exercise price therefor, will be validly issued, fully paid and
nonassessable shares of Common Stock and free of pre-emptive rights.
(1) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as may otherwise be
indicated or contemplated herein or therein, neither the Company nor any of the
Subsidiaries has (i) issued any securities except securities issued under the
Company's employee benefit plans and as provided herein or in the Registration
Statement, or incurred any liability or obligation, direct or contingent, for
borrowed money, (ii) entered into any material transaction not in the ordinary
<PAGE>
course of business, (iii) entered into any transaction with an affiliate of the
Company other than one or more of the Subsidiaries, or (iv) declared or paid any
dividend on its shares of Common Stock.
(1) The Company has obtained as of the date hereof lock-up
agreements, satisfactory to the Representative, with respect to the Common Stock
from all of the Company's directors, executive officers and stockholders who
beneficially own five percent (5%) or more of the Company's outstanding Common
Stock.
(2) No consent, authorization or approval is required to be
obtained by the Company from any Federal, state or local governmental agency or
body in order to consummate the transactions contemplated herein or in the
Registration Statement, other than such consents, authorizations or approvals as
have been obtained.
(3) No person holds a right to require or participate in the
registration under the Act of any securities of the Company to be effected by
the Registration Statement, which right has not been duly waived by the holder
thereof as of the date hereof. The Company does not have outstanding, and at the
Closing Date and the Additional Closing Date, if any, will not have outstanding,
any options to purchase, or any rights or warrants to subscribe for, or any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its Common Stock or any such warrants, convertible
securities or obligations, except as referred to in the Prospectus.
(4) The Company and each of the Subsidiaries has timely filed all
Federal, state, and local tax returns which are required to be filed and has
paid all taxes shown on such returns and all assessments received by it to the
extent that the same have become due, except any being contested in good faith.
(2) To the knowledge and belief of the Company's officers and
directors (such officers and directors having made reasonable investigation with
respect thereto), neither the Company, nor any of the Subsidiaries nor any
officer, director or employee of the Company or any of the Subsidiaries has made
any payment of funds of the Company or any of the Subsidiaries or purchased any
property with funds of the Company or any of the Subsidiaries in a manner
prohibited by law, and no funds of the Company or any of the Subsidiaries or
property purchased with funds of the Company or any of the Subsidiaries has been
set aside to be used for any payment prohibited by law.
(3) Except as set forth in the Registration Statement and Prospectus,
the Company does not know of any claims for services in the nature of a finders
fee, brokerage fee or otherwise with respect to this offering for which the
Company, any of the Subsidiaries or you may be responsible.
<PAGE>
(1)The Company has obtained from such key executives as are
designated by the Representative (the "Key Employees") new or modified
employment agreements upon terms agreeable to the Company and the
Representative, including, without limitation, the term, compensation,
arrangement and restrictive covenants. The Company has obtained key man life
insurance upon the lives of the Key Employees in face amounts mutually agreeable
to the Company and the Representative.
(4) Application for quotation of the Common Stock on The Nasdaq
SmallCap Market and application for listing on the Boston Stock Exchange and the
Pacific Stock Exchange have each been approved, subject to notice of issuance.
(b) Each of the Selling Shareholders, severally and not jointly,
represents and warrants to the Representative and the Company that:
(5) All consents, approvals, authorizations and orders necessary for
the execution and delivery by such Selling Shareholder of this Agreement and the
Power of Attorney (the "Power of Attorney") and the Custody Agreement (the
"Custody Agreement") hereinafter referred to, and for the sale and delivery of
the Additional Stock to be sold by such Selling Shareholder hereunder, have been
obtained; and such Selling Shareholder has full right, power and authority to
enter into this Agreement, the Power of Attorney and the Custody Agreement and
to sell, assign, transfer and deliver the Additional Stock to be sold by such
Selling Shareholder hereunder.
(6) The sale of the Additional Stock to be sold by such Selling
Shareholder hereunder and the performance of this Agreement, the Power of
Attorney and the Custody Agreement and the consummation of the transactions
herein and therein contemplated do not and will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under or give rise to rights of termination under, any indenture,
mortgage, deed of trust, voting agreement, loan agreement, note or other
evidence of indebtedness, lease, sublease, contract or other agreement or
instrument to which such Selling Shareholder is a party or by which such Selling
Shareholder or any of such Selling Shareholder's properties is bound, the
certificate or articles of incorporation and by-laws of such Selling Shareholder
if such Selling Shareholder is a corporation, the partnership agreement of such
Selling Shareholder if such Selling Shareholder is a partnership, or any
applicable law, rule, regulation, judgment, order or decree of any court,
government or governmental instrumentality, domestic or foreign, having
jurisdiction over such Selling Shareholder or the property of such Selling
Shareholder.
(7) Such Selling Shareholder has, and at the Additional Closing Date
(as defined in Section 3 hereof), such Selling Shareholder will have, good and
<PAGE>
valid title to the Additional Stock to be sold by such Selling Shareholder
hereunder, free and clear of all liens, encumbrances, equities or claims; and,
upon delivery of such Additional Stock and payment therefor pursuant hereto,
good and valid title to such Additional Stock free and clear of all liens,
encumbrances, equities or claims, will pass to the Representative.
(8) Such Selling Shareholder has delivered to the Representative on or
before the date of this Agreement, an agreement satisfactory in form and
substance to the Representative, whereby such Selling Shareholder agrees, for a
period of _____ days after the commencement of the public offering of the Stock,
not to offer, sell, contract to sell or grant an option relating to, or
otherwise dispose of any shares of Common Stock, directly or indirectly, without
the Representative's prior written consent.
(9) Such Selling Shareholder has not taken and will not take, directly
or indirectly, any action which is designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or manipulation
of the price of any security of the Company to facilitate the sale or resale of
the Additional Stock.
(10) All information regarding such Selling Stockholder contained in
the Registration Statement and the Prospectus and any amendment or supplement
thereto does not and will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading.
In order to document the Representative's compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 with respect to the transactions herein contemplated, each of
Selling Shareholders agree to deliver to the Representatives prior to or at the
Additional Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by Treasury
Department regulations in lieu thereof).
Each of the Selling Shareholders represents and warrants that
certificates in negotiable form representing all of the Additional Stock to be
sold by such Selling Shareholder hereunder have been placed in custody under a
Custody Agreement, in the form heretofore furnished to the Representative, duly
executed and delivered by such Selling Shareholder to
__________________________, as custodian (the "Custodian"), and that such
Selling Shareholder has duly executed and delivered a Power of Attorney, in the
form heretofore furnished to the Representative, appointing the persons
indicated in Schedule II hereto, and each of them, as such Selling Shareholder's
attorneys-in-fact (the "Attorneys-in-Fact") with authority to execute and
deliver this Agreement on behalf of such Selling Shareholder, to determine the
purchase price to be paid by the Representative to the Selling Shareholders as
provided in Section 3 hereof, to authorize the delivery of the Additional Stock
<PAGE>
to be sold by such Selling Shareholder hereunder and otherwise to act on behalf
of such Selling Shareholder in connection with the transactions contemplated by
this Agreement and the Custody Agreement.
Each of the Selling Shareholders specifically agrees that the
Additional Stock represented by the certificates held in custody for such
Selling Shareholder under the Custody Agreement are subject to the interests of
the Representative hereunder, and that the arrangements made by such Selling
Shareholder for such custody and the appointment by such Selling Shareholder of
the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable.
Each of the Selling Shareholders specifically agrees that the obligations of the
Selling Shareholders hereunder shall not be terminated by operation of law,
whether by the death or incapacity of any individual Selling Shareholder or, in
the case of a corporation, partnership, joint venture or business association,
by the merger, reorganization or dissolution of such Selling Shareholder, or by
the occurrence of any other event. If any individual Selling Shareholder should
die or become incapacitated, or in the case of a Selling Shareholder which is a
corporation, partnership, joint venture or business association such Selling
Shareholder should merge, reorganize or dissolve, or if any such other event
should occur before the delivery of the Additional Stock hereunder, certificates
representing the Additional Stock shall be delivered by or on behalf of the
Selling Shareholders in accordance with the terms and conditions of this
Agreement and the Custody Agreement, and actions taken by the Attorneys-in-Fact
pursuant to the Powers of Attorney shall be as valid as if such death,
incapacity, merger, reorganization or dissolution or other event had not
occurred, regardless of whether or not the Custodian, the Attorneys-in-Fact, or
any of them, shall have received notice of such death, incapacity, merger,
reorganization, dissolution or other event.
3. Purchase, Sale and Delivery of the Firm Stock and Additional Stock.
(1) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the Company
agrees to sell, severally and not jointly, to the Underwriters, and the
Underwriters, severally and not jointly, agree to purchase from the Company, at
a purchase price of $_____ per share, the number of shares of Firm Stock set
forth opposite their respective names in Schedule I.
(a) Payment of the purchase price for, and delivery of, the Firm Stock
shall be made at your discretion by wire transfer or by certified or official
bank check in New York Clearing House funds or similar next day funds, payable
to the order of the Company at the offices of Donald & Co. Securities Inc., 65
East 55th Street, New York, New York, through the facilities of the Depository
Trust Company, or such other place as shall be agreed upon between us. Such
delivery and payment shall be made at 9:00 A.M., New York time, on the third
business day following the Effective Date; provided, however, that such date may
<PAGE>
be extended for not more than an additional five business days by the
Representative or in accordance with the provisions of Section 9(c) hereof. The
hour and date of such delivery and payment are herein called the "Closing Date".
(b) Certificates evidencing the Firm Stock shall be registered in such
name or names and in such authorized denominations as you may request in writing
at least two full business days prior to the Closing Date. The Company will
permit you to examine and package said certificates at least one full business
day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained, but subject to the terms and conditions herein set forth, the
Selling Shareholders, as and to the extent indicated on Schedule II, hereby
grant, severally and not jointly, to you the option to purchase all or a portion
of the Additional Stock as may be necessary to cover over-allotments at the same
purchase price per share to be paid by the Underwriters to the Company for the
Firm Stock as determined in this Section 3. Of the aggregate number of shares of
Additional Stock the Representative may have elected to purchase, 100% of such
shares shall initially be purchased from S. Leslie Flegel to the extent
indicated in Schedule II and thereafter, the balance of the Additional Stock
shall be purchased from the remaining Selling Shareholders, pro rata based on
the number of shares of Additional Stock to be sold by such remaining Selling
Shareholders. This option may be exercised only to cover over-allotments in the
sale of shares of Firm Stock by the Underwriters. This option may be exercised
at any time or from time to time on or before the forty-fifth (45th) day
following the Effective Date by written notice by the Representative to the
Attorneys-in-Fact acting on behalf of the Selling Shareholders. Such notice
shall set forth the aggregate number of shares of Additional Stock as to which
the option is being exercised, the name or names in which the shares of
Additional Stock are to be registered, the denominations in which the Additional
Stock is to be issued, and the date and time, as reasonably determined by you,
when the Additional Stock is to be delivered (such date and time being herein
sometimes referred to as the "Additional Closing Date"); provided, however, that
the Additional Closing Date shall not be earlier than the Closing Date nor
earlier than the third business day after the date on which the option shall
have been exercised nor later than the eighth business day after the day on
which the option shall have been exercised.
(d) Payment of the purchase price for, and delivery of, the Additional
Stock shall be made at your discretion by wire transfer or by certified or
official bank checks in New York Clearing House funds or similar next day funds,
payable to the order of the Company with respect to the shares of Additional
Stock sold by S. Leslie Flegel and to the order of the Custodian with respect to
the remaining Selling Shareholders at the offices of Donald & Co. Securities
Inc., 65 East 55th Street, New York, New York, through the facilities of the
Depository Trust Company or such other place as shall be agreed upon between
you, the Company and the Custodian.
<PAGE>
(e) Certificates evidencing the Additional Stock shall be registered
in such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Additional Closing Date.
The Custodian will permit you to examine and package said certificates for
delivery at least one full business day prior to the Additional Closing Date.
(f) The Company and the Selling Shareholders shall not be obligated to
sell or deliver any shares of Firm Stock or Additional Stock, as the case may
be, except upon tender of payment by the Representative for all the Firm Stock
or Additional Stock, as the case may be, agreed to be purchased from it
hereunder.
(g) On the Closing Date, the Company shall issue and sell to the
Representative, at a purchase price of $0.001 per Warrant, the Representative's
Warrants. The Representative's Warrants shall be exercisable for a period of
four (4) years commencing one (1) year from the Effective Date at an initial
exercise price equal to one hundred ______ percent (___%) of the initial public
offering price of the Firm Stock. The Representative's Warrants shall be issued
pursuant to the terms and provisions of the Representative's Warrant Agreement
substantially in the form of the Representative's Warrant Agreement filed as
Exhibit 4.4 to the Registration Statement (the "Representative's Warrant
Agreement").
4. Offering. You are to make a public offering of the Firm Stock as soon,
on or after the effective date of the Registration Statement, as you deem it
advisable so to do. The Firm Stock is to be initially offered to the public at
the initial public offering price set forth on the cover page of the Prospectus
(such price being herein called the "public offering price"). You may from time
to time increase or decrease the public offering price after the initial public
offering to such extent as you may determine.
5. Covenants of the Company.
The Company covenants that it will:
(a) Use its best efforts to cause the Registration Statement to become
effective and will notify you immediately, and confirm the notice in writing,
(i) when the Registration Statement, or any post-effective amendment thereto,
shall have become effective, (ii) of the issuance by the Commission of any stop
order or of the initiation or the threatening of any proceedings for that
purpose, and (iii) of the receipt of any comments by the Commission. The Company
will prepare and timely file with the Commission under Rule 424(b) of the
Regulations a Prospectus containing information previously omitted on the
Effective Date in reliance of Rule 430A of the Regulations. The Company will use
its best efforts to prevent the issuance of any stop order or any order
<PAGE>
preventing or suspending the use of the Registration Statement or Prospectus
and, if such order is issued, to obtain the lifting thereof as promptly as
possible.
(b) During the time when a prospectus is required to be delivered
under the Act, comply so far as it is able with all requirements imposed upon it
by the Act, as now and hereafter amended, and by the Regulations, as from time
to time in force, so far as necessary to permit the continuance of sales or of
dealings in the Firm Stock and the Additional Stock in accordance with the
provisions hereof and the Prospectus. If at any time when a prospectus relating
to the Firm Stock or the Additional Stock is required to be delivered under the
Act any event shall have occurred as a result of which, in the reasonable
opinion of counsel for the Company or your counsel, the Registration Statement
or Prospectus as then amended or supplemented includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or it is necessary at any time to
amend or supplement the Registration Statement or Prospectus to comply with the
Act, the Company will notify you promptly and prepare and file with the
Commission an appropriate amendment or supplement (in form reasonably
satisfactory to you).
(c) Deliver to you such number of copies of each Preliminary
Prospectus as you may reasonably request and, deliver to you two signed copies
of the Registration Statement, including exhibits, and all post-effective
amendments thereto and such number of copies of the Prospectus, the Registration
Statement and amendments and supplements thereto, if any, without exhibits, as
you may reasonably request for the purposes contemplated by the Act.
(1) Endeavor in good faith, in cooperation with you, at or prior to
the time the Registration Statement becomes effective, to qualify the Firm Stock
and the Additional Stock for offering or sale of the Firm Stock and the
Additional Stock of such jurisdictions as you may reasonably designate; provided
that no such qualification shall be required in any jurisdiction where, as a
result thereof, the Company would be subject to service of general process or
would be required to become qualified to do business as a foreign corporation
doing business in such jurisdiction. In each jurisdiction where the
qualification of the Firm Stock and Additional Stock shall be effected, the
Company will, unless you agree that such action is not at the time necessary or
advisable, file and make such statements or reports at such times as are or may
be reasonably required by the laws of such jurisdiction.
(2) Make generally available to its security holders and to the
Representative as soon as practicable, but not later than the last day of the
fifteenth full calendar month following the Effective Date, an earnings
statement (which need not be certified by independent auditors unless required
by the Act or the Regulations, but which shall satisfy the provisions of Section
ll(a) of the Act) covering a period of at least twelve months beginning after
the Effective Date.
<PAGE>
(d) For a period of __ days after the Effective Date, not issue, sell,
contract to sell, grant an option for the sale of or otherwise dispose of,
directly or indirectly, any shares of Common Stock of the Company (or any shares
of securities convertible into or exercisable for such Common Stock) other than
the Firm Stock and Additional Stock being sold by the Company and securities
issued pursuant to the Company's employee benefit plans or as otherwise referred
to in the Prospectus, without your prior written consent.
(3) For a period of five years from the effective date of the
Registration Statement, furnish you the following:
(i) as soon as practicable after they have been filed with the
Commission, two copies of each annual, quarterly and current report on Form
10-K, Form 10-Q or Form 8-K (to the extent the Company shall be required to file
such reports pursuant to the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (collectively the "Exchange Act") and, as
soon as practicable after they have been sent by the Company to its security
holders, two copies of any communications sent by it to its public security
holders generally;
(ii) as soon as practicable, two copies of every press release and
every material news item and article with respect to the Company or its affairs
which was released by the Company; and
(iii) such additional non-confidential documents and information with
respect to the Company and its affairs as you may from time to time reasonably
request.
(4) Apply the net proceeds from the offering received by the Company
in the manner set forth under "Use of Proceeds" in the Prospectus and comply
with Rule 463 under the Act.
(5) Furnish to you as early as practicable prior to the Closing Date
and Additional Closing Date, as the case may be, but no later than two full
business days prior thereto, a copy of the latest available unaudited interim
financial statements of the Company, if any, which have been reviewed by the
Company's independent auditors, as stated in their letters to be furnished
pursuant to Section 7(f) hereof.
(6) Not file any amendment or supplement to the Registration Statement
or Prospectus after the Effective Date to which you shall reasonably object in
writing after being furnished a copy thereof.
(e) If any action or proceeding shall be brought by you in order to
<PAGE>
enforce any right or remedy under this Agreement, the Company hereby consents
to, and agrees that it will submit to, the jurisdiction of the courts of the
State of New York and of any Federal court sitting in the United States District
Court for the Southern District of New York. The Company agrees that process in
any such action or proceeding may be served in that manner provided by New York
law for service on foreign corporations.
(f) Comply with all registration, filing and reporting requirements of
the Exchange Act which may from time to time be applicable to the Company.
(g) Make all filings required, including registration under the
Exchange Act, to obtain and keep the quotation of its Common Stock in The Nasdaq
SmallCap Market and the listing of its Common Stock on the _______ Stock
Exchange, and effect and maintain such quotation and listing for the Common
Stock for at least five (5) years from the date of this Agreement.
(h) Use its best efforts to be included in Standard & Poors
Corporations Manual as soon as possible following the Closing Date and to
continue to be included in such Manual for at least five (5) years from the
Effective Date.
(7) Not later than three months following the date of this Agreement,
cause to be delivered to you and to your counsel, Parker Duryee Rosoff & Haft,
four (4) bound volumes containing therein all filings, including exhibits, and
correspondence to and from the Commission, the National association of
Securities Dealers, Inc, ("NASD") and all states or other jurisdictions
concerning the offering of the Firm Stock, underwriting documents and closing
documents, plus any other relevant material.
(8) For a period of three (3) years from the Closing Date, engage your
designee as an advisor (the "Advisor") to the Company's Board of Directors. The
Advisor shall be permitted to attend meetings of the Board and each of its
committees and receive no more or less compensation as is equal to the
entitlement of the Directors including, without limitation, all compensation
payable to Directors as members of the committees of the Board or in connection
with any other Board activities; provided, however, that the Company may require
as a condition precedent that any such Advisor shall agree to hold in confidence
and trust and to act in a fiduciary manner with respect to all information,
including, but not limited to, trade secrets, so received during such meetings
and may require that such Advisor sign a confidentiality agreement with the
Company; and, provided, further, that the Company reserves the right not to
provide information and to exclude such Advisor from any meeting or portion
thereof if attendance at such meeting by such Advisor or dissemination of any
information at such meeting to such Advisor would compromise or adversely affect
the attorney-client privilege between the Company and its counsel, or would, in
<PAGE>
the good faith judgment of the Board of Directors, result in a conflict of
interest situation. The Company shall use its reasonable efforts to promptly
bring to the attention of such Advisor any agenda item that, in the good faith
judgment of the Board of Directors, would result in such a trade secret,
privileged matter or conflict of interest and the Board of Directors may exclude
such Advisor (or alternatively, the Advisor shall be entitled to exclude himself
or herself) from any deliberation or discussion of the Board of Directors
concerning such trade secret (if the Advisor has not executed a confidentiality
agreement), privileged matter or conflict of interest matter and as a recipient
in the dissemination of any such information. If such Advisor in his or her good
faith judgment believes that an item to be discussed by the Board of Directors
would result in any conflict of interest, such Advisor shall promptly bring such
conflict to the attention of the Chairman of the Board. In no event shall any
provision of this paragraph waive any obligation of confidentiality to the
Company owed by any such Advisor or the Representative. In addition, the Advisor
shall be entitled to receive reimbursement for all reasonable costs incurred in
attending such meetings including, but not limited to, food, lodging, and
transportation; such costs to be subject to approval of the Company which will
not be unreasonably withheld.
(9) For a period of three (3) years from the Closing Date, there will
be no less than four (4) formal, "in person" or "telephonic" meetings, of the
Company's Board of Directors in each such year at which meetings the Advisor
shall be permitted to attend or participate, as the case may be in accordance
with the provisions of Section 5(p); said meetings shall be held quarterly each
year and ten (10) days' advance notice of such meetings shall be given to the
Advisor. The Advisor shall receive notice of special meetings of the Board of
Directors at the same time and manner as the members of the Board.
(10) Indemnify and hold the Representative and the Advisor harmless,
to the full extent allowed by applicable laws, against any and all claims,
actions, awards and judgments arising solely out of the attendance and
participation of the Advisor at any meeting described in Section 5(p) of this
Agreement. In the event the Company maintains a liability insurance policy
affording coverage for the acts of its officers and directors, the Company
agrees, if possible, to include the Representative and the Advisor as an insured
under such policy.
(11) Establish and maintain during the period that the Common Stock is
listed on The Nasdaq SmallCap Market an independent audit committee of the
Company's Board of Directors, which committee shall meet the requirements of The
Nasdaq Stock Market.
(i) On the Closing Date, enter into a two (2) year financial
consulting agreement with the Representative (the "Financial Consulting
Agreement") pursuant to which the Representative will provide the Company with
investment banking and financial consulting services at a fee of $72,000,
<PAGE>
payable at the rate of $3,000 per month in advance of each month for the
twenty-four months subsequent to the Closing Date.
(12) For a period of three (3) years from the Closing Date, grant the
Representative a right of first refusal to act as underwriter or placement agent
on any subsequent public or private offerings of equity or debt securities
(excluding sales to employees pursuant to the Company's stock option plan,
traditional commercial financing or bank financing) of the Company or any
subsidiary or successor of the Company, or by the Company, its subsidiaries,
their affiliates or their respective officers, directors or principal
stockholders.
6. Payment of Expenses.
(a) The Company hereby agrees to pay, whether or not the transactions
contemplated hereunder are consummated, all expenses (other than fees of your
counsel, except as provided in (iv) below) in connection with (i) the
preparation, printing, filing and mailing of the Registration Statement and the
Prospectus, including the cost of all copies thereof and of the Preliminary
Prospectus and of the Prospectus and any amendments or supplements thereto
supplied to you in quantities as hereinabove stated, (ii) the issuance, transfer
and delivery of the Firm Stock and the Additional Stock, including any transfer
or other taxes payable thereon, (iii) printing of this Agreement, the Agreement
Among Underwriters, the Selected Dealer Agreement, the Underwriters'
Questionnaire, the Power of Attorney and the certificates evidencing the Common
Stock, (iv) the qualification of the Firm Stock and the Additional Stock under
state or foreign securities or Blue Sky laws, including the costs of printing
and mailing the "Blue Sky Survey," and the fees of counsel to the Underwriters,
of which $10,000 has been paid prior to the date hereof, and disbursements in
connection therewith, (v) filing fees payable to the Commission, the NASD, the
Boston Stock Exchange, the Pacific Stock Exchange and The Nasdaq SmallCap
Market, (vi) arranging and holding due diligence meetings with prospective
underwriters and selected dealers, (vii) reasonable travel and lodging incurred
by the Representative and its counsel in connection with meetings outside of New
York City, (viii) tombstone advertising and (ix) the preparation, production and
delivery of plaques and bound volumes.
(1) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 6, it will pay to the
Representative a non-accountable expense allowance equal to three percent (3%)
of the gross proceeds received by the Company from the sale of Firm Stock and
Additional Stock, of which $25,000 has been paid to date and the Company will
pay the balance on the Closing Date and any additional balance on the Additional
Closing Date by certified or bank cashier's check or, at the election of the
Representative, by deduction from the proceeds of the offering contemplated
herein.
7. Conditions of Your Obligations. The obligation of the several
<PAGE>
Underwriters hereunder to purchase and pay for the Firm Stock and the Additional
Stock, as provided herein, shall be subject to the continuing accuracy in all
material respects of the representations and warranties of the Company as of the
date hereof and as of the Closing Date (or the Additional Closing Dare, as the
case may be), to the performance by the Company in all material respects of its
obligations hereunder and to the following conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M., New York City time, on the date of this Agreement or such later
date and time as shall be consented to in writing by you and, at the Closing
Date and Additional Closing Date, no stop order suspending the effectiveness of
the Registration Statement, as amended from time to time, shall have been issued
or proceeding therefor initiated or threatened by the Commission;
(b) At the Effective Date, the Closing Date and the Additional Closing
Date, as the case may be, you shall have received the favorable opinion of
Gallop, Johnson & Neuman, L.C., counsel for the Company, dated the Effective
Date, the Closing Date or the Additional Closing Date, as the case may be,
addressed to the Underwriters and in form and scope satisfactory to counsel of
the Underwriters, to the effect that:
(i) each of the Company and the Subsidiaries (A) is a corporation duly
organized and validly existing as a corporation in good standing under the laws
of the jurisdiction of its incorporation and (B) has full corporate power and
authority and all necessary authorizations, approvals, orders, licenses,
certificates and permits of and from all governmental regulatory officials and
bodies to own its properties and to conduct its business as now being conducted
as described in the Prospectus; to the best of such counsel's knowledge, neither
the Company nor any of the Subsidiaries has received any notice of proceedings
related to the revocation or modification of any authorization, approval, order,
license, certificate, franchise, or permit issued to any of them which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a Material Adverse Effect; nothing has come to the attention
of such counsel that would lead such counsel to believe that the Company and the
Subsidiaries taken as a whole are not conducting their business in all material
respects in compliance with applicable federal, state and local laws, rules and
regulations; the disclosures in the Registration Statement concerning the
effects of federal, state and local laws, rules and regulations on the Company's
and the Subsidiaries' business as currently conducted (or as proposed in the
Registration Statement or the Prospectus to be conducted) are correct in all
material respects and do not omit to state a fact necessary to make the
statements contained therein not misleading in light of the circumstances in
which they were made;
(ii) each of the Company and the Subsidiaries is duly qualified as a
foreign corporation and in good standing in each jurisdiction in which its
ownership or leasing of property or the conduct of its business requires such
<PAGE>
qualification, except where the failure to be so qualified would not have a
Material Adverse Effect;
(iii) the Company owns of record, directly or indirectly, all of the
capital stock of each of the Subsidiaries; all such shares of capital stock so
owned are validly issued and outstanding, fully paid and nonassessable and, to
the knowledge of such counsel after inquiry, are owned free and clear of any
liens, encumbrances or other claims or restrictions whatsoever;
(iv) the Company has authorized and outstanding the capital stock as
set forth in the Prospectus; all the issued shares of Common Stock of the
Company, including the Additional Stock, have been duly and validly authorized
and issued and are fully paid and nonassessable and all the issued shares of
Common Stock of the Company, including the Additional Stock, and the Firm Stock
are not subject to any preemptive rights; the Firm Stock, the Additional Stock
and the other capital stock of the Company conform as to legal matters to the
description thereof contained under the caption "Description of Securities" in
the Prospectus;
(v) the Representative's Warrant Stock has been duly authorized and
reserved for issuance and, when issued and delivered in accordance with the
terms of the Representative's Warrant Agreement will be duly and validly issued,
fully paid and nonassessable. (vi) the Company and Selling Shareholders have
conveyed to the Underwriters good and valid title to the Firm Stock and
Additional Stock, as the case may be, being sold hereunder, and to the knowledge
of such counsel after inquiry, free and clear of any liens, encumbrances,
security interests and claims whatsoever; the Firm Stock and Additional Stock as
the case may be, shall be validly issued and fully paid and nonassessable when
issued and paid for in accordance with the terms of this Agreement, and the
certificates evidencing the Firm Stock and the Additional Stock are in due and
proper form;
(vii) this Agreement, the Representative's Warrant Agreement and the
Financial Consulting Agreement have been duly and validly authorized, executed
and delivered by the Company and each is a valid and binding agreement of the
Company enforceable in accordance with its terms, except insofar as
indemnification and contribution provisions may be limited by applicable law
(including, but not limited to, Federal or state securities laws) or equitable
principles, and except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally or by general equitable principles; (viii) to the knowledge of
such counsel, there are no contracts or other documents which are required to be
filed as exhibits to the Registration Statement, as it may then be amended or
supplemented, or required to be described in the Registration Statement or
Prospectus as it may then be amended or supplemented that are not filed or
<PAGE>
described as required;
(ix) there are no legal or governmental proceedings pending or, to the
knowledge of such counsel, threatened against the Company or any of the
Subsidiaries, and no statutes or regulations applicable to the Company or any of
the Subsidiaries, of a character that are required to be disclosed in the
Registration Statement and Prospectus, which have not been so disclosed and
properly described therein;
(x) the statements in the Registration Statement and Prospectus,
insofar as they are descriptions of contracts, agreements or other documents, or
refer to statements of law or legal conclusions, are accurate in all material
respects and present fairly the information required to be shown with respect to
such contracts, agreements or other documents;
(xi) the execution and delivery of this Agreement, the
Representative's Warrant Agreement and the Financial Consulting Agreement, the
consummation of the transactions contemplated in this Agreement, the
Representative's Warrant Agreement and the Financial Consulting Agreement, and
compliance with the terms of this Agreement, the Representative's Warrant
Agreement and the Financial Consulting Agreement do not and will not (A)
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default (or an event which with notice or lapse of time or both
would constitute a default or acceleration) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any material property or
assets of the Company or any of the Subsidiaries pursuant to the terms of any
agreement or instrument known to such counsel and to which the Company or any of
the Subsidiaries is a party or by which the Company or any of the Subsidiaries
may be bound or to which any of the material properties or assets of the Company
or any of the Subsidiaries is subject, or any statute or any order, rule or
regulation applicable to the Company or any of the Subsidiaries of any court or
of any Federal, state or other regulatory authority or other governmental body
having jurisdiction over the Company or any of the Subsidiaries (provided,
however, that such counsel may render such opinion on state (other than
Missouri), regulatory or other governmental bodies, to such counsel's knowledge)
or (B) result in any violation of provisions of the Certificate of
Incorporation, by-laws or other charter documents of the Company or any of the
Subsidiaries;
(xii) no consent, approval, authorization or order of any court or
governmental agency or body is required in connection with the consummation of
the transactions contemplated by this Agreement, the Representative's Warrant
Agreement and the Financial Consulting Agreement, except such as have been
obtained or made or as may be required under the Act or state securities or Blue
Sky laws;
(xiii) (A) neither the Company nor any of the Subsidiaries is in
<PAGE>
violation uof any term or provision of its Certificate of Incorporation, by-laws
or other charter documents; (B) to such counsel's knowledge, neither the Company
nor any of the Subsidiaries is currently in material breach of, or in material
default (nor has an event occurred which with notice, lapse of time or both
would constitute such a material default or acceleration) under any indenture,
mortgage, deed of trust, note, bank loan or credit agreement or (in any respect
that is material in light of the financial condition of the Company and the
Subsidiaries, taken as a whole) any other agreement or instrument, known to such
counsel after inquiry, to which the Company or any of the Subsidiaries is a
party or by which either of them or any of their property may be bound or
affected, or to such counsel's knowledge, in violation of any franchise,
license, permit, judgment, decree, order, statute, rule or regulation, which
violation would have a Material Adverse Effect; and (C) to such counsel's
knowledge, neither the Company nor any of the Subsidiaries has received notice
of conflict with the asserted rights of others in respect of patents,
trademarks, service marks and rights necessary for the conduct of its business;
(xiv) the Company has the right to operate all of its facilities in
their present locations and the operation of its facilities in such locations as
described in the Prospectus does not violate the provisions of any lease with
respect thereto to which the Company is a party;
(xv) the Registration Statement and the Prospectus and any amendments
or supplements thereto (other than the financial statements and other financial
and statistical data included therein, as to which no opinion need be rendered)
comply as to form in all material respects with the requirements of the Act and
the Regulations and nothing has come to the attention of such counsel which
would lead them to believe that the Registration Statement or the Prospectus, as
amended or supplemented, if amended or supplemented (other than the financial
statements and other financial and statistical data included therein as to which
no opinion need be rendered) contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they are
made, not misleading; and
(xvi) the Registration Statement is effective under the Act, and to
the best of such counsel's knowledge, no proceedings for a stop order are
pending or threatened under the Act.
In rendering the opinions set forth above, such counsel may rely upon
certificates of officers of the Company and of public officials as to matters of
fact. In giving the foregoing opinions, such counsel may rely on such other
counsel as it deems advisable; provided that such counsel shall state that, in
such counsel's opinion, you are justified in relying on such opinions of such
other counsel. Copies of all such opinions and certificates shall be furnished
to your counsel on the Closing Date or the Additional Closing Date, as the case
may be.
<PAGE>
(1) On or prior to the Closing Date and the Additional Closing Date,
as the case may be, you shall have been furnished such documents, certificates
and opinions as you may reasonably require for the purpose of enabling you to
review the matters referred to in subsection (b) of this Section 7, and in order
to evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained.
(c) Prior to the Closing Date and the Additional Closing Date, as the
case may be, (i) there shall have been no material adverse change in the
business, properties, results of operations, condition (financial or otherwise),
affairs or prospects, of the Company and the Subsidiaries from that as of the
latest date as of which such condition is set forth in the Registration
Statement and Prospectus; (ii) there shall have been no transaction, not in the
ordinary course of business, entered into by the Company or the Subsidiaries,
from the latest date as of which the financial condition of the Company and the
Subsidiaries is set forth in the Registration Statement and Prospectus, other
than transactions referred to or contemplated therein or to which you have given
your written consent; (iii) neither the Company nor the Subsidiaries shall be in
default (nor shall an event have occurred which, with notice, or lapse of time
or both would constitute a default or acceleration) under any provision of, any
agreement, understanding or instrument relating to any indebtedness; (iv) no
material amount of the consolidated assets of the Company and the Subsidiaries
shall have been pledged or mortgaged, except as set forth in the Registration
Statement and Prospectus; and (v) no action, suit or proceeding, at law or in
equity, shall have been pending or, to the knowledge of the Company, threatened
against the Company or the Subsidiaries, or affecting any of their properties or
business before or by any court or federal, state or other jurisdictional
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding would materially adversely affect the business,
operations, prospects or financial condition or income of the Company and the
Subsidiaries, except as set forth in the Registration Statement and Prospectus.
(d) At the Closing Date and Additional Closing Date, as the case may
be, you shall have received a certificate of the President and the principal
financial or accounting officer of the Company, dated the Closing Date and
Additional Closing Date, as the case may be, (i) to the effect that the
conditions set forth in subsections (a) and (d) above have been satisfied and
(ii) as to the accuracy, as of the Closing Date and Additional Closing Date, as
the case may be, of the representations and warranties of the Company set forth
in Section 2 (a) hereof.
(e) At the time this Agreement is executed and at the Closing Date and
Additional Closing Date, as the case may be, you shall have received a letter,
addressed to you in form and substance satisfactory to you in all respects
(including the non-material nature of the changes or decreases, if any, referred
in to clause (iii) below), from BDO Seidman, LLP, dated as of the date of this
<PAGE>
Agreement and as of the Closing Date and Additional Closing Date, as the case
may be:
(i) confirming that they are independent accountants with
respect to the Company within the meaning of the Act and the
applicable published Regulations;
(ii) stating that in their opinion, the financial statements
of the Company and the Subsidiaries included in the Registration
Statement examined by them comply as to form in all material
respects with the applicable accounting requirements of the Act
and the published Regulations;
(iii) stating that, on the basis of procedures (but not an
audit in accordance with generally accepted auditing standards),
which included a reading of the latest available unaudited
consolidated interim financial statements of the Company and the
Subsidiaries (with an indication of the date of the latest
available unaudited interim financial statements), a reading of
the latest available minutes of the stockholders and board of
directors of the Company and the Subsidiaries and committees of
such boards and inquiries to certain officers and other employees
of the Company and the Subsidiaries responsible for financial and
accounting matters and other specified procedures and inquiries,
nothing has come to their attention that would cause them to
believe that (A) the unaudited consolidated financial statements
of the Company and the Subsidiaries included in the Registration
Statement (i) do not comply as to form in all material respects
with the applicable accounting requirements of the Act and
Regulations, or (ii) were not fairly presented in conformity with
generally accepted accounting principles on a basis substantially
consistent with that of the audited financial statements included
in the Registration Statement; (B) at the date of the latest
available interim financial statements and at a specified date
not more than five days prior to the date of such letter, there
was any change in long-term debt or capital stock of the Company
and its Subsidiaries, as compared with the amounts shown in the
__________, 1997 consolidated balance sheet of the Company and
its Subsidiaries, included in the Registration Statement and
Prospectus, other than as set forth in or contemplated by the
Registration Statement and Prospectus, or, if there was any
change, setting forth the amount of such change; or (C) during
the period from ___________, 1997 to a specified date not more
than five days prior to the date of such letter, there was any
decrease in revenues or in operating income, net income or net
income per share of the Company and its Subsidiaries, as compared
with the corresponding period in the preceding year, other than
as set forth in or contemplated by the Registration Statement and
Prospectus, or, if there was any decrease or increase,
<PAGE>
respectively, setting forth the amount of such decrease or
increase; and
(iv) stating that they have compared specific dollar
amounts, numbers of shares, percentages of dollar amounts and
shares and other information pertaining to the Company set forth
in the Prospectus, which have been specified by you prior to the
date of this Agreement, to the extent that such amounts, numbers,
percentages and other information may be derived from the general
accounting records of the Company and excluding any questions
requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries
and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted
auditing standards) set forth in the letter, and found them to be
in agreement.
(f) All proceedings taken in connection with the sale of the Firm
Stock and the Additional Stock as herein contemplated shall have been reasonably
satisfactory in form and substance to you and your counsel.
(g) The Company shall have furnished to the Representative such
further certificates and documents confirming the representations and warranties
contained herein, the performance of covenants prior to the Closing Date and the
Additional Closing Date, as the case may be, and related matters as the
Representative may reasonably have requested.
(h) There shall have been duly tendered to you certificates
representing all the Firm Stock and the Additional Stock, as the case may be,
agreed to be sold by the Company on the Closing Date and the Additional Closing
Date, as the case may be.
(i) Each Selling Shareholder shall have furnished to the
Representative at the Additional Closing Date, if any, a certificate, dated the
Additional Closing Date, signed by such Selling Shareholder in form and
substance satisfactory to the Representative, to the effect that the
representations, warranties and agreements of such Selling Shareholder in
Section 2 (b) hereof were when originally made and are at the time such
certificate is dated true and correct and such Selling Shareholder has complied
with all of such Selling Shareholder's agreements contained herein. (j) No order
suspending the sale of the Firm Stock or the Additional Stock, as the case may
be, in any jurisdiction designated by you pursuant to subsection (d) of Section
5 hereof, shall have been issued on the Closing Date or the Additional Closing
Date, as the case may be, and no proceedings for that purpose shall have been
instituted or to your knowledge or that of the Company shall be contemplated,
(k) At the Additional Closing Date, if any, you shall have received the
<PAGE>
favorable opinion of _________________, counsel for each of the Selling
Shareholders, with respect to each of the Selling Shareholders, dated the
Additional Closing Date, if any, addressed to you and in form and scope
satisfactory to your counsel, to the effect that:
(i) A Power of Attorney and a Custody Agreement have been duly
authorized (where such Selling Shareholder is not an individual), executed and
delivered by each Selling Shareholder and constitute valid and binding
agreements of such Selling Shareholder in accordance with their respective
terms. (ii) This Agreement has been duly authorized (where such Selling
Shareholder is not an individual), executed and delivered by or on behalf of
each Selling Shareholder and constitutes a valid and binding agreement of such
Selling Shareholder enforceable in accordance with its terms, except as rights
to indemnity and contribution hereunder may be limited by the securities laws of
the United States and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws or equitable principles
affecting the enforcement of creditors' rights generally; and the sale of the
Additional Stock to be sold by each Selling Shareholder hereunder and the
performance of this Agreement, the Power of Attorney and the Custody Agreement
and the consummation of the transactions herein and therein contemplated will
not conflict with or result in a breach or violation of any terms or provisions
of, or constitute a default under, or give rise to rights of termination under,
any indenture, mortgage, deed of trust, voting trust agreement, loan agreement
or other agreement or instrument known to such counsel to which such Selling
Shareholder is a party or by which such Selling Shareholder or any of such
Selling Shareholder's properties is bound, the articles or certificate of
incorporation and by-laws if such Selling Shareholder (if such Selling
Shareholder is a corporation), the partnership agreement of such Selling
Shareholder (if such Selling Shareholder is a partnership), or any applicable
law, rule or regulation, judgment, order or decree of any court, government or
governmental instrumentality having jurisdiction over such Selling Shareholder
or the property of such Selling Shareholder.
(iii) Except for the order of the Commission making the Registration
Statement effective (which is in effect) and permits or similar authorization
required under the securities or Blue Sky laws of certain jurisdictions and by
the NASD (as to which such counsel need express no opinion), no consent,
approval, authorization, license or order of any regulatory body, administrative
agency or other governmental body is legally required for the execution,
delivery and performance of this Agreement by the Selling Shareholders, other
than any such consents, approvals, authorizations, licenses, and orders as have
been obtained and are in full force and effect.
(iv) Immediately prior to the Additional Closing Date, if any, such
Selling Shareholder had good and valid title to the Additional Stock to be sold
<PAGE>
by such Selling Shareholder under this Agreement, free and clear of all liens,
encumbrances, equities or claims, and full right, power and authority to sell,
assign, transfer and deliver the Additional Stock to be sold by such Selling
Shareholder hereunder.
(v) Good and valid title to the Additional Stock sold by the Selling
Shareholders, free and clear of all liens, encumbrances, equities or claims, has
been transferred to the Representative who has purchased such Additional Stock
in good faith and without notice of any such lien, encumbrance, equity or claim
or any other adverse claim within the meaning of the Uniform Commercial Code.
In rendering the opinion of clause (iv), such counsel may rely upon a
certificate of such Selling Shareholder as to matters of fact as to ownership of
and liens, encumbrances, equities or claims on the Additional Stock sold by such
Selling Shareholder, provided that such counsel shall state that they believe
that both the Representative and they are justified in relying upon such
certificate.
(l) Any certificate signed by any duly authorized officer of the
Company in such capacity and delivered to you or your counsel shall be deemed a
representation and warranty by the Company to you as to the statements made
therein. If any condition to your obligations hereunder to be fulfilled prior to
or at the Closing Date or the Additional Closing Date, as the case may be, is
not so fulfilled, you may terminate this Agreement or, if you so elect, waive
any such conditions which have not been fulfilled or extend the time for their
fulfillment.
8. Indemnification.
(a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless each of the Underwriters, each of the officers and
directors of the Underwriters and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against any and all loss, liability, claim, damage and expense
whatsoever (including, but not limited to any and all expense whatsoever
reasonably incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever)("collectively,
"Damages") arising out of or based upon (i) the inaccuracy or breach of any
representation or warranty of the Company or the breach of any covenant made by
the Company in this Agreement or (ii) any untrue statement or alleged untrue
statement of a material fact contained (x) in any Preliminary Prospectus, the
Registration Statement or the Prospectus (as from time to time amended and
supplemented) or (y) in any application or other document (in this Section 8,
collectively called "Application") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company filed in
<PAGE>
any jurisdiction in order to qualify the Firm Stock or the Additional Stock
under the Blue Sky or securities laws thereof or filed with the Commission or
any securities exchange, such as the Nasdaq SmallCap Market and the Pacific
Stock Exchange, or (iii) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading; unless such statement or omission was made in reliance
upon and in conformity with written information furnished to the Company with
respect to the Underwriters by or on behalf of any Underwriter expressly for use
in the Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment or supplement thereof, or in any Application or in any communication
to the Commission, as the case may be. With respect to any Damages arising out
of or based upon any untrue statement or alleged untrue statement made in, or
omission or alleged omission from, any Preliminary Prospectus, the indemnity
agreement contained in this Section 8(a) with respect to such Preliminary
Prospectus shall not inure to the benefit of the Underwriters (or the benefit of
any person controlling any Underwriter), if the Prospectus (or the Prospectus as
amended or supplemented if the Company shall have made any amendments thereof or
supplements thereto which shall have been furnished to you prior to the time of
confirmation of such sale) does not contain such statement, alleged statement,
omission or alleged omission, a sufficient number of copies of such Prospectus
were provided to the Underwriters and a copy of such Prospectus shall not have
been sent or given to the person asserting such Damages at or prior to the
written confirmation of such sale to such person.
(b) Each Selling Shareholder agrees, severally and not jointly, that
it will indemnify and hold harmless the Representative, each of the officers and
directors of the Representative, and each person, if any, who controls the
Representative within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, and each of them, to the same extent as the foregoing indemnity
from the Company to the Underwriters, but only with respect to (i) statements or
omissions made in the Registration Statement (or any amendment thereto) or a
Preliminary Prospectus or the Prospectus (or any amendment or supplement
thereto) made in reliance on and in conformity with information relating to such
Selling Shareholder furnished to the Company by or on behalf of such Selling
Shareholder expressly for inclusion in the Registration Statement (or any
amendment thereto) or a Preliminary Prospectus or the Prospectus (or any
amendment or supplement thereto), and (ii) representations and warranties of
such Selling Shareholder contained in Section 2 (b) of this Agreement or
contained in certificates of such Selling Shareholder submitted pursuant to
Section ___ of this Agreement. Such Selling Shareholder's obligation to
indemnify the Representative shall be limited to the amount of proceeds (net of
the Representative's discount) of the sale of Additional Stock sold by such
Selling Shareholder. The Representative acknowledges that the statements set
forth under the heading "Principal and Selling Stockholders" (insofar as such
information relates to any Selling Shareholder) in any Preliminary Prospectus
and the Prospectus constitute the only information relating to such Selling
Shareholder furnished to the Company by or on behalf of such Selling Shareholder
expressly for inclusion in the Registration Statement. The indemnity agreement
<PAGE>
contained in this Section 8(b) is in addition to any liability that each Selling
Shareholder may otherwise have to the Representative or any controlling person
of the Underwriter.
(c) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act for all Damages with
respect to statements or omissions, or alleged statements or omissions, if any,
made in any Preliminary Prospectus, Registration Statement or Prospectus or any
amendment or supplement thereto or any Application in reliance upon, and in
conformity with, written information furnished to the Company with respect to
the Underwriters by or on behalf of any Underwriter for use in any Preliminary
Prospectus, the Registration Statement or Prospectus or any amendment or
supplement thereto or in any application, as the case may be.
(d) The Representative agrees that it will indemnify and hold harmless
each Selling Shareholder against any and all loss, liability, claim, damage,
expense or action, joint or several, to the same extent as the foregoing
indemnity from the Underwriters to the Company but only with respect to
statements or omissions made in the Registration Statement (or any amendment
thereto) or a Preliminary Prospectus or the Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with information
furnished in writing by the Representative to the Company expressly for use in
the Registration Statement (or any amendment thereto). The indemnity agreement
contained in this Section 8(d) is in addition to any liability which the
Representative may otherwise have to the Selling Shareholders. The Selling
Shareholders acknowledge that the statements set forth under the heading
"Underwriting" (insofar as such information relates to the Representative) and
in the last paragraph of text on the outside front cover page of any Preliminary
Prospectus and the Prospectus constitute the only information furnished in
writing by the Representative expressly for inclusion in the Registration
Statement, any Preliminary Prospectus or the Prospectus.
(e) If any action is brought against an indemnified party under
subsection (a) or (b) above (the "Indemnified Party") in respect of which
indemnity may be sought against the indemnifying party under subsection (a) or
(b) above (the "Indemnifying Party"), such Indemnifying Party shall promptly
notify in writing the party or parties against whom indemnification is to be
sought of the institution of such action and the Indemnifying Parties shall
assume the defense of such action, including the employment of counsel
(reasonably satisfactory to such Indemnified Party) and payment of expenses.
Such Indemnified Party shall have the right to employ it or their own counsel in
any such case, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Party unless the employment of such counsel shall have been
authorized in writing by the Indemnifying Parties in connection with the defense
of such action or the Indemnifying Parties shall not have employed counsel to
<PAGE>
have charge of the defense of such action or such Indemnified Party or parties
shall have reasonably concluded that there may be defenses available to the
Indemnifying Parties which are different or additional to those available to the
Indemnifying Parties (in which case the Indemnifying Parties shall not have the
right to direct the defense of such action on behalf of the Indemnified Party or
Parties), in any of which events such fees and expenses shall be borne by the
Indemnifying Parties. Anything in this paragraph to the contrary
notwithstanding, the Indemnifying Party shall not be liable for any settlement
of any such claim or action effected without its written consent. The
Indemnifying Party agrees promptly to notify the Indemnified Party of the
commencement of any litigation or proceedings against the Indemnifying Party or
any of its officers or directors in connection with the issue and sale of the
Firm Stock and the Additional Stock or in connection with such Preliminary
Prospectus, Registration Statement or Prospectus, or any amendment or supplement
thereto, or any such Application.
(f) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an Indemnified Party in respect of
any losses, claims, damages or liabilities (or actions in respect thereof)
referred to therein, then each Indemnifying Party shall contribute to the amount
paid or payable to such Indemnified Party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other from the
offering of the Firm Stock and Additional Stock. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the Indemnified Party failed to give the notice required above in this
Section 8, then each Indemnifying Party shall contribute to such amount paid or
payable by such Indemnified Party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company and the Selling Shareholders on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Selling Shareholders on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
and the Selling Shareholders bear to the total underwriting discounts received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company and the Selling Shareholders on the one hand
or the Underwriters on the other and the parties relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this subsection
(d) were determined by pro rata allocation or by any other method of allocation
<PAGE>
which does not take account of the equitable considerations referred to above in
this subsection (d). The amount paid or payable by an Indemnified Party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to include any
legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) the Underwriters
shall not be required to contribute any amount in excess of the amount by which
the total price at which the Firm Stock and Additional Stock underwritten by the
Underwriters and distributed to the public were offered to the public exceeds
the amount of any damages which the Underwriters have otherwise been required to
pay by reason of such untrue statement or omission and (ii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11 of the Act) shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in its or their
obligations to purchase the Firm Stock hereunder, and if the number of shares of
Firm Stock with respect to which such default relates does not exceed in the
aggregate 10% of the number of shares of Firm Stock which all Underwriters have
agreed to purchase hereunder, then such Firm Stock to which the default relates
shall be purchased by the non-defaulting Underwriters in proportion to their
respective commitments hereunder.
(b) In the event that such default relates to more than 10% of the
number of shares of Firm Stock, you may in your discretion arrange for yourself
or for another party or parties to purchase such Firm Stock to which such
default relates on the terms contained herein. If within one (1) business day
after such default relating to more than 10% of the number of shares of Firm
Stock, you do not arrange for the purchase of such Firm Stock, then the Company
shall be entitled to a further period of one (1) business day within which to
procure another party or parties satisfactory to you to purchase said Firm Stock
on such terms. In the event that neither you nor the Company arrange for the
purchase of the Firm Stock to which a default relates as provided in this
Section 9, this Agreement may be terminated by you or the Company (except as
provided in Section 6 and Section 8(a) hereof) or the several Underwriters, but
nothing herein shall relieve a defaulting Underwriter of its liability, if any,
to the other several Underwriters and to the Company for damages occasioned by
its default hereunder.
(c) In the event that the Firm Stock to which the default relates is
to be purchased by the non-defaulting Underwriters, or is to be purchased by
another party or parties as aforesaid, you or the Company shall have the right
to postpone the Closing Date for a reasonable period but not in any event
<PAGE>
exceeding five (5) business days, in order to effect whatever changes may
thereby be made necessary in the Registration Statement or the Prospectus or in
any other documents and arrangements, and the Company agrees to file promptly
any amendment to the Registration Statement or the Prospectus which in the
opinion of counsel for the Underwriters may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 9 with like effect as if it had originally been a party to
this Agreement with respect to such Firm Stock.
10. Representations and Agreements to Survive Delivery. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Date and the Additional Closing Date, and such
representations, warranties and agreements of you and the Company, including the
indemnity and contribution agreements contained in Section 8 hereof, shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of you or any controlling person, or by or on behalf of the
Company or any controlling person, and shall survive termination of this
Agreement and/or delivery of the Firm Stock and the Additional Stock to you.
11. Effective Date of This Agreement and Termination Thereof.
(a) This Agreement shall become effective at 9:30 A.M., New York Time,
on the first full business day following the day on which the Registration
Statement becomes effective or at the time of the initial public offering by you
of the Firm Stock, whichever is earlier. The time of the initial public
offering, for the purpose of this Section 11, shall mean the time, after the
Registration Statement becomes effective, of the release by you for publication
of the first newspaper advertisement which is subsequently published relating to
the Firm Stock or the time, after the Registration Statement becomes effective,
when the Firm Stock is first released by you for offering by the Underwriters or
dealers by letter or telegram, whichever shall first occur. You or the Company
may prevent this Agreement from becoming effective without liability of any
party to any other party, except as noted below, by giving the notice indicated
below in Section 11(d) before the time this Agreement becomes effective.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the Additional closing Date, as the case may be,
if, after the date of this Agreement, any domestic or international event or act
or occurrence has materially disrupted or, in the exercise of your reasonable
judgment, will in the immediate future materially disrupt, securities markets in
the United States; or trading on the New York Stock Exchange shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required on the New
York Stock Exchange by the New York Stock Exchange or by order of the Commission
or any other governmental authority having jurisdiction; or the United States
<PAGE>
shall have become involved in a war or major hostilities; or a banking
moratorium has been declared by a New York or Federal authority; or the Company
shall have sustained a material loss by fire, flood, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether or
not said loss shall have been insured, will, in your opinion, interfere
materially and adversely with the conduct of the business and operations of the
Company; or there shall have been such material adverse change in the condition
or prospects of the Company or the market for its and similar securities as in
your judgment would make it inadvisable to proceed with the offering, sale and
delivery of the Firm Stock or Additional Stock, as the case may be.
(c) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 11, the Company shall be
notified promptly by you by telephone or telegram, confirmed by letter. If the
Company elects to prevent this Agreement from becoming effective, you shall be
notified promptly by the Company by telephone or telegram, confirmed by letter.
(d) Anything in this Agreement to the contrary notwithstanding if this
Agreement shall not become effective by reason of an election of the Company
pursuant to this Section 11, or if this Agreement shall not be carried out
within the time specified herein by reason of any failure on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement by
it to be performed or satisfied, the sole liability of the Company to you, in
addition to the obligations assumed by the Company pursuant to Section 6 hereof,
will be to reimburse you for such actual out-of-pocket expenses (including the
fees and disbursements of your counsel) as shall have been incurred in
connection with this Agreement and the proposed purchase of the Firm Stock and
Additional Stock, and upon demand the Company will pay the full amount thereof
to you. If this Agreement shall not become effective by reason of an election by
you pursuant to this Section 11 or if this Agreement shall be terminated or
otherwise not carried out within the time specified herein for any reason other
than the failure on the part of the Company to perform any undertaking or
satisfy any condition of this Agreement by it or them to be performed or
satisfied, the Company shall have no liability to you other than for obligations
assumed by the Company pursuant to Section 6 hereof; provided, however, that you
may retain any sums heretofore paid to you by the Company as provided in Section
3 hereof to the extent that such sums are for your actual out-of-pocket expenses
(including the fees and disbursements of your counsel) as shall have been
incurred in connection with this Agreement and the proposed purchase of the Firm
Stock and Additional Stock.
Notwithstanding any election hereunder or any termination of this
Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Section 8 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
<PAGE>
12. Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to any Underwriter,
shall be mailed, delivered or telegraphed and confirmed to Donald & Co.
Securities Inc., 65 East 55th Street, New York, New York 10022, Att: Stephen A.
Blum, President, with a copy to Parker Duryee Rosoff & Haft, 529 Fifth Avenue,
New York, New York 10017-4608, Attn: Michael DiGiovanna; and if sent to the
Company, shall be mailed, delivered or telegraphed and confirmed to The Source
Information Management Company, 11644 Lilburn Park Road, St. Louis, Missouri,
63146, Attn: S. Leslie Flegel, Chief Executive Officer, with a copy to Gallop
Johnson & Neuman, L.C., 101 South Hanby Road, St. Louis, Missouri 63105, Attn:
Douglas J. Bates, Esq.
13. Parties. This Agreement shall be binding upon, you, the Company, and
the controlling persons, directors and officers referred to in Section 8 hereof,
and their respective successors, legal representatives and assigns, and no other
person shall have or be construed to have any legal or equitable right, remedy
or claim under or in respect of or by virtue of this Agreement or any provision
herein contained.
14. Construction. This Agreement shall be construed in accordance with the
laws of the State of New York.
If the foregoing correctly sets forth the understanding between you,
the Company and the Selling Shareholders, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
THE SOURCE INFORMATION MANAGEMENT
COMPANY
By:
-----------------------------------------
S. Leslie Flegel, Chief Executive Officer
SELLING SHAREHOLDERS
By:
-----------------------------------------
______________, As Attorney-in-Fact,
acting on behalf of each of the Selling
Shareholders named in Schedule II hereto
<PAGE>
Accepted as of the date first above written:
DONALD & CO. SECURITIES INC.
As Representative of the Underwriters
named in Schedule I hereto
By:
-----------------------------------
Stephen A. Blum, President
SCHEDULE I
Underwriters Number of Shares of Firm Stock
------------ ------------------------------
Donald & Co. Securities Inc.
TOTAL -----------
2,000,000
<PAGE>
SCHEDULE II
Number of Shares
Selling Shareholder (1) of Additional Stock (2)
----------------------- -----------------------
S. Leslie Flegel
----------------------
Total 300,000
(1) Each Selling Shareholder has appointed _______________ and
_____________ as Attorneys-in-Fact
(2) Represents the maximum number of Additional Stock to be sold by
each Selling Shareholder, assuming the exercise in full of the Representative's
over-allotment option.
Secretary of State
State of Missouri
P.O. Box 778
Jefferson City, Missouri 65102
AMENDMENT OF ARTICLES OF INCORPORATION
(To be submitted in duplicate)
Pursuant to the provisions of The General and Business Corporation Law of
Missouri, the undersigned Corporation certifies the following:
1. The name of the Corporation is The Source Company (#00409062).
The name under which it was originally organized was Periodico, Inc.
2. An amendment to the Corporation's Articles of Incorporation was
approved by
the shareholders on July 1, 1997.
3. Article One is amended to read as follows:
1. The name of the corporation is The Source Information
Management Company.
4. Of the 7,049,199 shares of common stock outstanding, 7,049,199 of such
shares were entitled to vote on such amendment.
None of the outstanding shares were entitled to vote thereon as a
class.
5. The number of shares voted for and against the amendment was as
follows:
4,809,599 shares voted for the amendment
-0- shares voted against the amendment
6. The amendment did not change the number or par value of authorized
shares having a par value.
The amendment did not change the number of authorized shares without
<PAGE>
par value.
7. The amendment does not provide for an exchange, reclassification or
cancellation of issued shares, or a reduction of the number of
authorized shares of any class.
IN WITNESS WHEREOF, the undersigned, S. Leslie Flegel, Chairman, has executed
this instrument and its Secretary has affixed its corporate seal hereto and
attested said seal as of the 1st day of July, 1997.
THE SOURCE COMPANY
CORPORATE SEAL
By:/s/ S. Leslie Flegel
----------------------------
S. Leslie Flegel, Chairman
ATTEST:
/s/ W. Brian Rodgers
- ---------------------------
W. Brian Rodgers, Secretary
STATE OF MISSOURI )
) SS
COUNTY OF ST. LOUIS )
I, Carol Hund, a Notary Public, do hereby certify that on this 1st day
of July, 1997, personally appeared before me S. Leslie Flegel, who being by me
first duly sworn, declared that he is the Chairman of The Source Company, that
he signed the foregoing document as Chairman of the Corporation, and that the
statements therein contained are true.
/s/ Carol Hund
------------------------------------
Notary Public
My commission expires:
Number Shares
THE SOURCE INFORMATION MANAGEMENT COMPANY
Common Stock
INCORPORATED UNDER THE LAWS CUSIP __________
OF THE STATE OF MISSOURI
SEE REVERSE FOR
CERTAIN INSTRUCTIONS
This certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF
THE SOURCE INFORMATION MANAGEMENT COMPANY
transferable on the books of the Corporation by the owner in person or by duly
authorized attorney upon surrender of this certificate properly endorsed. This
certificate and the shares represented hereby are issued and shall be held
subject to all the provisions of the Articles of Incorporation and Bylaws of the
Corporation and all amendments thereto (copies of which are on file with the
Transfer Agent), to all of which the holder by acceptance hereof, assents. This
certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar. In Witness Whereof, the Corporation has caused this
certificate to be signed by its duly authorized officers, and its corporate seal
to be hereunto affixed.
Dated:
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER
SERVICES, L.L.C.
/s/ S. Leslie Flegel TRANSFER AGENT AND REGISTRAR
CHAIRMAN AND CORPORATE
CHIEF EXECUTIVE OFFICER SEAL
BY
/s/ W. Brian Rodgers
SECRETARY AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM-as tenants in common UNIF GIFT MIN ACT - ____ as Custodian for ____
TEN ENT-as tenants by the (Cust) (Minor)
entireties
JT TEN -as joint tenants with under Unfirom Gifts to Minors
right of survivorship
and not as tenants in Act ______________
common (State)
TOD - transfer on death
direction in event of
owner's death, to
person named on face
UNIF TRAN MIN ACT - ____ as Custodian for ____
(Cust) (Minor)
under Uniform Transfers to Minors
Act _____________
(State)
Additional abbreviations may also be used though not in the above list.
THE SOURCE INFORMATION MANAGEMENT COMPANY
Keep this certificate in a safe place. If it is lost, stolen or destroyed
the Corporation may require a bond of indemnity as a condition to the issuance
of a replacement certificate.
For Value Received, _______________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
shares
of common stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated
X___________________________________________
NOTICE: THIS SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
X___________________________________________
ALL GUARANTEES MUST BE MADE BY A FINANCIAL
INSTITUTION (SUCH AS A BANK OR BROKER) WHICH
IS A PARTICIPANT IN THE SECURITIES TRANSFER
AGENTS MEDALLION PROGRAM ("STAMP"), THE NEW
YORK STOCK EXCHANGE, INC. MEDALLION
SIGNATURE PROGRAM ("MSP"), OR THE STOCK
EXCHANGES MEDALLION PROGRAM ("SEMP") AND
MUST NOT BE DATED. GUARANTEES BY A NOTARY
PUBLIC ARE NOT ACCEPTABLE.
REPRESENTATIVE'S WARRANT AGREEMENT (the "Warrant Agreement"), dated as of
_________, 1997, between THE SOURCE INFORMATION MANAGEMENT COMPANY, a Missouri
corporation (the "Company"), and DONALD & CO. SECURITIES INC. (hereinafter
referred to variously as the "Holder" or the "Representative").
The Company proposes to issue to the Representative warrants (the
"Warrants") to purchase up to 200,000 shares of the Company's common stock, par
value $.01 per share (the "Common Stock");
The Representative has agreed, pursuant to the underwriting agreement (the
"Underwriting Agreement") dated ________, 1997 among the Company, the
Representative and the other underwriters named in Schedule I thereof
(collectively with the Representative, the "Underwriters") to act as the
representative of the Underwriters in connection with the Company's proposed
initial public offering (the "Initial Public Offering") of 2,000,000 shares of
Common Stock (the "Stock") at an initial public offering price of $_____ per
share; and
The Warrants to be issued pursuant to this Agreement will be issued on the
Closing Date (as such term is defined in the Underwriting Agreement) by the
Company to the Representative in consideration for, and as part of the
compensation in connection with, the Representative acting as representative of
the Underwriters pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of TWO HUNDRED DOLLARS AND NO CENTS ($200.00), the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant. The Holder (as hereinafter defined) is hereby granted the
right to purchase, at any time from ________, 1998 until 5:30 p.m., New York
time, on ________, 2002, up to 200,000 shares of Common Stock (the "Warrant
Stock") at an initial exercise price (subject to adjustment as provided in
Article 8 hereof) of $_____ per share of Warrant Stock, subject to the terms and
conditions of this Agreement.
2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
<PAGE>
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant. The Warrants initially are exercisable at the
initial exercise price per share of Warrant Stock set forth in Section 6 hereof,
payable by certified or official bank check in New York Clearing House funds (or
by cashless exercise as provided below), subject to adjustment as provided in
Section 8 hereof. Upon surrender of a Warrant Certificate with the annexed Form
of Election to Purchase duly executed, together with payment of the Exercise
Price (as hereinafter defined) for the Warrant Stock purchased at the Company's
principal offices (presently located at 11644 Lilburn Park Road, St. Louis,
Missouri 63146) the registered holder of a Warrant Certificate ("Holder" or
"Holders") shall be entitled to receive a certificate or certificates for the
shares of Warrant Stock so purchased. The purchase rights represented by each
Warrant Certificate are exercisable at the option of the Holder thereof, in
whole or in part (but not as to fractional shares of the Warrant Stock
underlying the Warrants). In the case of the purchase of less than all the
securities purchasable under any Warrant Certificate, the Company shall cancel
said Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the
securities purchasable thereunder.
The Holder may, at its option, exchange the Warrants, in whole or in
part (a "Warrant Exchange"), into the number of shares of Warrant Stock
determined in accordance with this paragraph, by surrounding the Warrant
Certificate representing the Warrants at the Company's principal office,
accompanied by a notice stating (i) such Holder's intent to effect such
exchange, (ii) the number of shares of Warrant Stock subject to the Warrants as
to which the exchange is to be effected and (iii) the date on which the Holder
requests that such Warrant Exchange occur (the "Notice of Exchange"). The
Warrant Exchange shall take place on the date specified in the Notice of
Exchange or if the date the Notice of Exchange is received by the Company is
later than the date specified in the Notice of Exchange, such later date (the
"Exchange Date"). Certificates for the shares of Warrant Stock issuable upon
such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing
the balance of the shares of Warrant Stock remaining subject to the Warrants,
shall be issued as of the Exchange Date and delivered to the Holder within three
(3) business days following the Exchange Date. In connection with any Warrant
Exchange, the Warrants shall represent the right to subscribe for and acquire
the number of shares of Warrant Stock (rounded to the next highest integer)
equal to (i) the number of shares of Warrant Stock specified by the Holder in
its Notice of Exchange (the "Total Number") less (ii) the number of shares of
Warrant Stock equal to the quotient obtained by dividing (A) the product of the
Total Number and the existing Exercise Price of the Warrants by (B) the market
price of a share of Common Stock on the Exchange Date; and, in the case of any
Warrant Exchange for less than all of the shares of Warrant Stock purchasable
under the Warrants, the Company shall execute and deliver a new Warrant
Certificate of like tenor for the balance of the Shares purchasable thereunder.
By way of example, if a Holder of Warrants submits a Notice of Exchange relating
<PAGE>
to 60,000 of the 200,000 shares of Warrant Stock subject to the Warrants and the
current market price of a share of Common Stock on the Exchange Date is $8.00,
the holder will be entitled to receive _________ shares of Warrant Stock, along
with a new Warrant Certificate entitling the Holder to purchase _________ shares
of Warrant Stock.
4. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for the shares of Warrant Stock or other securities,
properties or rights underlying such Warrants, shall be made forthwith (and in
any event within three (3) business days thereafter) without charge to the
Holder thereof including, without limitation, any tax which may be payable in
respect of the issuance thereof, and such certificates shall (subject to the
provisions of Sections 5 and 7 hereof) be issued in the name of, or in such
names as may be directed by, the Holder thereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any such certificates in a
name other than that of the Holder and the Company shall not be required to
issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
The Warrant Certificates and the certificates representing the shares
of Warrant Stock or other securities, property or rights shall be executed on
behalf of the Company by the manual or facsimile signature of the Chairman of
the Board of Directors, or the President or any executive officer of the Company
under its corporate seal reproduced thereon, attested to by the manual or
facsimile signature of the Treasurer or Assistant Treasurer or the Secretary or
Assistant Secretary of the Company. Warrant Certificates shall be dated the date
of execution by the Company upon initial issuance, division, exchange,
substitution or transfer.
5. Restriction On Transfer of Warrants. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
may not be sold, transferred, assigned, hypothecated or otherwise disposed of,
in whole or in part, for a period of one (1) year from the date hereof, except
to officers of the Underwriters or to officers of the selected dealers
participating in the Initial Public Offering.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. The initial exercise price of
each Warrant shall be $_____ per share of Warrant Stock. The adjusted exercise
price shall be the price which shall result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Section 8 hereof.
6.2 Exercise Price. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context.
<PAGE>
7. Registration Rights.
7.1 Registration Under the Securities Act of 1933. The Warrants and
the shares of Warrant Stock have been registered under the Securities Act of
1933, as amended (the "Securities Act"). Upon exercise, in part or in whole, of
the Warrants, certificates representing the shares of Warrant Stock and any
other securities issuable upon exercise of the Warrants (collectively, the
"Warrant Securities") shall bear the following legend:
The securities represented by this certificate may not be offered or
sold except pursuant to (i) an effective registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), (ii) to the extent
applicable, Rule 144 under the Securities Act (or any similar rule under the
Securities Act relating to the disposition of securities), or (iii) an opinion
of counsel, if such opinion shall be reasonably satisfactory to counsel for the
issuer, that an exemption from registration under the Securities Act is
available.
7.2 Piggyback Registration. If, at any time commencing on ________,
1998 and expiring six (6) years thereafter, the Company proposes to register any
of its securities under the Securities Act (other than in connection with a
transaction contemplated by Rule 145(a) promulgated under the Securities Act or
pursuant to Form S-4, Form S-8 or any successor form thereto), it will give
written notice by registered mail, at least thirty (30) days prior to the filing
of each such registration statement, to the Representative and to all other
Holders of the Warrants and/or Warrant Securities of its intention to do so. If
the Representative or other Holders of the Warrants and/or Warrant Securities
notify the Company in accordance with Section 7.4 hereof of its or their desire
to include any such securities in such proposed registration statement, the
Company shall afford the Representative and such Holders of the Warrants and/or
Warrant Securities the opportunity to have any such Warrant Securities
registered under such registration statement. Notwithstanding the provisions of
this Section 7.2, the Company shall have the right at any time after it shall
have given written notice pursuant to this Section 7.2 (irrespective of whether
a written request for inclusion of any such securities shall have been made) to
elect not to file any such proposed registration statement, or to withdraw the
same after the filing but prior to the effective date thereof.
7.3 Demand Registration.
(a) At any time commencing on ________, 1998 and expiring four (4)
years thereafter, the Holders of Warrants and/or Warrant Securities representing
more than 50% of such securities at that time outstanding (assuming the exercise
of all of the Warrants), shall have the right (which right is in addition to the
<PAGE>
registration rights under Section 7.2 hereof), exercisable by written notice to
the Company, to have the Company prepare and file with the Securities and
Exchange Commission, on one occasion, a registration statement and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for the Representative and Holders in order
to comply with the provisions of the Securities Act, so as to permit a public
offering and sale of their respective Warrant Securities for nine (9)
consecutive months by such Holders and any other Holders of the Warrants and/or
Warrant Securities who notify the Company within ten (10) days after receiving
notice from the Company of such request.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by the majority of the Holders to
all other registered Holders of the Warrants and the Warrant Securities within
ten (10) days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2 and
subsection (a) of this Section 7.3, at any time commencing on ________, 1998 and
expiring four (4) years thereafter, the Holders of Warrants and/or Warrant
Securities representing more than 50% of such securities at the time outstanding
(assuming the exercise of all of the Warrants) shall have the right, exercisable
by written request to the Company, to have the Company prepare and file, on one
occasion, with the Commission a registration statement so as to permit a public
offering and sale for nine (9) consecutive months by any such Holder of its
Warrant Securities; provided, however, that the provisions of Section 7.5(b)
hereof shall not apply to any such registration request and registration and all
costs incident thereto shall be at the expense of the Holder or Holders making
such request.
7.4 Agreement by Holder to Participate in Registration.
Notwithstanding anything to the contrary contained herein, no Holder shall have
any rights under this Section 7 unless such Holder (i) executes a written
agreement stating that the information set forth in the registration statement
concerning the Holder is correct and that the Holder will not violate Regulation
M promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and (ii) delivers such written agreement (as executed by such
Holder) to the Company within 20 days after the Company delivers the form of
such written agreement to such Holder. 7.5 Covenants of the Company With Respect
to Registration. In connection with any registration under Section 7.2 or 7.3
hereof, the Company covenants and agrees as follows:
<PAGE>
(a) The Company shall use its best efforts to file a registration
statement within thirty (30) days of receipt of any demand pursuant to Section
7.3, shall use its best efforts to have any registration statements declared
effective at the earliest possible time, and shall furnish each Holder desiring
to sell Warrant Securities such number of prospectuses as shall reasonably be
requested.
(b) The Company shall pay all costs (excluding transfer taxes, if any,
and fees and expenses of Holder(s)' counsel and any underwriting or selling
commissions), fees and expenses in connection with all registration statements
filed pursuant to Sections 7.2 and 7.3(a) hereof including, without limitation,
the Company's legal and accounting fees, printing expenses, blue sky fees and
expenses. The Holder(s) will pay all costs, fees and expenses in connection with
any registration statement filed pursuant to Section 7.3(c). If the Company
shall fail to comply with the provisions of Section 7.5(a), the Company shall,
in addition to any other equitable or other damages or relief available to the
Holder(s), be liable for any and all incidental, special and consequential
damages and damages due to loss of profit sustained by the Holder(s) requesting
registration of their Warrant Securities.
(c) The Company will take all necessary action which may be required
in qualifying or registering the Warrant Securities included in a registration
statement for offering and sale under the securities or blue sky laws of such
states as reasonably are requested by the Holder(s), provided that the Company
shall not be obligated to execute or file any general consent to service of
process or to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(d) The Company shall indemnify the Holder(s) of the Warrant
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act against all loss, claim,
damage, expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which any
of them may become subject under the Securities Act, the Exchange Act or
otherwise, arising from such registration statement but only to the same extent
and with the same effect as the provisions contained in Section 8 of the
Underwriting Agreement pursuant to which the Company has agreed to indemnify the
Underwriters.
(e) The Company shall not require the Holder(s) to exercise their
Warrants prior to the initial filing of any registration statement or the
effectiveness thereof.
<PAGE>
(f) The Company shall not permit the inclusion of any securities other
than the Warrant Securities to be included in the registration statement filed
pursuant to Section 7.3(a) hereof, without the prior written consent of the
Representative.
(g) The Company shall furnish to the Representative on behalf of each
Holder participating in the offering and to the managing underwriter, if any, a
signed counterpart, addressed to the Representative on behalf on each Holder and
to the managing underwriter, if any, (i) an opinion of counsel to the Company,
dated the effective date of such registration statement if there is no managing
underwriter or the date of the closing under the underwriting agreement if there
is a managing underwriter, and (ii) a "cold comfort" letter, dated the effective
date of such registration statement and the date of the closing under the
underwriting agreement if there is a managing underwriter, signed by the
independent public accountants who have issued a report on the Company's
financial statements included in such registration statement, in each case
covering substantially the same matters with respect to such registration
statement (and the prospectus included therein) and, in the case of such
accountants' letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions of issuer's counsel
and in accountants' letters delivered to underwriters in underwritten public
offerings of securities.
(h) The Company shall as soon as practicable after the effective date
of the registration statement, and in any event within 15 months thereafter,
make "generally available to its security holders" (within the meaning of Rule
158 under the Securities Act) an earnings statement (which need not be audited)
complying with Section 11(a) of the Securities Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.
(i) The Company shall deliver promptly to each Holder who so requests
and the managing underwriter, if any, copies of all correspondence between the
Commission and the Company, its counsel or auditors and all memoranda relating
to discussions with the Commission or its staff with respect to any registration
statement filed pursuant to this Agreement, and permit each Holder who so
requests and the managing underwriter, if any, to do such investigation, upon
reasonable advance notice, with respect to information contained in or omitted
from the registration statement as it deems reasonably necessary to comply with
<PAGE>
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the business of the Company
with its officers and independent auditors, all to such reasonable extent and at
such reasonable times and as often as each Holder and the managing underwriter,
if any, shall reasonably request.
(j) With respect to a registration statement filed pursuant to Section
7.3, the Company shall enter into an underwriting agreement with the managing
underwriter, reasonably satisfactory to the Company, selected for such
underwriting by Holders holding a majority of the Warrant Securities requested
to be included in such underwriting. Such agreement shall be satisfactory in
form and substance to the Company, each Holder and such managing underwriters,
and shall contain such representations, warranties and covenants by the Company
and such other terms as are customarily contained in agreements of that type
used by the managing underwriter. The Holders shall be parties to any
underwriting agreement relating to an underwritten sale of their Warrant
Securities and may, at their option, require that any or all of the
representations, warranties and covenants of the Company to or for the benefit
of such underwriters shall also be made to and for the benefit of such Holders.
Such Holders shall not be required to make any representations or warranties to
or agreements with the Company or the underwriters except as they may relate to
such Holders and their intended methods of distribution.
7.6 Covenants of the Holder(s) With Respect to Registration. The
Holder(s) of the Warrant Securities to be sold pursuant to a registration
statement, and their successors and assigns, shall severally, and not jointly,
indemnify the Company, its officers and directors and each person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Securities Act, the Exchange Act or otherwise, arising from
information furnished by or on behalf of such Holders, or their successors or
assigns, for specific inclusion in such registration statement to the same
extent and with the same effect as the provisions contained in Section 8 of the
Underwriting Agreement pursuant to which the Underwriters have agreed to
indemnify the Company.
8. Adjustments to Exercise Price and Number of Securities.
8.1 Computation of Adjusted Exercise Price. In case the Company shall
at any time after the date hereof issue or sell any shares of Common Stock
(other than the issuances or sales referred to in Section 8.7 hereof), including
shares held in the Company's treasury and shares of Common Stock issued upon the
<PAGE>
exercise of any options, rights or warrants to subscribe for shares of Common
Stock and shares of Common Stock issued upon the direct or indirect conversion
or exchange of securities for shares of Common Stock, for a consideration per
share less than the "Exercise Price" on the date immediately prior to the
issuance or sale of such shares, or without consideration, then forthwith upon
such issuance or sale, the Exercise Price shall (until another such issuance or
sale) be reduced to the price (calculated to the nearest full cent) equal to the
quotient derived by dividing (A) an amount equal to the sum of (X) the product
of (a) the Exercise Price on the date immediately prior to the issuance or sale
of such shares, multiplied by (b) the total number of shares of Common Stock
outstanding immediately prior to such issuance or sale plus, (Y) the aggregate
of the amount of all consideration, if any, received by the Company upon such
issuance or sale, by (B) the total number of shares of Common Stock outstanding
immediately after such issuance or sale; provided, however, that in no event
shall the Exercise Price be adjusted pursuant to this computation to an amount
in excess of the Exercise Price in effect immediately prior to such computation,
except in the case of a combination of outstanding shares of Common Stock, as
provided by Section 8.3 hereof.
For the purposes of any computation to be made in accordance with this
Section 8.1, the following provisions shall be applicable:
(i) In case of the issuance or sale of shares of Common Stock for a
consideration part or all of which shall be cash, the amount of cash
consideration therefor shall be deemed to be the amount of cash received by the
Company for such shares (or, if shares of Common Stock are offered by the
Company for subscription, the subscription price, or if either of such
securities shall be sold to underwriters or dealers for public offering without
a subscription offering, the initial public offering price) before deducting
therefrom any compensation paid or discount allowed in the sale, underwriting or
purchase thereof by underwriters or dealers or others performing similar
services, or any expenses incurred in connection therewith.
(ii) In case of the issuance or sale (otherwise than as a dividend or
other distribution on any stock of the Company) of shares of Common Stock for a
consideration part or all of which shall be other than cash, the amount of the
consideration therefor other than cash shall be deemed to be the value of such
consideration as determined in good faith by the Board of Directors of the
Company.
(iii) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of stockholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
<PAGE>
(iv) The reclassification of securities of the Company other than
shares of the Common Stock into securities including shares of Common Stock
shall be deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (ii) of this Section 8.1.
(v) The number of shares of Common Stock at any one time outstanding
shall include the aggregate number of shares issued or issuable (subject to
readjustment upon the actual issuance thereof) upon the exercise of options,
rights, warrants and upon the conversion or exchange of convertible or
exchangeable securities; provided, however, that shares issuable upon the
exercise of the Warrants shall not be included in such calculation.
8.2 Options, Rights, Warrants and Convertible and Exchangeable
Securities. In case the Company shall at any time after the date hereof issue
options, rights or warrants to subscribe for shares of Common Stock, or issue
any securities convertible into or exchangeable for shares of Common Stock, for
a consideration per share less than the Exercise Price immediately prior to the
issuance of such options, rights or warrants, or such convertible or
exchangeable securities, or without consideration, the Exercise Price in effect
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, as the case may be, shall be reduced to
a price determined by making a computation in accordance with the provision of
Section 8.1 hereof, provided that:
(a) The aggregate maximum number of shares of Common Stock, as the
case may be, issuable under such options, rights or warrants shall be deemed to
be issued and outstanding at the time such options, rights or warranties were
issued, and for a consideration equal to the minimum purchase price per share
provided for in such options, rights or warrants at the time of issuance, plus
the consideration (determined in the same manner as consideration received on
the issue or sale of shares in accordance with the terms of the Warrants), if
any, received by the Company for such options, rights or warrants.
(b) The aggregate maximum number of shares of Common Stock issuable
upon conversation or exchange of any convertible or exchangeable securities
shall be deemed to be issued and outstanding at the time of issuance of such
securities, and for a consideration equal to the consideration (determined in
the same manner as consideration received on the issue or sale of shares of
Common Stock in accordance with the terms of the Warrants) received by the
Company for such securities, plus the minimum consideration, if any, receivable
by the Company upon the conversation or exchange thereof.
<PAGE>
(c) If any change shall occur in the price per share provided for in
any of the options, rights or warrants referred to in subsection (a) of this
Section 8.2, or in the price per share at which the securities referred to in
subsection (b) of this Section 8.2 are convertible or exchangeable, such
options, rights or warrants or conversion or exchange rights, as the case may
be, shall be deemed to have expired or terminated on the date when such price
change became effective in respect of shares not theretofore issued pursuant to
the exercise or conversation or exchange thereof, and the Company shall be
deemed to have issued upon such date new options, rights or warrants or
convertible or exchangeable securities at the new price in respect of the number
of shares issuable upon the exercise of such options, rights or warrants or the
conversion or exchange of such convertible or exchangeable securities.
8.3 Subdivision and Combination. In case the Company shall at any time
subdivide or combine the outstanding shares of Common Stock, the Exercise Price
shall forthwith be proportionately decreased in the case of subdivision or
increased in the case of combination.
8.4 Adjustment in Number of Securities. Upon each adjustment of the
Exercise Price pursuant to the provisions of this Section 8, the number of
shares of Warrant Stock issuable upon the exercise of each Warrant shall be
adjusted to the nearest full amount by multiplying a number equal to the
Exercise Price in effect immediately prior to such adjustment by the number of
shares of Warrant Stock issuable upon exercise of the Warrants immediately prior
to such adjustment and dividing the product so obtained by the adjusted Exercise
Price.
8.5 Definition of Common Stock. For the purpose of this Agreement, the
term "Common Stock" shall mean (i) the class of stock designated as Common Stock
in the Certificate of Incorporation of the Company as it may be amended as of
the date hereof, or (ii) any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value.
8.6 Merger or Consolidation. In case of any consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the Holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
<PAGE>
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8. The above provision of this
Subsection shall similarly apply to successive consolidations or mergers.
8.7 No Adjustment of Exercise Price in Certain Cases. No adjustment of
the Exercise Price shall be made:
(a) Upon the issuance or sale of the Warrants, the shares of Warrant
Stock issuable upon the exercise of the Warrants or shares of Common Stock
issuable upon exercise of options outstanding on the date hereof and described
in the prospectus relating to the Initial Public Offering;
(b) Upon the issuance or sale of shares of Common Stock upon the
exercise of options, rights or warrants, or upon the conversion or exchange of
convertible or exchangeable securities, in any case where the Exercise Price was
adjusted at the time of issuance of such options, rights or warrants, or
convertible or exchangeable securities, as contemplated by Section 8.2 hereof;
or
(c) If the amount of said adjustment shall be less than 2 cents ($.02)
per share of Warrant Stock; provided, however, that in such case any adjustment
that would otherwise be required then to be made shall be carried forward and
shall be made at the time of and together with the next subsequent adjustment
which, together with any adjustment so carried forward, shall amount to at least
2 cents ($.02) per share of Warrant Stock.
8.8 Dividends and Other Distributions. In the event that the Company
shall at any time prior to the exercise of all Warrants declare a dividend
(other than a dividend consisting solely of shares of Common Stock) or otherwise
distribute to its stockholders any assets, property, rights, evidences of
indebtedness, securities (other than shares of Common Stock), whether issued by
the Company or by another, or any other thing of value, the Holders of the
unexercised Warrants shall thereafter be entitled, in addition to the shares of
Common Stock or other securities and property receivable upon the exercise
thereof, to receive, upon the exercise of such Warrants, the same property,
assets, rights, evidences of indebtedness, securities or any other thing of
value that they would have been entitled to receive at the time of such dividend
or distribution as if the Warrants had been exercised immediately prior to such
dividend or distribution. At the time of any such dividend or distribution, the
Company shall make appropriate reserves to ensure the timely performance of the
<PAGE>
provisions of this subsection 8.5. Nothing contained herein shall provide for
the receipt or accrual by a Holder of cash dividends prior to the exercise by
such Holder of the Warrants.
9. Exchange and Replacement of Warrant Certificates. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of shares of Warrant Stock in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of any Warrant Certificate, and,
in case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Warrant Stock
upon the exercise of the Warrants, nor shall it be required to issue scrip or
pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Warrant Stock or other securities,
properties or rights.
11. Reservation and Listing. The Company shall at all times reserve
and keep available out of its authorized shares of Common Stock, solely for the
purpose of issuance upon the exercise of the Warrants, such number of shares of
Warrant Stock or other securities, properties or rights as shall be issuable
upon the exercise thereof. The Company covenants and agrees that, upon exercise
of the Warrants and payment of the Exercise Price therefor, all shares of
Warrant Stock and other securities issuable upon such exercise shall be duly and
validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Warrants shall be outstanding, the
Company shall use its best efforts to cause all shares of Warrant Stock issuable
upon the exercise of the Warrants to be listed (subject to official notice of
issuance) on all securities exchanges on which the Common Stock issued to the
public in connection herewith may then be listed and/or quoted on The Nasdaq
Stock Market.
12. Notices to Warrant Holders. Nothing contained in this Agreement
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
<PAGE>
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; then, in any one or more of said events, the Company shall give
written notice of such event at least fifteen (15) days prior to the date fixed
as a record date or the date of closing the transfer books for the determination
of the stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of the Warrants, to the address of
such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth in Section 3 hereof or
to such other address as the Company may designate by notice to the Holders.
14. Supplements and Amendments. The Company and the Representative may
from time to time supplement or amend this Agreement without the approval of any
Holders of Warrant Certificates (other than the Representative) in order to cure
any ambiguity, to correct or supplement any provision contained herein which may
be defective or inconsistent with any provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
<PAGE>
and the Representative may deem necessary or desirable and which the Company and
the Representative deem shall not adversely affect the interests of the Holders
of Warrant Certificates.
15. Successors. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the Holders and
their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of
business on ________, 2004. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on ________, 2007.
17. Governing Law; Submission to Jurisdiction. This Agreement and each
Warrant Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of New York and for all purposes shall be construed in
accordance with the laws of said State without giving effect to the rules of
said State governing the conflicts of laws. The Company, the Representative and
the Holders hereby agree that any action, proceeding or claim against it arising
out of, or relating in any way to, this Agreement shall be brought and enforced
in the courts of the State of New York or of the United States District Court
for the Southern District of New York, and irrevocably submits to such
jurisdiction, which jurisdiction shall be exclusive. The Company, the
Representative and the Holders hereby irrevocably waive any objection to such
exclusive jurisdiction or inconvenient forum. Any such process or summons to be
served upon any of the Company, the Representative and the Holders (at the
option of the party bringing such action, proceeding or claim) may be served by
transmitting a copy thereof, by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
13 hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the party so served in any action, proceeding or claim. The
Company, the Representative and the Holders agree that the prevailing party(ies)
in any such action or proceeding shall be entitled to recover from the other
party(ies) all of its/their reasonable legal costs and expenses relating to such
action or proceeding and/or incurred in connection with the preparation
therefor.
18. Entire Agreement; Modification. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought.
19. Severability. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
<PAGE>
20. Captions. The caption headings of the Sections of this Agreement
are for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Warrant Certificates or
Warrant Securities any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole and exclusive benefit of the
Company and the Representative and any other Holder(s) of the Warrant
Certificates or Warrant Securities.
22. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
THE SOURCE INFORMATION MANAGEMENT
COMPANY
By:_________________________________
Name:
Title:
Attest:
- -------------------------------
_______________, Secretary
DONALD & CO. SECURITIES INC.
By:___________________________________
Name: Stephen A. Blum
Title: President
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE
SECURITIES ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION
OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE
REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M., NEW YORK TIME, ________, 2002
No. W- _________ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ________, or registered
assigns, is the registered holder of _____________ Warrants to purchase
initially, at any time from ________, 1998 until 5:30 P.M. New York time on
________, 2002 ("Expiration Date"), up to _________ fully paid and
non-assessable shares of common stock, $.01 par value ("Common Stock"), of THE
SOURCE INFORMATION MANAGEMENT COMPANY, a Missouri corporation (the "Company"),
at the initial exercise price, subject to adjustment in certain events (the
"Exercise Price"), of $_____ per share, upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the
Representative's Warrant Agreement dated as of _______, 1997 between the Company
<PAGE>
and Donald & Co. Securities Inc. (the "Representative's Warrant Agreement").
Payment of the Exercise Price shall be made by certified or official bank check
in New York Clearing House funds payable to the order of the Company.
No Warrant may be exercised after 5:30 p.m., New York time, on
the Expiration Date, at which time all Warrants evidenced hereby, unless
exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Representative's
Warrant Agreement, which Representative's Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants.
The Representative's Warrant Agreement provides that upon the
occurrence of certain events the Exercise Price and the type and/or number of
the Company's securities issuable thereupon may, subject to certain conditions,
be adjusted. In such event, the Company will, at the request of the holder,
issue a new Warrant Certificate evidencing the adjustment in the Exercise Price
and the number and/or type of securities issuable upon the exercise of the
Warrants; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair,
the rights of the holder as set forth in the Representative's Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Representative's Warrant Agreement, without any charge except
for any tax or other governmental charge imposed in connection with such
transfer.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
<PAGE>
All terms used in this Warrant Certificate which are defined
in the Representative's Warrant Agreement shall have the meanings assigned to
them in the Representative's Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ________, 199__
THE SOURCE INFORMATION
MANAGEMENT COMPANY
By:__________________________________
Name:
Title:
Attest:
- ----------------------------
, Secretary
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase __________ shares of Common
Stock and herewith tenders in payment for such securities a certified or
official bank check payable in New York Clearing House Funds to the order of THE
SOURCE INFORMATION MANAGEMENT COMPANY in the amount of $___________, all in
accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of ______________________________
whose address is __________________________ and that such Certificate be
delivered to ___________________ whose address is ----------------------------.
Dated: Signature:___________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate.)
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be exercised by the registered holder if such
holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED
hereby sells, assigns and transfers unto
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________________
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, and full power of substitution.
Dated: Signature:__________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant
Certificate.)
(Insert Social Security or Other Identifying
Number of Assignee)
GALLOP, JOHNSON & NEUMAN, L.C.
Interco Corporate Tower
101 S. Hanley
St. Louis, MO 63105
August 1, 1997
The Source Information Management Company
11644 Lilburn Park Road
St. Louis, MO 63114
Re: Registration Statement on Form SB-2 (File No. 333-__________)
Ladies and Gentlemen:
We have acted as counsel for The Source Information Management Company,
a Missouri corporation (the "Company"), in connection with the various legal
matters relating to the filing of a Registration Statement on Form SB-2, File
No. 333-__________ (the "Registration Statement") under the Securities Act of
1933, as amended, relating to 2,000,000 shares of the common stock of the
Company, $0.01 par value per share (the "Common Stock") to be sold by the
Company, a warrant to purchase 200,000 shares of Common Stock (the "Warrant") to
be issued by the Company to Donald & Co. Securities, Inc. as representative of
the several underwriters, 200,000 shares of Common Stock issuable upon the
exercise of the Warrant (the "Warrant Shares"), and up to 300,000 shares of
Common Stock to be sold by certain of the shareholders of the Company (the
"Selling Shareholders") pursuant to an option to purchase granted to the
representative to cover over-allotments.
We have examined such corporate records of the Company, such laws and
such other information as we have deemed relevant, including the Company's
Articles of Incorporation, Bylaws, resolutions adopted by the Board of Directors
of the Company relating to such offering and certificates received from state
officials and from officers of the Company. In delivering this opinion, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to the originals of all documents
submitted to us as certified, photostatic or conformed copies, and the
correctness of all statements submitted to us by officers of the Company.
Based solely on the foregoing, the undersigned is of the opinion that:
1. The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Missouri.
2. The Common Stock, the Warrant and the Warrant Shares being
offered by the Company, if sold and issued in the manner
<PAGE>
The Source Information
Management Company
August 1, 1997
Page 2
described in the Registration Statement, will be validly issued
and outstanding and will be fully paid and non-assessable.
3. The Common Stock being offered by each of the Selling
Shareholders are validly issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Registration Statement.
We also consent to your filing copies of this opinion as an exhibit to the
Registration Statement with agencies of such states as you deem necessary in the
course of complying with the laws of such states regarding the issuance of the
Common Stock sold.
Very truly yours,
GALLOP, JOHNSON & NEUMAN, L.C.
[THE SOURCE COMPANY LETTERHEAD]
January 15, 1996
Mr. John P. Watkins
139 Keswick Drive
Advance, NC 27006
Dear John:
The Source Company welcomes the opportunity to make the following proposal:
The purpose of this Memorandum is to set forth the principal terms and
conditions of the employment of John P. Watkins ("Watkins"), 138 Keswick Drive,
Advance, North Carolina 27006 (telephone: 910-998-2125) by The Source Company
("The Source") 711 Gallimore Dairy Road, #200, High Point, North Carolina 27265
(telephone: 910-665-0816, 314-995-9040, 212-319-8030).
1. Watkins will be employed by The Source, at its North Carolina office,
effective February 1, 1996. The initial term of the employment agreement will be
for two years, but it will continue thereafter automatically from year to year,
unless terminated by either party by written notice to the other not less than
90 days prior to the expiration of the initial term or any such annual renewal
term.
2. Watkins's position with The Source will be President of the Retail Services
Group and Chief Administrative Officer of The Source. In this position, Watkins
will be responsible for all Divisions of The Source engaged in serving retailer
operations. As such, the president of the RDA Division (Bob Dixon), the
president of the Fixture Development Division (Bob Shupe) and the president of
the Merchandising Division (George Turnbull) will report directly to Watkins,
excluding the Advance Pay Program, which will be the separate responsibility of
Lance McCord, the Chief Financial Officer of The Source. Watkins will report to
the President of The Source, Bill Lee.
3. Watkins will receive a base salary, subject to annual review and increases,
of $150,000.
4. Watkins will also be provided with a bonus of up to 50% of his base salary
for outstanding performance, which is tied to total company revenue, not income
and stock performance, and a possible additional bonus for extraordinary
performance.
<PAGE>
5. Watkins Will be provided the fringe benefits provided to other senior
executives of The Source, including the provision of health insurance and a
luxury automobile.
6. Watkins will be granted Incentive Stock Options to purchase 100,000 shares Of
common stock of The Source under the company's existing Incentive Stock Option
Plan. Stock options awarded under the Plan must be granted at their fair market
value at the time of grant (regulations on valuation specify that the use of the
mean between the bid and asked quotation). The term of the option will be for a
five year period, with the right to exercise the option and purchase the shares
granted vesting over a period of five years, cumulatively, with 20% of the
shares under the option becoming exercisable annually over the five year period
of the option. Under the Internal Revenue Code, neither the grant of the option
not its exercise is a taxable event. The transaction is only taxable when the
underlying shares purchased upon the exercise of the option are sold, Any
profits realized under the sale of the underlying shares are taxed at capital
gains rates at the time of sale of such shares. Under Missouri law, the company
is not permitted to issue its shares in return for a promissory note.
7. Watkins would agree that for the two year period following the termination of
his employment with The Source, Watkins would not: (a) engage in any business,
directly or indirectly, in competition with The Source, or (b) solicit the
employment of any employee or agent of The Source or employ any person who has
been an employee of The Source within one year following the date of termination
of Watkins's employment or otherwise in contravention of an agreement between
any person and The Source.
8. Watkins would agree to maintain in confidence and not to use for any purpose
other than in connection with his employment by The Source any proprietary or
confidential information of The Source.
If you have any questions or need clarification please call me at (910) 665 -
0816 or page me at (800) 913-4226. I look forward to a long and prosperous
relationship.
Sincerely,
/s/ Bill Lee /s/ John P. Watkins
President/CEO
EMPLOYMENT AGREEMENT BETWEEN
THE SOURCE COMPANY AND
ROBERT G. SHUPE
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into as of the 30th
day of August, 1995 between THE SOURCE COMPANY, a Missouri corporation
("Employer" or "Company"), and Robert G. Shupe ("Employee").
Employer and Employee agree that the Company is in the business of the
collection of retail discount allowances, pocket payments and other rebates,
discounts and allowances related to the sale of periodicals, books and other
products through retail operations, the collection, review and analysis of
retail sales information, the sale of rack fixtures, and related consulting
services throughout the United States and Canada. The parties recognize the
nationwide scope of the Company's business and the national relationships
established with the parties necessary to transact the Company's business.
Employer and Employee wish to establish the terms of the continuing
employment of Employee and desire to enter into this Agreement for that purpose;
and therefore, Employer and Employee agree as follows:
1. Employment. Employer hereby employs Employee, and Employee hereby
accepts such employment from Employer upon the following terms and conditions.
Employee represents that Employee's employment by the Company under the terms of
this Agreement will not violate or result in a breach of any agreement or
obligation to which Employee is a party or by which Employee may be bound.
2. Term of Employment. The term of Employee's employment under this
Agreement shall commence as of the date hereof and continue until February 4,
1996, and thereafter shall automatically be extended and continued for
successive one-year periods unless terminated by Employer or Employee as of the
end of the initial term, or at any time thereafter, upon not less than 30
calendar days' notice of termination; or, in the case of a termination by
Employer, any combination of notice and/or termination pay which totals one
month. Employee's employment under this Agreement may also be terminated at any
time during the term hereof upon the occurrence of any of the following:
(A) Employee's death.
(B) At Employer's option, on 30 days' written notice, in the
event of Employee's Disability (defined as the failure substantially to
discharge Employee's duties under this Agreement for 90 consecutive
days or 120 days during any 12- month period as a result of an injury,
<PAGE>
disease, sickness or other physical or mental incapacity). A
determination of Employee's Disability shall be made by a licensed
physician chosen by Employer subject to Employee's approval, which
approval shall not be unreasonably withheld. If Employer and Employee
do not agree on a physician, a physician shall be chosen by the Dean of
the Washington University (St. Louis) School of Medicine. The cost of
the determination shall be borne by the corporation and shall be
binding on Employer and Employee.
(C) By Employer for "cause," which shall mean: (i) Employee
has engaged in the conduct of bribery, stealing, embezzlement, fraud,
dishonesty, giving false information or statements, submitting false
reports, misappropriation of funds or violation of paragraph 6 of this
Agreement; (ii) Employee's continuing failure to perform Employee's
duties or excessive, unexcused absenteeism from work (provided Employer
has given written notice to Employee setting forth the basis for
Employer's claim of Employee's failure to perform Employee's duties or
excessive, unexcused absenteeism, and Employee has failed to correct
such failure of performance or absenteeism), other than for Employee's
Disability under paragraph (B); or (iii) Employee's conviction of a
felony.
(D) Upon the mutual agreement in writing of the Company and
the Employee.
Upon Employee's cessation of employment for any of the above reasons or
voluntarily by Employee upon advance written notice as provided herein, Employee
shall receive only accrued salary, bonus and vacation pay earned and unpaid as
of the date of termination, and shall not be entitled to additional
compensation.
3. Duties of Employment. Employee shall serve Employer as
President-Display Group. Employer may also designate additional duties to be
performed by Employee. Employee shall serve at Employer's direction and control
to the best of Employee's ability, and shall perform such duties and in such
capacities within the scope of Employee's position as are assigned to Employee
from time to time by senior officers of Employer.
4. Compensation. Employer agrees to pay Employee for Employee's
services during the term of Employee's employment under this Agreement a base
salary as set forth in Appendix A, subject to required withholdings and payable
at such times and otherwise on a basis consistent with Employer's normal pay and
compensation practices. If applicable, Employer shall also pay Employee
additional incentive bonuses, if earned, determined in the manner provided in
Appendix A.
5. Extent of Services. Employee agrees to devote Employee's entire
working time, attention, skills and productive efforts to the business of
2
<PAGE>
Employer (except for usual vacations and reasonable time for attention to
personal affairs, so long as Employee's performance is not adversely affected
thereby). Employee agrees to continually endeavor to improve Employee's ability
and knowledge of the business of Employer in order to increase the value of
Employee's services for the mutual benefit of Employee and Employer. Employee
shall not, during the term of this Agreement or any extension thereof, without
Employer's prior written consent, be engaged in any other business activity,
whether or not such business activity is pursued for gain, profit or other
pecuniary advantage; which shall not prevent Employee from investing in not more
than 1% of any issue of capita) stock or other securities of any corporation
whose stock is traded on a national securities exchange or over-the-counter
market and with which Employee has no employment, representative, agency or
fiduciary relationship.
6. Covenants of Employee.
(A) During Employee's employment with Employer and for two
years thereafter, Employee agrees that Employee will not, in any
manner, directly or indirectly:
(i) Except as required in Employee's duties to
Employer, disclose or divulge to any person or entity, or use
for Employee's own benefit or the benefit of any other person,
directly or indirectly, any knowledge, business methods,
customer lists, supplier lists, data, business plans or other
information of Employer. Employer and Employee stipulate that,
as between them, such information is important, material and
confidential and greatly affects the effective and successful
conduct of the business and the goodwill of Employer;
(ii) Solicit, divert, take away or interfere with
any of the customers, business, employees or agents of
Employer; or
(iii) Engage, personally or as an employee, owner,
partner, associate, officer, manager, agent, advisor,
consultant or otherwise, or by means of any corporate or other
entity or device, in any business within the United States or
Canada which is competitive with any business in which
Employer engaged during Employee's employment by Employer, or
which Employer has formulated definitive plans to enter and of
which Employee has knowledge.
(B)Each agreement of Employee in this paragraph 6 shall be
construed to be independent and severable from any other provision of
this Agreement. The existence of any claim or cause of action against
Employer, whether based on this Agreement or otherwise, shall not
constitute a defense to the enforcement by Employer of any such
agreement.
3
<PAGE>
(C)Employer and Employee intend to restrict the activities of
Employee under this paragraph 6 only to the extent necessary for the
protection of the business interests of Employer. Should any of the
provisions hereof be determined to be too broad for that purpose or
invalid or unenforceable for any reason, such provisions will be so
interpreted and applied in such a narrower sense as is necessary to
make them valid and enforceable in accordance with the intent of
Employer and Employee expressed herein, or, if legally necessary in any
jurisdiction, so as to severally exclude any one or more of them from
this Agreement.
(D)For purposes of this Agreement, a business will be deemed
competitive if it is conducted in whole or in part within the United
States or Canada and involves the collection of retail discount
allowances, pocket payments or other rebates, discounts or allowances
relating to the sale of periodicals, books or other products through
retail operations, the collection, review and analysis of retail sales
information, the sale of rack fixtures, and related consulting
services; or if it involves any other business which is competitive
with any business in which the Company is engaged during the term of
this Agreement or as of the date of Employee's cessation of employment,
or as to which the Company has formulated, on or before the date of
cessation of employment, definitive plans to enter into, of which
Employee has knowledge.
7. Expenses and Fringe Benefits. During the term of this Agreement:
(A)Employer will pay or reimburse Employee for items of
reasonable and necessary expense authorized by Employer and incurred by
Employee in the interest of the business of Employer upon presentation
by Employee, within 90 days after the date incurred, of an itemized
account of such expenditures sufficient to support the deductibility
thereof for federal income tax purposes. Any such reimbursement shall
be made by Employer within its normal expense reimbursement cycle,
generally within 30 days after Employer's receipt of such itemization
from Employee.
(B)Employee shall be entitled to participate in the fringe
benefits (medical, including dependent coverage, life insurance,
pension, retirement, 401k or other fringe benefits, some or all of
which may entail Employee contributions), if any, normally accorded to
Employees at the same level as Employee; provided, however, that
nothing in this Agreement shall obligate Employer to continue any such
benefits in force (or to require Employer to maintain the benefits at
their present levels, standards or Employee contribution rate) for any
particular period of time. Employer specifically reserves
4
<PAGE>
the right to add or change any such coverages or benefits, to reduce
any coverages or benefits, or to eliminate any coverages or benefits at
any time, and to change the eligibility criteria, carriers, providers
or plans relating to any such benefits or coverages, with corresponding
changes in coverage, cost and eligibility, without any such change,
cancellation or modification being deemed a breach of this Agreement.
8. Documents. All documents, software, records, notebooks, programs,
invoices, statements and correspondence, including all copies thereof, relating
to the business of Employer, whether prepared by Employee or others ("Employer
Documents") are the sole property of Employer. Upon the cessation of Employee's
employment with Employer, all Employer Documents in Employee's possession or
control will be returned and left with the Employer.
9. Remedies. It is agreed that the breach or evasion of the terms of
this Agreement by Employee will result in immediate and irreparable injury to
Employer which cannot be adequately compensated for by the payment of damages
alone and will authorize recourse to injunction and/or specific performance and
all other legal or equitable remedies to which Employer may be entitled. No
remedy conferred by any specific provision of this Agreement is intended to be
exclusive of any other remedy, and each and every remedy shall be cumulative and
in addition to every other remedy given hereunder or now or hereafter existing
at law or in equity, by statute or otherwise. The election of any one or more
remedies by any party shall not constitute a waiver of the right to pursue other
available remedies. Employee represents and admits that in the event of the
cessation of Employee's employment with Employer for any reason, Employee's
experience and capabilities are such that Employee can obtain employment in a
business in other lines or of a different nature, and the enforcement of a
remedy by way of injunction will not prevent Employee from earning a livelihood.
In the event Employer or Employee institutes legal action to enforce the
provisions of this Agreement which results in a judgment, the prevailing party
shall be entitled to recover its reasonable attorneys' fees and related costs
and expenses, in addition to any other judgment, award or remedy to which such
party may be entitled.
10. Severability; Enforceability. All agreements and covenants herein
are severable. In the event any of them are held to be invalid or unenforceable
as to any jurisdiction by any competent court, this Agreement shall continue in
full force and effect and, subject to subparagraph 6(C), shall be interpreted as
if such agreements or covenants were not contained herein, to the extent
necessary with respect to that jurisdiction. The reason or cause for termination
of Employee's employment or non-renewal of this Agreement shall not affect the
enforceability of any provision of this Agreement.
5
<PAGE>
11. Waiver or Modification. No waiver, amendment or modification of
this Agreement or any portion hereof shall be valid unless it is in writing and
duly executed by the party to be charged therewith. No evidence of any waiver,
amendment or modification shall be offered or received into evidence in any
proceeding, arbitration or litigation between the parties arising out of or
affecting this Agreement, or the rights or obligations of the parties hereunder,
unless such waiver, amendment or modification is in writing and duly executed as
described above. The failure of the Employer to exercise or otherwise act with
respect to any of its rights hereunder in the event of a breach of any of the
terms or conditions hereof by Employee shall not be construed as a waiver of
such breach, nor shall any such conduct prevent the Company from thereafter
enforcing strict compliance with any and all of the terms and conditions hereof.
12. Notices. All notices or other communications hereunder
shall be written and shall be deemed to have been given if
delivered personally or mailed by certified or registered mail,
return receipt requested, or sent by next business day courier,
if to Employer, to: and, if to Employee, to:
The Source Company Robert G. Shupe
Attention: President 4109 Pheasant Run Dr.
11644 Lilburn Park Road Greensboro, North Carolina 27408
St. Louis, Missouri 63146
or to such other addresses and persons as to which the parties give notice in
the manner provided under this paragraph 12.
13. Construction. This Agreement shall be governed by and construed
under the laws of the State of Missouri, notwithstanding the place of execution
hereof or the performance of any acts in connection with this Agreement or
Employee's employment by Employer hereunder in any other jurisdiction. For
purposes of paragraph 6 of this Agreement, references to Employer shall include
companies or other entities controlled by, controlling or under common control
with Employer, whether such control is exercised through ownership or other
direction of the management or policies of any such company or entity.
14. Successors. This Agreement shall be binding upon and shall inure to
the benefit of Employer and Employee and their respective successors, assigns,
heirs, executors, administrators and legal representatives.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
EMPLOYEE THE SOURCE COMPANY "Employer"
/s/ Robert G. Shupe By:
- -------------------- ---------------------------
Robert G. Shupe S. Leslie Flegel
Chairman of the Board and
Chief Executive Officer
7
THIS NON-COMPETITION AGREEMENT (this "Agreement") is made and entered
into as of this 14th day of November, 1994 between Display Information Systems
Company, Inc. a Pennsylvania corporation ("Company") and Dwight L. DeGolia
("Employee").
This agreement is being entered into in consideration of the continuing
employment of Employee and certain other key employees of Company and in order
to protect the value of Company's assets for the benefit of Employee and
Company's other employees.
For and in consideration of the premises and the mutual promises and
agreements contained herein the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. Agreements Regarding Company's Business.
(a) During or after the term of Employee's employment by Company and for three
(3) years thereafter, Employee agrees that Employee will not divulge to anyone
other than Company's officers, (or such other persons as such officers may
designate), or, except in the performance of Employee's duty to Company, make
any use of (i) any information or knowledge relating to the business of Company
on which Employee shall have worked or shall be working or otherwise have
knowledge; (ii) Company's business or that of any of Company's affiliates or
suppliers or (iii) any other business or technical information not generally
known by the public which is either confidential in nature or is not intended to
be disclosed to others and which Employee shall have obtained either 90 days
prior to, or during the Employee's employment by Company.
(b) During the term of Employees employment by Company and for two (2) years
thereafter, for whatever reason, Employee covenants and agrees that employee
will not, in any manner, directly or indirectly: (i) solicit, divert, take away
or interfere with any of the customers, trade, business, patronage, employees or
agents of Company; or (ii) or for the period of one year engage, indirectly,
either personally or as an employee, partner, associate partner, officer,
manager, agent, advisor, consultant, or otherwise, or by means of any corporate
or other entity or device, in any business which is competitive with the
business of Company.
(c) For the purpose hereof, a business will be deemed competitive with the
business of Company if it involves the furnishing of goods or services which are
competitive, as of the date of cessation of Employee's employment by Company,
with any business then being conducted by Company, or as to which Company has
formulated definitive plans to enter as of the date of the cessation of
Employee's employment by Company.
(d) All documents, agreements, records, software, notebooks, invoices,
statements, promotional materials and correspondence, including copies thereof,
relating to the business of Company, whether prepared by Company, Employee or
<PAGE>
others ("Company Records"), whether presently existing or hereafter prepared,
are and will continue to be the property of Company. Upon the cessation of
Employees employment by Company, for whatever reason, all Company Records in
Employee's possession or under Employee's control will be immediately delivered
to Company.
(e) All of the covenants of Employee contained in this paragraph 1 shall be
construed as agreements independent of any other provision of this Agreement,
given for adequate and independent consideration, and the existence of any claim
or cause of action against Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by Company of these
covenants.
(f) It is the intention of the parties to restrict the activities of the
Employee under this paragraph 1 only to extent the provisions hereof are legally
enforceable. The parties specifically covenant and agree that if any of the
provisions hereto under any set of circumstances, whether or not foreseeable by
the parties, are hereafter held to be invalid or unenforceable in their present
form and scope in any jurisdiction, the remaining provisions of this Agreement
shall continue to be given full force and effect, without regard to the invalid
portions of their unenforceability in such jurisdiction, and such holding shall
not affect the validity or enforceability of this Agreement in its entirety in
any other jurisdiction. Furthermore, if any of the provisions or covenants
contained in this paragraph 1 are held to be unenforceable in any jurisdiction
because of the duration or scope thereof, the parties agree that the court
making such determination shall have the power to reduce the duration and/or
scope of such provision or covenant and, in its reduced form, said provision or
covenant shall be enforceable; provided, however, that the determination of such
court shall not affect the enforceability of this paragraph 1 in its present
form and scope in any other jurisdiction.
(g) For purposes of this paragraph 1, reference to Company shall include any
corporation, partnership or other entity controlling, controlled by or under
common control with Company.
2. Notices. Any notice under this agreement shall be in writing and sent by
certified or registered mail, next business day courier delivery, telegram or
personal delivery addressed to the party to be notified at the address set forth
below. Notice shall be deemed received upon deposit in the mail or delivery to a
next business day courier or telegraph company in accordance with the terms
hereof, or if notice is given by personal delivery, then notice shall be deemed
received on the date of delivery,
2
<PAGE>
a) In the case of the Company, to:
Display Information Systems Company, Inc.
11644 Lilburn Park
St Louis, MO 63146
Attn: Michael Garavalia
b) In the case of the Employee, to:
14884 Greenleaf Valley Dr.
Chesterfield, MO 63017
3. Waiver. The failure of the parties to insist upon strict
performance of any of the terms, conditions or provisions of this
Agreement shall not be construed as a waiver or relinquishment of
future compliance, and said terms, conditions and provisions shall
remain in full force and effect.
4. Amendment. This Agreement may be amended only by a written
agreement executed by all of the parties.
5. Governing Law. This agreement shall be governed by and
construed under the laws of the State of Missouri, notwithstanding
the place of execution hereof or the performance of any acts by
Employee or Company in any other jurisdiction.
6. Remedies. It is agreed that the breach of the term of this Agreement by
Employee will result in immediate and irreparable injury to Company which cannot
be adequately compensated for by the payment of damages. Company shall be
entitled to obtain relief from the effect of such breach by way of injunction
and specific performance, as well as any relief available under any and all
other available legal or equitable remedies, including the recovery of damages
suffered by Company by reason of such breach. No remedy conferred by any of the
specific provisions of this Agreement is intended to be exclusive of any other
remedy, and each and every remedy shall be cumulative and in addition to every
other remedy by statute or otherwise. The election of any one or more remedies
by Company shall not constitute a waiver of the right to pursue other available
remedies, In the event it becomes necessary for Company to institute a suit at
law or in equity for the purpose of enforcing any of the provisions of this
Agreement, Company shall be entitled to recover from Employee, Company's
reasonable attorney's fees, plus court costs and expenses.
IN WITNESS WHEREOF, each party, or its duly authorized officer, if applicable,
has executed this Agreement as of the date first above written.
3
<PAGE>
ATTEST:
By: /s/ Michael Garavalia
---------------------------
Secretary Michael Garavalia,
President
"Company"
/s/ Dwight L. DeGolia
----------------------------
Dwight L. DeGolia
"Employee"
4
FRONT END MANAGEMENT AGREEMENT
This Front End Management Agreement is entered into as of ________,
1997 between THE SOURCE COMPANY, a Missouri corporation ("THE SOURCE"), 1164
Lilburn Park Road, St. Louis, Missouri 63146, and KMART CORPORATION, a Michigan
corporation ("KMART"), 3100 West Big Beaver Road, Troy, Michigan 48084.
In consideration of the mutual covenants, terms and conditions herein
contained, the parties agree as follows:
1. Appointment by KMART; Acceptance by THE SOURCE. KMART hereby
appoints THE SOURCE as its management agent, and THE SOURCE hereby accept as
such appointment, to oversee and assist KMART in the management of GM/HBC,
confection and publication product categories offered by KMART and in particular
to provide those services described on EXHIBIT A and EXHIBIT B attached hereto
and made a part hereof (collectively, the "Services"). Reasonable care and its
best efforts shall be utilized by THE SOURCE in the performance of this
Agreement.
2. Authority. In connection with the provision of the Services by THE
SOURCE hereunder, KMART hereby authorizes THE SOURCE to take and perform, or
cause to be taken and performed, such actions, in the name and on behalf of
KMART, as may be necessary or desirable, in the judgment of THE SOURCE, for the
performance of the Services, subject to the terms of this Agreement. THE SOURCE
and its designees shall at all times have the complete and unrestricted right of
access to the facilities, offices and the books and records relating to the
subject of the Services. Notwithstanding any provision of the Agreement, all
Services provided by THE SOURCE shall be performed under the direction and
control of KMART, and THE SOURCE will immediately modify or delete any practice
as requested by KMART.
3. Confidentiality. THE SOURCE agrees that any and all information in
any form that is provided to THE SOURCE or its representatives by KMART or is
otherwise obtained by THE SOURCE as part of this Agreement is provided and
received in confidence, and THE SOURCE will at times preserve and protect the
confidentiality of such information, and any other proprietary or nonpublic
information of or relating to KMART which THE SOURCE or its representatives
becomes aware or is acquired during the performance of this Agreement. THE
SOURCE also agrees that it will take all necessary steps to ensure that such
confidential information will not be disclosed to or used by any person,
association or entity except THE SOURCE's own employees, and then only to the
extent necessary to permit THE SOURCE to perform this Agreement. The
confidentiality and nondisclosure obligations contained herein will survive and
continue after termination of this Agreement for any reason.
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4. Management Fee. The management fee (the "Management Fee") for the
performance of the Services by THE SOURCE hereunder shall be calculated and paid
in accordance with the provisions of the Exhibits attached hereto and made a
part hereof. The fee for Services detailed in the Exhibits shall be the entire
amount due THE SOURCE for the Services. All charges, costs and expenses incurred
in connection with THE SOURCE's performance of this Agreement shall be borne by
THE SOURCE .
5. Vendor Payments. THE SOURCE acknowledges that all moneys received by
THE SOURCE from KMART vendors as part of providing the Services are the sole and
exclusive property of KMART, and THE SOURCE hereby waives any and all claims to
such vendor funds. All vendor funds received by THE SOURCE will be forwarded to
KMART without deduction or offset of any kind by THE SOURCE. The vendor funds
received by THE SOURCE shall at all times be kept separate from the other funds
of THE SOURCE. Further, no assignee for the benefit of creditors, custodian,
receiver, trustee in bankruptcy appointed for THE SOURCE, or any other person
charged with taking custody of THE SOURCE's assets or business shall obtain any
rights to the vendor funds collected by THE SOURCE on behalf of KMART.
6. Term of Agreement; Termination. This Agreement shall be effective
immediately and shall continue in effect, until terminated at the option of
KMART, with or without cause, by sixty (60) days prior written notice to THE
SOURCE. Upon termination of this Agreement for any reason, THE SOURCE shall not
be entitled to any further compensation beyond any fee due for Services
performed through the date of termination. Anything herein to the contrary
notwithstanding, the provisions of Section 8 of this Agreement shall survive the
termination of this Agreement.
7. Audit. THE SOURCE shall maintain complete and accurate records with
respect to all vendor payments received on behalf of KMART, with records THE
SOURCE, shall allow KMART to inspect, audit, and/or review upon KMART's request.
Such records shall be maintained in accordance with generally accepted
accounting principals.
8. No Liability; Indemnification.
(a) Notwithstanding any other provision of this Agreement, neither THE
SOURCE nor any affiliate or employee of THE SOURCE shall be liable to KMART or
any creditor of KMART for any mistake, error or misjudgment of THE SOURCE or its
affiliates, or their officers, directors, employees or agents, for any losses,
liabilities or claims incurred or suffered by KMART, or its creditors in
connection with the rendering of Services by THE SOURCE or occurring in
connection with the operation of the business, or for any services, products or
equipment provided by any contractor, agent, accountant or counsel retained on
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behalf of KMART, except for losses resulting from the willful misconduct, fraud
or negligence of THE SOURCE in the performance of its duties under this
Agreement or from a breach of this Agreement by THE SOURCE. THE SOURCE shall
indemnify KMART and its officers, directors, partners, representatives, agents
and employees ("KMART") against and hold KMART Indemnified Persons harmless from
all liabilities, losses, claims, actions, suits, penalties, damages and expenses
(including reasonable attorneys' fees and court costs) based on or arising out
of or in connection with the performance by THE SOURCE or its duties to KMART
hereunder but only where such liabilities, losses, claims, actions, suits,
penalties, damages and expenses are due to the negligence, fraud or willful
misconduct of, or a breach of this Agreement by, THE SOURCE, its officers,
directors, employees, agents, and control persons.
(b) KMART shall indemnify THE SOURCE and its affiliates, and their
officers, directors, partners, representatives, employees and agents ("THE
SOURCE Indemnified Persons"), against and hold THE SOURCE Indemnified Persons
harmless from all liabilities, losses, claims, actions, suits, penalties,
damages and expenses (including reasonable attorneys' fees and court costs)
based on or arising out of or in connection with the performance by THE SOURCE
or other THE SOURCE Indemnified Person or other parties selected by THE SOURCE
in connection with the performance of this Agreement or the operation of the
Business, including actions by or claims of any creditor, or former creditor, of
KMART, except to the extent, and only to the extent, any such loss, liability,
claim, action, suit, penalty, damage or expense is proven to have incurred or
sustained as a result of the willful misconduct, fraud or negligence of THE
SOURCE or its affiliates, and their officers, directors, partners,
representatives, employees and agents or from a breach of this Agreement by THE
SOURCE.
(c) In the event any error or other mistake by THE SOURCE in
performing the Services shall require KMART to refund, return, or re-credit any
funds to a vendor participating in the programs contemplated by this Agreement,
then THE SOURCE shall return to KMART any fee that may have been paid to THE
SOURCE for the funds refunded, returned, or re-credited to such vendors.
9. Relationship of Parties. THE SOURCE and its employees shall serve
as independent contractors in rendering Services under this Agreement and are
not and shall not be employees or servants of KMART. KMART and THE SOURCE will
pay their own respective taxes, contributions, wages and expenses with regard to
employees on their respective payrolls and will indemnify and hold the other
party harmless from and against any and all claims that are made by their
respective employees against the other party. Any conflicts of interest arising
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from THE SOURCE's ownership and/or management of other businesses shall be
resolved in good faith in the judgment and discretion of THE SOURCE.
Notwithstanding any other provision of this Agreement, however, the parties
understand and agree that THE SOURCE shall only be required to devote such of
its resources to providing the Services called for by this Agreement as are
reasonably necessary and appropriate to the discharge thereof.
10. Notices. All notices under this Agreement shall be given in writing
and shall be effective when personally delivered or sent by Express, registered
or certified mail, postage paid, or by next business day delivery service,
charges prepaid, addressed to the parties at their respective addresses set
forth in the first paragraph of this Agreement, or such other addresses as may
be designated from time to time by notice given under this Section.
11. Modification; Construction of Agreement. This Agreement may not be
modified, altered or amended in any manner, except by agreement in writing duly
executed by the parties. This Agreement shall be the entire and exclusive
agreement between KMART and THE SOURCE with regard to the subject matter hereof
and shall supersede all prior understandings, agreements, contracts or
arrangements between the parties regarding the performance of the Services. This
Agreement shall be governed by and construed under the laws of the State of
Michigan, notwithstanding the execution or performance of any portion of this
Agreement by any party in any other jurisdiction.
12. Return of Books and Records. Upon termination of this Agreement for
any reason all books, records and data bases in the possession of THE SOURCE
relating to the rendition of the Services, (whether or not created or developed
by THE SOURCE), together with all supplies and other items of property owned by
KMART in THE SOURCE's possession shall be delivered to KMART, and THE SOURCE's
right to compensation shall cease; provided, however, that THE SOURCE shall be
entitled to retain copies of any records necessary to THE SOURCE.
13. Assignment. No party hereto shall have right to assign this
Agreement without the prior written consent of the other party, nor shall this
Agreement or any rights or obligations of the parties hereunder be transferable
by operations of law or otherwise. Subject to the foregoing, this Agreement
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors and assigns.
14. Compliance. THE SOURCE shall be responsible for and does represent
that it shall comply with all federal, state and local laws, rules and
regulations applicable to this Agreement or the performance of the Services.
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IN WITNESS HEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
THE SOURCE COMPANY KMART CORPORATION
By: /s/ Dwight L. DeGolia By: /s/ James R. Wuest
Title: EXEC VP Title: DIV VP
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EXHIBIT A
"FRONT END MANAGEMENT SERVICES"
The Source Company, in conjunction with Kmart and at their direction,
serves as the control point coordinating all aspects of the Front End display
project including:
1. Designing an attractive and functional Front End Merchandiser that
enhances the presentation of the GM/HBC, confection and publication categories.
2. Plan-o-gram magazine section to maximize sales, Retail Display
Allowances ("RDA"), Retail Display Pocket Payments ("RDP"), Retail Display
Pocket Payments ("RDP") and Introductory Promotion Offers ("IPO").
3. Formulate payment terms and conditions of program for participating
vendors as directed by Kmart representatives.
4. Assist Kmart in negotiating the per linear inch cost for confection
vendors.
5. Secure written agreements for payment terms and conditions from all
publishing and confection vendors.
6. Coordinate store surveys with publishing quarterbacks.
7. Coordinate/set installation schedules with publisher quarterbacks,
confection quarterbacks and Kmart personnel.
8. Administer invoicing to magazine and confection vendors (frequency
of invoicing could range from as few as two invoices to monthly invoicing for
the entire length of the program).
9. Record and post all vendor payments.
10. Provide a weekly update on installation completion and accounts
receivable.
11. Provide a weekly update on billings, receipts and open accounts.
12. Maintain database that tracks by store the type and number of
fixtures.
13. Notify magazine and confection vendors of installation schedule so
that product allocations can be adjusted for the new fixtures.
For these services, The Source Company will charge Kmart 1% of cash or
cash equivalent collected from magazine and confection vendors participating in
A-1
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the project. The 1% billing of funds collected and sent to Kmart will be
itemized on a monthly invoice, with payment due Net 30 days.
A-2
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EXHIBIT B
"GENERAL MERCHANDISE PEG BILLING"
The Source Company will provide the following tracking and billing
functions, reference general merchandise displayed on peg hooks on the checkout
display fixtures:
1. Build and maintain a Kmart database including specific information
of each item placed on physical fixtures.
2. Maintain a store level database which includes the store footprint
of all fixtures placed.
3. Maintain an accurate open/close store database.
4. Per specific GM item, bill each appropriate vendor on their agreed
billing cycle, per term and conditions negotiated by Kmart.
5. Provide each vendor, per billing cycle, precise detail support of
store level merchandising detail.
6. Provide Kmart with weekly vendor checks, receipts and supporting
A/R documentation.
The Source Company will charge Kmart 1% of all dollars collected
(either through cash payments or vendor deductions) for these services. The 1%
billing of funds collected and sent to Kmart will be itemized on a monthly
invoice, with payment due Net 30 days.
B-1
AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT TO CREDIT AGREEMENT, made this 31st day of July, 1997, by and
between THE SOURCE COMPANY (the "Borrower") and WACHOVIA BANK, N.A. (the
"Bank");
WITNESSETH:
WHEREAS, the Borrower and the Bank entered into a Credit Agreement dated the
Fourteenth day of November, 1996; and
WHEREAS, the Borrower and the Bank now mutually desire to effect certain
amendments to the Credit Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein
and in the Credit Agreement contained, the parties agree as follows:
I. Section 6.03 contained on Page 29 of the Credit Agreement is hereby amended
and restated to read as follows:
Ratio of EBILT to Interest Expense and Lease Obligations. From the
Fiscal Quarter beginning February 1, 1997 through October 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 1.15 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.
II. Section 6.04 contained on Page 29 of the Credit Agreement is hereby amended
and restated to read as follows:
Ratio of Funded Debt to EBITDA. As of October 31, 1997, 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 more than 5.25 to 1.00; and as of January 31, 1998 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
more than 4.00 to 1.00.
III. Section 6.05 contained on Page 29 of the Credit Agreement is hereby amended
and restated to read as follows:
Ratio of Funded Debt to Total Capitalization. From the Closing Date
through the Fiscal Quarter ending October 31, 1997 the ratio of Funded
Debt to Total Capitalization shall not exceed 80.0%; from November 1,
1997 through January 31, 1998, the ratio of
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The Source Company
Amendment to Credit Agreement
July 31, 1997
Page 2
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%.
Except as herein amended, the terms and provisions of the Credit Agreement shall
be and remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to the Credit
Agreement to be executed as of the year and the day first written.
CONSENTED TO AND AGREED:
THE SOURCE COMPANY
By: /s/ S. Leslie Flegel
Chairman and Chief Executive Officer
ATTEST:
[CORPORATE SEAL] By: /s/ W. Brian Rodgers
Assistant Secretary
WACHOVIA BANK, N.A.
By: /s/ John K. Stephens
Vice President
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
K-Sub, Inc.
L-Sub, Inc.
Readers Choice, Inc.
Magazine Marketing, Inc.
The Source - Canada Corp.
Mike Kessler and Associates, Inc.
BDO Seidman, LLP
Accountants and Consultants
720 Olive Street, Suite 2300
St. Louis, MO 63101-2387
Consent of Independent Certified Public Accountants
The Source Information Management Company
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Prospectus
constituting a part of this Registration Statement of our report dated March 27,
1997 relating to the financial statements of The Source Information Management
Company, which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
St. Louis, Missouri /s/ BDO Seidman, LLP
August 1, 1997
