AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1997
Registration No. 333-32733
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
Under the
SECURITIES ACT OF 1933
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Name of Small Business Issuer in Its Charter)
Missouri 7374 43-1710906
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Identification Number)
Classification
Code Number)
W. Brian Rodgers
Chief Financial Officer
11644 Lilburn Park Road 11644 Lilburn Park Road 11644 Lilburn Park Road
St. Louis, Missouri 63146 St. Louis, Missouri 63146 St. Louis, Missouri 63146
(314) 995-9040 (314) 995-9040 (Address of Principal
(Address and Telephone (Name, Address and Telephone Place of Business
of Principal Number of Agent for Service) or Intended Place
Executive Offices) of Business)
Copies of all correspondence to:
Douglas J. Bates, Esq. Michael D. DiGiovanna, Esq.
Gallop, Johnson & Neuman, L.C. Parker Duryee Rosoff & Haft
101 South Hanley Road 529 Fifth Avenue
St. Louis, Missouri 63105 New York, New York 10017
(314) 862-1200 (212) 599-0500
Approximate Date of Proposed Sale to the Public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER __ , 1997
PROSPECTUS [LOGO]
2,000,000 Shares
THE SOURCE INFORMATION MANAGEMENT COMPANY
Common Stock
--------------
The Source Information Management Company, a Missouri corporation (the
"Company"), is offering hereby 2,000,000 shares of its common stock (the "Common
Stock"). If the option granted to the Representative to cover over-allotments is
exercised, certain shareholders of the Company (the "Selling Shareholders") will
also offer up to 300,000 shares of Common Stock pursuant to this Prospectus. The
Company will not directly receive any of the proceeds from the sale of Common
Stock by the Selling Shareholders. See "PRINCIPAL AND SELLING SHAREHOLDERS."
The Common Stock is quoted on The Nasdaq SmallCap Market ("Nasdaq
SmallCap") under the symbol "SORC." On October 1 , 1997, the last sale
price of the Common Stock, as reported on Nasdaq SmallCap, was $3.19 per
share, or $3.86 per share after giving effect to the proposed 1-to-1.21
reverse stock split. See "PROSPECTUS SUMMARY" and "PRICE RANGE OF COMMON STOCK."
The securities offered hereby involve a high degree of risk. See "RISK
FACTORS" commencing on page 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
Price to Underwriting Proceeds to
Public Discounts(1) Company(2)
Per Share $ $ $
Total(3) $ $ $
(1) Does not include additional compensation payable to Donald & Co.
Securities Inc., acting as representative (the "Representative") of the
several underwriters identified elsewhere herein (the "Underwriters"),
in the form of a non-accountable expense allowance equal to 2% of the
gross proceeds of this offering. The Company has also agreed to sell
the Representative warrants to purchase up to 200,000 shares of Common
Stock at an exercise price of $ per share, subject to adjustment,
exercisable over a period of four years commencing one year from the
date hereof (the "Representative's Warrants") and to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). See
"UNDERWRITING."
(2) Before deducting expenses estimated to be $450,000, payable by the
Company, including the Representative's nonaccountable expense
allowance.
(3) The Selling Shareholders have granted the Representative an option
exercisable within 45 days after the date of this Prospectus (the
"Over-Allotment Option") to purchase up to 300,000 additional shares of
Common Stock, on the same terms and conditions as set forth above,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discounts, Proceeds to
Company and Proceeds to Selling Shareholders will be $ , $ , $ and $ ,
respectively. The Company will not receive any of the proceeds from the
sale of Common Stock by the Selling Shareholders. See "PRINCIPAL AND
SELLING SHAREHOLDERS" and "UNDERWRITING."
The Common Stock is being offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters,
and subject to approval of certain legal matters by their counsel and subject to
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify this offering and to reject any order in whole or in part. It is
expected that delivery of the certificates evidencing the Common Stock will be
made against payment therefor on or about _____________, 1997 at the offices of
Donald & Co. Securities Inc., New York, New York or through the facilities of
the Depository Trust Company.
DONALD & CO. SECURITIES INC.
The date of this Prospectus is _________, 1997
<PAGE>
[MAP]
The Company is currently a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and furnishes its
shareholders with annual reports containing audited financial statements after
the close of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING TRANSACTIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
(IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ SMALL-CAP MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the notes related thereto, appearing
elsewhere in this Prospectus. Except as otherwise indicated, all information in
this Prospectus (other than the historical financial statements contained
herein) reflects the formation of the Company and subsequent acquisitions, as if
such transactions had occurred on February 1, 1995. See "BUSINESS -Formation of
the Company." All share and per share data in this Prospectus (other than the
historical financial statements contained herein) (i) have been adjusted to give
effect to a 1-to-1.21 reverse stock split to occur as of the date of this
Prospectus and (ii) assume that the Representative's Over-Allotment Option, the
Representative's Warrants and all other options and warrants outstanding on the
date of this Prospectus will not be exercised.
The Company
For more than 20 years, The Source Information Management Company (the
"Company") and its predecessors have provided information gathering, consulting
and other information based services to operators of mass merchandise, grocery,
convenience and pharmacy stores located throughout the United States and eastern
Canada. Currently, the Company provides monitoring and documentation services to
approximately 710 retailers, such as Wal-Mart Stores, Inc., Kmart Corporation,
Target Stores, Inc., Food Lion, Inc., and W.H. Smith, Inc., in connection with
processing and collection of incentive payments from magazine publishers on
single copy sales of approximately 6,000 magazine titles offered in
approximately 70,000 stores. As an extension of this service, the Company
established its Advance Pay Program, under which the Company advances an agreed
upon percentage of the incentive payments due to the retailer from magazine
publishers. It then directly collects from the publishers the claims due to the
retailer. In fiscal 1996 and 1997, the Company advanced approximately $1,783,000
and $16,743,000 under the Advance Pay Program, respectively. In October, 1996,
the Company expanded its services and potential client base with the
introduction of the Periodical Information Network ("PIN"), an information
service in which the Company provides subscribing magazine publishers with
industry-wide, single copy magazine sales information in a user friendly format.
Based on conversations with representatives of magazine publishers, the Company
believes that publishers and advertisers perceive that PIN provides a valuable
basis on which to formulate marketing, distribution, advertising and other
policies.
The Company intends to continue to capitalize on its retailing
experience and extensive database of single copy magazine sales information.
Since the introduction of PIN, several leading publishers have subscribed,
including Time Distribution Services, ICD/The Hearst Corp. and Globe Marketing
Services. In addition, the Company is currently preparing to launch a new
administrative support service enabling publishers and retailers to efficiently
verify and correct price changes and other information contained in the
magazine's uniform product code ("UPC"). The Company also intends to introduce
services, comparable to those currently offered, in connection with
merchandising of high volume consumer products other than magazines, and the
processing and collection of incentive payments and cooperative advertising
payments offered with respect thereto.
The Company's integrated software system is designed to efficiently and
accurately accumulate and manage sales data with respect to sales of low-cost,
high volume consumer products, allowing the Company's retailer clients to
optimize the effectiveness of their marketing effort. While the Company's
software system was developed to aid retailers in the collection of sales
incentive payments and the merchandising of magazines, it has been used in
connection with integrated magazine and confections displays and may be
adaptable for use in connection with most other consumer products, including
high volume items such as soft drinks and batteries. Such capability enables the
Company to provide consulting services to retailers, such as Kmart Corporation
which has engaged the Company to provide services with respect to the
reconfiguration of display fixtures in the checkout area of its stores,
including fixture design, product selection, plan-o-gramming, vendor
negotiation, vendor billing and collection, fixture prototype review and
supervision of fixture installation.
The Company was formed by the consolidation of two significant
providers, Display Information Systems Corporation ("DISC") and Periodical
Management and Marketing, Inc. ("PMM"), of information services to retailers of
magazines. The Company has expanded, and intends to continue to expand, through
the acquisition of businesses and technologies that address additional services
or products, market segments or geographic regions in which the Company is not
currently active and which would allow the Company to expand the services
offered to its clients, or its ability to support existing or planned services.
3
<PAGE>
Client Services
The Company is dedicated to providing full information services to its
clients. Such services include the following:
Claim Submission. Through its software system, the Company offers to
assist retailers in accurately monitoring, documenting, claiming and
collecting publisher incentive payments. Based on information gathered
with respect to the titles and number of copies actually sold, the
Company prepares publisher supplied claim forms and submits the
documented claim for payment to the appropriate national distributor,
which acts as payment agent for the publisher. Typically, the Company
receives payment to the order of the retailer, records the payment and
forwards it to the retailer. The Company charges the retailer a
negotiated percentage of the cash collected. As an extension of its
claim submission service, the Company has established an Advance Pay
Program. Under this program, the Company advances an agreed upon
percentage of the incentive payments due the retailer from magazine
publishers. It then directly collects from the publishers the claims
due to the retailer. Service revenues earned under the Advance Pay
Program generally exceed those charged under the traditional method.
Periodical Information Network. The Company's large and sophisticated
database of magazine industry information has resulted in it becoming a
magazine information center which management believes is used by
many companies in the magazine industry to formulate their
publishing and distribution strategies. PIN is a comprehensive system
designed to use current computer technologies, including CD ROM, to
effectively manage all elements of its database including information
packaging and efficient inbound, outbound access. The network provides
access to periodically updated historical information concerning the
titles and quantity of each title sold by retailers for analysis
purposes. Several leading publishers have subscribed to PIN.
Space Design. Through its Display Group, the Company offers to assist
retailers in the placement of displays and the selection of titles to
optimize available display space, and thereby to maximize sales and
incentive payment revenues. Based on its knowledge of local consumer
preferences and the terms and conditions of publisher incentive payment
programs, the Company analyzes the retailer's store layout, customer
traffic patterns and available display alternatives. Thereafter, the
Company consults with its retailer client to develop an appropriate
display program.
Marketing and Promotional Program. As part of its full-service
philosophy, the Company offers its clients advice and suggestions
concerning specialized marketing and promotional programs which may
include, for example, special mainline and checkout displays and
cross-promotions of magazines and products of interest to readers of
such magazines. Such services are offered to enhance single copy
magazine sales by the Company's clients, and thereby increase service
revenue due the Company in connection with the submission of incentive
payment claims; accordingly, no separate charge is made for these
services.
Administrative Support. The Company assists retailers to more
efficiently conduct their magazine sales operations through
computerized inventory control, automated pricing updates and
management reporting. For example, the Company is currently preparing
to launch a new administrative support service enabling publishers and
retailers to efficiently verify and correct price changes and other
information contained in the magazine's uniform product code ("UPC").
The Source Information Management Company was organized under
the laws of the State of Missouri on March 22, 1995 . Its principal
executive offices are located at 11644 Lilburn Park Road, St. Louis, Missouri
63146, and its telephone number is (314) 995-9040.
4
<PAGE>
The Offering
Securities Offered Hereby........ 2,000,000 shares of Common Stock, $0.01
par value per share
Common Stock Outstanding
Prior to the Offering(a)....... 6,014,263 shares of Common Stock, $0.01
par value per share
Common Stock Outstanding
After the Offering............. 8,014,263 shares of Common Stock, $0.01
par value per share
Use of Proceeds.................. To fund the expansion of the Company's
Advance Pay Program, the development of
new or enhanced products and services,
the acquisition by the Company of one or
more businesses and to fund working
capital and other general corporate
activities, including the continued
upgrade of the Company's computer
systems. See "USE OF PROCEEDS."
Risk Factors..................... This offering involves a high degree of
risk. See "RISK FACTORS" beginning on
page 7.
Nasdaq SmallCap Trading Symbol: SORC
- ----------
(a) Based on shares outstanding as of September 4, 1997, after giving
retroactive effect to the proposed reverse stock split. Includes 91,938
and 82,644 shares of Common Stock with respect to which the
respective holders thereof have been granted an option to sell
such shares to the Company at a price of $4.84 and $1.21 per share
respectively subject to adjustment. Excludes shares reserved for
issuance under the Company's stock option and other stock based plans
and upon exercise of the Over-Allotment Option, the Representative's
Warrants, as well as 408,414 reserved for issuance under other
outstanding warrants. See "CAPITALIZATION" and "UNDERWRITING."
5
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data should be read in conjunction with the
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
January 31, July 31,
Statements of Operations Data: 1997 1996 1997 1996
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Service Revenue................................ $7,056,270 $7,195,176 $5,459,668 $2,633,958
Merchandise Revenue............................ 242,177 926,008 8,348 124,540
---------- --------- --------- ----------
Total Revenue................................ 7,298,447 8,121,184 5,468,016 2,758,498
---------- ---------- --------- ---------
Gross Profit................................. 2,233,859 3,711,962 2,583,439 396,152
Selling, General &
Administrative Expenses...................... 2,904,372 2,799,841 1,062,128 1,671,502
---------- ---------- --------- ----------
Operating Income (Loss)...................... (670,513) 912,121 1,521,311 (1,275,350)
Other Expense, Net ............................ 309,992 314,127 442,713 108,653
---------- ---------- --------- ----------
Income (Loss) Before Income Taxes.............. (980,505) 597,994 1,078,598 (1,384,003)
Net Income (Loss)............................ (603,317) 191,994 589,598 (905,540)
Earnings (Loss) Per Share...................... $ (0.09) $ 0.03 $ 0.07 $ (0.14)
Weighted Average
Outstanding Shares........................... 6,658,891 6,084,542 7,087,838 6,463,909
Pro Forma(1) Earnings (Loss) Per Share......... $ (0.11) $ 0.06 $ 0.08 $ (0.17)
Pro Forma(1) Weighted Average
Outstanding Shares........................... 5,503,215 5,028,547 5,857,717 5,342,074
<CAPTION>
July 31, 1997
Balance Sheet Data: Actual As Adjusted(2)
- ------------------- ------ --------------
<S> <C> <C>
Working Capital................................ $ 11,681,190 $ 11,681,190
Total Assets................................... 20,079,046 20,079,046
Long-term debt, less current portion........... 10,960,682 4,050,682
Redeemable Common Stock ....................... 503,820 503,820
Stockholders' Equity........................... 4,265,724 11,175,724
<FN>
(1) Pro forma data is presented to reflect a provision for income taxes as
if DISC, a Subchapter S Corporation prior to the merger between DISC
and PMM, had not been a Subchapter S Corporation, and the proposed
1-to-1.21 reverse stock split.
(2) Assumes (a) the net proceeds of this offering will be applied initially
to the temporary reduction of the outstanding principal balance of the
Company's credit facility resulting in total availability thereunder of
$8,461,000 and (b) the proposed 1-to-1.21 reverse stock split.
</FN>
</TABLE>
6
<PAGE>
RISK FACTORS
Any forward-looking statements set forth in this Prospectus are
necessarily subject to significant uncertainties and risks, including, but not
limited to those set forth in "RISK FACTORS." When used in this Prospectus, the
words "believes," "anticipates," "intends," "expects," and similar expressions
are intended to identify forward-looking statements. Actual results could be
materially different as a result of various possibilities, including increased
competition, significant changes in the marketing strategies of publishers, the
inability of the Company to successfully manage its expansion and the
availability of suitable acquisition candidates. Readers are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Prospective investors should consider carefully the following factors,
in addition to the other information contained in this Prospectus, in evaluating
an investment in the Common Stock offered hereby.
Dependence on the Marketing and Distribution Strategy of Publishers
Substantially all of the Company's revenues are currently derived from
the service revenues earned in connection with the collection of payments owed
to the Company's retailer clients from magazine publishers under programs
designed by publishers to provide magazine retailers with an incentive to
increase single copy magazine sales. Although these incentive programs have been
offered as part of the publishers' overall marketing strategy for more than 20
years, the incentive programs are governed by short-term contracts and,
accordingly, magazine publishers are under no long-term contractual obligation
to continue the incentive programs in their present form or otherwise. Certain
magazine publishers have entered into experimental contracts with magazine
retailers under which selected magazines and other periodicals are distributed
directly to such retailers rather than indirectly though independent magazine
distributors. Such arrangements replace the traditional incentive payment
programs with discounted sale pricing. If magazine publishers increase the use
of direct retail distribution without incentive payment programs or otherwise
discontinue or significantly modify the incentive programs to which the
Company's services relate in a manner which is not compatible with the Company's
services, the Company's results of operations and financial condition may be
materially and adversely affected. See "BUSINESS-The Magazine Industry."
Risk Associated with the Advance Pay Program
The recent increases in revenue and profitability recorded by the
Company result, in part, from the admission of existing retailer clients to the
Advance Pay Program. The profitability of the Advance Pay Program is dependent,
in part, on (a) the difference between the service revenues collected by the
Company with respect to the Advance Pay Program and the interest paid by the
Company for borrowed funds advanced thereunder and (b) the length of the
collection period of the trade accounts receivable associated with the Advance
Pay Program. Interest rates applicable to borrowings made by the Company are
subject to fluctuation and any decrease in the spread between service revenues
collected and interest paid would have a negative effect on the Company's
results of operations and financial condition. The availability of funds under
the Company's credit facility is conditioned on the maintenance of certain
financial ratios. There can be no assurance that the Company will be able to
satisfy such conditions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital Resources."
Additionally, any increase in the average collection period for trade accounts
receivable associated with the Advance Pay Program will increase the Company's
interest expense and have a negative effect on the Company's results of
operations and financial condition.
Furthermore, in connection with the Advance Pay Program, the Company
assumes the risk otherwise borne by the retailer client that magazine publishers
will refuse or be unable to pay the amount of incentive payments claimed. Based
on historical experience, the Company maintains a reserve of 2% of all claims
submitted against such refusal or inability to pay. However, if a prominent
magazine publisher files a petition in bankruptcy or otherwise seeks protection
from its creditors, such reserve may be inadequate and the results of operations
and financial condition of the Company could be materially and adversely
affected.
7
<PAGE>
Unspecified Acquisitions
The Company has allocated $500,000 (or 7.2%) of the net proceeds of
this offering to acquire businesses primarily by issuing equity securities, but
may also utilize cash payments or debt financing, or both, in making
acquisitions. At the date of this Prospectus, the Company has no commitments or
contracts to acquire any businesses. Furthermore, management has not selected
any specific business for investment of any of the proceeds of this offering.
Purchasers of Common Stock will not have the opportunity to vote on any such
potential acquisitions or review the financial status of any business to be
acquired. Shareholders of the Company must rely upon management for prudent
expenditure of the funds of the Company in making such acquisitions. Management
of the Company does not anticipate seeking independent appraisals of any
businesses which it may acquire.
Possible Need for Additional Financing
To date, the Company has met its liquidity requirements through the
private sale of its equity securities and borrowings under existing credit
facilities. However, the Company will not be able to expand its Advance Pay
Program, in accordance with the Company's current plan without additional
financing. If the proceeds of this offering together with the Company's
currently available funds and internally generated cash flows are not sufficient
to satisfy its financing needs, the Company likely will seek additional funding
through increased bank borrowings and/or the public or private sale of debt or
equity securities. There can be no assurance that additional funds will be
available on a timely basis, on acceptable terms or at all, or that such funds,
if raised, would be sufficient to permit the Company to continue its expansion
as planned. If the proceeds of this offering and funding through any additional
public or private sales of debt or equity securities are inadequate, and
borrowings under the existing credit facility or a comparable replacement
thereof are not available, the Company may be required to curtail the Advance
Pay Program. If the Company is required to pay $2,150,000 from its credit
facility in connection with amounts due for an acquisition, the amount available
for the Advance Pay Program would be reduced. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital
Resources."
Risk of Increased Competition
Competition among providers of many of the Company's products and
services, particularly the processing of incentive payment claims, is highly
competitive. While such competition is fragmented, the Company recognizes
approximately 32 direct competitors, all of which are closely-held private
companies. Based on its review of the industry and informal discussions with
magazine publishers and retailers, the Company believes that none of its direct
competitors have greater financial, technological, marketing and sales resources
than the Company. However, it is possible that certain services offered by the
Company could be performed directly by its retail customers or otherwise offered
or performed in the future by publishers, distributors or other organizations,
such as Nielsen IRI and Audit Bureau of Circulation. Many of such organizations
have greater financial, technological, marketing and sales resources than the
Company. Additionally, competitors may develop new or different service programs
which are perceived by customers to be of similar or superior quality at the
same or lower prices than the Company's services. There can be no assurance that
its present competitors or companies that choose to enter its marketplace in the
future will not exert significant competitive pressures on the Company resulting
in a deterioration of the business environment in which the Company operates,
including a decrease in the number of clients served by the Company and a
decrease in the service revenues chargeable by the Company. See
"BUSINESS-Competition."
8
<PAGE>
Management of Expansion
The Company intends to continue to implement its expansion strategy
through the acquisition of one or more companies which offer products and
services compatible to those of the Company, some of which may involve products
or services with which management of the Company has little or no experience.
Such acquisitions also could continue to place a significant strain on the
Company's capital and human resources. There can be no assurance that the
Company will be able to adequately manage its expansion successfully, introduce
new services or products, or integrate any business which it may acquire, the
failure of any of which could have a material adverse effect on the Company.
Need to Manage New Service Introduction
The Company believes that its future growth is dependent, in part, on
its ability to anticipate the informational needs of existing and potential
clients and develop and introduce, in a timely manner, new services that
adequately address such needs. There can be no assurance that the Company will
be successful in developing, introducing and marketing new services. If the
Company is unable to introduce new services or if the Company's new services do
not receive sufficient market acceptance, the Company's revenues and results of
operations may be adversely affected.
Limited Trading Volume for Common Stock.
Although the Company's Common Stock is quoted on Nasdaq SmallCap, the
volume of shares of Common Stock actually traded, as reported by Nasdaq
SmallCap, averaged approximately 28,000 shares per week during the four-week
period ended August 29, 1997. There can be no assurance that a public market
having the desirable characteristics of depth, liquidity and orderliness, over
which neither the Company, its affiliates, nor any marketmaker has control will
develop or, if developed, will be sustained. Persons purchasing the securities
offered hereby may be unable to readily sell such securities at such time or
price as the security holder may desire.
Possible Delisting
The trading of the Common Stock on Nasdaq SmallCap is
conditioned upon the Company meeting certain asset, capital and surplus,
earnings and stock price tests. The requirements to maintain eligibility on
Nasdaq SmallCap requires the Company to maintain net tangible assets in
excess of $2,000,000, and (subject to certain exceptions) a bid price of $1.00
per share. If the Company fails to satisfy either of these tests, the Common
Stock may be delisted from trading on Nasdaq SmallCap. The effects of
delisting include the limited release of market prices of the Common Stock and
more limited news coverage of the Company. Delisting may restrict investors
interest in the Common Stock and materially adversely affect the trading
market and prices for the Common Stock and the Company's ability to issue
additional securities or to secure additional financing.
Penny Stock Regulation
If the Common Stock was delisted from trading on Nasdaq
SmallCap and the trading price of the Common Stock was less than $5.00
per share, the Common Stock would be subject to Rule 15g-2 under the Exchange
Act, which among other things requires that brokers/dealers satisfy special
sales practice requirements, including making individualized written suitability
determinations and receiving a purchaser's written consent prior to any
transaction. If the Common Stock was delisted and the trading price was less
than $5.00 per share, the Common Stock could also be deemed Penny Stock under
the Securities Enforcement and Penny Stock Reform Act of 1990, which would
require additional disclosure in connection with trades in the Common Stock
including the delivery of a disclosure schedule explaining the nature and risks
of the penny stock market. Such requirements could severely limit the liquidity
of the Common Stock and the ability of purchasers in this offering to sell their
shares in the secondary market.
9
<PAGE>
Shares Eligible for Future Sale; Preferred Stock; Registration Rights
Of the 6,014,263 shares of Common Stock outstanding on September 4,
1997, 1,696,001 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 the remaining shares of Common
Stock outstanding are "restricted" within the meaning of Rule 144 under the
Securities Act, and may not be sold in the absence of registration under the
Securities Act or an exemption therefrom. However, the executive
officers , directors and certain other shareholders of the
Company, who as of September 4, 1997 beneficially held an aggregate of
4,689,217 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. During the second year following the date of this
Prospectus, such persons have agreed not to sell or otherwise dispose of more
than twenty-five percent (25%) of any shares of Common Stock beneficially owned
by them in any calendar quarter. Thereafter, such persons are entitled to
sell, without the consent of the Representative, subject in some cases
to the volume and other conditions of Rule 144.
Pursuant to authority granted by its Articles of Incorporation, the
Company's Board of Directors has authority to issue up to 2,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions thereof, including voting rights, without any further vote or
action by the Company's shareholders. The voting and other rights of the holders
of Common Stock will be subject to and may be adversely affected by the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in connection
with obtaining necessary capital resources and for other corporate purposes,
could have the effect of delaying, deferring or preventing a change of control
of the Company. The Company has no current arrangements to issue any additional
shares of Preferred Stock. See "DESCRIPTION OF CAPITAL STOCK."
The Company has filed a registration statement under the Securities Act
to register an aggregate of 520,661 shares of Common Stock issued or reserved
for issuance under the Company's 1995 Incentive Stock Option Plan and 41,322
shares issued or reserved for issuance under the Company's Stock Award Plan. The
holders of approximately 536,412 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 affect the prevailing market price of the Common
Stock. See "CAPITALIZATION" and "SHARES ELIGIBLE FOR FUTURE SALE."
Continued Control By Management
Upon completion of this offering, the Company's executive officers and
directors will beneficially own approximately 47.4% (44.5% if the
Over-Allotment Option is exercised in full) of the outstanding shares of Common
Stock. As a result, the Company's executive officers and directors will have
effective voting control of the Company and the practical ability to elect all
of the Company's directors and determine the vote on any matter being voted on
by the Company's shareholders, including any merger, sales of assets or other
change of control of the Company. The Company's Articles of Incorporation and
Bylaws do not provide for cumulative voting in the election of directors. See
"PRINCIPAL AND SELLING SHAREHOLDERS" and "CERTAIN PROVISIONS OF THE ARTICLES OF
INCORPORATION AND BYLAWS."
10
<PAGE>
Related Party Transactions; Potential Conflicts of Interest
From time to time, the Company has engaged in various transactions with
its directors, executive officers and other affiliated parties. The terms and
conditions of such transactions were not negotiated on an arms-length basis and
inherently involve conflicts of interest between the Company and the related
party. However, all future transactions between the Company and its officers,
directors, principals, shareholders and affiliates will be approved by a
majority of the independent and disinterested outside directors and must be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties under similar circumstances.
Dependence on Key and Other Personnel
The Company believes that its success is dependent, in part, on the
efforts of its key executives, including S. Leslie Flegel and William H. Lee.
The Company has entered into employment agreements with all its key
executives except W. Brian Rodgers and Messrs. Flegel and Lee, each of whom
is required as a condition to the consummation of this offering to enter
into an employment agreement with the Company effective as of the date of this
Prospectus. Although the Company believes that the loss of no single executive
will have a material adverse effect on the Company, certain events, many of
which are beyond the control of the Company, could result in the loss of the
services of such executives. The Company has procured and intends to maintain
policies of insurance on the lives of certain members of its senior management,
including Messrs. Flegel and Lee. See "MANAGEMENT."
No Dividends With Respect to Common Stock
The Company currently anticipates that it will retain all 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 Effects 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 effect 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 currently 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. The Board of directors has adopted a
resolution which, if approved by the shareholders of the Company at the 1998
Annual Meeting of shareholders, would amend the Bylaws to include an express
election of the Company to not be subject to such provisions to the extent
allowable under Missouri law. If such resolution is not adopted, such provisions
could have the effect of delaying, deferring or preventing a change in
control of the Company.
11
<PAGE>
Dilution
The public offering price per share will exceed the Company's net book
value per share of Common Stock immediately following this offering. Based on
the proposed public offering price of $4.00 per share of Common Stock, and the
proposed use of the net proceeds of this offering, new investors will experience
immediate dilution in net book value per share of approximately $2.61. In
addition, holders of certain outstanding options and warrants have the right to
acquire additional shares of Common Stock at a cost substantially less than the
proposed public offering price. If the net book value per share of Common Stock
has not substantially increased by the date of the exercise of such rights to
acquire Common Stock, holders of the Common Stock will incur substantial
additional dilution.
Representative's Warrants
The Company will sell to the Representative and/or its designees, for
nominal consideration, the Representative's Warrants to purchase from the
Company up to 200,000 shares of Common Stock. The Representative's Warrants are
exercisable for a period of four years commencing on the first anniversary of
the date of this Prospectus, at an exercise price equal to $_____________ per
share. For the life of the Representative's Warrants, the holders are given, at
nominal cost, the opportunity to profit from a rise in the market price for the
securities of the Company without assuming the risk of ownership, with a
resulting dilution in the interest of other security holders. As long as the
Representative's Warrants remain unexercised, the terms under which the Company
could obtain additional capital may be adversely affected. Moreover, the holders
of the Representative's Warrants may be expected to exercise them at a time when
the Company would, in all likelihood, be able to obtain any needed capital by a
new offering of its securities on terms more favorable than those provided by
the Representative's Warrants. Additionally, if the holders of the
Representative's Warrants should exercise their registration rights to effect a
distribution of the Representative's Warrants or underlying securities, the
Representative, prior to and during such distribution, will be unable to make a
market in the Company's securities and will be required to comply with other
limitations on trading set forth in Rules 101, 103, and 104 of Regulation M
promulgated under the Exchange Act. Such rules restrict the solicitation of
purchasers of a security when a person is interested in the distribution of such
security and also limit market making activities by an interested person until
the completion of the distribution. If the Representative must cease making a
market, the market and market price for such securities may be adversely
affected and the holders of such securities may be unable to sell such
securities. See "UNDERWRITING."
Representative's Influence on the Market
A significant amount of the Common Stock offered hereby may be sold to
customers of the Representative. Such customers subsequently may engage in
transactions for the sale or purchase of shares of Common Stock through or with
the Representative. If it participates in the market, the Representative may
exert a dominating influence on the market for the shares of Common Stock
offered hereby. Such market making activity may be discontinued at any time. The
price and liquidity of the shares may be significantly affected by the degree,
if any, of the Representative's participation in such market. See "DESCRIPTION
OF CAPITAL STOCK" and "UNDERWRITING."
12
<PAGE>
USE OF PROCEEDS
The following table sets forth the Company's anticipated use of
proceeds, expressed in dollars and as a percentage of gross proceeds.
Amount Percentage
------ ----------
Gross proceeds $8,000,000 100.0%
Less:
Underwriting discounts 640,000 8.0%
Offering expenses 450,000 5.6%
---------- ------
Net proceeds $6,910,000 86.4%
---------- -------
Use of Proceeds:
Expansion of Advance Pay Program 5,000,000 62.5%
Development of new or enhanced
products and services 1,310,000 16.4%
Acquisition of one or more
businesses 500,000 6.3%
Working Capital and general corporate
purposes, including the continued
upgrade of the Company's computer systems 100,000 1.2%
----------- --------
Total Use of Proceeds $6,910,000 86.4%
=========== ========
Pending the use of the net proceeds from the sale of the shares of
Common Stock as described above such funds will be used to temporarily reduce
the principal balance under the Company's credit facility. Such credit facility
provides for the availability of up to $12,500,000 of borrowings until
termination by Wachovia Bank on not less than 13 months prior notice. At July
31, 1997, the outstanding principal balance under this credit facility was
$10,949,000 the effective interest rate thereon was 9.1875% and the unused
availability thereunder was approximately $1,551,000. After application of the
net proceeds of this offering to the temporary repayment of the outstanding
principal balance on its credit facility, the Company intends to make additional
borrowings under the credit facility for the foregoing purposes.
The foregoing represents the Company's present intentions for the use
of the proceeds of this offering based on its currently contemplated operations,
business plan and currently prevailing economic and industry conditions. The
Company's business plan contemplates that the Company may acquire businesses or
introduce additional products and services. Although the Company has had and
will continue to have discussions with potential acquisition candidates it does
not have any present agreements or understandings with respect to any
significant acquisitions. Changes in the proposed expenditures may be made in
response to, among other things, changes in the Company's plans and its future
revenues and expenditures, as well as changes in general industry conditions and
technology.
The Company believes that the net proceeds of this offering, cash flow
from operations, trade credit and existing lines of credit will be sufficient to
meet its immediate cash needs and finance its plans for expansion for the
indefinite future, and in any case for not less than twelve months from the date
of this Prospectus. This belief is based upon certain assumptions regarding the
13
<PAGE>
Company's business and cash flow as well as prevailing industry and
economic conditions. The Company's capital requirements may vary significantly,
depending on how rapidly management seeks to expand the business and the
expansion strategies elected. Accordingly, the Company may, in the future,
require additional financing to continue to expand its business. There is no
assurance that the Company will be successful in obtaining additional financing,
if required, on favorable terms, or at all. If the Company were unable to obtain
additional financing, its ability to meet its current plan for expansion could
be materially and adversely affected. See "CAPITALIZATION" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
PRICE RANGE OF COMMON STOCK
From June 22, 1995 until February 12, 1996, the Company's Common Stock
was quoted on the Nasdaq OTC Bulletin Board. Beginning on February 12, 1996, the
Common Stock was quoted on 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
Nasdaq SmallCap, as applicable.
<TABLE>
<CAPTION>
Actual Pro forma(1)
------ ------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
Fiscal 1996
Second Quarter (beginning June 22, 1995) $7.00 $6.00 $ 8.47 $7.26
Third Quarter $8.50 $6.25 $10.29 $7.56
Fourth Quarter $7.50 $3.50 $ 9.08 $4.24
Fiscal 1997
First Quarter $5.75 $4.38 $ 6.96 $5.30
Second Quarter $4.75 $4.00 $ 5.75 $4.84
Third Quarter $4.75 $2.63 $ 5.75 $3.18
Fourth Quarter $3.25 $2.25 $ 3.93 $2.72
Fiscal 1998
First Quarter $2.88 $2.13 $ 3.48 $2.58
Second Quarter $3.06 $1.00 $ 3.70 $1.21
<FN>
(1) Pro forma to reflect the proposed 1-to-1.21 reverse stock split.
</FN>
</TABLE>
The foregoing quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions. On October 1, 1997 , the last sale price for the Common
Stock as reported by Nasdaq SmallCap was $3.19 per share or
$3.86 per share after giving effect to the proposed 1-to-1.21 reverse
stock split. As of September 4, 1997, there were 171 holders of record of the
Common Stock.
DIVIDEND POLICY
During the last two years, the Company has not declared or paid any
cash dividends on its Common Stock. The Board of Directors presently intends to
retain all its earnings, if any, for the development of the Company's
business for the foreseeable future. The declaration and payment of cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will depend upon a number of factors, including among others,
future earnings, operations, capital requirements, the general financial
condition of the Company and such other factors that the Board of Directors may
deem relevant.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as
of July 31, 1997, (ii) pro forma to reflect the proposed 1-to-1.21 reverse stock
split as if such transaction had occurred on July 31, 1997, and (iii) pro forma
as adjusted to reflect the sale by the Company of the shares of Common Stock
offered hereby and the application of the estimated net proceeds therefrom. This
table should be read in conjunction with the financial statements of the
Company, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "DESCRIPTION OF CAPITAL STOCK" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
July 31, 1997
-------------
Pro Forma
Actual Pro Forma As Adjusted
------ --------- -----------
<S> <C> <C> <C>
Long-term debt (less current portion)................................. $10,960,682 $10,960,682 $4,050,682(a)
Redeemable Common Stock, par value $0.01 per share
111,245 shares outstanding
actual, 91,938 shares pro
forma and pro forma as adjusted.................................... 503,820 503,820 503,820
Stockholders' equity:
Common Stock, par value $0.01 per share
7,165,953 shares outstanding actual,
5,922,275 shares pro forma, and
7,922,275 shares outstanding pro forma
as adjusted ..................................................... 71,659 59,223 79,223
Additional paid-in capital........................................... 3,292,872 3,305,308 10,195,308
Retained earnings ................................................... 901,193 901,193 901,193
Total stockholders' equity .................................. 4,265,724 4,265,724 11,175,724
Total capitalization ........................................ $15,730,226 $15,730,226 $15,730,226
<FN>
(a) Assumes the net proceeds of this offering will be applied to the temporary
reduction in the outstanding principal balance of the Company's credit
facility resulting in total availability thereunder of $8,461,000.
</FN>
</TABLE>
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data as of and for the periods presented below
have been derived from the financial statements of the Company. The financial
statements of the Company as of and for the fiscal years ended January 31, 1997
and 1996 have been audited by BDO Seidman, LLP, and its report thereon is
included elsewhere herein. The balance sheet data as of July 31, 1997 and the
statement of operations data as of and for the six months ended July 31, 1997
and 1996 have been derived from unaudited financial statements, which have been
prepared on the same basis as the audited financial statements and in the
opinion of management, include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the information set forth
herein. Results of operations for the six months ended July 31, 1997 are not
necessarily indicative of the results to be expected for the year ending January
31, 1998. The selected financial data should be read in conjunction with the
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
January 31, July 31,
Statements of Operations Data: 1997 1996 1997 1996
--------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Service Revenues............................ $7,056,270 $7,195,176 $5,459,668 $2,633,958
Merchandise Revenues........................ 242,177 926,008 8,348 124,540
--------- ---------- ------- ---------
7,298,447 8,121,184 5,468,016 2,758,498
Cost of Service Revenues.................... 4,862,207 3,859,409 2,851,857 2,351,092
Cost of Merchandise Sold.................... 202,381 549,813 32,720 11,254
--------- --------- -------- ----------
Gross Profit................................ 2,233,859 3,711,962 2,583,439 396,152
Selling, General & Administrative Expenses . 2,904,372 2,799,841 1,062,128 1,671,502
--------- ---------- ----------- ----------
Operating Income (Loss)..................... (670,513) 912,121 1,521,311 (1,275,350)
Other Income (Expense)...................... (309,992) (314,127) ( 442,713) ( 108,653)
----------- ---------- ---------- ----------
Income (Loss) Before Income Taxes........... (980,505) 597,994 1,078,598 (1,384,003)
Income Tax (Expense) Benefit................ 377,188 (406,000) (489,000) 478,463
---------- ------------ ----------- --------
Net Income (Loss)......................... (603,317) 191,994 589,598 (905,540)
Earnings (Loss) per Share................... $(0.09) $0.03 $0.07 ($0.14)
Pro Forma(1) Earnings
(Loss) per Share.......................... $(0.11) $0.06 $0.08 $(0.17)
Pro Forma(1) Weighted Average Outstanding
Shares.................................... 5,503,215 5,028,547 5,857,717 5,342.074
<CAPTION>
January 31, July 31, 1997
Balance Sheet Data: 1997 1996 Actual As Adjusted (2)
-------- -------- ---------- -------------------
<S> <C> <C> <C> <C>
Working Capital............................. $2,322,778 $ 1,305,679 $ 11,681,190 $ 11,681,190
Total Assets ............................. 15,569,649 5,346,384 20,079,046 20,079,046
Revolving Line of Credit.................... 7,124,000 1,713,715 - -
Long-term debt, less current portion........ 22,814 32,341 10,960,682 4,050,682
Redeemable Stock............................ 1,026,326 - 503,820 503,820
Stockholders' Equity........................ 3,145,622 2,017,626 4,265,724 11,175,724
<FN>
(1) Pro forma data is presented to reflect a provision for income taxes
as if DISC, a Subchapter S Corporation prior to the merger between DISC
and PMM, had not been a Subchapter S Corporation, and the proposed
1-to-1.21 reverse stock split.
(2) Assumes (a) the net proceeds of this offering will be applied initially
to the temporary reduction of the outstanding principal balance of the
Company's credit facility resulting in total availability thereunder of
$8,461,000, and (b) the proposed 1-to-1.21 reverse stock split.
</FN>
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
For more than 20 years, The Source Information Management Company (the
"Company") and its predecessors have provided information gathering, consulting
and other information based services to operators of mass merchandise, grocery,
convenience and pharmacy stores located throughout the United States and eastern
Canada. Currently, the Company provides monitoring and documentation services to
approximately 710 retailers, such as Wal-Mart Stores, Inc., Kmart
Corporation, Target Stores, Inc., Food Lion, Inc., and W.H. Smith, Inc., in
connection with processing and collection of incentive payments from magazine
publishers on single copy sales of approximately 6,000 magazine titles offered
in approximately 70,000 stores. As an extension of this service, the Company
established its Advance Pay Program, under which the Company advances an agreed
upon percentage of the incentive payments due to the retailer from magazine
publishers. It then directly collects from the publishers the claims due to the
retailer. In fiscal 1996 and 1997, the Company advanced approximately $1,783,000
and $16,743,000 under the Advance Pay Program, respectively. In October, 1996,
the Company expanded its services and potential client base with the
introduction of the Periodical Information Network ("PIN"), an information
service in which the Company provides subscribing magazine publishers with
industry-wide, single copy magazine sales information in a user friendly format.
Based on conversations with representatives of magazine publishers, the Company
believes that publishers and advertisers perceive that PIN provides a valuable
basis on which to formulate marketing, distribution, advertising and other
policies.
A majority of the Company's revenues are derived from service fees
earned in connection with the collection of incentive payments owed to the
Company's retailer clients from magazine publishers. Most such incentive payment
programs offer the retailer a cash rebate, equal to a percentage of the
retailer's actual net sales of the publisher's titles, which is payable
quarterly upon submission of a properly documented claim. Under agreements with
its retailer clients, the Company gathers sales data, submits claims for
payment, collects payments and receives a percentage of the aggregate payments
collected on the retailers' behalf. Claims for incentive payments are generally
submitted to the publishers quarterly based on actual net sales of the
publishers' titles recorded in the previous calendar quarter. Except in
connection with its Advance Pay Program, the Company does not guarantee to its
retailer clients any payments due to the client from magazine publishers, and
accordingly, does not assume any credit risk associated with such incentive
payments. In substantially all the contracts under the Advance Pay Program the
Company bears the risk of uncollectibility associated with collecting payments
from publishers. To date, management believes that the reserve maintained by the
Company as an allowance for doubtful accounts in the amount of approximately 2%
of accounts receivable is adequate to satisfy any losses incurred by the Company
from uncollectible accounts receivable.
Under both the standard arrangement and the Advance Pay Program,
service revenues are recognized at the time claims for incentive payments are
substantially completed for submission to the publishers based on the amount
claimed, less an estimated reserve necessary to maintain an allowance for
doubtful accounts of approximately 2% of trade accounts receivable. However,
under the standard arrangement, invoices for services provided by the Company in
connection with the claim process are not issued until the Company receives
settlement of the claim. Under the Advance Pay Program, the customer is not
invoiced for the service fee, which is the difference between the claim and the
advance amount.
17
<PAGE>
Results of Operations
The following table sets forth, for the periods presented, certain
information relating to the operations of the Company expressed as a percentage
of Total Revenues:
<TABLE>
<CAPTION>
Six Months Ended July 31, Fiscal Year Ended January 31,
------------------------- -----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service Revenues 99.8% 95.5% 96.7% 88.6%
Merchandise Revenues 0.2 4.5 3.3 11.4
Total Revenue 100.0 100.0 100.0 100.0
Cost of Service Revenues 52.2 85.2 66.6 47.5
Cost of Merchandise Sold 0.6 0.4 2.8 6.8
Gross Profit 47.2 14.4 30.6 45.7
Selling, General &
Administrative Expense 19.4 60.6 39.8 34.5
Operating Income (Loss) 27.8 (46.2) (9.2) 11.2
Interest Expense, Net (7.4) (3.6) (3.9) (1.2)
Other Income (Expense), Net (0.7) (0.4) (0.4) (2.7)
Income (Loss) Before
Income Taxes 19.7 (50.2) (13.5) 7.3
Net Income (Loss) 10.8% (32.8)% (8.3)% 2.4%
</TABLE>
Six Months Ended July 31, 1997 Compared to Six Months Ended July 31, 1996
Service Revenues
Increased retailer participation in the Advance Pay Program, the
acquisitions of Magazine Marketing, Inc., Readers Choice, Inc. and Mike Kessler
and Associates, Inc., and the implementation of PIN during the third quarter of
fiscal year 1997, contributed to an increase in service revenue of approximately
$2,826,000 during the six month period ended July 31, 1997. The increase
consisted of approximately $2,313,000 of claims, PIN and Advance Pay Program
revenue over the comparable period in fiscal 1997. Also, space design revenue
increased from $182,000 for the six months ended July 31, 1996 to $695,000 for
the six months ended July 31, 1997. Currently, the Company is negotiating flat
fee arrangements; however, historically, space design revenues have been
recognized as front end display manufacturers ship the displays to the
retailers, the timing of which is not within the Company's control. Space design
revenues have historically fluctuated significantly depending upon a variety of
factors including the number and magnitude of reconfiguration programs
undertaken by the Company's retailer client and the timely shipping of displays
by manufacturers. As a result, variations in the timing and amounts of space
design revenues could have a material adverse effect on the Company's quarterly
operating results.
18
<PAGE>
Merchandise Revenues and Cost of Merchandise Sold
As a result of its relationships with the leading retailers in the
United States, the Company has had opportunities from time to time to purchase
merchandise, such as gift and greeting cards, caps and other leisure time
products for resale to its retailer clients. However, management has decided to
de-emphasize this portion of its business in order to dedicate more resources to
its core services. The revenues derived from merchandising sales are declining
while the inventory is being liquidated.
Cost of Service Revenues and Selling, General and Administrative Expense ("Total
Costs")
Total Costs for the six month period ended July 31, 1997 decreased
approximately $109,000 compared to the same period in the prior year, resulting
from a $500,765 increase in Cost of Service Revenues offset by a $609,374
decrease in Selling, General and Administrative Expense. The largest decrease in
Total Costs was in the data processing area. These costs decreased $174,000 over
last year's comparable period due to the purchase of the employment service
company on January 1, 1997 which previously provided such services. However,
this decrease was partially offset by an increase in wages because the
individuals formerly employed by the employment services company are now
employed by the Company. The acquisitions of Magazine Marketing, Inc., Readers
Choice, Inc. and Mike Kessler and Associates, Inc. have led to increased costs,
including wages, amortization, rent and depreciation. Travel and entertainment
expenses decreased $38,000 and $16,000, respectively. Bad debt expense decreased
$56,000 over the same period in the prior year.
Other Expense
Interest Expense increased $302,000 due to increased borrowings
necessary to fund the Advance Pay Program.
Income Tax Expense (Benefit)
The effective income tax rate for the six months ended July 31, 1997
was 45.3% compared to 34.6% for the six months ended July 31, 1996. This
increase was a result of an increase in expenses not deductible for income tax
purposes as a percentage of income (loss) before income taxes. Such
non-deductible expenses include meals and entertainment, goodwill amortization,
and officers' life insurance premiums.
Earnings Per Share
In calculating earnings per share, net income for the six months ended
July 31, 1997 was reduced by a constructive dividend of $109,937, which resulted
from the exchange of all 5,600 outstanding shares of Preferred Stock for 186,667
shares of Common Stock and non-transferable warrants, expiring in 2000, to
purchase 310,710 shares of Common Stock at an exercise price of $3.00 per
share.
Fiscal 1997 Compared to Fiscal 1996
Service Revenues
Increased retailer participation in the Advance Pay Program, the
acquisition of Magazine Marketing, Inc. and Readers Choice, Inc., and the
implementation of PIN during the third quarter of fiscal year 1997, contributed
to an increase in revenue from claims submission services of approximately
$468,000. However, space design revenue decreased from $1,243,000 in 1996 to
$636,000 in 1997 causing an overall decrease in Service Revenues of $139,000.
Currently, the Company is negotiating flat fee arrangements; however,
historically, space design revenues have been recognized as front end display
manufacturers ship the displays to the retailers, the timing of which is not
within the Company's control. Based on management's understanding of the
anticipated shipment dates for proposed and planned programs expected to occur
during the next year, space design revenue should exceed both 1996 and 1997
levels.
19
<PAGE>
Merchandise Revenues
As a result of its relationships with the leading retailers in the
United States, The Company has had opportunities from time to time to purchase
merchandise, such as gift and greeting cards, caps and other leisure time
products for resale to its retailer clients. However, management has decided to
de-emphasize this portion of its business in order to dedicate more resources to
its core services. Thus, Merchandise Revenues decreased $684,000 from $926,000
in 1996 to $242,000 in 1997.
Cost of Merchandise Sold
The Cost of Merchandise Sold decreased primarily as a result of
de-emphasizing this portion of the business as noted above. Comparing the gross
profit percentage associated with Merchandise Revenues to the prior year is not
considered meaningful by management because a wide variety of items with
varying profit margins have been purchased and resold.
Cost of Service Revenues and Selling, General and Administrative Expense ("Total
Costs")
Total Costs increased approximately $1,100,000 resulting from a
$1,002,798 increase in Cost of Service Revenues and a $104,531 increase in
Selling, General and Administrative Expense. Wages accounted for $840,000 of the
increase. New hires, including personnel formerly employed by Magazine
Marketing, Inc., comprised approximately $579,000 of this increase, while the
balance of the increase was the result of wage increases and bonuses. Insurance
costs increased approximately $152,000 resulting from the addition of directors
and officers insurance, additional life insurance policies and an increase in
the package policy due to the Company's expansion into other states and Canada.
Rent, telephone and utilities have increased $100,000 as a direct result of
expanding the square footage rented in North Carolina and adding regional
offices in Canada, Arizona and California (which was subsequently closed as a
result of de-emphasizing the merchandising portion of the business). Computer
hardware and software acquisitions combined with equipment and furniture
acquisitions related to the additional regional offices contributed to a $48,000
increase in depreciation expense. Lastly, bad debt expense increased
approximately $40,000. Such increases were mitigated by decreases in contract
labor and data entry costs. During 1997, permanent hires reduced the need to
utilize temporary employees as frequently as in 1996, and an increase in the
number of wholesalers supplying sales data on tape contributed to a decrease in
data entry costs.
Other Expense
Interest Expense increased $191,000 due to increased borrowings
necessary to fund the Advance Pay Program. Registration expenses decreased by
$213,000 in 1997 following the one time expense incurred in 1996 to register the
Company's Common Stock under the Exchange Act.
Income Tax (Benefit) Expense
The effective income tax rate decreased to 38.5% for 1997 from a pro
forma effective rate of 47.5% for 1996. This decrease was a result of a decrease
in expenses not deductible for income tax purposes as a percentage of income
(loss) before income taxes. Such non-deductible expenses include meals and
entertainment, officers' life insurance premiums and goodwill amortization.
Seasonality
To date, the Company's results of operation have not been subject to
seasonal variation and management does not expect such seasonal variation to
occur in the future.
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Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128). The new standard simplifies the standards for computing earnings per
share and requires presentation of two new amounts, basic and diluted earnings
per share. The Company will be required to retroactively adopt this standard
when it reports its operating results for the fiscal quarter and year ending
January 31, 1998. When the Company adopts SFAS No. 128, it expects no changes in
its previously reported Primary and Fully Diluted earnings per share. In
addition, SFAS No. 128 is expected to have no effect on earnings per share for
the six months ended July 31, 1997 and 1996 if it had been adopted.
Liquidity and Capital Resources
The Company's primary cash requirements are for funding the Advance Pay
Program and selling, general and administrative expenses (particularly salaries,
travel and entertainment) incurred in connection with the solicitation of new
clients and the maintenance of existing accounts. Historically, the Company has
financed its business activities through borrowings under available lines of
credit, cash flow from operations and through the issuance of equity securities.
Net cash used by operating activities increased from $3,051,000 during
the six months ended July 31, 1996 to $3,542,000 during the six months ended
July 31, 1997. During the six months ended July 31, 1997, $2,787,000 was used to
cover checks drawn against future deposits at January 31, 1997, net cash used
for the Advance Pay Program was approximately $339,000 and cash paid for
interest was $359,000.
The average collection period for the six months ended July 31, 1997
was 137 days compared to 148 days for the six months ended July 31, 1996. The
collection periods were calculated as follows: 365 days/(Revenues/Average
Accounts Receivable), where accounts receivable includes all trade accounts
receivable, but only the commission portion of amounts due from publishers in
association with the Advance Pay Program.
The Company is primarily engaged in the business of providing services
to its retailer clients; therefore, its capital expenditure requirements are
minimal. At July 31, 1997, the Company had no outstanding material commitments
for capital expenditures.
The Company has a credit agreement that provides for a revolving loan
of up to $12,500,000 with Wachovia Bank of North Carolina, N.A. ("Wachovia
Bank"). Wachovia Bank has the right to terminate the agreement upon not less
than thirteen months prior written notice. Borrowings bear interest at a rate
related to the monthly LIBOR index rate plus a percentage ranging from 2.5% to
3.5% depending upon the ratio of funded debt to earnings before interest, taxes,
depreciation and amortization. Borrowings are secured by personal guarantees of
Messrs. S. Leslie Flegel and William H. Lee and their spouses and by a security
interest in substantially all the Company's assets including
receivables, inventory, equipment, goods and fixtures, software, contract
rights, notes, and general intangibles. Under the Credit Agreement, the Company
is required to maintain certain financial ratios. Although the Company was not
in compliance at January 31, 1997, with the requisite ratio of Earnings Before
Interest, Lease Obligations and Taxes to Interest Expense and Lease Obligations
("EBILT/IELO") or the requisite ratio of Funded Debt to Total Capitalization
("Debt/Cap"), it received a written temporary waiver of such ratios from
Wachovia Bank. Subsequently, the Credit Agreement was amended to provide the
Company with greater flexibility with respect to the maintenance of certain
financial ratios including the EBILT/IELO and Debt/Cap ratios. At July 31, 1997,
the Company was in compliance with all financial ratios imposed by the Credit
Agreement, as amended. During fiscal 1999 certain of such financial ratios
become more stringent; however, the Company expects to remain in compliance with
all financial ratios through October 31, 1998. Although the Company believes it
is unlikely, Wachovia Bank may decide to enforce any or all of its remedies,
including declaring the loan immediately due and payable, if the financial
ratios are not maintained. Such action would have a material adverse effect on
the financial condition of the Company and would require the Company to curtail
the Advance Pay Program.
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At July 31, 1997, the Company's total long-term debt obligations were
$13,174,000. Of such amount, $2,150,000 was incurred by the Company in
connection with its acquisition of all the stock of Mike Kessler and
Associates, Inc. ("MKA"). Such indebtedness which is due January 5, 1998 with
interest at 6.25%, is expected to be financed by operations and an additional
term loan from Wachovia Bank. To the extent that such additional term loan is
unavailable, the Company intends to repay such obligation from its existing
credit facility thereby reducing the funds available for the Advance Pay
Program. Wachovia Bank issued a standby letter of credit for $2,231,912 for the
benefit of the former owner of MKA covering the period from May 30, 1997 through
January 31, 1998. The seller operated MKA as a business engaged in the
collection of retail display allowances for retail store chains. The Company has
continued the operation of such business and has continued servicing MKA's
customer base. The Company anticipates that the funds necessary to satisfy
its other debt obligations will be derived from cash provided by
operations and/or additional bank borrowings.
In July 1997, the holders of the Company's 1996 Series 7% Convertible
Preferred Stock exchanged all 5,600 outstanding shares for 186,667 shares of
Common Stock at an effective exchange price of $3.00 per share and
non-transferable warrants, expiring in 2000, to purchase 310,710 shares
of Common Stock at an exercise price of $3.00 per share. Such exchange resulted
in a constructive dividend of $109,937 which was reported in the fiscal quarter
ending July 31, 1997.
In September 1997, the Company issued to Aron Katzman, Harry L. Franc
III and Timothy A. Braswell, each a director of the Company, non-transferable
warrants, expiring in 2000, to purchase an aggregate of 89,289 shares of
Common Stock at an exercise price of $3.00 per share. Although the effect of
this transaction will be reported in the third quarter, the Company expects that
such warrants will be deemed to have an aggregate value ranging from $30,000 to
$50,000.
Without additional financings, the Company will not be able to expand
its operations, particularly its Advance Pay Program, in accordance with the
Company's current plan. If the proceeds of this offering together with the
Company's currently available funds and internally generated cash flows are not
sufficient to satisfy its financing needs, the Company likely will seek
additional funding through increased bank borrowings and/or the public or
private sale of debt or equity securities. There can be no assurance that
additional funds will be available on a timely basis, on acceptable terms or at
all, or that such funds, if raised, would be sufficient to permit the Company to
continue its expansion as planned. If the proceeds of this offering and funding
through additional public or private sale of debt or equity securities are
inadequate, and borrowings under the existing credit facility or a comparable
replacement thereof are not available, the Company may be required to curtail
the Advance Pay Program.
BUSINESS
Overview
For more than 20 years, The Source Information Management Company (the
"Company") and its predecessors have provided information gathering, consulting
and other information based services to operators of mass merchandise, grocery,
convenience and pharmacy stores located throughout the United States and eastern
Canada. Currently, the Company provides monitoring and documentation services to
approximately 710 retailers, such as Wal-Mart Stores, Inc., Kmart Corporation,
Target Stores, Inc., Food Lion, Inc., and W.H. Smith, Inc., in connection with
processing and collection of incentive payments from magazine publishers on
single copy sales of approximately 6,000 magazine titles offered in
approximately 70,000 stores. As an extension of this service, the Company
established its Advance Pay Program, under which the Company advances an agreed
upon percentage of the incentive payments due to the retailer from magazine
publishers. It then directly collects from the publishers the claims due to the
retailer. In fiscal 1996 and 1997, the Company advanced approximately $1,783,000
and $16,743,000 under the Advance Pay Program, respectively. In October, 1996,
the Company expanded its services and potential client base with the
introduction of the Periodical Information Network ("PIN"), an information
service in which the Company provides subscribing magazine publishers with
industry-wide, single copy magazine sales information in a user friendly format.
Based on conversations with representatives of magazine publishers, the Company
believes that publishers and advertisers perceive that PIN provides a valuable
basis on which to formulate marketing, distribution, advertising and other
policies.
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Formation of the Company
The Company was organized in 1995 by the consolidation of two
significant providers of services to retailers of magazines and other
periodicals. Since its organization the Company has expanded through the
acquisition of businesses and technologies that address additional services or
products, market segments or geographic regions in which the Company is not
currently active and which would allow the Company to expand the services
offered to its clients, or its ability to support existing or planned services.
In 1995, the Company acquired the business of Dixon's Modern Marketing Concepts,
Inc. and Tri-State Stores, Inc., both of Chicago Heights, Illinois. In 1996, the
Company again expanded its presence in the upper Midwest by acquiring the
businesses of Magazine Marketing, Inc. of Canton, Ohio and Readers Choice, Inc.,
a subsidiary of United Magazine Company located in Columbus, Ohio. In May 1997,
the Company acquired the business of Mike Kessler and Associates, Inc. of Fair
Lawn, New Jersey.
The Magazine Industry
Based on its knowledge of the industry and discussions with magazine
publishers and retailers, management of the Company believes that magazine
publishers are placing an increasing degree of importance on revenues derived
from single copy newsstand sales and that the emphasis placed on single copy
sales by publishers will continue to increase as: (i) mailing costs continue to
rise with respect to subscription distribution; and (ii) magazine advertisers
continue to value the increased target market accuracy achieved through single
copy sales.
The distribution of the approximately 6,000 magazine titles currently
published for single copy sales on a national basis is dominated by six national
distributors, which distribute to over 200 local independent distributors, which
in turn supply copies to magazine retailers. Although the nature of the
businesses in which magazine retailers are engaged is wide ranging, the largest
volumes of single copy sales historically are achieved by grocery retailers and
mass merchandise stores. The primary function of the retailer is the display of
available titles in two store locations, at a dedicated section called a
"mainline display" and at displays located within the merchandise checkout area.
Because magazines are frequently purchased on impulse, publishers increasingly
compete for display spaces, referred to as "pockets," at the checkout.
National distributors receive a brokerage fee based on sales and
distribution to local independent distributors. Local independent distributors
purchase copies at a discount to the suggested retail price and resell to
retailers, also at a discount to the suggested retail price. All unsold copies
are returnable by the retailer for full credit to all parties in the
distribution chain, such that payments are made only with respect to copies
actually sold. All accounting for copies is done by the local independent
distributors which invoice for distributed copies, credit retailers for returns
and credit national distributors for sales through a computer-assisted single
entry information system.
To provide further incentives to retailers to prominently display their
respective titles, publishers typically enter into Retail Display Allowance
("RDA") programs under which the retailer is entitled to receive, on a quarterly
basis, a cash rebate directly from the publisher equal to a percentage of the
retailer's actual net sales of the publisher's titles upon submission of a
properly documented claim. Conversely, certain publishers of high volume
magazines rent "pocket" space from retailers for the display and sale of
specific titles. Such rent, referred to as "pocket payments" (or "RDP"
payments), is a fixed amount per pocket, per store based on the verified
location and other criteria of the pocket, and is paid quarterly. The national
distributors administer a majority of RDA and RDP programs on behalf of the
publishers.
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Publishers have also implemented programs to encourage retailers to
upgrade their checkout and mainline display fixtures by making one-time
incentive payments, based on the pockets allocated to their respective titles.
Similar to RDA and RDP, such payments are made only upon submission of a
properly documented claim.
Client Services
The Company is dedicated to providing full information services to its
clients. Such services include the following:
Claim Submission. Through its software system, the Company offers to
assist retailers in accurately monitoring, documenting, claiming and collecting
publisher incentive payments. The claim submission process begins at the end of
each calendar quarter when the Company obtains information from the local
independent distributors detailing the titles and number of copies actually sold
by the client retailer. Based on this information, the Company prepares
publisher supplied claim forms and submits the documented claim to the
appropriate national distributor, which acts as payment agent for the publisher.
After verification of the claim, the national distributor remits payment to the
order of the retailer in care of the Company, which records the payment and
forwards it to the retailer. The Company charges the retailer a negotiated
percentage of the cash collected.
As an extension of its claim submission service, the Company has
established an Advance Pay Program. Under the provisions of the written
agreement signed by each participating retailer, the Company acquires the right
to collect the incentive payments otherwise due the retailer directly from
magazine publishers with respect to the sale and display of magazines. In
return, the Company pays to the retailer a negotiated fixed percentage of the
total incentive payments otherwise due the retailer with respect to each
calendar quarter generally not later than ninety days after the end of each such
quarter. The funds necessary to make such payments are derived from cash flow
from operations and borrowings under the Company's existing $12,500,000 credit
facility. Typically, the agreement provides for a minimum term of one year and
thereafter is terminable by either party on not less than ninety days notice.
This service relieves the retailer from the burdensome administrative task of
processing multitudes of small publisher checks. Service fees earned under the
Advance Pay Program generally exceed those charged under the traditional method;
however the Company generally assumes the risk of uncollectibility of the
incentive payments. Based on historical experience, the Company maintains a
reserve for doubtful accounts equal to approximately 2% of outstanding accounts
receivable. The Company believes such reserve will be adequate.
Space Design. Through its Display Group, the Company offers to assist
retailers in the placement of displays and the selection of titles to optimize
available display space, and thereby to maximize sales and incentive payment
revenues. Based on its knowledge of local consumer preferences and the terms and
conditions of publisher incentive payment programs, the Company analyzes the
retailer's store layout, customer traffic patterns and available display
alternatives. Thereafter, the Company consults with its retailer client to
develop an appropriate display program.
Generally, retailers undertake a comprehensive redesign of the checkout
display space on three-year cycles. As a result of its marketing experience, the
Company is frequently engaged to provide services with respect to the entire
redesign process including, fixture design and assisting the retailer in product
selection, plan-o-gramming and vendor negotiations. The Company provides
additional services to retailers including vendor billing and collection,
fixture prototype reviews and supervision of fixture installation in the stores.
In June 1997, K-Mart Corporation contracted with the Company to provide such
services with respect to the reconfiguration of display fixtures in the checkout
area of its stores. The new merchandising units which display magazines,
confections and selected general merchandise illustrate the applicability of the
Company's existing services beyond magazines to other high volume consumer
products.
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Periodical Information Network. The Company's large and sophisticated
database of magazine industry information has resulted in it becoming a magazine
information center which management believes is used by many companies in the
magazine industry to formulate their publishing and distribution strategies. PIN
is a comprehensive system designed to use current computer technologies,
including CD-ROM, to effectively manage all elements of the Company's database
including information packaging and efficient inbound, outbound access. The
network provides access to periodically updated historical information
concerning the titles and quantity of each title sold by retailers for analysis
purposes. Several leading publishers have subscribed to PIN. The PIN
subscription agreement provides that the Company will furnish each subscriber
with a historical database of sales information and quarterly updates capable of
generating three general types of reports: total sales, sales by class of trade,
and sales by retailer. Each report ranks titles in order of sales volume, and
provides other sales related information, including sales efficiencies, category
contributions and total sales ranking. For such database, subscribers pay
service fees equal to a one-time enrollment fee and quarterly update fees. PIN
subscriptions have a term of one year, which is automatically renewed for
successive one-year terms unless either party terminates by notice to the other
not later than ninety days before commencement of the next renewal term.
Marketing and Promotional Program. As part of its full-service
philosophy, the Company offers its clients advice and suggestions concerning
specialized marketing and promotional programs which may include, for example,
special mainline and checkout displays and cross-promotions of magazines and
products of interest to readers of such magazines. Such services are offered to
enhance single copy magazine sales by the Company's clients, and thereby
increase service revenues due the Company in connection with the submission of
incentive payment claims; accordingly, no separate charge is made for these
services.
Administrative Support. The Company assists retailers to more
efficiently conduct their magazine sales operations through computerized
inventory control, automated pricing updates and management reporting. During
the fourth quarter of fiscal 1998, the Company intends to introduce a new
administrative support service enabling publishers and retailers to efficiently
verify and correct price changes and other information contained in the
magazine's uniform product code ("UPC").
Growth Opportunities
Expansion of Services to New Product Categories. The Company's
information services have been designed to efficiently and accurately accumulate
and manage sales data with respect to sales of low cost, high volume consumer
products. While the Company's services, including PIN and the Advance Pay
Program, were developed for use in the magazine industry, the Company has been
engaged to provide its services in connection with integrated magazine and
confections displays and expects to offer its services for use in connection
with other consumer products, such as soft drinks and batteries.
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Development of New and Enhanced Products and Services. The Company was
founded and believes that its future success will be dependent upon its ability
to anticipate the informational needs of existing and potential clients and to
develop and introduce, in a timely manner, new products and services which
address such needs. A portion of the proceeds of this offering are expected to
be used to continue the Company's development of new and enhanced products and
services. The Company encourages creativity and originality in its sales
personnel and believes that one of the keys to the growth of the Company has
been the willingness of senior management to implement product and service
solutions suggested by the Company's personnel to address the needs of customers
with whom they interact. In addition, Messrs. Flegel and Lee, as well as various
members of the Company's senior management and sales staff, periodically meet
with consumers to discuss industry trends and informational requirements. After
identifying an unsatisfied consumer need, members of the Company's senior
management and sales team meet to design new or enhanced products and services
addressing such consumer need. Thereafter, a team is appointed to develop such
products and services for introduction to the market.
Customers/Clients
The Company provides services to approximately 710 operators of mass
merchandise, grocery, convenience and pharmacy stores located throughout the
United States and eastern Canada. Such retailers include Wal-Mart Stores, Inc.,
Kmart Corporation, Target Stores, Inc., Food Lion, Inc. and W.H. Smith, Inc. In
addition, the Company provides market data to publishers, including Time
Distribution Services, ICD/The Hearst Corp. and Globe Marketing Services. All of
the Company's services are rendered pursuant to short term contracts and,
accordingly, the Company's clients are under no long term contractual obligation
to continue to employ the Company's services.
Marketing and Sales
The Company markets its services through its own direct sales force.
The Company's sales group consists of seven regional managers and three
divisional vice presidents. Each manager is assigned to a specific geographic
territory and is responsible for the preparation of quotations, program
presentations and the general development of sales, as well as maintenance of
existing accounts, within his or her assigned territory.
Competition
Competition among providers of many of the Company's products and
services, particularly the processing of incentive payment claims, is highly
competitive. While such competition is fragmented, the Company recognizes
approximately 32 direct competitors, all of which are closely held private
companies. The Company believes that, in virtually all cases, it is the sole
provider of magazine incentive payment claim services to its clients and the
Company's clients do not perform such services on their own behalf. Based on its
review of the industry and informal discussions with magazine publishers and
retailers, the Company believes that none of its direct competitors have greater
financial, technological, marketing and sales resources than the Company.
However, it is possible that certain services offered by the Company could be
performed directly by its retail customers or otherwise offered or performed in
the future by publishers, distributors or other organizations, such as Nielsen,
IRI and Audit Bureau of Circulation. Many of such organizations have greater
financial, technological, marketing and sales resources than the Company.
Additionally, competitors may develop new or different service programs which
are perceived by customers to be of similar or superior quality at the same or
lower prices than the Company's services.
Management further believes that the principal competitive factors in
the retail information industry include information access, technological
support, accuracy, system flexibility, financial stability, customer service and
reputation. The Company believes it competes effectively with respect to each of
the above factors.
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Properties
The Company conducts its operations from 11 office facilities, located
in St. Louis, Missouri; New York, New York; Chicago Heights, Illinois;
Schaumburg, Illinois; Oklahoma City, Oklahoma; San Antonio, Texas; Cranberry
Township, Pennsylvania; Canton, Ohio; Fair Lawn, New Jersey; Woodstock, Georgia;
and Mississauga, Ontario, Canada. These facilities contain an aggregate of
approximately 19,000 square feet of space. Each of the facilities is occupied by
the Company under leases containing terms and conditions believed to be
comparable to those prevailing in the market in which the facility is located.
The Company believes that each of such facilities may be relocated without
material expense or delay, and that suitable alternative office facilities are
available in each market on comparable terms, if required.
In addition, the Company's data processing center, located in High
Point, North Carolina, contains approximately 13,900 square feet and is occupied
under a written lease with 711 Gallimore Partnership, a North Carolina general
partnership ("711 Partnership"), expiring in 2012. Such lease provides for the
payment of monthly rent of approximately $14,000, subject to adjustment for
taxes, insurance and utilities. See "MANAGEMENT-Certain Relationships and
Related Transactions."
Management Information Systems
The Company uses a customized software system to accumulate and manage
sales data in connection with its processing of claims and maintenance of the
PIN database under a license from a third party which has been retained by the
Company to service and upgrade the Company's software system. This sophisticated
software system is of a type used by several companies engaged in the collection
of sales incentive payments in the magazine industry. Although the Company uses
several service marks in connection with its business, it believes that its
business is not dependent on the strength of its service marks or any of its
intellectual property rights.
Legal Proceedings
The Company is not a party to any legal proceedings, other than routine
claims and lawsuits arising in the ordinary course of business. The Company does
not believe that such claims and lawsuits, individually or in the aggregate,
will have a material adverse effect on the Company's business.
Employees
As of August 31, 1997, the Company employed 125 persons, of whom 108
were employed on a full-time basis and 17 were employed on a part-time basis. Of
such persons, 31 are engaged in administrative activities and two devote at
least a portion of their efforts to research and development activities. The
Company's employees are not subject to a collective bargaining agreement. The
Company considers its relations with its team members to be good.
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MANAGEMENT
The following table sets forth certain information concerning the
directors and executive officers of the Company:
Name Age Position
S. Leslie Flegel 60 Director, Chairman and Chief
Executive Officer
William H. Lee 46 Director, President and Chief
Operating Officer
John P. Watkins 42 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 32 Assistant Secretary and Chief
Financial Officer
Jason S. Flegel 32 Sr. Vice President of RDA Operations
Stephen E. Borjes 48 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 March 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 March 1995. For
approximately 14 years prior thereto, Mr. Lee was the principal owner and chief
executive officer of Periodical Marketing and Management, Inc. ("PMM"), a
predecessor of the Company.
John P. Watkins has served as Chief Administrative Officer and
President-Retail Services since February 1, 1996. For more than 16 years prior
thereto, Mr. Watkins served in several senior management positions with Food
Lion, Inc., a seven billion dollar retail grocery chain. From September 1992 to
July 1995, Mr. Watkins served as Senior Vice President and Chief Operating
Officer and as a member of the Board of Directors of Food Lion, Inc.
Dwight L. DeGolia has served as Executive Vice President of the Company
since its commencement of operations in May 1995. For more than seven years
prior thereto, Mr. DeGolia served as Executive Vice President of Sales and
Marketing for DISC. From 1986 to 1993, Mr. DeGolia also served as a director of
Advanced Marketing Services, a leading supplier of books to wholesale clubs.
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Robert B. Dixon became Executive Vice President and President -
Periodical Information Management in June 1995. For more than 13 years prior
thereto, Mr. Dixon served as President and was the principal shareholder of
Dixon's Modern Marketing Concepts, Inc. and related entities.
W. Brian Rodgers has served as Assistant Secretary of the Company and
Chief Financial Officer since October 1996. Prior to joining the Company, Mr.
Rodgers practiced for seven years as a Certified Public Accountant with BDO
Seidman, L.L.P.
Jason S. Flegel has served as Senior Vice President of RDA Operations
since June 1996. Prior thereto, and since the Company's inception in
March 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.
Stephen E. Borjes has served as President of the Display Group since
September 1, 1997. For more than 20 years, Mr. Borjes held several positions
with Dixie News Co. ("Dixie News") and the News Group, which purchased Dixie
News in 1994. His latest position at News Group was Vice President of operations
for the distribution centers in Charlotte and Winston-Salem, North Carolina, and
Johnston City, Tennessee.
Timothy A. Braswell has been a director of the Company since it
commenced operations in May 1995. He established Braswell Investment Company, a
consultant and broker of wholesale magazine businesses in 1994 and is its owner.
For more than five years prior thereto, Mr. Braswell was the principal owner and
chief executive officer of City News Co. and Dixie News Co., each of which is a
wholesale periodical company.
Harry L. "Terry" Franc, III, has been a director of the Company since
it commenced operations in May 1995. Mr. Franc is one of the founders of Bridge
Information Systems, Inc., a St. Louis, Missouri-based provider of information
services to the securities industry ("BIS") and of BIS's subsidiary, Bridge
Trading Company, a registered broker-dealer and member of the New York Stock
Exchange ("BTC"). For more than 20 years, Mr. Franc has served as a director and
an Executive Vice President of BIS and an Executive Vice President of BTC.
Aron Katzman has served as a director of the Company since it commenced
operations in May 1995. Mr. Katzman is the President of New Legends, Inc., one
of St. Louis' leading country club/residential communities. For more than five
years prior to May 1994, when it was sold, Mr. Katzman served as the Chairman
and Chief Executive Officer of Roman Company, a manufacturer and distributor of
fashion custom jewelry. Mr. Katzman is a member of the board of directors of
Phonetel Technologies, an American Stock Exchange listed company.
Randall S. Minix has served as a director of the Company since it
commenced operations in May 1995. For more than five years, Mr. Minix has been
the managing partner of Minix, Morgan & Company, L.L.P., an independent
accounting firm headquartered in Greensboro, North Carolina.
29
<PAGE>
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.
The Board of Directors of the Company has established an Audit
Committee, a Compensation Committee, a Finance Committee and an Acquisition
Committee. The Audit Committee is comprised of two non-employee directors,
presently Messrs. Minix and Katzman, and has the responsibility of recommending
the firm that will serve as the Company's independent auditors, reviewing the
scope and results of the audit and services provided by the Company's
independent accountants, and meeting with the financial staff of the Company to
review accounting procedures and policies. The Compensation Committee is
comprised of three non-employee directors, presently Messrs. Katzman, Braswell
and Franc, and has been given the responsibility of reviewing the financial
records of the Company to determine overall compensation and benefits for
executive officers of the Company and to establish and administer the policies
which govern employee salaries and benefit plans. The Finance Committee is to be
comprised of two directors. Presently, Mr. Franc serves as one member and the
other position is vacant. The Finance Committee has been given the
responsibility of monitoring the Company's capital structure, reviewing
available alternatives to satisfy the Company's liquidity and capital
requirements and recommending the firm or firms which will provide investment
banking and financial advisory services to the Company. The Company's
Acquisition Committee is comprised of three directors, presently Messrs. Franc,
Braswell and Katzman, and has been given the responsibility of monitoring the
Company's search for attractive acquisition opportunities, consulting with
members of management to review plans and strategies for the achievement of the
Company's external growth objectives and recommending the firm or firms that
will serve as advisors to the Company in connection with the evaluation of
potential business combinations.
30
<PAGE>
Executive Compensation
The following table summarizes information concerning cash and non-cash
compensation paid to or accrued for the benefit of the named executive officers
for all services rendered in all capacities to the Company and its predecessors.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation
Name of Principal Other Annual All Other
Position Year Salary Bonus Compensation(a) Compensation
-------- ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
S. Leslie Flegel 1997 $227,500 $78,856 $30,624 $97,542(b)
Chairman and Chief Executive 1996 200,000 26,543 30,995 -
Officer 1995 171,875 - 22,425 -
William H. Lee 1997 $224,830 $30,000 $13,944 -
President and Chief Operating 1996 192,646 - 19,006 -
Officer 1995 145,000 60,000 25,937 -
Dwight L. DeGolia 1997 $140,000 - $11,223 $4,773(b)
Executive Vice President 1996 134,884 - 16,739 -
1995 97,358 - 9,790 -
John P. Watkins 1997 $150,000 - $11,891 -
Chief Administrative Officer and 1996 - - - -
President-Retail Services 1995 - - - -
Robert B. Dixon 1997 $150,000 - $13,907 -
Executive Vice President and 1996 114,000 $ 50,000 5,458 -
President-Periodical Information 1995 36,000 128,500 26,982 -
Management
<FN>
(a) Reflects personal benefits derived by Messrs. Flegel, Lee, DeGolia,
Watkins and Dixon primarily in connection with personal use of Company
automobiles, country club membership dues and life insurance premiums.
In fiscal 1997 the estimated incremental cost to the Company of the use
by Messrs. Flegel, Lee, DeGolia, Watkins and Dixon of Company
automobiles was $10,339, $8,650, $6,090, $7,800 and $8,597,
respectively. In fiscal 1996, such cost was $11,444, $6,234, $6,360,
$-0- and $3,158, respectively. In fiscal 1995, such cost was $10,417,
$8,753, $5,728, $-0- and $-0-, respectively.
In fiscal 1997, the estimated incremental cost to the Company of the
membership dues paid on behalf of Messrs. Flegel, Lee, DeGolia, Watkins
and Dixon was $11,192, $2,239, $5,133, $3,330 and $5,310, respectively.
In fiscal 1996, such cost was $11,503, $4,738, $4,751, $-0- and $2,300,
respectively. In fiscal 1995, such cost was $8,212, $4,356, $4,751,
$-0-, and $2,300, respectively.
31
<PAGE>
In fiscal 1997, the estimated incremental cost to the Company of life
insurance premiums paid on behalf of Messrs. Flegel, Lee, DeGolia,
Watkins and Dixon was $9,093, $3,056, $-0-, $761 and $-0-,
respectively. In fiscal 1996, such cost was $8,048, $8,033, $5,628,
$-0-, and $-0-, respectively. No life insurance premiums were paid on
behalf of the officers in fiscal 1995.
(b) Represents compensation awarded by the Company and used to repay
certain indebtedness of the named executive officer to a predecessor of
the Company incurred in connection with subchapter S earnings of such
predecessor. If the Over-Allotment Option is exercised, the first
82,000 shares sold as a result thereof will be sold by Mr. Flegel and
the proceeds used to retire the principal balance and accrued interest
of Mr. Flegel's indebtedness to the Company which is in the amount of
approximately $245,000. Accordingly, the Company expects that
compensation of similar type will not be paid in the future to Mr.
Flegel. See "MANAGEMENT-Certain Relationships and Related
Transactions."
</FN>
</TABLE>
Director Compensation
With the exception of Mr. Minix, who is paid in cash, under the
Company's present policy, each director of the Company who is not also an
employee of the Company receives $1,000 payable in shares of Common Stock, for
each meeting of the Board of Directors attended. Directors are also entitled to
be reimbursed for expenses incurred by them in attending meetings of the Board
of Directors and its committees.
Employment Agreements with Named Executive Officers.
Pursuant to an agreement effective February 1, 1996, John P. Watkins is
to be employed by the Company for a minimum period of two years as President of
the Retail Services Group and Chief Administrative Officer. As compensation for
services rendered to the Company, the agreement provides for Mr. Watkins to
receive an annual base salary of $150,000. In addition, Mr. Watkins is eligible
to receive a pay performance bonus of up to 50% of his base salary in an amount
which is determined by reference to specified criteria including total revenue,
net income and stock performance. Mr. Watkins has agreed to refrain from
disclosing information confidential to the Company or engaging, directly or
indirectly, in activities competitive to the Company during the term of his
employment and for two years thereafter.
32
<PAGE>
Under the terms of a written agreement with the Company, Dwight L.
DeGolia has agreed to refrain from disclosing information confidential to the
Company or engaging directly or indirectly, in any activity which is competitive
with the business of the Company during the term of his employment and for two
years thereafter.
The Company is required as a condition to consummation of this offering
to enter into employment agreements with S. Leslie Flegel, William H. Lee and W.
Brian Rodgers effective as of the date of this Prospectus. Under the agreements,
which expire January 31, 1999, (subject to renewal), Mr. Flegel will serve as
the Chairman of the Board and Chief Executive Officer of the Company in exchange
for annual base compensation of $255,000, Mr. Lee will serve as President and
Chief Operating Officer of the Company in exchange for annual base compensation
of $240,573, and W. Brian Rodgers will serve as Chief Financial Officer of the
Company in exchange for annual base compensation of $100,000, subject to annual
adjustment by the Compensation Committee of the Board of Directors (the "Base
Compensation"). In the event the employment of any such person with the Company
is terminated for reasons other than for cause, permanent disability or death or
there occurs a significant reduction in the position, duties or responsibilities
thereof (a "Termination") within two years following a "Change of Control" (as
defined in the agreement and which does not include this offering), the
discharged person will be entitled to an additional bonus of 300% of the Base
Compensation payable in the fiscal year in which such Termination occurs. Such
person also will agree to refrain from disclosing information confidential to
the Company or engaging, directly or indirectly, in the rendition of services
competitive with those offered by the Company during the term of his employment
agreement and for two years thereafter, without the prior written consent of the
Company.
In addition, all employees, including named executive officers
are eligible to receive a portion of a bonus pool funded by the Company in
an amount equal to 8% of pretax income if such pretax income is equal to
budgeted pretax income, plus 10% of any pretax income which exceeds budgeted
pretax income but is less than or equal to 150% of budgeted pretax income, plus
12% of any pretax income which exceeds 150% of budgeted pretax income. The
amount received by each participant is determined on a discretionary basis by
Messrs. Flegel and Lee subject to the approval of the Board of Directors.
Certain Relationships and Related Transactions.
From time to time, the Company and its predecessors have engaged in
various transactions with its directors, executive officers and other affiliated
parties. The following paragraphs summarize certain information concerning such
transactions and relationships which have occurred during the past two fiscal
years or which are presently proposed.
33
<PAGE>
Predecessor Transactions
S. Leslie Flegel, Chairman and Chief Executive Officer of the Company
and Dwight L. DeGolia, Executive Vice President of the Company, have from time
to time received cash advances from DISC, a subchapter S predecessor of the
Company with respect to distribution of the Subchapter S earnings of such
corporation. The largest aggregate amount of such indebtedness outstanding at
any time since February 1, 1996 was $270,675 and $22,093 and at July 31,
1997, such outstanding balances were $221,485 and $22,093, respectively. All
such advances are evidenced by promissory notes in favor of the Company. Such
notes bear interest at the rate of 7.34% per annum, and are payable in five
equal annual installments.
PMM, a predecessor of the Company incurred a debt to Timothy A.
Braswell, a director of the Company, on March 1, 1991 in the amount of $300,000,
which accrued interest at the rate of 10.00% per annum. The indebtedness matured
on January 1, 1996 and was paid in full on the maturity date.
On June 28, 1991, PMM entered into a written lease with 711 Partnership
in which Mr. William H. Lee, President and Chief Operating Officer of the
Company, is a partner, 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.
Under the terms of a written lease entered into prior to the Company's
acquisition of Dixon's Modern Marketing Concepts, Inc., Robert B. Dixon,
Executive Vice President and President-Periodical Information Management of the
Company, provides the Company with office space in Chicago Heights, Illinois.
The lease provides for annual rent of $36,000 and expired on December 31, 1996.
In fiscal 1996 and 1997, the Company paid Mr. Dixon $36,000 and $36,000,
respectively, in rent.
34
<PAGE>
Company Transactions
Data-Pros, Inc. ("Data-Pros"), a corporation in which Mr. Lee is a
shareholder , provided the Company with data processing services. In fiscal
1996 and 1997, the Company paid Data-Pros $306,751 and $274,893, respectively,
for such services. On January 1, 1997, the Company purchased the assets of
Data-Pros for $45,000.
2532 Investments, Inc., a North Carolina corporation in which Mr. Lee
is a shareholder, has occasionally provided the Company with the use of an
airplane. In fiscal 1996 and 1997, the Company paid 2532 Investments $57,926 and
$0, respectively in consideration for the use of the airplane. During the six
months ended July 31, 1997, the Company paid 2532 Investments $5,200 in
consideration for the use of the airplane.
On March 11, 1996, the Company sold an aggregate of 20,000 shares of
its Preferred Stock in transactions exempt from the registration requirements of
the Securities Act, to Cameron Capital Ltd. ("Cameron"), and Timothy A.
Braswell, Harry L. Franc III , and Aron Katzman, each a director of the
Company. Cameron and Messrs. Braswell, Franc and Katzman purchased 15,000,
2,250, 500 and 2,250 shares, respectively. The Company received payment for the
shares from each of the purchasers in the amount of $100 per share.
In July 1997, the holders of the Company's 1996 Series 7% Convertible
Preferred Stock exchanged all 5,600 outstanding shares for 186,667 shares of
Common Stock at an effective exchange price of $3.00 per share and
non-transferable warrants , expiring in 2000, to purchase 310,710 shares
of Common Stock at an exercise price of $3.00 per share.
In September 1997, the Company issued to Messrs. Katzman, Franc and
Braswell, non-transferable warrants, expiring in 2000, to purchase an
aggregate of 89,289 shares of Common Stock at an exercise price of $3.00 per
share. The Company expects that such warrants will be deemed to have an
aggregate value ranging from $30,000 to $50,000.
James Looman, a shareholder and employee of the Company, provides the
Company with office space in Canton, Ohio, under the terms of a written lease
dated June 1, 1996. The lease provides for annual rent of $24,000. In fiscal
1997, the Company paid Mr. Looman $14,000 in rent.
The terms of the foregoing transactions were not negotiated on an
arms-length basis, but were ratified by a majority of the independent and
disinterested outside directors who had access, at the Company's expense, to the
Company's legal counsel. All future transactions between the Company and its
officers, directors, principal shareholders and affiliates will be approved by a
majority of the independent and disinterested outside directors, who have
access, at the Company's expense, to the Company's legal counsel, and must be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties under similar circumstances.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of September 4,
1997, concerning the beneficial ownership of the Company's Common Stock by: (i)
each person known by the Company to be the beneficial owner of more than five
percent of the outstanding Common Stock, (ii) all directors, (iii) each
executive officer named in the Summary Compensation Table contained in this
Prospectus, and (iv) all directors and executive officers of the Company as a
group. Each person named has sole voting and investment power with respect to
the shares indicated, except as otherwise stated in the notes to the table:
35
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership Number of Shares Beneficial Ownership
Prior to Offering Being Offered(a) After the Offering(a)
----------------- ---------------- ---------------------
Name and Address
of Beneficial Owner Amount Percent Amount Percent
- ------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
S. Leslie Flegel 1,443,471 24.0 82,000(b) 1,361,471 17.0
11644 Lilburn Park Road
St. Louis, Missouri 63146
William H. Lee 1,105,434(c) 18.4 - 1,105,434(c) 13.8
711 Gallimore Dairy Road
High Point, North Carolina 27265
Cameron Capital Ltd. 712,829(d) 11.3 - 717,829(d) 8.9
10 Cavendish Road
Hamilton, HM 19, Bermuda
Timothy A. Braswell 513,262(e) 8.5 - 513,262(e) 6.4
711 Gallimore Dairy Road
High Point, North Carolina 27265
Robert B. Dixon 248,760 4.1 151,884 (f) 96,876 1.2
907 Park Drive
Flossmoor, Illinois 60422
Aron Katzman 170,121(e) 2.8 - 170,121(e) 2.1
10 Layton Terrace
St. Louis, Missouri 63124
Dwight L. DeGolia 152,099 (g) 2.5 - 152,099 (g) 1.9
11644 Lilburn Park Road
St. Louis, Missouri 63146
Harry L. Franc, III 42,167 (h) * - 42,167 (h) *
19 Briarcliff
St. Louis, Missouri 63124
James W. Looman 117,155 (i) 1.9 66,166 50,991 (i) *
2454 Whipple Ave., N.W.
Canton, OH 44708
John P. Watkins 27,521 (j) * - 27,521 (j) *
711 Gallimore Dairy Road
High Point, North Carolina 27265
Randall S. Minix 5,785 * - 5,785 *
5502 White Blossom Drive
Greensboro, North Carolina 27410
All directors and 3,859,231(k) 62.8 233,884 3,625,347(k) 44.5
executive officers
as a group (12 persons)
*Less than 1%
36
<PAGE>
<FN>
(a) These shares will be sold only upon exercise of the Over-Allotment
Option. If the Over-Allotment Option is not exercised in full, the
first 82,000 shares offered will be sold by Mr. Flegel and any
additional shares subject to the Over-Allotment Option will be sold
proportionately by the remaining Selling Shareholders.
(b) All of the proceeds from the sale of such shares will be used to retire
the indebtedness of Mr. Flegel to the Company. Accordingly, the Company
will indirectly receive the proceeds from the sale of these shares.
Mr. Flegel is a director, the Chairman and Chief Executive Officer
of the Company. See "MANAGEMENT."
(c) Includes exercisable options to acquire 9,818 shares of Common Stock at
an exercise price of $2.42 per share.
(d) Includes exercisable warrants to acquire 300,000 shares of Common Stock
at an exercise price of $3.00 per share.
(e) Includes exercisable warrants to acquire 40,180 shares of Common Stock
at an exercise price of $3.00 per share.
(f) Mr. Dixon is the Executive Vice President and President - Periodical
Information Management of the Company. See "MANAGEMENT."
(g) Includes exercisable options to acquire 2,182 shares of Common Stock at
an exercise price of $2.42 per share.
(h) Includes exercisable warrants to acquire 8,930 shares of Common Stock
at an exercise price of $3.00 per share.
(i) Includes exercisable options to acquire 33,057 shares and 1,454 shares
of Common Stock at an exercise price of $5.30 per share and $2.42 per
share, respectively. Until acquired by the Company in 1996, Mr. Looman
was the sole shareholder and chief executive officer of Magazine
Marketing, Inc. After such acquisition, Mr. Looman joined the Company
as Vice-President.
(j) Includes exercisable options to acquire 24,793 shares and 2,727 shares
of Common stock at an exercise price of $5.60 per share and $2.42 per
share, respectively.
(k) Includes exercisable options not listed separately above to acquire
4,000 shares of Common stock at an exercise price of $2.42 per
share.
</FN>
</TABLE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
The Company's Articles of Incorporation (the "Articles") provide for
authorized capital of 18,528,925 shares, consisting of 16,528,925
shares of Common Stock, $0.01 par value per share and 2,000,000 shares of
preferred stock, $0.01 par value per share ("Preferred Stock") . At
September 4, 1997, 6,014,263 shares of Common Stock were outstanding. The
following summary description of the capital stock of the Company is qualified
in its entirety by reference to the Articles.
37
<PAGE>
Common Stock
The holders of Common Stock are entitled to cast one vote for each
share of record on all matters to be voted on by shareholders, including the
election of directors. The Company's Articles (and Bylaws) provide for a
classified Board of Directors with three classes serving staggered three year
terms so that approximately one-third of the directors will be elected at each
annual meeting. This provision could have the effect of delaying, deferring or
preventing a change in control of the Company. Subject to payment or provision
for full cumulative dividends in respect of any outstanding shares of
Preferred Stock , the holders of Common Stock are entitled to receive
dividends when and if declared by the Board of Directors out of legally
available funds. In the event of liquidation, dissolution or winding up of the
affairs of the Company, the holders of the Common Stock are entitled to share
ratably in all remaining assets available for distribution to them after the
payment of liabilities and after provision has been made for each class of
stock, including the Preferred Stock, having preference over the Common Stock.
Holders of shares of Common Stock, as such, have no conversion, preemptive or
other subscription rights, and there are no redemption provisions generally
applicable to the Common Stock. A holder of 91,938 shares of Common Stock has
been granted an option to sell such shares to the Company at a purchase price of
$4.84 per share subject to adjustment and a second holder (who is an officer of
the Company) of 82,644 shares of Common Stock has also been granted a similar
option to such shares at a purchase price of $1.21 per share.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of Preferred
Stock. The Board of Directors has the authority to issue Preferred Stock in one
or more series and to fix the number of shares constituting any such series, the
voting powers, designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions thereof,
including the dividend rights, dividend rate, terms of redemption, redemption
price or prices, conversion and voting rights and liquidation preferences of the
shares constituting any series, without any further vote or action by the
shareholders of the Company. The issuance of Preferred Stock by the Board of
Directors could adversely affect the rights of holders of Common Stock. For
example, issuance of Preferred Stock could result in a series of securities
outstanding that would have preferences over the Common Stock with respect to
dividends and in liquidation and that could (upon conversion or otherwise) enjoy
all of the rights appurtenant to the Common Stock.
The authority possessed by the Board of Director to issue Preferred
Stock could potentially be used to discourage attempts by others to obtain
control of the Company through merger, tender offer, proxy or consent
solicitation or otherwise by making such attempt more difficult to achieve or
more costly. The Board of Directors may issue Preferred Stock without
shareholder approval and with voting rights that could adversely affect the
voting power of holders of Common Stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
The Articles and Bylaws of the Company contain certain provisions
regarding the rights and privileges of shareholders , 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 shareholder to participate in tender offers,
including tender offers at a price above the then current market value of the
Common Stock or over a shareholder's cost basis in the Common Stock, and
inhibiting fluctuations in the market price of the Common Stock that could
result from takeover attempts. These provisions of the Articles and Bylaws are
summarized below.
38
<PAGE>
Size of Board, Election of Directors and Classified Board
The Articles provide that the number of directors shall be fixed from
time to time as provided in the Bylaws. The Bylaws provide for a minimum of
three and a maximum of nine persons to serve on the Board. The number of
directors may be increased or decreased by a resolution adopted by the
affirmative vote of a majority of the Board. The Articles further provide that
the Board may amend the Bylaws by action taken in accordance with such Bylaws,
except to the extent that any matters under the Articles or applicable law are
specifically reserved to the shareholders.
The Bylaws provide that the Board will be divided into three classes of
directors, with the classes to be as nearly equal in number as possible, and one
of each such classes shall be elected each year to serve for a three-year term.
Shareholder Nominations and Proposals
The Company's Bylaws provide for advance notice requirements for
shareholder nominations and proposals at annual meetings of the Company.
Shareholders may nominate directors or submit other proposals only upon written
notice to the Company not less than 120 days nor more than 150 days prior to the
date of the notice to shareholders of the previous year's annual meeting. A
shareholder's notice also must contain certain additional information, as
specified in the Bylaws. The Board may reject any proposals that are not made in
accordance with the procedures set forth in the Bylaws or that are not proper
subjects of shareholder action in accordance with the provisions of applicable
law.
Calling Shareholder Meetings; Action by Shareholders Without a Meeting
Matters to be acted upon by the shareholders at special meetings are
limited to those which are specified in the notice thereof. A special meeting of
shareholders may be called by the Board of Directors, the Chairman or the
President of the Company or at the request in writing of shareholders holding
at least ten percent (10%) of the outstanding shares entitled to vote at such
meeting . As required by Missouri law, the Bylaws provide that any action by
written consent of shareholders in lieu of a meeting must be signed by the
holders of all outstanding shares of Common Stock.
The foregoing provisions contained in the Articles and Bylaws are
designed in part to make it more difficult and time consuming to obtain majority
control of the Board of Directors or otherwise to bring a matter before
shareholders without the Board's consent, and therefore to reduce the
vulnerability of the Company to an unsolicited takeover proposal. These
provisions are designed to enable the Company to develop its business in a
manner which will foster its long-term growth without the threat of a takeover
not deemed by the Board to be in the best interests of the Company and its
shareholders, and to reduce, to the extent practicable, the potential disruption
entailed by such a threat. However, these provisions may have an adverse effect
on the ability of shareholders to influence the governance of the Company and
the possibility of shareholders receiving a premium above the market price for
their securities from a potential acquirer who is unfriendly to management.
39
<PAGE>
Indemnification of Directors and Officers
Sections 351.355(1) and (2) of The General and Business Corporation Law
of the State of Missouri provide that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful, except that, in the case of an action or suit by or in the right of
the corporation, the corporation may not indemnify such persons against
judgments and fines and no person shall be indemnified as to any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of the person's duty to the
corporation, unless and only to the extent that the court in which the action or
suit was brought determines upon application that such person is fairly and
reasonably entitled to indemnity for proper expenses. Section 351.355(3)
provides that, to the extent that a director, officer, employee or agent of the
corporation has been successful in the defense of any such action, suit or
proceeding or in defense of any claim, issue or matter therein, the person shall
be indemnified against expenses, including attorney's fees, actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Section 351.355(7) provides that a corporation may provide
additional indemnification to any person indemnifiable under subsection (1) of
(2), provided such additional indemnification is authorized by the corporation's
articles of incorporation or an amendment thereto or by a shareholder- approved
bylaw or agreement, and provided further that no person shall thereby be
indemnified against conduct which was finally adjudged to have been knowingly
fraudulent, deliberately dishonest or willful misconduct or which involves an
accounting for profits pursuant to Section 16(b) of the Exchange Act. Paragraph
9 of the Articles of Incorporation of the Company permits the Company to enter
into agreements with its directors, officers, employees and agents to provide
such indemnification as deemed appropriate. Paragraph 9 also provides that the
Company may extend to its directors and executive officers such indemnification
and additional indemnification.
The Company has entered into an indemnification agreements with certain
of its directors and officers. The form of indemnity agreement provides that
each such person will be indemnified to the full extent permitted by applicable
law against all expenses (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement of any threatened, pending or completed
action, suit or proceeding, on account of his services as a director and officer
of the Company or any other company or enterprise in which he is serving at the
request of the Company, or as a guarantor of any debt of the Company. To the
extent the indemnification provided under the agreement exceeds that permitted
by applicable law, indemnification may be unenforceable or may be limited to the
extent it is found by a court of competent jurisdiction to be contrary to public
policy.
The Company may procure and maintain a policy of insurance under which
the directors and officers of the Company will be insured, subject to the limits
of the policy, against certain losses arising from claims made against such
directors and officers by reason of any acts or omissions covered under such
policy in their respective capacities as directors or officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
40
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
8,014,263 shares of Common Stock. Of the shares, approximately 3,696,001
shares, including those offered for sale in this offering, will be tradeable
without restriction under the Securities Act. The remaining 4,318,262
shares of Common Stock held by existing shareholders are "restricted" within the
meaning of Rule 144. Subject to compliance with the provisions of Rule 144, all
of such shares presently are eligible for sale to the public, notwithstanding
the fact that such shares have not been registered under the Securities Act.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one year but less than two
years, will be entitled to sell in any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
common stock (approximately 80,142 shares immediately after this offering) or
(ii) the average weekly trading volume during the four calendar weeks
immediately preceding the date on which notice of the sales is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale and who has beneficially
owned his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
In accordance with the provisions of an agreement which each director,
executive officer and holder of more than 5% of the Common Stock must execute
and deliver to the Representative as a condition to the consummation of this
offering, certain restrictions prohibiting the sale of the 4,689,217
shares of Common Stock beneficially held by such persons will be imposed. The
restrictions imposed by these agreements will remain in effect for a period of
12 months following the date of this Prospectus and for the 12 months
thereafter, such persons will be prohibited from selling more than twenty-five
percent (25%) of such shares in any calendar quarter . The agreements to be
executed by the existing directors, officers, and shareholders of the Company
will have no effect on the date on which shares become eligible for sale
pursuant to Rule 144.
UNDERWRITING
The Underwriters named below, for whom Donald & Co. Securities Inc. is
acting as representative (the "Representative"), have severally agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase from the
Company a total of 2,000,000 shares of Common Stock. The number of shares of
Common Stock that each Underwriter has agreed to purchase is set forth opposite
its name:
Number of
Underwriter Shares
----------- ------
Donald & Co. Securities Inc.
Total 2,000,000
41
<PAGE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain legal matters by counsel to the
Underwriters and various other conditions precedent, and that the Underwriters
are obligated to purchase all of the shares of Common Stock offered by this
Prospectus (other than the shares of Common Stock covered by the over-allotment
option described below), if any are purchased.
The Company has been advised by the Representative that the
Underwriters propose to offer the shares of Common Stock to the public at the
initial offering price set forth on the cover page of this Prospectus and to
certain dealers (who may include Underwriters) at that price less a concession
not in excess of $ _____ per share of Common Stock. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $_____ per share of
Common Stock to certain other dealers. After the initial public offering, the
offering price and other selling terms may be changed by the Representative.
The Selling Shareholders have granted to the Representative an option,
exercisable during the 45-day period after the date of this Prospectus, to
purchase from the Selling Shareholders at the offering price, less
underwriting discounts and the nonaccountable expense allowance, up to an
aggregate of 300,000 additional shares of Common Stock for the sole purpose of
covering over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has also agreed to pay to the Representative an expense
allowance on a nonaccountable basis equal to 2% of the gross proceeds derived
from the sale of the shares of Common Stock underwritten (including the sale of
any shares of Common Stock subject to the Representative's over-allotment
option), $25,000 of which has been paid to date.
The Company has granted the Representative for a period of three years
from the date hereof the right to have the Representative's designee present at
meetings of the Company's Board of Directors and each of its committees
subject to the right of the Company to exclude such designee under certain
circumstances . Such designee will be entitled to the same notices and
communications sent by the Company to its directors and to attend directors' and
committees' meetings, but will not be entitled to vote thereat. Such designee
will also be entitled to receive the same compensation payable to directors as
members of the Board and its committees and all reasonable expenses in attending
such meetings. The Representative has not named such designee as of the date of
this Prospectus.
42
<PAGE>
In connection with this offering, the Company has agreed to sell to the
Representative, for nominal consideration, the right to purchase up to an
aggregate of 200,000 shares of Common Stock (the "Representative's Warrants").
The Representative's Warrants are exercisable initially at $_____ per share of
Common Stock (the "Exercise Price") for a period of four years commencing one
year from the date hereof. The Representative's Warrants contain antidilution
provisions providing for adjustment of the Exercise Price upon the occurrence of
certain events, including (i) the issuance of Common Stock, or securities
exercisable or convertible into Common Stock, at a price less than the Exercise
Price and (ii) any recapitalization, reclassification, stock dividend, stock
split, stock combination or similar transaction. In addition, the
Representative's Warrants grant to the holders thereof certain demand and "piggy
back" rights for periods of four and six years, respectively, commencing one
year from the date of this Prospectus with respect to the registration under the
Securities Act of the Common Stock issuable upon exercise of the
Representative's Warrants.
The Company has agreed that, upon the consummation of this offering, it
will enter into a two year consulting agreement with the Representative. The
consulting agreement will not require the Representative to devote a specific
amount of time in the performance of its duties thereunder. Pursuant to such
agreement, the Representative will provide the Company with investment banking
and financial consulting services at the rate of $3,000 per month for the
twenty-four months subsequent to the consummation of this offering (an aggregate
of $72,000). Such services will include, among other matters, consulting with
the Company's management with respect to shareholder relations, corporate
expansion and long-term financing. In the event that the Representative
originates a financing or a merger, acquisition, joint venture or other
transaction to which the Company is a party, the Representative will be entitled
to receive a fee in consideration for the origination of such transaction.
The offering price of the Common Stock was determined by negotiations
among the Company and the Representative, based in part upon the market price
for the Common Stock as reported on Nasdaq SmallCap.
In connection with this offering, certain Underwriters and selling
group members (if any) who are qualified market makers on The Nasdaq Stock
Market may engage in passive market making transactions in the Common Stock on
The Nasdaq Stock Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the five business days prior
to the pricing of the offering before the commencement of offers or sales of the
Common Stock. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market maker
43
<PAGE>
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.
LEGAL MATTERS
The validity of the Securities offered hereby and certain other legal
matters in connection with the sale of the shares of Securities offered hereby
will be passed upon for the Company by Gallop, Johnson & Neuman, L.C., St.
Louis, Missouri. Certain legal matters relating to this offering will be passed
upon for the Underwriters by Parker Duryee Rosoff & Haft.
EXPERTS
The financial statements of the Company as of January 31, 1997 and for
the fiscal years ending January 31, 1996 and 1997 included in the Prospectus and
the Registration Statement and the financial schedules included in the
Registration Statement have been so included in reliance on the report of BDO
Seidman, LLP, independent certified public accountants given on the authority of
said Firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange of 1934 as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy or information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy or information statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following Regional Offices of the Commission: 7 World Trade Center, Suite
1500, New York, New York 10048; and Northwestern Atrium Center, Suite 1400, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can be
obtained at prescribed rates from the public reference section of the Commission
at 450 Fifth Street N.W., Washington, D.C. 20549 or retrieved electronically via
the internet at the Commission's web site (http://www.sec.gov). In addition,
reports, proxy statements and other information concerning the Company may be
inspected at the offices of The Nasdaq Stock Market, 1735 K Street N.W.,
Washington, D.C. 20549 on which the Common Stock is quoted. The Company has
filed with the Commission a registration statement on Form SB-2 herein,
(together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended, with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents and each such statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
Commission.
44
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
INDEX TO FINANCIAL STATEMENTS
Page
Unaudited Interim Financial Statements
Unaudited Balance Sheet as of July 31, 1997
Unaudited Statements of Operations for the six
months ended July 31, 1997 and 1996
Unaudited Statements of Cash Flows for the six
months ended July 31, 1997 and 1996
Notes to Unaudited Financial Statements
Audited Financial Statements
Independent Auditors' Report
Balance Sheet as of January 31, 1997
Statements of Operations for the fiscal years
ended January 31, 1997 and 1996
Statements of Stockholders' Equity
Statements of Cash Flows for the fiscal years
ended January 31, 1997 and 1996
Summary of Accounting Policies
Notes to Financial Statements
F-1
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Balance Sheet
July 31, 1997
- --------------------------------------------------------------------------------
Assets (Note 3)
Current
Cash $ 70,718
Trade receivables (net of allowance for doubtful
accounts of $374,289) (Note 5) 15,336,384
Notes receivable - officers (Note 2) 108,530
Other current assets 272,378
- --------------------------------------------------------------------------------
Total Current Assets 15,788,010
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Office equipment and furniture 2,030,361
Less accumulated depreciation and amortization 1,313,535
- --------------------------------------------------------------------------------
Net Office Equipment and Furniture 716,826
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other Assets
Notes receivable - officers (Note 2) 135,048
Goodwill (net of accumulated amortization of $134,267) 3,285,112
Other 154,050
- --------------------------------------------------------------------------------
Total Other Assets 3,574,210
- --------------------------------------------------------------------------------
$ 20,079,046
- --------------------------------------------------------------------------------
See accompanying notes
to financial statements
F-2
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Balance Sheet
July 31, 1997
- -----------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current
Checks issued against future deposits $ 438,188
Accounts payable and accrued expenses 660,306
Due to retailers (Note 6) 167,741
Income tax payable 555,350
Deferred income taxes (Note 7) 72,000
Current maturities of long-term debt (Note 3) 2,213,235
- -----------------------------------------------------------------------------
Total Current Liabilities 4,106,820
- -----------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 3) 10,960,682
- -----------------------------------------------------------------------------
Deferred Income Taxes (Note 7) 242,000
- -----------------------------------------------------------------------------
Total Liabilities 15,309,502
- -----------------------------------------------------------------------------
Commitments and Contingencies
Redeemable Common Stock
111,245 shares outstanding 503,820
- -----------------------------------------------------------------------------
Stockholders' Equity
Common Stock, $.01 par - shares authorized
20,000,000; outstanding 7,165,953 71,659
Additional paid-in capital 3,292,872
Retained earnings 901,193
- -----------------------------------------------------------------------------
Total Stockholders' Equity 4,265,724
- -----------------------------------------------------------------------------
$20,079,046
See accompanying notes
to financial statements
F-3
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Statements of Operations
<TABLE>
<CAPTION>
Six Months Ended July 31, 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Service Revenues $ 5,459,668 $ 2,633,958
Merchandise Revenues 8,348 124,540
- ----------------------------------------------------------------------------------------------
5,468,016 2,758,498
- ----------------------------------------------------------------------------------------------
Cost of Service Revenues 2,851,857 2,351,092
Cost of Merchandise Sold 32,720 11,254
- ----------------------------------------------------------------------------------------------
2,884,577 2,362,346
- ----------------------------------------------------------------------------------------------
Gross Profit 2,583,439 396,152
Selling, General and Administrative Expense 1,062,128 1,671,502
- ----------------------------------------------------------------------------------------------
Operating Income (Loss) 1,521,311 (1,275,350)
- ----------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 13,662 16,240
Interest expense (415,750) (114,178)
Other (40,625) (10,715)
- ----------------------------------------------------------------------------------------------
Total Other Income (Expense) (442,713) (108,653)
- ----------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 1,078,598 (1,384,003)
Income Tax (Expense) Benefit (Note 7) (489,000) 478,463
- ----------------------------------------------------------------------------------------------
Net Income (Loss) $ 589,598 $ (905,540)
- ----------------------------------------------------------------------------------------------
Earnings (Loss) per Share - Primary and Fully
Diluted $ 0.07 $ (0.14)
- ----------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Primary and
Fully Diluted 7,087,838 6,463,909
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
to financial statements
F-4
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
Unaudited Statements of Cash Flows
<CAPTION>
Six Months Ended July 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 589,598 $ (905,540)
Adjustments to reconcile net income to
cash used in operating activities:
Depreciation and amortization 184,851 98,812
Provision for losses on accounts receivable 38,672 (35,394)
Impairment of investment in limited partnership 10,000 10,000
Loss on disposition of assets 1,338 -
Increase in cash surrender value of life insurance (33,743) -
Deferred income taxes (116,000) (114,191)
Services received in exchange for Common Stock 8,000 -
Changes in assets and liabilities:
Increase in accounts receivable (1,855,845) (975,001)
Decrease (increase) in other assets 51,739 (557,556)
Decrease in checks issued against future deposits (2,787,840) -
Increase (decrease) in accounts payable and accrued expenses 399,071 (573,797)
(Decrease) increase in amounts due customers (31,834) 2,098
- --------------------------------------------------------------------------------------------------------------------------
Cash Used in Operating Activities (3,541,633) (3,050,569)
- --------------------------------------------------------------------------------------------------------------------------
Investing Activities
Acquisition of Mike Kessler and Associates, Inc., net of cash acquired (349,777) -
Acquisition of Magazine Marketing, Inc. - (275,000)
Loan to affiliate (5,820) -
Loans to officers (10,000) -
Collections from related party - 22,000
Collections on notes receivable - 32,475
Proceeds from sale of fixed assets 2,000 -
Proceeds from surrender of life insurance policies 83,959 -
Capital expenditures (125,521) (115,360)
- --------------------------------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (405,159) (335,885)
- --------------------------------------------------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of Common Stock - 30,000
Proceeds from issuance of Preferred Stock - 1,922,075
Borrowings under credit facility 17,218,000 281,318
Principal payments on credit facility (13,393,000) (62,420)
Borrowings under short-term debt agreements - 2,076,000
Repayments under short-term debt agreements (34,098) (325,000)
Registration costs (58,310) -
Preferred Stock dividends (3) -
- --------------------------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 3,732,589 3,921,973
- --------------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash (214,203) 535,519
Cash, beginning of period 284,921 23,828
- --------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 70,718 $ 559,347
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes
to financial statements
F-5
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
- --------------------------------------------------------------------------------
1. Unaudited Financial
Statements In the opinion of management, the unaudited
financial information as of July 31, 1997
contained herein reflects all adjustments
(consisting only of normal recurring adjustments)
necessary to fairly present such information in
accordance with generally accepted accounting
principles. The results of operations for the six
months ended July 31, 1997 are not necessarily
indicative of the results to be expected for the
entire year.
2. Related Party
Transactions The Company purchased $174,000 in data processing
services from an employment service company owned
by certain officers of the Company during the six
months ended July 31, 1996. The Company acquired
this employment service company for $45,000 on
January 1, 1997.
One of the Company's stockholders also owns a
majority of the stock of FMG, Inc., primarily an
investing company. At July 31, 1996, the Company
had a receivable from FMG of $31,171 at prime
plus .5%. The receivable was collected in full on
November 5, 1996.
The Company currently leases certain office space
from businesses controlled by stockholders of the
Company. Amounts paid for the office space were
approximately $108,000 and $95,000 for the six
months ended July 31, 1997 and 1996,
respectively. The Company occasionally charters
an airplane owned by a partnership in which one
of the Company's stockholders owns an interest.
Amounts paid to the partnership were $5,200 and
$0 for the six months ended July 31, 1997 and
1996, respectively.
Certain officers of the company, have from time
to time, received cash advances from the Company.
The officers executed promissory notes in favor
of the Company in the aggregate amounts of
$243,578. Such notes bear interest at the rate of
7.34% per annum.
F-6
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
3. Long-term Long-term debt consists of:
Debt and Revolving
Credit Facility
July 31, 1997
----------------------------------------------------
Revolving Credit Facility $ 10,949,000
Note payable to former owner of
Mike Kessler and Associates,
Inc., payable in full on January
5, 1998, interest at 6.25%,
secured by a letter of credit
for $2,231,912 for the benefit
of the former owner 2,150,000
Unsecured note payable to
stockholder (former owner of
Magazine Marketing, Inc.),
non-interest bearing, payable in
eight quarterly installments of
$10,000, discounted based on the
Company's effective borrowing
rate 28,664
Term note payable in monthly
installments of $629 through
November 1999, collateralized by
an automobile 15,970
Obligations under capital lease 30,283
----------------------------------------------------
Total Long-term Debt 13,173,917
Less current maturities 2,213,235
----------------------------------------------------
Long-term Debt $ 10,960,682
----------------------------------------------------
F-7
<PAGE>
The Company has an agreement providing for a
revolving loan up to $12,500,000. The bank has the
right to terminate the agreement upon not less than
thirteen months prior written notice. Borrowings
bear interest at a rate related to the monthly LIBOR
index rate plus a percentage ranging from 2.5% to
3.5%, depending upon the ratio of funded debt to
earnings before interest, taxes, depreciation and
amortization (effectively 9.1875% at July 31, 1997).
Borrowings are secured by personal guarantees of
Messrs. S. Leslie Flegel and William H. Lee and
their spouses and by a security interest in
substantially all the Company's assets including
receivables, inventory, equipment, goods and
fixtures, software, contract rights, notes, and
general intangibles.
The revolving loan agreement requires the Company to
maintain certain ratios and a specified level of net
worth, restricts payment of dividends, and limits
additional indebtedness. The Company was in
compliance with such ratios at July 31, 1997.
4. Supplemental Cash
Flow Information Supplemental information on interest and income
taxes paid is as follows:
Six Months Ended July 31, 1997 1996
----------------------------------------------------
Interest Paid $ 359,000 $112,000
Income Taxes Paid (Refunded) $(122,000) $286,000
----------------------------------------------------
F-8
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
On February 28, 1997, 7,721 shares of Common Stock
were issued as a dividend to the Preferred
Stockholders.
5. Advance Pay
Program The Company has established an Advance Pay Program.
Under this program the Company advances an agreed
upon percentage of the incentive payments otherwise
due the retailer from magazine publishers upon
quarterly submission of claims for such payments.
The claims otherwise due the retailer become due the
Company. Included in trade receivables at July 31,
1997 is $11,159,322 due the Company under the
Advance Pay Program (net of $3,782,255 due the
program participants). Income from the program was
approximately $1,838,000 and $483,000 during the six
months ended July 31, 1997 and 1996, respectively.
6. Due to Retailers The Company has arrangements with certain of its
customers whereby the Company is authorized to
collect and deposit in its own accounts, checks
payable to its customers for incentive payments. The
Company retains the service revenue related to such
payments and pays the customer the difference. The
Company owes retailers $167,741 at July 31, 1997
under such arrangements.
7. Income Taxes Provision for federal and state income taxes
(benefit) in the statements of operations consist of
the following components:
Six Months Ended July 31, 1997 1996
----------------------------------------------------
Current
Federal $482,000 $(295,463)
State 123,000 (110,000)
----------------------------------------------------
Total Current 605,000 (405,463)
----------------------------------------------------
Deferred
Federal (93,000) (53,000)
State (23,000) (20,000)
----------------------------------------------------
Total Deferred (116,000) (73,000)
----------------------------------------------------
Total Income Tax (Benefit)
Expense $489,000 $(478,463)
----------------------------------------------------
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of
the assets and liabilities for financial reporting
purposes and the amounts used for income tax
purposes. The sources of the temporary differences
and their effect on deferred taxes are as follows:
July 31, 1997
----------------------------------------------------
Deferred Tax Assets
Allowance for doubtful accounts $ 146,000
Deferred compensation 22,000
Other 13,000
----------------------------------------------------
F-9
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
----------------------------------------------------
Total Deferred Tax Assets 181,000
----------------------------------------------------
Deferred Tax Liabilities
Income not previously taxed
under cash basis of accounting
for income tax purposes 455,000
Depreciation 25,000
Other 15,000
----------------------------------------------------
Total Deferred Tax Liabilities 495,000
----------------------------------------------------
Net Deferred Tax Liability 314,000
----------------------------------------------------
Classified as:
Current 72,000
Non-current 242,000
----------------------------------------------------
Net Deferred Tax Liability $ 314,000
----------------------------------------------------
F-10
<PAGE>
The following summary reconciles income taxes at the
maximum federal statutory rate with the effective
rate for the first quarters of fiscal 1998 and 1997:
Six Months Ended July 31, 1997 1996
----------------------------------------------------
Income tax expense (benefit)
at statutory rate $ 367,000 $(470,000)
State income tax expense
(benefit), net of federal
income tax benefit 80,000 (58,000)
Non-deductible meals and
entertainment 10,000 13,000
Non-deductible goodwill
amortization 21,000 3,000
Non-deductible officers'
life insurance 2,000 14,000
Other, net 9,000 19,537
----------------------------------------------------
Income Tax Expense (Benefit) $ 489,000 $(478,463)
----------------------------------------------------
8. Business
Combinations On May 30, 1997, the Company acquired all of the
stock of Mike Kessler and Associates, Inc. (MKA) for
$2,500,000 of which $350,000 was paid upon closing.
The balance is due January 5, 1998 with interest at
6.25%. Wachovia Bank of North Carolina, N.A. issued
a standby letter of credit for $2,231,912 for the
benefit of the former owner of MKA covering the
period from May 30, 1997 through January 31, 1998.
The seller operated MKA as a business engaged in the
collection of retail display allowances for retail
store chains. The Company has continued servicing
MKA's customer base.
F-11
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Unaudited Financial Statements
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair market value.
Results of operations have been included as of the
effective date of the transaction. The purchase
price exceeds the fair value of the assets acquired
in the amount of $2,324,346.
9. Preferred Stock In July 1997, the Company exchanged all 5,600
outstanding shares of the Company's 1996 Series 7%
Convertible Preferred Stock for an aggregate of
225,867 shares of Common Stock and non-transferable
warrants ,expiring in 2000, to purchase
375,959 shares of Common Stock at an exercise price
of $2.48 per share. Such exchange resulted in a
constructive dividend of $109,937 which was reported
in the fiscal quarter ending July 31, 1997.
10. Reverse Stock
Split On July 1, 1997, the Company's shareholders approved
a proposal which gave the Board of Directors the
authority to execute a 1 for 1.21 reverse stock
split. As of the financial statement report date,
the Board of Directors has not effected the reverse
stock split.
11. Earnings Per
Share In calculating earnings per share, net income for
the six months ended July 31, 1997 was reduced by a
constructive dividend of $109,937, which resulted
from the exchange of all 5,600 outstanding shares of
Preferred Stock for 225,867 shares of Common Stock
and non-transferable warrants, expiring in 2000,to
purchase 375,959 shares of Common Stock at an
exercise price of $2.48 per share.
12. Subsequent Events In September 1997, the Company issued to Aron
Katzman, Harry L. Franc III and Timothy A. Braswell,
each a director of the Company, non-transferable
warrants ,expiring in 2000, to purchase an
aggregate of 108,041 shares of Common Stock at an
exercise price of $2.48 per share. Although the
effect of this transaction will be reported in the
third quarter of fiscal 1998, the Company expects
that such warrants will be deemed to have an
aggregate value ranging from $30,000 to $50,000.
On August 4, 1997, the Company filed a preliminary
registration statement with the Securities and
Exchange Commission. This statement is being filed
for the purpose of selling approximately 2,000,000
shares of Common Stock after giving effect to the
proposed 1 for 1.21 reverse stock split. The Company
anticipates the aggregate selling price of all the
securities to approximate $8,000,000. The proposed
issue date of these securities is expected to be in
October, 1997.
F-12
<PAGE>
Independent Auditors' Report
Board of Directors
The Source Information Management Company
St. Louis, Missouri
We have audited the balance sheet of The Source Information Management Company
as of January 31, 1997 and the related statements of operations, stockholders'
equity and cash flows for each of the two years in the period ended January 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Source Information
Management Company at January 31, 1997 and the results of its operations and its
cash flows for each of the two years in the period ended January 31, 1997 in
conformity with generally accepted accounting principles.
BDO Seidman, LLP
St. Louis, Missouri
March 27, 1997
F-13
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Balance Sheet
January 31, 1997
- --------------------------------------------------------------------------------
Assets (Note 4)
Current
Cash $ 284,921
Trade receivables (net of allowance for doubtful
accounts of $323,587) (Note 11) 12,922,738
Income taxes receivable (Note 8) 171,305
Notes receivable - officers (Notes 1 and 2) 58,395
Other current assets 87,306
- --------------------------------------------------------------------------------
Total Current Assets 13,524,665
- --------------------------------------------------------------------------------
Office equipment and furniture (Note 5) 1,823,004
Less accumulated depreciation and amortization 1,191,668
- --------------------------------------------------------------------------------
Net Office Equipment and Furniture 631,336
- --------------------------------------------------------------------------------
Other Assets
Notes receivable - officers (Notes 1 and 2) 175,183
Goodwill, net of accumulated amortization of
$72,209 (Note 9) 1,022,824
Cash surrender value of life insurance 104,358
Other 111,283
- --------------------------------------------------------------------------------
Total Other Assets 1,413,648
- --------------------------------------------------------------------------------
$ 15,569,649
- --------------------------------------------------------------------------------
See accompanying summary of accounting
policies and notes to financial statements
F-14
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Balance Sheet
January 31, 1997
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current
Revolving Line of Credit (Note 4) $ 7,124,000
Checks issued against future deposits 3,225,668
Accounts payable and accrued expenses 559,441
Due to retailers (Note 12) 199,575
Deferred income taxes (Note 8) 24,000
Current maturities of long-term debt (Note 3) 69,203
- -----------------------------------------------------------------------------
Total Current Liabilities 11,201,887
- -----------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 3) 22,814
- -----------------------------------------------------------------------------
Deferred Income taxes (Note 8) 173,000
- -----------------------------------------------------------------------------
Total Liabilities 11,397,701
- -----------------------------------------------------------------------------
Commitments (Note 5 and 6)
- -----------------------------------------------------------------------------
Redeemable Preferred Stock, $.01 par - shares authorized,
2,000,000; outstanding, 5,600 (Note 10) 522,506
Redeemable Common Stock,
111,245 shares outstanding (Note 13) 503,820
- -----------------------------------------------------------------------------
1,026,326
- -----------------------------------------------------------------------------
Stockholders' Equity
Common Stock, $.01 par - shares authorized,
20,000,000; outstanding, 6,930,233 69,302
Additional paid-in-capital 2,745,180
Retained earnings 331,140
- -----------------------------------------------------------------------------
Total Stockholders' Equity 3,145,622
- -----------------------------------------------------------------------------
$ 15,569,649
See accompanying summary of accounting
policies and notes to financial statements
F-15
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Statements of Operations
Years Ended January 31, 1997 1996
- --------------------------------------------------------------------------------
Service Revenues $ 7,056,270 $ 7,195,176
Merchandise Revenues 242,177 926,008
- --------------------------------------------------------------------------------
7,298,447 8,121,184
- --------------------------------------------------------------------------------
Cost of Service Revenues 4,862,207 3,859,409
Cost of Merchandise Revenues 202,381 549,813
- --------------------------------------------------------------------------------
5,064,588 4,409,222
- --------------------------------------------------------------------------------
Gross Profit 2,233,859 3,711,962
Selling, General and Administrative
Expense (Notes 1,2, 5 and 6) 2,904,372 2,799,841
- --------------------------------------------------------------------------------
Operating Income (Loss) (670,513) 912,121
- --------------------------------------------------------------------------------
Other Income (Expense)
Interest income 30,628 25,403
Interest expense (311,737) (120,427)
Registration expense - (213,666)
Other (28,883) (5,437)
- --------------------------------------------------------------------------------
Total Other Income (Expense) (309,992) (314,127)
- --------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (980,505) 597,994
Income Tax (Benefit) Expense (Note 8) (377,188) 406,000
- --------------------------------------------------------------------------------
Net Income (Loss) $ (603,317) $ 191,994
- --------------------------------------------------------------------------------
Earnings (Loss) per Share - Primary and
Fully Diluted $ (0.09) $ 0.03
- --------------------------------------------------------------------------------
Weighted Average of Shares Outstanding -
Primary and Fully Diluted 6,658,891 6,084,542
- --------------------------------------------------------------------------------
Pro Forma Amounts (unaudited)
Income before income taxes $ 597,994
Provision for income taxes (Note 8) 284,000
- --------------------------------------------------------------------------------
Net Income (unaudited) $ 313,994
- --------------------------------------------------------------------------------
Net Income per share (unaudited) $ 0.05
- --------------------------------------------------------------------------------
See accompanying summary of accounting
policies and notes to financial statements
F-16
<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-17
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Statements of Cash Flows
<CAPTION>
Years Ended January 31, 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ (603,317) $ 191,994
Adjustments to reconcile net cash
used in operating activities:
Depreciation and amortization 246,599 140,622
Loss on disposition of equipment 299 -
Provision for losses on accounts receivable 224,387 (35,149)
Impairment of investment in limited partnership 20,000 20,000
Increase in cash surrender value of life insurance (32,740) (22,696)
Write-off of uncollectible note receivable - 92,063
Shareholder distribution - (27,000)
Deferred income taxes (259,064) (59,000)
Services received in exchange for Common Stock 51,750 -
Changes in assets and liabilities:
Increase in accounts receivable (8,789,885) (1,765,173)
Increase in other assets (230,004) (63,463)
Increase in checks issued against future deposits 3,225,668 -
Increase (decrease) in accounts payable
and accrued expenses (513,110) 107,590
Increase in amounts due customers 116,120 29,137
- --------------------------------------------------------------------------------------------------
Cash Used in Operating Activities (6,543,297) (1,391,075)
- --------------------------------------------------------------------------------------------------
Investing Activities
Acquisition of Magazine Marketing, Inc. (275,000) -
Loans to officers - (33,990)
Collections on notes receivable 29,715 483
Collections from related party 53,171 280,884
Capital expenditures (276,729) (197,331)
- --------------------------------------------------------------------------------------------------
Cash (Used in) Provided by Investing Activities (468,843) 50,136
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements
F-18
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Statements of Cash Flows
<CAPTION>
Years Ended January 31, 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Financing Activities
Proceeds from issuance of Common Stock 30,000 226,125
Proceeds from issuance of Preferred Stock 1,922,075 -
Borrowings under long-term debt agreements 9,791,000 -
Principal payments on long-term debt (2,756,121) (183,387)
Borrowings under short-term debt agreements 2,836,366 2,739,884
Repayments under short-term debt agreements (4,550,081) (1,670,370)
Preferred Stock dividends (6) -
- ------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 7,273,233 1,112,212
- ------------------------------------------------------------------------------------------
Increase (Decrease) in Cash 261,093 (228,727)
Cash, beginning of period 23,828 252,555
- ------------------------------------------------------------------------------------------
Cash, end of period $ 284,921 $ 23,828
- ------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements
F-19
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Basis of
Presentation The financial statements of The Source Information
Management Company reflect the accounts of companies
formerly known as Display Information Systems
Corporation (DISC), Periodical Management & Marketing,
Inc. (PMM) and Dixon's Modern Marketing Concepts, Inc.
and Tri-State Stores, Inc. (MMC). DISC and PMM merged
on February 1, 1995 and the net assets of MMC were
merged on June 15, 1995, as discussed in Note 9.
Business The Source Information Management Company (the Company)
is a provider of merchandise management information and
related services primarily in connection with the
display and marketing of magazines and other
periodicals. The Company assists retailers in
monitoring, documenting, claiming and collecting
incentive payments, primarily from publishers of
periodicals, and performs consulting and other services
in exchange for service revenues. The Company obtains
merchandising revenue from (a) consulting and other
services rendered to clients on other than a commission
basis and (b) the sale, as principal or broker, of
merchandise to the Company's retailer clients for
resale by them.
Concentrations of
Credit Risk Services are provided to mass merchandise, grocery,
convenience and pharmacy stores throughout the United
States and in Eastern Canada. Management periodically
performs credit evaluations of its customers and
generally does not require collateral. At the balance
sheet date, the Company had no concentrated credit risk
with any individual customer.
Revenue
Recognition Service revenues are recognized during the period in
which services are performed. Merchandising revenues
are recognized in the period in which the merchandising
services are provided.
Equipment and
Furniture Equipment and furniture are stated at cost.
Depreciation is computed using the straight-line method
for financial reporting and accelerated methods for
income tax purposes over the estimated useful lives of
5 to 7 years.
Income Taxes Income taxes are calculated using the asset and
liability method specified by Statement of Financial
Accounting Standards No. 109, "Accounting for Income
Taxes."
Goodwill Goodwill represents the excess of the cost of a company
acquired over the fair value of the net assets acquired
which is amortized over 15 years.
Pro Forma
Information Pro forma data is presented for 1996 which reflects a
provision for income taxes as if DISC, an S corporation
prior to the merger discussed in Note 9, had not been
an S corporation in 1996. Pro forma net income per
share for 1996 has been determined by dividing pro
forma net income by the weighted average number of
common shares outstanding during the year.
F-20
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Stock-Based
Compensation The Company grants stock options for a fixed number of
shares to employees with an exercise price greater than
or equal to the fair value of the shares at the date of
grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB
Opinion No. 25). That Opinion requires that
compensation cost related to fixed stock option plans
be recognized only to the extent that the fair value of
the shares at the grant date exceeds the exercise
price. Accordingly, the Company recognizes no
compensation expense for its stock option grants.
In October 1995, the Financial Accounting Standards
Board, issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). SFAS No. 123 allows
companies to continue to account for their stock option
plans in accordance with APB Opinion No. 25, but
encourages the adoption of a new accounting method
based on the estimated fair value of employee stock
option. Pro forma net loss and loss per share,
determined as if the Company had applied the new
method, are disclosed within Note 6.
Accounting
Estimates The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Long-Lived
Assets In March 1995, Statement of Financial Accounting
Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets Disposed
Of" ("SFAS No. 121) was issued. SFAS No. 121 requires
that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an
entity be received for impairment whenever events or
changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. During
fiscal 1997, the Company adopted this statement and
determined that no impairment loss need be recognized
for applicable assets of continuing operations.
Reclassifications Certain 1996 amounts have been reclassified to conform
to the 1997 presentation.
F-21
<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-22
<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-23
<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-24
<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-25
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
Stock Award Plan
In September 1996, the Company adopted The Source
Company Stock Award Plan for all employees and reserved
50,000 shares of Common Stock for such plan. Under the
plan, the stock award committee, appointed by the board
of directors of the Company, shall determine the
employees to whom awards shall be granted.
On September 18, 1996, 10,050 shares of Common Stock
were awarded to certain employees under the plan.
7. Supplemental Supplemental information on interest and income taxes
Cash Flow paid is as follows:
Information
Years Ended January 31, 1997 1996
-------------------------------------------------------
Interest $ 285,000 $ 109,000
Income Taxes $ 264,000 $ 254,000
-------------------------------------------------------
Capital lease obligations of $15,687 and $59,095 were
incurred in 1997 and 1996, respectively, when the
Company entered into leases for new office equipment.
On August 30, 1996, 9,515 shares of common stock were
issued as a dividend to the preferred stockholders as
of that date.
During 1997 the Company issued 100,000 shares and
111,245 shares of common stock in connection with the
acquisitions of Magazine Marketing, Inc. and Readers
Choice, Inc. (Note 9). During 1996 the Company issued
959,389 shares of common stock in connection with the
acquisition of the Company by Periodico, Inc. (Note 9).
8. Income Taxes Provision for federal and state income taxes (benefit)
in the statements of operations consist of the
following components:
Year Ended January 31, 1997 1996
-------------------------------------------------------
Current
Federal $(102,768) $355,000
State (15,356) 110,000
-------------------------------------------------------
Total Current (118,124) 465,000
-------------------------------------------------------
Pro Forma (Unaudited)
Federal (105,000)
State (17,000)
-------------------------------------------------------
Total Pro Forma (122,000)
-------------------------------------------------------
Deferred
Federal (225,386) (46,000)
State (33,678) (13,000)
-------------------------------------------------------
Total Deferred (259,064) (59,000)
-------------------------------------------------------
Total Income Tax (Benefit)
Expense $(377,188) $284,000
-------------------------------------------------------
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of
the assets and liabilities for financial reporting
F-26
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
purposes and the amounts used for income tax purposes.
The sources of the temporary differences and their
effect on deferred taxes are as follows:
January 31, 1997 1996
-------------------------------------------------------
Deferred Tax Assets
Allowance for doubtful
accounts $ 126,000 $ 38,000
Deferred compensation 14,000 -
Other 3,000 -
-------------------------------------------------------
Total Deferred Tax Assets 143,000 38,000
-------------------------------------------------------
Deferred Tax Liabilities
Income not previously taxes
under cash basis of
accounting for income tax
purposes 312,000 446,000
Depreciation 28,000 28,000
-------------------------------------------------------
Total Deferred Tax Liabilities 340,000 474,000
-------------------------------------------------------
Net Deferred Tax Liability 197,000 436,000
-------------------------------------------------------
Classified as:
Current 24,000 110,000
Non-current 173,000 326,000
-------------------------------------------------------
Net Deferred Tax Liability $ 197,000 $436,000
-------------------------------------------------------
The following unaudited summary reconciles income taxes
at the maximum federal statutory rate with the
effective rate for 1997 and the pro forma effective
rate for 1996:
Year Ended January 31, 1997 1996
-------------------------------------------------------
Income tax (benefit) expense
at statutory rate $(333,372) $ 204,000
State income tax (benefit)
expense, net of federal
income tax benefit (80,421) 52,000
Non-deductible meals and
entertainment 35,320 26,000
Non-deductible officers'
life insurance (3,250) 4,300
Non-deductible goodwill
amortization 2,306 2,300
Other, net 2,229 (4,600)
-------------------------------------------------------
Income Tax (Benefit) Expense $(377,188) $284,000
-------------------------------------------------------
F-27
<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 Modern Marketing Concepts, Inc. and
Tri-State Stores, Inc. (MMC) in exchange for 300,000
shares of Common Stock of The Source Company and the
assumption by the Company of all the liabilities of
MMC. The transaction has been accounted for as a
pooling of interests and, accordingly, the Company's
financial statements have been restated for all periods
prior to the acquisition to include the results of
operations, financial position, and cash flows of The
Source Company and MMC.
The S corporation retained earnings of MMC totaling
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-28
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
- --------------------------------------------------------------------------------
The
Source
Company MMC Combined
-------------------------------------------------------------------
February 1 to June 15, 1995
Revenues $2,175,383 $ 435,529 $2,610,912
Net income (loss) $ 96,829 $ (5,609) $ 91,220
-------------------------------------------------------------------
Acquisition of Magazine Marketing, Inc.
On June 28, 1996 the Company acquired all of the stock
of Magazine Marketing, Inc. in exchange for 100,000
shares of Common Stock of the Company and $275,000 in
cash. In addition, the Company shall pay $10,000 at the
end of each quarter for a two year period following the
closing date (or a total of $80,000).
The transaction has been accounted for as a purchase
and, accordingly, the assets and liabilities have been
recorded at fair market value. Results of operations
have been included as of the effective date of the
transaction. The purchase price of the transaction
exceeded the fair value of the assets acquired in the
amount of $704,748 and is being amortized over 15
years.
Acquisition of Readers Choice, Inc.
On June 30, 1996 the Company acquired all of the issued
and outstanding shares of Readers Choice, Inc., a
wholly owned subsidiary of United Magazine Company, in
exchange for 111,245 shares of Common Stock of the
Company. This transaction has been accounted for as a
purchase and accordingly, the assets and liabilities
have been recorded at fair market value. Results of
operations have been included as of the effective date
of the transaction. This transaction did not meet any
of the conditions to be considered a significant
business combination. The purchase price of the
transaction exceeded the fair value of the assets
acquired in the amount of $280,507 and is being
amortized over 15 years.
10. Redeemable
Preferred
Stock The Company has authorized 2,000,000 shares of $.01 par
Preferred Stock. On March 13, 1996 65,000 shares were
designated as 1996 Series 7% Convertible Preferred
Stock. Rights and restrictions on the remaining shares
will be established if, and when, any shares are
issued.
Each share of the 1996 Series 7% Convertible Preferred
Stock entitles its holder to receive an annual
dividend, when and as declared by the Board of
Directors, of $7 per share payable in shares of the
Company's Common Stock; to convert it into shares of
Common Stock; to receive $100 per share in the event of
dissolution, liquidation, or winding up of the Company,
whether voluntary or involuntary; and subject to
certain conditions in the Certificate of Designations,
Preferences and Relative Rights of 1996 Series 7%
Convertible Preferred Stock, may be redeemed at the
option of the holder thereof at a price of $100 per
share within 30 days following the effective date of a
merger or consolidation in which the Company is not the
surviving entity.
F-29
<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.
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-30
<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-31
<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-32
<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-33
<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-34
<PAGE>
No underwriter, dealer, salesperson or
other person has been authorized to give
any information or to make any
representations other than those
contained in this prospectus and, if
given or made, such other information or THE SOURCE INFORMATION
representations must not be relied upon MANAGEMENT COMPANY
as having been authorized by the Company
or any Underwriter. Neither the delivery
of this Prospectus nor any sale made
hereunder shall, under any
circumstances, create any implication
that there has been no change in the
affairs of the Company since the date
hereof or that the information contained 2,000,000 SHARES
herein is correct as of any date
subsequent to the date hereof. This
Prospectus does not constitute an offer COMMON STOCK
to sell or a solicitation of an offer to
buy any securities offered hereby by
anyone in any jurisdiction in which such
offer or solicitation is not authorized
or in which the person making such offer
or solicitation is not qualified to do
so or to anyone to whom it is unlawful
to make such offer or solicitation.
--------------------------------
TABLE OF CONTENTS
Page
Prospectus Summary ............. 3
Risk Factors.................... 7 ---------
Use of Proceeds ................ 12 P R O S P E C T U S
Price Range of Common Stock..... 13 ---------
Dividend Policy................. 13
Capitalization ................. 14
Selected Financial Data ........ 15
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations .................... 16
Business ....................... 21
Management ..................... 26
Principal and Selling
Shareholders .................. 31
Description of Capital
Stock ......................... 33 DONALD & CO.
Certain Provisions of the SECURITIES, INC.
Articles of Incorporation
and Bylaws..................... 33
Shares Eligible for Future
Sale .......................... 35
Underwriting ................... 37
Legal Matters .................. 38
Experts ....................... 38
Available Information .......... 39
Index to Financial
Statements ................... F-1
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Sections 351.355(1) and (2) of The General and Business Corporation Law
of the State of Missouri provide that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful, except that, in the case of an action or suit by or in the right of,
the corporation, the corporation may not indemnify such persons against
judgments and fines and no person shall be indemnified as to any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of the person's duty to the
corporation, unless and only to the extent that the court in which the action or
suit was brought determines upon application that such person is fairly and
reasonably entitled to indemnity for proper expenses. Section 351.355(3)
provides that, to the extent that a director, officer, employee or agent of the
corporation has been successful in the defense of any such action, suit or
proceeding or in defense of any claim, issue or matter therein, the person shall
be indemnified against expenses, including attorney's fees, actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Section 351.355(7) provides that a corporation may provide
additional indemnification to any person indemnifiable under subsection (1) of
(2), provided such additional indemnification is authorized by the corporation's
articles of incorporation or an amendment thereto or by a shareholder-approved
bylaw or agreement, and provided-further that no person shall thereby be
indemnified against conduct which was finally adjudged to have been knowingly
fraudulent, deliberately dishonest or willful misconduct or which involves
an-accounting-for profits pursuant to Section 16(b) of the Exchange Act.
Paragraph 9 of the Articles of Incorporation of the Company permits the Company
to enter into agreements with its directors, officers, employees and agents to
provide such indemnification as deemed appropriate. Paragraph 9 also provides
that the Company may extend to its directors and executive officers such
indemnification and additional indemnification.
The Company has entered into an indemnification agreement with its
directors and certain of its executive officers. The form of indemnity agreement
provides that such persons will be indemnified to the full extent permitted by
applicable law against all expenses (including attorneys' fees), judgments,
fines, penalties and amounts paid in settlement of any threatened, pending or
completed action, suit or proceeding, on account of such person's services as a
director or executive officer of the Company or any other company or enterprise
in which he is serving at the request of the Company, or as a guarantor of any
debt of the Company. To the extent the indemnification provided under the
agreement exceeds that permitted by applicable law, indemnification may be
unenforceable or may be limited to the extent it is found by a court of
competent jurisdiction to be contrary to public policy.
The Company has procured and intends to maintain a policy of insurance
under which the directors and officers of the Company will be insured, subject
to the limits of the policy, against certain losses arising from claims made
against such directors and officers by reason of any acts or omissions covered
under such policy in their respective capacities as directors or officers.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the shares of Preferred Stock offered hereby,
all of which will be paid by the Company:
SEC Registration fee.................................. $ 3,477
NASD Filing fee....................................... 1,508
State securities law compliance....................... 30,000
Listing fees.......................................... 7,500
Transfer agent fees and expenses...................... 5,000
Printing and engraving................................ 75,000
Legal fees and expenses............................... 100,000
Accounting fees and expenses.......................... 50,000
Non-accountable expense allowance..................... 160,000
Miscellaneous......................................... 17,515
--------
Total............................................. $450,000
=======
- ---------------------------
Item 26. Recent Sales of Unregistered Securities
Explanatory Note: The following share and per share data does not
reflect the proposed 1-to-1.21 reverse stock split.
During February of 1996, the Company issued 8,000 shares of Common
Stock to Dennis Mensch for $3.75 per share in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
During March of 1996, the Company issued 2,250, 2,250 and 500 shares of
1996 Series 7% Convertible Preferred Stock for $100 per share to Messrs. Aron
Katzman, Timothy A. Braswell and Harry L. Franc, III pursuant to Section 4(2) of
the Securities Act of 1933. Each share of the 1996 Series 7% Convertible
Preferred Stock entitles its holder to receive an annual dividend, when and as
declared by the Board of Directors, of $7 per share payable in shares of the
Company's Common Stock; to convert it into shares of common stock subject to the
conversion rights described in the Certificate of Designations, Preferences and
Relative Rights of 1996 Series 7% Convertible Preferred Stock (the Certificate);
to receive $100 per share in the event of dissolution, liquidation, or winding
up of the Company, whether voluntary or involuntary; and subject to certain
conditions in the Certificate, may be redeemed at the option of the Company at a
price of $100 per share within 30 days following the effective date of a merger
or consolidation in which the Company is not the surviving entity.
In a series of transactions, taking place in August 1996 and September
1996, exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, the Company issued 5,082 shares of Common Stock to Financial Power Network
in exchange for $21,600 of marketing services.
During June 1996, the Company issued 100,000 shares of Common Stock to
James W. Looman in connection with the purchase of Magazine Marketing, Inc. in a
transaction exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933.
II-2
<PAGE>
During June 1996, the Company issued 111,245 shares of Common Stock to
United Magazine Company in connection with the purchase of Readers Choice, Inc.
in a transaction exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In July, 1997, the Company issued 225,867 shares of Common Stock to the
holders of the Company's 1996 7% Convertible Preferred Stock in exchange for all
of the issued and outstanding shares of such Preferred Stock.
Item 27. Exhibits
Exhibit
Number Description
1.1 Form Underwriting Agreement
2.1 Stock Purchase Agreement dated as of April 24, 1997 among
Michael Kessler, Mike Kessler and Associates, Inc.,
The Source Company and K-Sub, Inc.
2.2 First Amendment to Stock Purchase Agreement dated as of
May 19, 1997, among Michael and Loretta B. Kessler, Mike
Kessler and Associates, Inc. and The Source Company
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
3.3 Amendment to Articles of Incorporation of the Company
4.1 Form of Common Stock Certificate
4.4 Form of Representative's Warrants
4.5 Form of Privately Issued Warrant
5.1 Opinion of Gallop, Johnson & Neuman, L.C.
10.1 Form of Promissory Notes with S. Leslie Flegel and
Dwight DeGolia
10.2 Form of Indemnity Agreement with Officers and Directors
10.3 Lease Agreement dated June 28, 1991 with 711 Gallimore
Partnership
10.6 Lease Agreement dated January 1, 1993 with Robert B. Dixon
10.8 Addendum to the Lease Agreement, dated as of
January 1, 1994, with 711 Gallimore Partnership
10.9 Addendum to the Lease Agreement, dated as of
January 1, 1996, with 711 Gallimore Partnership
10.10 Addendum to the Lease Agreement, dated as of
April 1, 1996, with 711 Gallimore Partnership
10.11 Addendum to the Lease Agreement, dated as of
April 25, 1996, with 711 Gallimore Partnership
10.12 Stock Acquisition Agreement dated June 20, 1996
among James Looman, Magazine Marketing, Inc. and
The Source Company
10.13 $8,700,000 Credit Agreement dated as of November 14,
1996 between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.14 Amendment to Credit Agreement dated December 19, 1996
by and between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.15 Amendment to Credit Agreement dated January 31, 1997
by and between The Source Company and Wachovia Bank of
North Carolina, N.A.
II-3
<PAGE>
10.16 The Source Company Common Stock Award Plan .
10.17 The Source Company Amended and Restated 1995 Incentive Stock
Option Plan.
10.18 Employment Agreement, effective February 1, 1996, with
John P. Watkins
10.19 Employment Agreement dated as of August 30, 1995, with
Robert G. Shupe
10.20 Agreement with Dwight L. DeGolia.
10.21 Front End Management Agreement with Kmart Corporation
10.22 Amendment to Credit Agreement dated July 31, 1997 by and
between The Source Company and Wachovia Bank, N.A.
10.23 Form of Financial Consulting Agreement with Donald & Co.
Securities, Inc. (to be filed by Amendment)
10.24 Amendment to Credit Agreement dated May 29, 1997 by and
between the Source Company and Wachovia Bank of North
Carolina, N.A.
10.25 Form of Employment Agreement with S. Leslie Flegel,
William H. Lee and W. Brian Rodgers
11.1 Statement Regarding Computation of Earnings Per Share
21.1 Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
23.3 Consent of Gallop, Johnson & Neuman, L.C.
(included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page of initial
filing)
27.1 Financial Data Schedule (Filed in EDGAR version only)
Item 28. Undertakings
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) If the issuer relies on Rule 430A under the Securities Act, that
the small business issuer will:
(1) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the small business issuer under Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it
Effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at the time
as the initial bona fide offering of those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Amendment to
Registration Statement to be signed on its behalf by the undersigned, in the
County of St. Louis, State of Missouri, on the 3rd day of October, 1997.
THE SOURCE INFORMATION MANAGEMENT COMPANY
By: /s/ W. Brian Rodgers
W. Brian Rodgers
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ S. Leslie Flegel* Chief Executive October 3, 1997
- ------------------------------- Officer and Chairman
S. Leslie Flegel of the Board
(principal executive
officer)
/s/ W. Brian Rodgers Chief Financial Officer October 3, 1997
- ------------------------------- (principal financial and
W. Brian Rodgers accounting officer)
/s/ William H. Lee* President, Chief Operating October 3, 1997
- ------------------------------- Officer and Director
William H. Lee
/s/ Timothy A. Braswell* Director October 3, 1997
- -------------------------------
Timothy A. Braswell
/s/ Harry L. "Terry" Franc, III* Director October 3, 1997
- -------------------------------
Harry L. "Terry" Franc, III
/s/ Aron Katzman* Director October 3, 1997
- -------------------------------
Aron Katzman
II-5
<PAGE>
/s/ Randall Minix* Director October 3, 1997
- -------------------------------
Randall Minix
- ------------
* By: /s/ W. Brian Rodgers
W. Brian Rodgers, Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------ ----------- ----
1.1 Form of Underwriting Agreement (filed herewith)
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 (filed herewith)
4.5* Form of Privately Issued Warrant
5.1* Opinion of Gallop, Johnson & Neuman, L.C.
10.1(2) Form of Promissory Notes with S. Leslie Flegel and
Dwight DeGolia
10.2(2) Form of Indemnity Agreement with Officers and Directors
10.3(2) Lease Agreement dated June 28, 1991 with 711 Gallimore
Partnership
10.6(2) Lease Agreement dated January 1, 1993 with Robert B.
Dixon
10.8(3) Addendum to the Lease Agreement, dated as of January 1,
1994, with 711 Gallimore Partnership
10.9(3) Addendum to the Lease Agreement, dated as of January 1,
1996, with 711 Gallimore Partnership
10.10(3) Addendum to the Lease Agreement, dated as of April 1,
1996, with 711 Gallimore Partnership
E-1
<PAGE>
10.11(3) Addendum to the Lease Agreement, dated as of April 25,
1996, with 711 Gallimore Partnership
10.12(4) Stock Acquisition Agreement dated June 20, 1996 among
James Looman, Magazine Marketing, Inc. and The Source
Company
10.13(4) $8,700,000 Credit Agreement dated as of November 14,
1996 between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.14(4) Amendment to Credit Agreement dated December 19, 1996
by and between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.15(4) Amendment to Credit Agreement dated January 31, 1997 by
and between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.16(5) The Source Company Common Stock Award Plan.
10.17* The Source Company Amended and Restated 1995 Incentive
Stock Option Plan
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. (filed herewith)
10.24* Amendment to Credit Agreement dated May 29, 1997 by and
between the Source Company and Wachovia Bank of North
Carolina, N.A.
10.25 Form of Employment Agreement with S. Leslie Flegel,
William H. Lee and W. Brian Rodgers (filed herewith)
11.1* Statement Regarding Computation of Earnings Per Share
21.1* Subsidiaries of the Company
23.1* Consent of BDO Seidman, LLP
23.3* Consent of Gallop, Johnson & Neuman, L.C.
(included in Exhibit 5.1)
24.1* Power of Attorney (included on signature page of initial filing)
27.1* Financial Data Schedule
- ----------------------------
*Previously filed
E-2
<PAGE>
(1) Incorporated by reference to Form 8-K, filed on June 13, 1997.
(2) Incorporated by reference to Registration Statement on Form 10-SB (File
no. 0-26238) first filed on June 12, 1995.
(3) Incorporated by reference to Form 10-KSB for the fiscal year ended
January 31, 1996.
(4) Incorporated by reference to Form 10-KSB for the fiscal year ended
January 31, 1997.
(5) Incorporated by reference to Form S-8 (File No. 333-16039) filed on
November 13, 1996, as exhibit 4.4 thereof.
E-3
2,000,000 Shares
The Source Information Management Company
Common Stock
UNDERWRITING AGREEMENT
October , 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"), and the shareholders of the Company named in Schedule II hereto
(collectively the "Selling Shareholders") 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 Selling Shareholders propose to grant to the
Representative the option to purchase up to an additional 300,000 shares of
Common Stock ("Additional Stock"). The Common Stock to be sold by the Company is
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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:
(i) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and amendments thereto,
on Form SB-2 (File No. 333-32733), 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".
(ii) 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
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
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<PAGE>
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.
(iii) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State of
Missouri. 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
than the Subsidiaries.
(iv) 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 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.
3
<PAGE>
(v) 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.
(vi) 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.
(vii) 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 notes 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.
(viii) 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.
(ix) 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.
(x) 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,
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.
(xi) 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
4
<PAGE>
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.
(xii) 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.
(xiii) 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.
(xiv) The Company has all requisite corporate power and
authority to 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.
(xv) All of the issued shares of Common Stock, including the
Additional Stock, have been duly authorized and validly issued and are fully
5
<PAGE>
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 Company has no outstanding capital stock other than the
Common Stock. None of the Certificate of Incorporation, the by-laws, nor any
contract or other instrument contain provisions regarding preemptive rights.
(xvi) 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.
(xvii) 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.
(xviii) 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 (except under the Company's
credit facility in a manner consistent with past practice), (ii) entered into
any material transaction not in the ordinary 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.
(xix) 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, Selling Shareholders
and shareholders who beneficially own five percent (5%) or more of the Company's
outstanding Common Stock.
(xx) 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.
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(xxi) 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.
(xxii) 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.
(xxiii) 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.
(xxiv) 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.
(xxv) 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.
(xxvi) Application for quotation of the Common Stock on The
Nasdaq SmallCap Market and application for listing on the Boston 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:
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<PAGE>
(i) 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.
(ii) 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.
(iii) Such Selling Shareholder has, and at the Additional
Closing Date (as defined in Section 3 hereof), such Selling Shareholder will
have, good and 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.
(iv) 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 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.
(v) 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.
(vi) All information regarding such Selling Shareholder
contained in the Registration Statement and the Prospectus and any amendment or
8
<PAGE>
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 agrees to deliver to the Representative 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 Chase Mellon Shareholder
Services, 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 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
9
<PAGE>
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.
(a) 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.
(b) 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 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".
(c) 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.
(d) 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
10
<PAGE>
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.
(e) 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.
(f) 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.
(g) 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.
(h) 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 twenty percent (120%) 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
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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
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.
(d) 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
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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.
(e) 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.
(f) For a period of 180 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.
(g) 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.
(h) 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.
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(i) 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.
(j) 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.
(k) If any action or proceeding shall be brought by you in
order to 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.
(l) Comply with all registration, filing and reporting
requirements of the Exchange Act which may from time to time be applicable to
the Company.
(m) 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 Boston 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.
(n) 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.
(o) 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.
(p) 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
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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
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.
(q) 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.
(r) 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.
(s) 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.
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(t) 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,
payable at the rate of $3,000 per month in advance of each month for the
twenty-four months subsequent to the Closing Date.
(u) 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 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
not exceeding $14,000 and (ix) the preparation, production and delivery of
plaques and bound volumes.
(b) 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 two percent (2%)
of the gross proceeds received by the Company from the sale of Firm Stock, of
which $25,000 has been paid to date, and the Company will pay the balance on the
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. The Selling Shareholders agree that they will pay to the Representative
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a non-accountable expense allowance equal to two percent (2%) of the gross
proceeds received by such Selling Shareholders from the sale of the Additional
Stock 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
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;
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(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 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 to, the knowledge of such counsel after inquiry, are
fully paid; all the issued shares of Common Stock of the Company are
nonassessable; none of the issued shares of Common Stock of the Company,
including the Additional Stock, nor the Firm Stock are 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, to the knowledge of such
counsel after inquiry, the 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, 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
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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 described as required;
(ix) to the knowledge of such counsel after inquiry,
there are no legal or governmental proceedings pending or, 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 violation of 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
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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.
(c) 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
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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.
(d) 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.
(e) At the Closing Date and Additional Closing Date, as the
case may be, you shall have received a certificate of the Chief Executive
Officer and the Chief Financial 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.
(f) 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 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;
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(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 July 31, 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 July 31,
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,
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
22
<PAGE>
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.
(g) 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.
(h) 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.
(i) 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.
(j) 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.
(k) 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.
(l) At the Additional Closing Date, if any, you shall have
received the favorable opinion of Gallop, Johnson & Newman, L.C. 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, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally or by general equitable principles;
23
<PAGE>
(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) To the knowledge of such counsel after inquiry,
immediately prior to the Additional Closing Date, if any, such Selling
Shareholder had good and valid title to the Additional Stock to be sold 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; and
(v) To the knowledge of such counsel after inquiry,
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.
24
<PAGE>
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.
(m) 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
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 Boston 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
25
<PAGE>
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 7(n) 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 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,
26
<PAGE>
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
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
27
<PAGE>
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
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
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<PAGE>
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 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
29
<PAGE>
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 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.
(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
30
<PAGE>
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.
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 Hanley 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:____________________________________
S. Leslie Flegel, As Attorney-in-Fact,
acting on behalf of each of the
Selling Shareholders named in Schedule
II hereto
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
32
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SCHEDULE I
Underwriters
Donald & Co. Securities Inc.
TOTAL
Number of Shares of Firm Stock
-----------
2,000,000
33
<PAGE>
SCHEDULE II
Number of Shares
Selling Shareholder (1) of Additional Stock (2)
----------------------- -----------------------
S. Leslie Flegel 82,000
Robert B. Dixon 151,884
James W. Looman 66,166
-----------
Total 300,000
(1) Each Selling Shareholder has appointed S. Leslie Flegel and W.
Brian Rodgers 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.
34
REPRESENTATIVE'S WARRANT AGREEMENT (the "Warrant Agreement"),
dated as of October __, 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 October __, 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
public offering (the "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 October __, 1998 until 5:00
p.m., St. Louis, Missouri time, on October __, 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 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 wire transfer, or certified or official bank check (or by
1
<PAGE>
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 surrendering 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 three (3) business days prior to the date specified in the Notice of
Exchange, the date which is three (3) business days after the date of receipt
(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 average market price of a share of Common Stock for the ten (10) trading
days ending 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 to 60,000 of the 200,000
shares of Warrant Stock subject to the Warrants and the current average market
price of a share of Common Stock for the ten trading day period ending 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 five (5) business days thereafter) without
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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 and directors of the Representative.
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.
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:
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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 October __, 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 or certified
mail at least twelve (12) business days prior to the filing of each such
registration statement, to all Holders of the Warrants and/or Warrant Securities
of its intention to do so. If the Holders of the Warrants and/or Warrant
Securities notify the Company in writing not more than ten (10) business days
after receipt of such notice of their desire to include any such securities in
such proposed registration statement, the Company shall afford 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. Furthermore, if the managing underwriter of any such offering
shall advise the Company in writing that, in its opinion, the distribution of
all or a portion of the Warrant Securities requested to be included in the
registration statement concurrently with the securities being registered by the
Company would materially and adversely affect the distribution of such
securities by the Company for its own account, then the Warrant Securities shall
nevertheless be included in such registration statement but withheld from the
market for a period not to exceed sixty (60) days, which period the managing
underwriter reasonably determines as necessary in order to effect the
underwritten public offering.
7.3 Demand Registration.
(a) At any time commencing on October __, 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 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
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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) business 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)
business 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 October __, 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 Holders of their 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 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: (a) The Company shall file a registration statement
as promptly as practicable after receipt of any demand
pursuant to Section 7.3, but in no event later than forty-five
(45) days after receipt of such demand, and shall use its best
efforts to have any registration statements declared effective
at the earliest practicable time, and shall furnish each
Holder desiring to sell Warrant Securities such number of
prospectuses as shall reasonably be requested. Notwithstanding
the foregoing sentence, the Company shall not be obligated to
file a registration statement pursuant to Section 7.3 (i)
during the period when the Warrant Securities are withheld
from the market as set forth in Section 7.2 and (ii) if any
demand pursuant to Section 7.3 is made within ninety (90) days
following the fiscal year end of the Company when the
conditions set forth in Rule 3-01(c) of Regulation S-X are not
met for filings made after forty-five (45) days but within
ninety (90) days of the end of the Company's final year. Upon
the occurrence of the event set forth in Section 7.4(a)(i),
the Company shall file the registration statement as promptly
as practicable after the conclusion of the period when the
Warrant Securities were withheld from the market, but in no
event later than forty-five (45) days after the conclusion of
such period. Upon the occurence of the event set forth in
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Section 7.4(a)(ii), the Company shall file the registration
statement as promptly as practicable after the earlier of the
date when the Company files its annual report on Form 10-K or
10-KSB with the Securities and Exchange Commission or ninety
days (90) days following the fiscal year end of the Company,
but in no event later than forty-five (45) days after the
earlier of such dates.
(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 7.4(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 shall use its best efforts to qualify
or register 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, and further provided that if
any jurisdiction in which the Warrant Securities shall be
qualified shall require that expenses incurred in connection
with the qualification of the securities in that jurisdiction
shall be borne by selling shareholders, then such expenses
shall be payable by the selling shareholders pro rata to the
extent required by such jurisdiction.
(d) To the extent permitted by law, 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.
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(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 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.
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(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.
7.7 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) shall
furnish to the Company information concerning the number of Warrant Securities
held by him and the intended method of disposition of such Warrant Securities,
(ii) 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 (iii) 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.
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
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hereof), including shares held in the Company's treasury and shares of Common
Stock issued upon the 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.
(iv) The reclassification of securities of the
Company other than shares of the Common Stock into securities
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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 conversion or exchange thereof.
(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
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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.
(d) If any options, rights or warrants referred to in
subsection (a) of this Section 8.2, or any convertible or
exchangeable securities referred to in subsection (b) of this
Section 8.2, expire or terminate without exercise or
conversion, as the case may be, then the Exercise Price of the
remaining outstanding Warrants shall be readjusted as if such
options, rights or warrants or convertible or exchangeable
securities, as the case may be, had never been issued.
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 Warrant, the kind and amount of shares of stock and other
securities and property receivable upon such consolidation or merger, by a
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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 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;
(c) Upon the issuance of any shares of
Common Stock pursuant to the Company's Stock Award Plan
described in the prospectus relating to the Public Offering,
if the value attributable to such shares is equal to or
greater than the market value of the Common Stock (based on
the last sales price of the Common Stock on the date of
issuance of such shares);
(d) Upon the grant of options pursuant to
the Company's 1995 Incentive Stock Option Plan described in
the prospectus relating to the Public Offering, if the
exercise price of such options is equal to or greater than the
market value of the Common Stock (based on the last sales
price of the Common Stock on the date of grant of such
options);
(e) Upon the issuance to a non-employee
director of the Company as compensation for attendance at a
Board of Directors meeting of shares of Common Stock having a
market value (based on the last sales price on the date of the
meeting) no greater than $1,000; or
(f) If the amount of said adjustment shall
be less than 2 cents ($.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
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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 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:
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(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 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.
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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 October __, 2004. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until the
close of business on October __, 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 part(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.
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
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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: S. Leslie Flegel
Title: Chairman and Chief Executive Officer
Attest:
- -------------------------------
Alan G. Johnson, Secretary
DONALD & CO. SECURITIES INC.
By:___________________________________
Name: Stephen A. Blum
Title: President
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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
5:00 P.M., ST. LOUIS TIME, OCTOBER ___, 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 October __, 1998 until 5:00 P.M. St. Louis, Missouri
time on October __, 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 October __, 1997 between the
Company and Donald & Co. Securities Inc. (the "Representative's Warrant
Agreement"). Payment of the Exercise Price shall be made by wire transfer, or
certified or official bank check payable to the order of the Company.
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No Warrant may be exercised after 5:00 p.m., St. Louis,
Missouri 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.
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.
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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: S. Leslie Flegel
Title: Chairman and Chief Executive Officer
Attest:
- ----------------------------
Alan G. Johnson, Secretary
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[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 wire transfer,
or a certified or official bank check payable 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)
Signature Guarantee
-----------------------------------
<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)
Signature Guarantee
----------------------------------------
FINANCIAL CONSULTING AGREEMENT
The parties to this Agreement are Donald & Co. Securities Inc., a New
Jersey corporation (the "Consultant"), and The Source Information Management
Company, a Missouri corporation (the "Company"). The Company intends to
undertake a public offering of its securities (the "Offering") and desires to
contract with the Consultant for certain financial services, and the Consultant
is willing to render such services as hereinafter more fully set forth.
THEREFORE, in consideration of the mutual agreements and covenants set
forth in this Agreement, the parties agree as follows:
1. Engagement of the Consultant. The Company hereby engages and retains
the Consultant to render to the Company the financial services described in
Section 2 hereof (the "Financial Services") for the period of two years
commencing on the consummation of the Offering (the "Consulting Period").
2. Description of Financial Services. The Financial Services rendered
by the Consultant hereunder shall consist of consultations with management of
the Company which consultations management may from time to time request during
the term of this Agreement, provided that the Consultant shall not be required
to undertake duties not reasonably within the scope of the financial advisory or
investment banking services contemplated by this Agreement. It is understood and
acknowledged by the parties that the value of the Consultant's advice is not
readily quantifiable, and that the Consultant shall be obligated to render
advice upon the request of the Company, in good faith, but shall not be
obligated to spend any specific amount of time so doing. The Consultant's duties
may include, but will not necessarily be limited to, providing recommendations
concerning the following financial and related matters:
A. Disseminating information about the Company to the investment
community at large;
B. Rendering advice and assistance in connection with the preparation of
annual and interim reports and press releases;
C. Assisting in the Company's financial public relations;
D. Arranging, on behalf of the Company, at appropriate times, meetings
with securities analysts of major regional investment banking firms;
E. Rendering advice with regard to internal operations, including:
1. the formation of corporate goals and their implementation;
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2. the Company's financial structure and its divisions or
subsidiaries;
3. securing, when and if necessary and possible, additional
financing through banks and/or insurance companies; and
4. corporate organization and personnel; and
F. Rendering advise with regard to any of the following corporate finance
matters:
1. changes in the capitalization of the Company;
2. changes in the Company's corporate structure;
3. redistribution of holdings of the Company's stock;
4. offerings of securities in public transactions;
5. sales of securities in private transactions;
6. alternative uses of corporate assets;
7. structure and use of debt; and
8. sales of stock by insiders pursuant to Rule 144 or otherwise.
In addition to the foregoing, the Consultant agrees to furnish
advice to the Company in connection with (i) the acquisition and/or merger of or
with other companies, divestiture or any other similar transaction, or the sale
of the Company itself (or any significant percentage, assets, subsidiaries or
affiliates thereof) (a "Transaction"), and (ii) bank financings or any other
financing from financial institutions (including but not limited to liens of
credit, performance bonds, letters of credit, loans or other financings not
provided for in Paragraph 4 hereof).
3. Payment for Services Rendered. The Company agrees to pay the
Consultant for the Financial Services hereunder the sum of $36,000 per annum;
payable $3,000 per month in advance of each month commencing upon consummation
of the Offering for the twenty four months subsequent to the consummation of the
Offering. In addition, if the Company requests that the Consultant provide
financial services to the Company not contemplated by this Agreement, the
Consultant shall be compensated for such additional financial services in an
amount agreed to by the Consultant and the Company.
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4. Additional Services. (a) In the event that any Transaction is
directly originated by the Consultant during the term of this Agreement, the
Company shall pay fees to the Consultant upon the consummation of such
Transaction as follows:
Consideration Fee
$ -0- to $ 500,000 Minimum fee of $25,000
$ 500,000 to $5,000,000 5% of Consideration
$5,000,000 or more $250,000 plus 2-1/2% of the Consid-
ration in excess of $5,000,000
Notwithstanding anything to the contrary, the Company shall have no
obligation to consummate any Transaction that is originated by the Consultant.
Notwithstanding the provisions of Section 4 hereof, if the Company
identifies the other party and seeks investment banking services to such a
Transaction during the term of this Agreement, the Company shall engage the
Consultant to render investment advisory services and shall pay fees to the
Consultant to be mutually agreed upon.
For the purposes of this Agreement, "Consideration" shall mean the
total market value on the day of closing of stock, cash, assets and all other
property (real or personal) exchanged or received, directly or indirectly by the
Company or any of its security holders in connection with any transaction,
including without limitation any amounts paid by the Company or any person or
entity to holders of warrants, stock purchase rights, straight or convertible
securities of the Company or any affiliate thereof, options or stock
appreciation rights issued by the Company or any affiliate thereof, whether or
not vested, and to holders of any other securities of any kind whatsoever of the
Company, or pursuant to any employment agreement, royalty, consulting agreement,
covenant not to compete, earnout or contingent payment right or similar
arrangement, agreement or understanding, whether oral or written. Any co-broker
retained by the Consultant shall be paid by the Consultant.
In the event the Consultant originates a line of credit with an
institutional lender, the Company and the Consultant will mutually agree on a
satisfactory fee and the terms of payment of such fee; provided, however, that
in the event the Company is introduced to a corporate partner in connection with
a merger, acquisition or financing and a credit line is established directly in
connection with such transaction no later than the closing date thereof, and, in
any case, develops directly as a result of the introduction, the appropriate fee
shall be the amount set forth in the schedule above. In the event the Consultant
introduces the Company to a joint venture partner or customer and sales develop
as a result of the introduction, the Company agrees to pay a fee of ten percent
(10%) of the pre-tax income (before any deduction of interest charges or
expenses) generated directly from this introduction during the first two years
following the date of the first sale. Commission payments shall be paid on the
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15th day of each month following the receipt of customer's payment. In the event
any adjustments are made to the total sales after the commission has been paid,
the Company shall be entitled to an appropriate refund or credit against future
payments due under this Agreement.
(b) Fees and expenses payable to the Consultant with regard to
fairness opinions and evaluations, will be determined by mutual agreement at
such time as the nature and terms of such financing are affirmed.
All fees to be paid pursuant to this Agreement, except as
otherwise specified, are due and payable to the Consultant in cash at the
closing or closings of any transaction specified in this Section 4. In the event
that this Agreement shall not be renewed or if terminated for any reason
notwithstanding any such renewal or termination, the Consultant shall be
entitled to a full fee as provided under this Section 4 for any Transaction for
which the discussions were initiated during the term of this Agreement and which
is consummated within a period of twelve months after non-renewal or termination
of this Agreement.
5. Compensation for Out-of-Pocket Expenses. The Consultant shall be
entitled to reimbursement by the Company of such reasonable, accountable
out-of-pocket expenses as the Consultant may incur in performing Financial
Services requested by the Company under this Agreement. Such reimbursement shall
be in addition to any fees otherwise earned by the Consultant hereunder. Any
expense in excess of $1,000 in any calendar month for which the Consultant shall
be entitled to reimbursement hereunder shall be approved in advance by the
Company.
6. Nonexclusivity of this Agreement. The Company expressly understands
and agrees that the Consultant shall not be prevented or barred from rendering
services of the same nature as, or a similar nature to, those described herein,
or of any nature whatsoever, for or on behalf of any person, firm, corporation
or entity other than the Company. The Consultant understands and agrees that the
Company shall not be prevented or barred from retaining other persons or
entities to provide services of the same nature or similar nature as those
described herein or of any nature whatsoever.
7. Disclaimer of Responsibility for Acts of the Company. The
obligations of the Consultant described in this Agreement consist solely of the
furnishing of information and advice to the Company. In no event shall the
Consultant be required by this Agreement to act as the agent of the Company or
otherwise to represent or make decisions for the Company. All final decisions
with respect to acts of the Company, its subsidiaries or its affiliates, whether
or not made pursuant to or in reliance on information or advice furnished by the
Consultant hereunder, shall be those of the Company or such subsidiaries or
affiliates and the Consultant shall under no circumstances be liable for any
expense incurred or loss suffered by the Company as a consequence of such
decisions. Since the Consultant will be acting on behalf of the Company in
connection with its engagement hereunder, the Company and the Consultant have
entered into a separate indemnification agreement substantially in the form
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attached hereto as Exhibit A and dated the date hereof, providing for the
indemnification of the Consultant by the Company. The Consultant has entered
into this Agreement in reliance on the indemnities set forth in such
indemnification agreement.
8. Termination. The Consultant may terminate this Agreement by giving
notice to the Company, accompanied by the pro-rata share of the payment
described in Section 3 hereof, based on the number of months remaining in the
original term of this Agreement on the effective date of the termination,
without interest. In the event of termination pursuant to this Section 8,
neither party shall have any rights or obligations hereunder after the date of
such termination except that the obligation of the Company to make any payment
required with respect to Additional Financial Services performed by the
Consultant prior to such termination shall continue in effect until such payment
is made.
Any termination pursuant to this Section 8 shall be effective at the
close of business on the first day of the third month following the date of
receipt of notice thereof by the receiving party.
9. Confidentiality. The Consultant will not disclose to any other
person, firm, or corporation, nor use for its own benefit, during or after the
term of this Agreement, any trade secrets or other information designated as
confidential by the Company which is acquired by the Consultant in the course of
performing services hereunder. (A trade secret is information not generally
known to the trade which gives the Company an advantage over its competitors.
Trade secrets can include, by way of example, products or services under
development, production methods and processes, sources of supply, customer lists
and marketing plans.) Any financial advice rendered by the Consultant pursuant
to this Agreement may not be disclosed publicly in any manner without the prior
written approval of the Consultant. Any information, which (i) at or prior to
the time of disclosure by the Company to the Consultant was generally available
to the public through no breach of this Agreement, (ii) was available to the
public on a nonconfidential basis prior to its disclosure by the Company to the
Consultant or (iii) was made available to the public from a third party provided
that such party did not obtain or disseminate such information in breach of any
legal obligation of the Consultant shall not be deemed confidential information
of the Company for purposes hereof.
10. Amendment. No amendment to this Agreement shall be valid unless
such amendment is in writing and is signed by authorized representatives of all
the parties to this Agreement.
11. Waiver. Any of the terms and conditions of this Agreement may be
waived at any time and from time to time in writing by the party entitled to the
benefit thereof, but a waiver in one instance shall not be deemed to constitute
a waiver in any other instance. A failure to enforce any provision of this
Agreement shall not operate as a waiver of the provision or of any other
provision hereof.
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12. Severability. In the event that any provision of this Agreement
shall be held to be invalid, illegal or unenforceable in any circumstances, the
remaining provisions shall nevertheless remain in full force and effect and
shall be construed as if the unenforceable portion or portions were deleted.
13. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York.
14. Notices. All notices, requests, payments, instructions, claims or
other communications hereunder shall be in writing and shall be deemed to be
given or made when delivered by first-class, registered or certified mail to the
following address or addresses or such other address or addresses as the parties
may designate in writing in accordance with this Section:
If to the Company: 11644 Lilburn Park Road
St. Louis, Missouri 63146
Attention: S. Leslie Flegel, Chief Executive Officer
If to the Consultant: Park Avenue Tower
65 East 55th Street, 12th Floor
New York, New York 10022
Attention: Stephen A. Blum, President
15. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns; provided,
however, that this Agreement shall not be binding on or inure to the benefit of
any successor or assign of the Consultant where, as a result of such succession
or assignment, control of the entity which would otherwise succeed to the rights
and obligations of this Agreement is materially different from the control of
the entity having such rights and obligations prior to such succession or
assignment.
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16. Execution in Counterparts. This Agreement may be executed by the
parties in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which when taken together shall
constitute one and the same agreement.
Dated as of October , 1997
THE SOURCE INFORMATION MANAGEMENT
COMPANY
By:
S. Leslie Flegel
Chief Executive Officer
DONALD & CO. SECURITIES INC.
By:
Stephen A. Blum,
President
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__________, 1997
Donald & Co. Securities Inc.
Park Avenue Tower
65 East 55th Street
New York, New York 10022
Attention: Stephen A. Blum
Gentlemen:
In connection with our engagement of Donald & Co. Securities Inc. (the
"Consultant") as our financial advisor and investment banker, we hereby agree to
indemnify and hold the Consultant and its affiliates, and their respective
directors, officers, shareholders, agents and employees of the Consultant
(collectively, the "Indemnified Persons"), harmless from and against any and all
claims, actions, suits, proceedings (including those of shareholders), damages,
liabilities and expenses incurred by any of them (including reasonable fees and
expenses of counsel) which are (A) related to or arise out of (i) any actions
taken or omitted to be taken (including any untrue statements made or any
statements omitted to be made) by us, or (ii) any actions taken or omitted to be
taken by any Indemnified Person in connection with the engagement of the
Consultant hereunder or, (B) otherwise related to or arising out of Consultant's
activities on our behalf under the Consultant's engagement hereunder, and we
shall reimburse any Indemnified Person for all expenses (including the
reasonable fees and expenses of counsel) incurred by such Indemnified Person in
connection with investigating, preparing or defending any such claim, action,
suit or proceeding (collectively a "Claim"), whether or not in connection with
pending or threatened litigation in which any Indemnified Person is a party. We
will not, however, be responsible for any Claim which is finally judicially
determined to have resulted exclusively from the gross negligence or willful
misconduct of any person seeking indemnification hereunder. We further agree
that no Indemnified Person shall have any liability to us for or in connection
with the Consultant's engagement except for any Claim incurred by us solely as a
direct result of any Indemnified Person's gross negligence or willful
misconduct.
We further agree that we will not, without prior written consent of the
Consultant, settle, compromise or consent to the entry of any judgment in any
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pending or threatened Claim in respect of which indemnification may be sought
hereunder (whether or not any Indemnified Person is an actual or potential party
to such Claim), unless such settlement, compromise or consent includes a legally
binding, unconditional, and irrevocable release of each Indemnified Person
hereunder from any and all liability arising out of such Claim. Anything to the
contrary herein notwithstanding, we shall have no indemnification obligations
hereunder in connection with the settlement of any claim without our prior
written consent.
Promptly upon receipt by an Indemnified Person of notice of any
complaint or the assertion or institution of any Claim with respect to which
indemnification is being sought hereunder, such Indemnified Person shall notify
us in writing of such complaint or of such assertion or institution but failure
to so notify us shall not relieve us from any obligation we may have hereunder,
unless and only to the extent such failure results in the forfeiture by us of
substantial rights and defenses, and will not in any event relieve us from any
other obligation or liability we may have to any Indemnified Person otherwise
than under this Agreement. If we so elect or are requested by such Indemnified
Person, we will assume the defense of such Claim, including the employment of
counsel reasonably satisfactory to such Indemnified Person and payment of the
reasonable fees and expenses of such counsel. In the event, however, that such
Indemnified Person reasonably determines in its sole judgment that having common
counsel would present such counsel with a conflict of interest or such
Indemnified Person concludes that there may be legal defenses available to it or
other Indemnified Persons different from or in addition to those available to
us, then such Indemnified Person may employ its own separate counsel to
represent or defend it in any such Claim and we shall pay the reasonable fees
and expenses of such counsel. Notwithstanding anything herein to the contrary,
if we fail timely or diligently to defend, contest, or otherwise protect against
any Claim, the relevant Indemnified Party shall have the right, but not the
obligation, to defend, contest, compromise, settle, assert cross claims or
counterclaims, or otherwise protect against the same, and shall be fully
indemnified by us therefor, including without limitation, for the fees and
expenses of its counsel and all amounts paid as a result of such Claim or the
compromise or settlement thereof. In any Claim in which we assume the defense,
the Indemnified Person shall have the right to participate in such defense and
to retain its own counsel therefor at its own expense.
We agree that if any indemnity sought by an Indemnified Person
hereunder is held by a court to be unavailable for any reason, then (whether or
not the Consultant is the Indemnified Person) we and the Consultant shall
contribute to the Claim for which such indemnity is held unavailable in such
proportion as is appropriate to reflect the relative benefits to us, on the one
hand, and the Consultant on the other, in connection with the Consultant's
engagement hereunder, subject to the limitation that in no event shall the
amount of the Consultant's contribution to such Claim exceed the amount of fees
actually received by the Consultant from us pursuant to the Consultant's
engagement. We hereby agree that the relative benefits to us, on the one hand,
and the Consultant on the other, with respect to the Consultant's engagement
hereunder shall be deemed to be in the same proportion as (a) the total value
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paid or proposed to be paid or received by us or our stockholders as the case
may be, pursuant to the transaction (whether or not consummated) for which the
Consultant is engaged to render services bears to (b) the fee paid or proposed
to be paid to the Consultant in connection with such agreement.
Our indemnity, reimbursement and contribution obligations under this
Agreement shall be in addition to, and shall in no way limit or otherwise
adversely affect any rights that any Indemnified Person may have at law or at
equity.
We hereby consent to personal jurisdiction and service of process and
venue in any court in which any claim for indemnity is brought by any
Indemnified Person.
It is understood that, in connection with the Consultant's engagement,
the Consultant may be engaged to act in one or more additional capacities and
that the terms of the original engagement or any such additional engagement may
be embodied in one or more separate written agreements. The provisions of this
Agreement shall apply to the original engagement, any such additional engagement
and any modification of the original engagement or such additional engagement
and shall remain in full force and effect following the completion or
termination of the Consultant's engagement(s).
Very truly yours,
THE SOURCE INFORMATION
MANAGEMENT COMPANY
By:
S. Leslie Flegel
Chief Executive Officer
Confirmed and Agreed to:
DONALD & CO., SECURITIES INC.
By:
Stephen A. Blum, President
Dated: As of __________, 1997
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EMPLOYMENT AGREEMENT BETWEEN
THE SOURCE INFORMATION MANAGEMENT COMPANY AND
_________________________
This Agreement is entered into as of October ____, 1997, between THE
SOURCE INFORMATION MANAGEMENT COMPANY, a Missouri corporation ("Company"), and
________________ ("EXECUTIVE").
WHEREAS, EXECUTIVE is a founder of the business of the Company and is
presently serving as ________ and _______________________ of the Company and has
made significant contributions to the Company during the term of his employment;
and
WHEREAS, the Company and EXECUTIVE desire that EXECUTIVE continue to be
employed by the Company under the terms and conditions set forth in this
Employment Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties agree as follows:
1. Employment. The Company hereby employs EXECUTIVE, and EXECUTIVE
hereby accepts such employment from the Company, upon the terms and conditions
set forth in this Agreement. EXECUTIVE represents that his 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 EXECUTIVE is a party or by which he may
be bound.
2. Position and Duties of EXECUTIVE. During EXECUTIVE's employment by
the Company, EXECUTIVE shall exercise the authority and perform the duties of
the ________ and _______________________ of the Company. EXECUTIVE shall at all
times faithfully, industriously and to the best of his ability, experience and
talents, perform all of the duties of the aforementioned office and all other
duties described in this Agreement.
3. Term of Employment. The term of EXECUTIVE's employment under this
Agreement shall extend from the date hereof through January 31, 1999 and
thereafter automatically continue for additional one year periods unless
terminated by either EXECUTIVE or the Company as of the expiration of the
initial term or additional terms upon: (a) the giving of sixty (60) days' notice
of termination or (b) in the case of the Company, the payment of termination pay
equal to the level of Base Compensation then payable to EXECUTIVE for a sixty
(60) day period, or any combination of an aggregate of sixty (60) days notice
and termination pay by the Company. This Employment Agreement may also be
terminated at any time prior to the expiration of any term of employment upon
the earlier occurrence of any of the following events:
(a) By mutual written consent of the Company and EXECUTIVE;
(b) Immediately upon EXECUTIVE's death;
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(c) By the Company, upon the permanent total disability of
EXECUTIVE which, for purposes hereof, shall be deemed to have occurred
upon the first anniversary of the date of an event resulting in a
continuing condition which prevents EXECUTIVE from discharging
EXECUTIVE's principal duties hereunder;
(d) By the Company, immediately upon written notice to
EXECUTIVE, for Cause, as hereinafter defined;
(e) By EXECUTIVE, immediately upon at least thirty days'
written notice to Company, in the event of the failure of Company to
maintain Employment Conditions, as hereinafter defined.
The term "Cause" as used in this Agreement shall mean (i) the
conviction of EXECUTIVE of a felony or (ii) the material breach by EXECUTIVE of
any of EXECUTIVE's obligations under this Agreement or any other agreement
between Company and EXECUTIVE.
Notwithstanding the foregoing, an act or event shall not entitle either
party to terminate this Agreement if it is of such a nature that substantially
all detriment otherwise resulting therefrom can be cured and eliminated by
appropriate action, and the offending party causes such action to be taken,
within ten days following written notice thereof from the other party.
The term "Employment Conditions" as used in this Agreement shall mean
any of the following (i) the withdrawal by Company from EXECUTIVE of any
substantive part of EXECUTIVE's responsibilities, duties or authority as
previously discharged or exercised for the benefit of the Company without
EXECUTIVE's consent; (ii) the assignment by Company to EXECUTIVE of substantive
additional duties or responsibilities which are inconsistent with the duties or
responsibilities previously discharged or exercised for the benefit of the
Company, without EXECUTIVE's consent ; (iii) the relocation of EXECUTIVE's
principal place of employment without EXECUTIVE's consent to a place outside the
St. Louis metropolitan area; (iv) the failure of EXECUTIVE to continue in the
office of ________ and _______________ _______ of Company without EXECUTIVE's
consent; (v) the harassment of EXECUTIVE intended, designed or which would have
the foreseeable effect of causing EXECUTIVE to resign or abandon EXECUTIVE's
employment with Company; or (vi) the material breach by Company of this
Agreement or any other agreement to which Company and EXECUTIVE are a party.
4. Compensation.
(a) As compensation for EXECUTIVE's services under the
Agreement and subject to adjustment as provided below, the Company
shall pay EXECUTIVE, commencing on the date hereof and continuing
throughout EXECUTIVE's employment by the Company, an annual base rate
of compensation (the "Base Compensation") of ___
___________________________________ ($_______), which Base Compensation
shall be payable at such intervals as the Company pays its other senior
executive employees, but in any event, not less frequently than
semi-monthly. Each fiscal year (commencing after the conclusion of the
fiscal year ending January 31, 1998), the Compensation Committee of the
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Board of Directors of the Company (the "Board") will set the
EXECUTIVE's Base Compensation for that fiscal year, taking into account
the performance of the EXECUTIVE, the total compensation paid to the
_________ officers of similar companies of comparable size to that of
the Company performing similar duties and having similar authority and
responsibilities and such other factors deemed relevant by the
Committee; provided however that in no event shall such Base
Compensation for any annual period be less than the Base Compensation
set forth for the immediately preceding annual period times a fraction
the numerator of which is the Consumer Price Index for All Urban
Consumers derived from the United States Cities Average for the third
month preceding the month in which the Company's fiscal year is
concluded and the denominator of which is the base index figure of
157.5.
(b) In addition to EXECUTIVE's Base Compensation, EXECUTIVE
shall be entitled to receive a bonus (the "Annual Bonus") each year in
such amount and/or on such basis as the Compensation Committee of the
Company's Board of Directors shall determine to be reasonable and
appropriate based on such criteria as the Compensation Committee shall
have established. EXECUTIVE shall have no vested right to receive an
Annual Bonus and EXECUTIVE agrees that the amount, if any, of the
Annual Bonus shall be in the sole discretion of the Compensation
Committee.
5. Expenses; Fringe Benefits.
(a) The Company will pay directly, or reimburse EXECUTIVE, for
such items of reasonable and necessary expense as are authorized by the
Company and incurred by EXECUTIVE in the interest of the business of
the Company. All such expenses paid by EXECUTIVE will be reimbursed by
the Company upon the presentation by EXECUTIVE of an itemized account
of such expenditures, sufficient to support their deductibility to the
Company for federal income tax purposes (without regard to whether or
not the Company's deduction for such expenses is limited for federal
income tax purposes), within thirty (30) days after the date such
expenses are incurred.
(b) The Company will provide EXECUTIVE with health and life
insurance and other fringe benefits normally accorded the Company's
executive officers (which may entail employee contributions); provided,
however, that the foregoing shall not obligate the Company to continue
any such benefits in force, or to maintain such benefits at their
present standards and levels, at any time as to such class of
employees. EXECUTIVE shall also be entitled to participate in all other
insurance and retirement plans, retirement benefits, death benefits,
salary continuation benefits, stock option plans and other perquisites
and fringe benefits generally available for the senior executive
officers of The Company.
(c) The Company will provide EXECUTIVE with four (4) weeks of
vacation per year of this Agreement.
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6. Covenants of EXECUTIVE. EXECUTIVE covenants to and agrees with the
Company as follows:
(a) Except as required in EXECUTIVE's duties to the Company,
EXECUTIVE will not disclose or divulge to any person, entity, firm or
company, or use for EXECUTIVE's benefit or the benefit of any other
person, entity, firm or company, directly or indirectly, as the same
may exist during the term of EXECUTIVE's employment by the Company or
at the date of such termination, any knowledge, information, business
methods, techniques, devices, customer lists, supplier lists, business
plans, software, programs or other data of the Company, without regard
to whether all of the foregoing matters will be otherwise deemed
confidential, material or important, the parties stipulating that as
between them, the same are important, material and confidential and
greatly affect the effective and successful conduct of the business and
the goodwill of the Company;
(b) Except as required in EXECUTIVE's duties to the Company,
EXECUTIVE will not disclose or divulge to any person, entity, firm or
company, or use for EXECUTIVE's benefit or the benefit of any other
person, entity, firm or company, directly or indirectly, as the same
may exist during the term of EXECUTIVE's employment by the Company or
at the date of such termination, any knowledge, information, business
methods, techniques, devices, customer lists, supplier lists, business
plans, software, programs or other data of the Company, without regard
to whether all of the foregoing matters will be otherwise deemed
confidential, material or important, the parties stipulating that as
between them, the same are important, material and confidential and
greatly affect the effective and successful conduct of the business and
the goodwill of the Company;
(c) During the term of EXECUTIVE's employment with the Company
and thereafter for a period of two (2) years, EXECUTIVE will not, in
any manner, directly or indirectly with or through any other person or
entity:
(i) Solicit, divert, take away or interfere with any
of the customers, trade, suppliers, business, patronage,
employees or agents of the Company, or employ any person who
was an employee of the Company at any time during the two year
period prior to the date of such employment; or
(ii) Engage, directly or indirectly, either
personally or as an employee, partner, associate, officer,
manager, agent, advisor, associate, consultant or otherwise,
or by means of any corporate or other entity or device, in
competition with the business of the Company in the United
States or Canada as such business exists on the date of
EXECUTIVE's cessation of employment, or as to which the
Company has formulated definitive plans, of which EXECUTIVE
has knowledge, to enter into during the term of this Agreement
or as of the date of the cessation of EXECUTIVE's employment.
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(d) It is the intention of the parties to restrict the
activities of EXECUTIVE under paragraph 6(c)(ii) only to the extent
necessary for the protection of the business interests of the Company,
and the parties specifically covenant and agree that should any of the
provisions thereof, under any set of circumstances, be determined by a
court having jurisdiction to be too broad for that purpose or invalid
or unenforceable for any reason, it is the intention and agreement of
the parties that such provisions shall be so interpreted and applied by
such court in such a narrower sense as shall be necessary to make the
same valid and enforceable to the maximum extent possible, consistent
with the intent of the parties expressed in this Agreement.
(e) The covenants and agreements of EXECUTIVE contained in
paragraph 6(b) and (c) shall be construed as independent of any other
provision of this Agreement and given for valuable independent
consideration, and the existence of any defense, claim or cause of
action against the Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the
Company of such covenants and agreements.
7. Documents. Upon the cessation of EXECUTIVE's employment with the
Company, for any reason, all documents, records, software, programs, models,
financial statements and projections, notebooks, invoices, statements and
correspondence, including copies thereof, relating to the business of the
Company then in EXECUTIVE's possession or under EXECUTIVE's control, whether
prepared by EXECUTIVE or others, will be left with or returned to the Company,
it being recognized and agreed that each of the foregoing constitutes property
of the Company.
8. Remedies.
(a) At the expiration of the initial term, or any extension
thereof, or the termination of this Agreement by mutual consent of the
parties, the death of EXECUTIVE or for Cause, unless otherwise agreed
by the Company and EXECUTIVE, the obligation of the Company to pay
further compensation to EXECUTIVE shall cease, provided, however, that
all other obligations hereunder of either party to the other party at
the time of such expiration or termination shall not be affected by
such termination or expiration;
(b) In the event this Agreement is terminated by the Company
as a result of the permanent total disability of EXECUTIVE, EXECUTIVE
shall be entitled to receive one-half EXECUTIVE's base compensation and
full benefits provided for in this Agreement for a period of
twenty-four months following the date of such termination.
(c) In the event this Agreement is terminated by EXECUTIVE as
a result of the Company's failure to maintain Employment Conditions,
EXECUTIVE shall be entitled to a severance payment, payable within ten
days after the date of termination, equal to 200% of EXECUTIVE's annual
base compensation in effect immediately prior to such termination, plus
any earned but unpaid bonus.
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(d) The Company and EXECUTIVE agree that the following
provisions shall immediately and automatically become operational upon
the occurrence of a Change of Control (as described in Schedule I
hereof), without further action on the part of either the Company or
EXECUTIVE:
(i) In the event of the involuntary termination or
significant reduction in the position, duties or
responsibilities of EXECUTIVE (a "Termination"), EXECUTIVE
shall be entitled to an additional bonus, payable within sixty
(60) days of the occurrence of the Termination, equal to Three
Hundred percent (300%) of the greater of the Base Compensation
in effect as of the day of such Change of Control or in effect
as of the date of such Termination if the Termination occurs
within two years following the Change of Control.
(ii) All options to purchase shares of the common
stock of the Company held by EXECUTIVE pursuant to a stock
option or other incentive compensation plan of the Company
("Stock Options") shall be fully vested and exercisable.
(iii) All restrictions on restricted stock of the
Company held by EXECUTIVE pursuant to a restricted stock or
other incentive compensation plan of the Company (the
"Restricted Stock") that may result in the forfeiture of such
stock shall terminate.
(iv) EXECUTIVE shall also be awarded a bonus (the
"Special Executive Bonus") on a "grossed-up" basis (to take
into account the taxability for federal and state income tax
purposes of the Special Executive Bonus to the EXECUTIVE)
equal to the amount of federal and state income tax payable by
the EXECUTIVE arising from the vesting of EXECUTIVE's
interests in Stock Options or the elimination of restrictions
on Restricted Stock, assuming the maximum statutory rate of
federal and state income tax then applicable to an individual
taxpayer.
(v) All agreements with the Company by EXECUTIVE to
refrain from selling any securities of the Company shall
terminate.
(e) It is expressly agreed that the breach or evasion of the
terms of this Agreement by EXECUTIVE will result in immediate and
irreparable injury to the Company, for which the payment of money
damages would be an inadequate remedy, and will authorize recourse to
the equitable remedies of injunction and specific performance, as well
as to all other legal or equitable remedies to which the Company may be
entitled. 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 shall be 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 the Company shall not constitute a waiver of the right to
pursue other available remedies.
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(f) In the event the Company or EXECUTIVE institutes a suit at
law or in equity for the purpose of enforcing the provisions of this
Agreement, the prevailing party in any such action shall be entitled to
recover reasonable attorneys' fees and expenses and related costs and
expenses, in addition to any other judgment, award or remedy to which
the prevailing party may be entitled.
9. Severability. All agreements and covenants herein contained are
severable, and in the event any of them shall be held to be invalid by any
competent court, this Agreement shall continue in full force and effect and,
subject to subparagraph 6(d), shall be interpreted as if such invalid agreements
or covenants were not contained herein.
10. Waiver or Modification. No waiver, amendment or modification of
this Agreement or any portion hereof shall be valid unless in writing and duly
executed by the party to be charged therewith. The failure of the Company or
EXECUTIVE to exercise or otherwise act with respect to any of its or his rights
hereunder in the event of a breach of any of the terms or conditions hereof by
the other shall not be construed as a waiver of such breach, nor prevent the
Company or EXECUTIVE, as the case may be, from thereafter enforcing strict
compliance with any and all of the terms and conditions hereof.
11. Notices. All notices, requests, demands, consents or other
communications hereunder shall be in writing and shall be deemed to have been
given if delivered personally or mailed by certified, registered or Express
mail, return receipt requested, or next business day courier service (such as
Federal Express), if to the Company, to:
The Source Information Management Company
Attention: S. Leslie Flegel
11644 Lilburn Park Road
St. Louis, Missouri 63146
and, if to EXECUTIVE, to:
--------------------------
--------------------------
--------------------------
or to such other address to which a party gives notice to the other in
accordance with this paragraph 11.
12. Construction.
(a) This Employment Agreement shall be governed by and
construed under the laws of the State of Missouri, provided that the
sole and absolute venue for purposes of suit shall be St. Louis County,
Missouri, notwithstanding the place of execution hereof or the
performance of any acts under this Agreement in any other jurisdiction.
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(b) For purposes of paragraph 6, references to the Company
shall include all companies or other entities controlled by,
controlling, or under common control with the Company, whether such
control is exercised through ownership or other direction of the
management or policies of any such company or entity, and all licensees
of the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THE SOURCE INFORMATION
MANAGEMENT COMPANY
By:
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SCHEDULE I
A Change in Control shall be deemed to have occurred as of the first
date that (A) any individual, corporation (other than the Company),partnership,
trust, association, pool, syndicate, or any other entity or any group of persons
acting in concert becomes the beneficial owner, as that concept is defined in
Rule 13d-d promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, as the result of any one or more
securities transactions (including gifts and stock repurchases but excluding
transactions described in subdivision (C) below and transactions with
EXECUTIVE), of securities of the Company then possessing twenty-five percent
(25%) or more of the voting power for the election of directors of the Company,
or (B) "approved directors" shall constitute less than a majority of the entire
Board of Directors of the Company, with "approved directors" defined to mean the
members of the Board as of the date of this Agreement and any subsequently
elected members of such Board who shall be nominated or approved by a majority
of the approved directors on the Board prior to such election, or (C) the
Company shall have entered into a binding agreement for a Sale of the Company,
as defined below, and shall have received all required corporate, regulatory and
other approvals for consummating such transaction. For the purposes of
subdivision (C) of the preceding sentence, "Sale of the Company" shall mean (i)
any consolidation, merger or stock-for-stock exchange involving the Company or
the securities of the Company in which the holders of voting securities of the
Company immediately prior to the consummation of such transaction own, as a
group, immediately after such consummation, voting securities of the Company
(or, if the Company does not survive such transaction, voting securities of the
corporation surviving such transaction) having less than fifty percent (50%) of
the total voting power in an election of directors of the Company (or such other
surviving corporation), or (ii) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all, or substantially
all, of the assets of the Company to a party which is not controlled by or under
common control with the Company.
9
