U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended July 31, 1997
|_| Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to _________
Commission file number 0-26238
The Source Information Management Company
(Exact Name of Small Business Issuer as Specified in Its Charter)
Missouri 43-1710906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11644 Lilburn Park Road
St. Louis, Missouri 63146
(Address of Principal Executive Offices)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
The Source Company
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes|X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 7,165,953 (as of July 31,
1997)
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Unaudited Balance Sheet as of July 31, 1997 1
Unaudited Statements of Operations for the three
months ended July 31, 1997 and 1996 and for the
six months ended July 31, 1997 and 1996 3
Unaudited Statements of Cash Flows for the six
months ended July 31, 1997 and 1996 4
Notes to Financial Statements 5
ITEM 2. Management's Discussion and Analysis 12
PART II - OTHER INFORMATION
ITEM 2. Changes in Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 6. Exhibits and Reports on Form 8-K 17
<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
1
<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
2
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Statements of Operations
- -----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
----------------------------------- -----------------------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service Revenues $ 2,940,137 $ 1,209,928 $ 5,459,668 $ 2,633,958
Merchandise Revenues - 8,348 124,540
94,602
- -----------------------------------------------------------------------------------------------------------------------
2,940,137 1,304,530 5,468,016 2,758,498
- -----------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues 1,590,631 1,146,254 2,851,857 2,351,092
Cost of Merchandise Sold - 32,720 11,254
11,254
- -----------------------------------------------------------------------------------------------------------------------
1,590,631 1,157,508 2,884,577 2,362,346
- -----------------------------------------------------------------------------------------------------------------------
1,349,506 147,022 2,583,439 396,152
Selling, General and Administrative
Expense 534,341 1,062,128 1,671,502
794,600
- -----------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) 815,165 (647,578) 1,521,311 (1,275,350)
- -----------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 7,404 13,662
7,284 16,240
Interest expense (213,614) (415,750) (114,178)
(71,856)
Other (21,483) (40,625)
(4,760) (10,715)
- -----------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (227,693) (69,332) (442,713) (108,653)
- -----------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 587,472 (716,910) 1,078,598 (1,384,003)
Income Tax (Expense) Benefit (Note 7) (254,000) (489,000) 478,463
281,599
- -----------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ 333,472 $ (435,311) $ 589,598 $ (905,540)
- -----------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per Share - Primary
and Fully Diluted $ 0.03 $ (0.07) $ 0.07 $ (0.14)
- -----------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding -
Primary and Fully Diluted 7,127,482 6,546,092 7,087,838 6,463,909
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
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 (2,787,480) -
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)
- --------------------------------------------------------------------------------------------------------------------
Investment Activities
Acquisition of Mike Kessler & Associates, Inc., net of cash acquired (349,777) -
Acquisition of Magazine Marketing, Inc. - (275,000)
Capital expenditures (125,521) (115,360)
Loan to affiliate (5,820) -
Loan to officer (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 -
- --------------------------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (405,159) (335,885)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Unaudited Statements of Cash Flows
<CAPTION>
Six Months Ended July 31, 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
5
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to 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 Transaction
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.
6
<PAGE>
3. Long-term Debt and Revolving Credit Facility
<TABLE>
Long-term debt consists of:
<CAPTION>
July 31, 1997
-----------------------------------------------------------------------------------
<S> <C>
Revolving Credit Facility $ 10,949,000
Note payable to former owner of Mike Kessler &
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
-----------------------------------------------------------------------------------
</TABLE>
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.
7
<PAGE>
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
----------------------------------------------------------------------
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
commission related to such payments and pays the customer the difference.
The Company owes retailers $167,741 at July 31, 1997 under such
arrangements.
8
<PAGE>
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
-------------------------------------------------------------------
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
-------------------------------------------------------------------
9
<PAGE>
The following summary reconciles income taxes at the maximum federal
statutory rate with the effective rate for the first six months of fiscal
1998 and 1997:
<TABLE>
<CAPTION>
Six Months Ended July 31, 1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C>
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)
-----------------------------------------------------------------------------------
</TABLE>
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 the operation of such
business and has continued servicing MKA's customer base.
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 plan which gave
the Board of Directors the authority to execute a 1 for 1.21 reverse
stock split. As of the financial statement report date, the Board of
Directors has not effected the reverse stock split.
10
<PAGE>
11. Earnings Per Share
In calculating earnings per share, Net Income for the three months and
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 Event
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. 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.
In September 1997, the Company issued to Aron Katzman, Harry L. Franc III
and Timothy A. Braswell, each a director of the Company, non-transferable
warrants expiring 2000 to purchase an aggregate of 108,041 shares of
Common Stock at an exercise price of $2.48 per share. Although the effect
of this transaction will be reported in the third quarter, the Company
expects that such warrants will be deemed to have an aggregate value
ranging from $30,000 to $50,000.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This quarterly report contains forward looking statements that are
necessarily subject to significant uncertainties and risks, including, but not
limited to those set forth in "RISK FACTORS" in Form SB-2, a copy of which may
be obtained without charge by written request to the Company. When used in this
quarterly report, 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.
Overview
For more than 20 years, 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, the reserve maintained by the Company as an allowance
for doubtful accounts in the amount of 2% of accounts receivable has been
adequate to satisfy any losses incurred by the Company from uncollectible
accounts receivable.
Under both the standard arrangement and the Advance Pay Program service
revenues are recognized at the time claims for incentive payments are
substantially completed for submission to the publishers based on the amount
claimed, less an estimated reserve necessary to maintain an allowance for
doubtful accounts of approximately 2% of trade accounts receivable. However,
under the standard arrangement, invoices for services provided by the Company in
connection with the claim process are not issued until the Company receives
settlement of the claim. Under the Advance Pay Program, the customer is not
invoiced for the commission, which is the difference between the claim and the
advance amount.
12
<PAGE>
Results of Operations
The following table sets forth, for the periods presented, certain
information relating to the operations of the Company expressed as a percentage
of Total Revenues:
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service Revenues 100.0% 92.7% 99.8% 95.5%
Merchandise Revenues -% 7.3% 0.2% 4.5%
Total Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Service Revenues 54.1% 87.9% 52.2% 85.2%
Cost of Merchandise Sold -% 0.8% 0.6% 0.4%
Gross Profit 45.9% 11.3% 47.2% 14.4%
Selling, General &
Administrative Expenses 18.2% 60.9% 19.4% 60.6%
Operating Income (Loss) 27.7% (49.6)% 27.8% (46.2)%
Interest, Net (7.0)% (4.9)% (7.4)% (3.6)%
Other Income (Expense), Net (0.7)% (0.4)% (0.7)% (0.4)%
Income (Loss) Before
Income Taxes 20.0% (55.0)% 19.7% (50.2)%
Net Income (Loss) 11.3% (33.4)% 10.8% (32.8)%
</TABLE>
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 during both the
quarter and the six month period ended July 31, 1997 of approximately $1,730,000
and $2,826,000, respectively, over the comparable periods in fiscal 1997. The
increases consisted of approximately $1,470,000 and $2,313,000, respectively, of
claims, PIN and Advance Pay Program revenue over the comparable periods in
fiscal 1997. Also, space design revenue increased from $125,000 for the quarter
ended July 31, 1996 to $385,000 for the quarter ended July 31, 1997 and from
$182,000 for the six month period ended July 31, 1996 to $695,000 for the six
month period 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 clients 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.
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.
13
<PAGE>
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. The
largest decrease in Total Costs was in the data processing area. These costs
decreased $174,000 over last year's comparable period due to the purchase of the
employment service company on January 1, 1997 which previously provided such
services. However, this decrease was partially offset by an increase in wages
since the individuals formerly employed by the employment services company are
now employed by the Company. The acquisitions of Magazine Marketing, Inc.,
Readers Choice, Inc. and Mike Kessler and Associates, Inc. (MKA) have led to
increased costs, including wages, amortization, rent and depreciation. Travel
and entertainment expenses decreased $38,000 and $16,000, respectively. Lastly,
bad debt expense decreased $56,000 over the same period in the prior year.
Total Costs for the second quarter increased over the second quarter of
the prior year by $184,000. Bad debt expense increased $96,000 resulting from
the write-off of an uncollectible account. The acquisition of MKA resulted in
costs of $200,000 during the quarter ended July 31, 1997. Additionally, legal
costs, depreciation expense, costs of seminars, deferred compensation and costs
associated with filings required by the Securities and Exchange Commission and
Nasdaq increased approximately $56,000. All other expenses included in Total
Costs combined for a decrease of approximately $170,000.
Interest Expense
Interest Expense increased for the three month and the six month
periods ended July 31, 1997 $142,000 and $302,000, respectively, over the
comparable periods in the prior year. This increase is due to increased
borrowings necessary to fund the Advance Pay Program.
Income Tax (Expense) Benefit
The effective income tax rates for the three month and six month
periods ended July 31, 1997 were 43.2% and 45.3%, respectively. These rates
varied from the statutory rate due to expenses not deductible for income tax
purposes. Such non-deductible expenses include meals and entertainment, goodwill
amortization, and officers' life insurance premiums.
Earnings Per Share
In calculating earnings per share, Net Income for the three months and
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.
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.
14
<PAGE>
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
has the right to terminate the agreement upon not less than thirteen months
prior written notice. Borrowings bear interest at a rate related to the monthly
LIBOR index rate plus a percentage ranging from 2.5% to 3.5% depending upon the
ratio of funded debt to earnings before interest, taxes, depreciation and
amortization. Borrowings are secured by personal guarantees of Messrs. S. Leslie
Flegel and William H. Lee and their spouses and by a security interest in
substantially all of the Company's assets including receivables, inventory,
equipment, goods and fixtures, software, contract rights, notes, and general
intangibles. Under the Credit Agreement, the Company is required to maintain
certain financial ratios. Although the Company was not in compliance at January
31, 1997, with the requisite ratio of Earnings Before Interest, Lease
Obligations and Taxes to Interest Expense and Lease Obligations ("EBILT/IELO")
or the requisite ratio of Funded Debt to Total Capitalization ("Debt/Cap"), it
received a written temporary waiver of such ratios from Wachovia Bank.
Subsequently, the Credit Agreement was amended to provide the Company with
greater flexibility with respect to the maintenance of certain financial ratios
including the EBILT/IELO and Debt/Cap ratios. At July 31, 1997, the Company was
in compliance with all financial ratios imposed by the Credit Agreement, as
amended, and expects to remain in compliance 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.
At July 31, 1997, the Company's total long-term debt obligations were
$13,174,000. Of such amount, $2,213,000 matures in the next 12 months. The
Company anticipates that the funds necessary to satisfy these obligations will
be derived from the proceeds of the offering of equity securities and/or
additional bank borrowings.
15
<PAGE>
On May 30, 1997, the Company acquired all of the stock of 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 the operation of
such business and has continued servicing MKA's customer base.
In July 1997, the holders of the Company's 1996 Series 7% Convertible
Preferred Stock exchanged all 5,600 outstanding shares for 225,867 shares of
Common Stock at an effective price of $2.48 per share and non-transferable
warrants expiring in 2000 to purchase 375,959 shares of Common Stock at an
exercise price of $2.48 per share, before giving effect to the proposed
1-to-1.21 reverse stock split. Such exchange resulted in a constructive dividend
of $109,937 which was recorded in the fiscal quarter ending July 31, 1997.
In September 1997, the Company issued to Aron Katzman, Harry L. Franc
III and Timothy A. Braswell, each a director of the Company, non-transferable
warrants expiring 2000 to purchase an aggregate of 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, 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.
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.
Without additional financing, 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 the 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 the 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.
16
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities.
(c) During the quarter ended July 31, 1997, the following warrants for
the purchase of shares of Common Stock were issued: 2,848 warrants at $4.20
expiring on November 20, 1998 and 4,518 warrants at $2.98 expiring on July 31,
1999 were issued to certain financial advisors of the Company in consideration
of prior services. These transactions were made in reliance on Section 4(2) of
the Securities Act based on the sophistication of the acquiring persons as
securities professionals.
In July 1997, the holders of the Company's 1996 Series 7% Cumulative
Convertible Preferred Stock exchanged all 5,600 shares into 225,867 shares of
Common Stock at an effective price of $2.48 per share and non-transferable
warrants expiring in 2000 to purchase 375,959 shares of Common Stock at an
exercise price of $2.48 per share. This transaction was made in reliance on
Section 3(a)(9).
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Annual Meeting of the Stockholders of the Company was held on
July 1, 1997. Of the 7,049,199 shares entitled to vote at such meeting,
4,809,599 shares were present at the meeting in person or by proxy.
(c) The proposal to amend the Company's Articles of Incorporation to
decrease the number of authorized shares, reduce the Company's stated capital
and to effect a 1-for-1.21 Reverse Stock Split was approved. The purpose of the
Amendment is to increase the per share bid in the Common Stock and possibly
promote greater liquidity for the Company's shareholders. The number of shares
voted for, against and withheld were as follows:
For Against Withheld
4,696,117 113,482 0
The proposal to amend the Company's Articles of Incorporation to change
the name of the Company to "The Source Information Management Company" was
approved. The purpose of the Amendment is to better reflect the Company's
current and proposed business operations and attract a broader spectrum of
investors, which should benefit both the Company and its shareholders. The
number of shares voted for, against and withheld were as follows:
For Against Withheld
4,809,599 0 0
There were no broker non-votes regarding the election of officers, the
approval of the Reverse Stock Split or he approval of the name change.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See Exhibit Index.
(b) No current reports on Form 8-K have been filed during the three months ended
July 31, 1997.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE SOURCE INFORMATION MANAGEMENT COMPANY
Date: September 15, 1997 /S/ W. BRIAN RODGERS
--------------------------------
W. Brian Rodgers
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
11.1 Statement re: computation of per share earnings
27.1 Financial Data Schedule (Filed in EDGAR version only)
19
The Source Information Management Company
<TABLE>
Calculation for Weighted Average Number of
Common Shares Outstanding
<CAPTION>
Weighted
Weighted Average
Common Common Days Average Number
Share Shares Out- Number of Shares
Date Description Activity Outstanding standing of Shares Outstanding
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
February 1, 1997 Balance
7,041,478 27 1,050,386
February 28, 1997 Stock dividend on preferred stock
7,721 7,049,199 75 2,920,939
May 15, 1997 Assumed conversion of stock
options 47,786 7,096,985 41 1,607,604
June 25, 1997 Assumed conversion of stock
options 51,170 7,148,155 7 276,448
July 1, 1997 Assumed conversion of warrants 40,330 7,188,485 28 1,112,031
July 29, 1997 Stock issued in payment of
services 2,132 7,190,617 2 79,454
July 31, 1997 Exchange of preferred stock for
common stock 225,867 7,416,484 1 40,975
July 31, 1997 Balance
7,416,484 7,087,838
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Balance Sheet
at July 31, 1997 (Unaudited) and the Statement of Income for the Six Months
Ended July 31, 1997 (Unaudited) and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JUL-30-1997
<CASH> 70,718
<SECURITIES> 0
<RECEIVABLES> 15,336,384
<ALLOWANCES> 374,289
<INVENTORY> 0
<CURRENT-ASSETS> 15,788,010
<PP&E> 2,030,361
<DEPRECIATION> 1,313,535
<TOTAL-ASSETS> 20,079,046
<CURRENT-LIABILITIES> 4,106,820
<BONDS> 0
0
0
<COMMON> 71,659
<OTHER-SE> 4,194,065
<TOTAL-LIABILITY-AND-EQUITY> 20,079,046
<SALES> 5,468,016
<TOTAL-REVENUES> 5,468,016
<CGS> 2,884,577
<TOTAL-COSTS> 1,062,128
<OTHER-EXPENSES> 26,963
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 415,750
<INCOME-PRETAX> 1,078,598
<INCOME-TAX> 489,000
<INCOME-CONTINUING> 589,598
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 589,598
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
