U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(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, 1996
|_| 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 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)
Not Applicable
(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: 6,809,689 (as of July 31,
1996)
Transitional Small Business Disclosure Format (check one):
Yes_________ No X
<PAGE>
THE SOURCE COMPANY
QUARTERLY REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTER ENDED
July 31, 1996
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements Page
Unaudited Balance Sheet as of July 31, 1996 3
Unaudited Statements of Income for the three
months ended July 31, 1996 and 1995 and for the
six months ended July 31, 1996 and 1995 5
Unaudited Statements of Cash Flows for the six
months ended July 31, 1996 and 1995 6
Notes to Financial Statements 7
ITEM 2. Management's Discussion and Analysis 13
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 18
SIGNATURE PAGE 19
EXHIBIT INDEX 20
<PAGE>
THE SOURCE COMPANY
Unaudited Balance Sheet
July 31, 1996
Assets
Current
Cash $ 559,347
Receivables:
Trade (net of allowance for doubtful
accounts of $63,806) 5,414,973
Income Taxes 401,000
Related Parties 31,171
Employees 4,280
Interest Receivable 6,792
Notes Receivable - Officers 58,395
Prepaid Expenses 179,742
Other current assets 1,627
- --------------------------------------------------------------------------
Total Current Assets 6,657,327
- --------------------------------------------------------------------------
Office Equipment and Furniture 1,648,414
Less Accumulated Depreciation and Amortization 1,082,312
- --------------------------------------------------------------------------
Net Office Equipment and Furniture 566,102
- --------------------------------------------------------------------------
Other Assets
Notes Receivable - Officers 175,183
Investment in limited partnership 57,956
Goodwill, net of accumulated amortization 79,273
Unallocated purchase price of acquisitions 990,097
Cash surrender value of life insurance 71,618
Other 56,747
- --------------------------------------------------------------------------
Total Other Assets 1,430,874
- --------------------------------------------------------------------------
TOTAL ASSETS $ 8,654,303
- --------------------------------------------------------------------------
<PAGE>
THE SOURCE COMPANY
Unaudited Balance Sheet
July 31, 1996
Liabilities and Stockholders' Equity
Current
Note payable - bank (Note 3) $ 3,464,715
Accounts payable 144,898
Due to Retailers (Note 9) 85,553
Accrued liabilities:
Compensation 254,827
Other 138,979
Deferred income taxes 124,000
Current maturities of long-term debt (Note 4) 164,531
- --------------------------------------------------------------------------
Total Current Liabilities 4,377,503
- --------------------------------------------------------------------------
Long-term Debt (Note 4) 384,349
Less current maturities 164,531
- --------------------------------------------------------------------------
Total Long-term Debt 219,818
- --------------------------------------------------------------------------
Deferred income taxes 239,000
- --------------------------------------------------------------------------
Total Liabilities 4,836,321
- --------------------------------------------------------------------------
Redeemable Common Stock
211,245 Shares Issued and Outstanding 753,820
- --------------------------------------------------------------------------
Stockholders' Equity
Preferred stock (Note 7) 129
Common stock 68,097
Additional paid-in-capital 2,924,551
Retained Earnings 71,385
- --------------------------------------------------------------------------
Total Stockholders' Equity 3,064,162
- --------------------------------------------------------------------------
TOTAL LIABILITIES, REDEEMABLE COMMON
STOCK & STOCKHOLDERS' EQUITY $ 8,654,303
- --------------------------------------------------------------------------
<PAGE>
<TABLE>
THE SOURCE COMPANY
Unaudited Statements of Income
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
1996 1995 1996 1995
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Commission Revenues $ 1,209,928 $ 1,820,519 $ 2,633,958 $ 3,577,904
Merchandise Revenues 94,602 67,280 124,540 342,532
- --------------------------------------------------------------------------------------------------------------------
1,304,530 1,887,799 2,758,498 3,920,436
- --------------------------------------------------------------------------------------------------------------------
Cost of Commission Revenues 1,146,254 797,034 2,351,092 1,556,184
Cost of Merchandise Sold 11,254 4,550 11,254 176,142
- --------------------------------------------------------------------------------------------------------------------
1,157,508 801,584 2,362,346 1,732,326
- --------------------------------------------------------------------------------------------------------------------
Gross Profit 147,022 1,086,215 396,152 2,188,110
Selling, General and Administrative
Expense 794,600 795,408 1,671,502 1,546,771
- --------------------------------------------------------------------------------------------------------------------
Operating Income (Loss) (647,578) 290,807 (1,275,350) 641,339
- --------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 7,284 5,336 16,240 8,481
Interest expense (71,856) (23,512) (114,178) (47,181)
Other (4,760) (21,228) (10,715) (23,126)
- --------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (69,332) (39,404) (108,653) (61,826)
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes (716,910) 251,403 (1,384,003) 579,513
Provision for Income Taxes 281,599 (95,677) 478,463 (343,352)
- --------------------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (435,311) $ 155,726 $ (905,540) $ 236,161
- --------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per Share - Primary $ (0.07) $ 0.02 $ (0.14) $ 0.04
- --------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares
Outstanding - Primary 6,546,092 6,299,389 6,463,909 6,299,389
- --------------------------------------------------------------------------------------------------------------------
Earnings (Loss) per Share - Fully
Diluted $ (0.07) N/A $ (0.14) N/A
- --------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares
Outstanding - Fully Diluted 6,546,092 N/A 6,463,909 N/A
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
THE SOURCE COMPANY
Unaudited Statements of Cash Flows
<CAPTION>
Six Months Ended July 31,
------------------------------------------
1996 1995
<S> <C> <C>
Operating Activities
Net income (loss) $ (905,540) $ 236,161
Adjustments to reconcile net cash
provided by operating activities:
Depreciation and amortization 98,812 73,994
Provision for losses on accounts receivable (35,394) 60,779
Impairment of investments in limited partnership 10,000 10,000
Write-off related party receivable 0 10,644
Deferred income taxes (114,191) (27,000)
Changes in assets and liabilities:
(Increase)/Decrease in accounts receivable (975,001) (808,988)
(Increase)/Decrease in other assets (557,556) (272,328)
Increase/(Decrease) in A/P and accrued expenses (573,797)
94,118
Increase/(Decrease) in amounts due customers 2,098 (3,000)
- ------------------------------------------------------------------------------------------------------------------
Cash Used in Operating Activities (3,050,569) (625,620)
- ------------------------------------------------------------------------------------------------------------------
Investment Activities
Acquisition of Magazine Marketing, Inc. (275,000) 0
Repayments on Notes Receivable 29,715 0
Repayments from related party 22,000 240,240
(Advances to) collections from employees 2,760 (3,000)
Capital expenditures (115,360) (62,024)
- ------------------------------------------------------------------------------------------------------------------
Cash Provided by (Used in) Investing Activities (335,885) 175,216
- ------------------------------------------------------------------------------------------------------------------
Financing Activities
Issuance of Common Stock 30,000 0
Issuance of preferred convertible stock 1,922,075 0
Borrowings under long-term debt agreements 281,318 0
Principal payments on long-term debt (62,420) 0
Borrowings under short-term debt agreements 2,076,000 395,501
Repayments under short-term debt agreements (325,000) (156,891)
- ------------------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 3,921,973 238,610
- ------------------------------------------------------------------------------------------------------------------
Increase/(Decrease) in Cash 535,519 (211,794)
Cash, beginning of period 23,828 252,555
- ------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 559,347 $ 40,761
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
THE SOURCE COMPANY
Notes to Financial Statements (Unaudited)
1. Related Party
Transactions The Company purchases data processing services from
an employment service company owned by certain
officers of the Company. There were $174,345 and
$116,988 of such purchases made during the six months
ended July 31, 1996 and 1995, respectively.
At January 31, 1995, the Company was indebted to
director and stockholder Timothy A. Braswell in the
amount of $56,192. Such debt bore interest at 10.0%
and matured on January 1, 1996. The Company's
indebtedness under the promissory note was secured by
an interest in the accounts receivable of the
Company. This obligation was fully satisfied as the
final payment was made on December 29, 1995.
One of the Company's stockholders also owns a
majority of 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 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
$94,783 and $73,500 for the six months ended July 31,
1996 and 1995, respectively. Amounts paid for the
airplane were $0 and $37,204 for the six months ended
July 31, 1996 and 1995, 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 amount of $233,578. Such
notes bear interest at the rate of 7.34% per annum
and are payable in five equal annual installments.
2. Notes Officers
Receivable
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.
<PAGE>
Other
The Company had a $120,000 unsecured non-interest
bearing note from a non-affiliated company which
required quarterly installments of $6,000 through
June 2000. The note was stated net of discount of
$27,454 which was computed using a 10% imputed
interest rate. On March 31, 1996, the debtor
defaulted on the note. Based on the financial
condition of the debtor, the note was written off
resulting in a charge to selling, general and
administrative expenses during the year ended January
31, 1996 of $92,063.
3. Notes Payable The Company has a revolving loan credit facility
providing for aggregate borrowings of $5,000,000
scheduled to expire on July 1, 1997. Borrowings under
the loans bear interest at the bank's prime plus 1%
(effectively 9.25% at July 31, 1996) and are secured
by an assignment of interest in the limited
partnership investment, personal guarantees of
certain of the stockholders of the Company, and a
security agreement including equipment, fixtures,
personal property, accounts receivable, contract
rights, notes and general intangibles. Borrowings
under the revolving credit facility at July 31, 1996
were $3,464,715.
4. Long-term
Debt Long-term debt consists of:
Note payable to bank, $3,950 per
month including interest at
bank's prime rate plus .5%
(effectively 8.75%) through
October 1996, collateralized by
equipment $ 11,995
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 63,950
Term note payable in monthly
installments of $7,639 plus
interest at the bank's coporate
base rate plus 1%, due June 1,
1999 259,720
Obligations under capital lease 48,684
-----------------------------------------------------
Total Long-term Debt 384,349
Less Current Maturities 164,531
-----------------------------------------------------
Long-term Debt $219,818
-----------------------------------------------------
<PAGE>
5. Supplemental Supplemental information on interest and income taxes
Cash Flow paid is as follows:
Information
Six Months Ended July 31, 1996 1995
-----------------------------------------------------
Interest $ 112,000 $ 47,000
Income Taxes $ 286,000 $ 343,000
-----------------------------------------------------
6. Business Acquisition of the Company by Periodico, Inc.
Combinations
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. In addition, the pre-transaction
date financial statements of the combined entity are
those of the Company.
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.
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 Source 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 first such payment was made on July 29,
1996.
<PAGE>
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 exceeds the fair value of the assets
acquired in the amount of $762,368.
The following schedule reflects pro forma statements
of income:
Six Months Ended July 31, 1996 1995
-----------------------------------------------------
Revenue $2,995,433 $4,371,347
Net income (loss) $(883,911) $ 278,188
Net income (loss) per share $ (0.14) $ 0.04
-----------------------------------------------------
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 Source 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 exceeds the
fair value of the assets acquired in the amount of
$233,169.
7. 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 subject to the conversion rights
described in the Certificates 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 or
at the option of the holder 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.
<PAGE>
During March 1996, the Company issued 20,000 shares
of 1996 Series 7% Convertible Preferred Stock for
$100 per share. Brokers' fees totaling $120,000 were
incurred in connection with the stock issuances of
which $60,000 was paid in cash and $60,000 was paid
by issuance of an additional 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 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.
8. 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,
1996 is $1,394,764 due the Company under the Advance
Pay Program (net of $1,364,807 due the program
participants). Income from the program was $482,598
during the six months ended July 31, 1996 and was not
material in 1995.
<PAGE>
9. 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 $85,553 at July 31, 1996 under
such arrangements.
10. Unaudited
Financial
Statements In the opinion of management, the unaudited financial
information as of July 31, 1996 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, 1996 are
not necessarily indicative of the results to be
expected for the entire year.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report contains forward looking information that is
subject to certain risks, trends and uncertainties that could cause actual
results to differ materially from those projected. Among these risks, trends and
uncertainties are those related to the ability of the Company to attract
adequate capital resources to fund its growth, and the dependence of the Company
on the terms of incentive programs over which it has no control. For a more
complete discussion of these and other risks, trends and uncertainties,
investors are directed to Exhibit 99.1 attached to the Company's Annual Report
on Form 10-KSB, a copy of which may be obtained without charge by written
request to the Company.
Overview
The Company provides monitoring, documentation and collection services
required to obtain single copy magazine sales incentive payments available from
magazine publishers to magazine and periodical retailers. The Company has
developed a contractual relationship with approximately 50,000 mass merchandise,
grocery and pharmacy stores located throughout the United States and in eastern
Canada under which it provides such services and related merchandising services
on a frequent basis, in many cases daily, and holds power of attorney from its
retailer clients to collect incentive payments from publishers. To further
expand its presence in the upper midwest and increase the number of its
mid-sized chain retailer clients, in June of 1995 the Company acquired all of
the business and assets of Dixon's Modern Marketing Concepts, Inc. and Tri-State
Stores, Inc., both of Chicago Heights, Illinois, in exchange for the issuance of
an aggregate of 300,000 shares of common stock. The Company has continued to
expand its operations in the upper midwest through the acquisitions of Magazine
Marketing, Inc. and Readers Choice, Inc., a wholly owned subsidiary of United
Magazine Company.
The Company issued 100,000 shares of its common stock, cash of
$275,000 and a note payable totaling $80,000 payable quarterly over a two year
period, in exchange for all the stock of Magazine Marketing, Inc. This
transaction has been accounted for as a purchase and, accordingly, the financial
statements reflect the combined results of operations as of June 28, 1996, the
transaction date. Assets have been recorded at fair value and the purchase price
in excess of fair value has been recorded as unallocated purchase price of
acquisitions.
The Company issued 111,245 shares of its common stock in exchange for
all issued and outstanding stock of Readers Choice, Inc. This transaction has
been accounted for as a purchase and, accordingly, the assets have been recorded
at fair value and the results of operations reflect combined results of
operations from June 30, 1996, the transaction date. The purchase price in
excess of the fair value of the assets has been recorded as unallocated purchase
price of acquisitions.
A majority of the Company's revenues are derived from commissions
earned in connection with the collection of incentive payments owed to the
Company's retailer clients from magazine publishers. Most such incentive payment
programs offer the retailer a cash rebate equal to a percentage of the
retailer's actual net sales of the publisher's titles which is payable quarterly
upon submission of a properly documented claim. Under agreements with its
retailer clients, the Company gathers sales data, submits claims for payment,
collects payments and receives a percentage of the aggregate payments collected
on the retailers' behalf. Claims for incentive payments are generally submitted
to the publishers quarterly based on actual net sales of the publishers' titles
recorded in the previous calendar quarter. Except in connection with its
expanded 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.
<PAGE>
Under both the standard arrangement and the Advance Pay Program,
commission revenue is recognized at the time claims for incentive payments are
substantially completed for submission to the publishers based on the amount
claimed, less an estimated reserve necessary to maintain an allowance for
doubtful accounts of approximately 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.
Results of Operations
The following table sets forth, for the periods presented, certain
information relating to the operations of the Company expressed as a percentage
of Total Revenue:
<TABLE>
<CAPTION>
Three Months Six Months
Ended July 31, Ended July 31,
-------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Commission Revenues 92.7% 96.4% 95.5% 91.3%
Merchandise Revenues 7.3% 3.6% 4.5% 8.7%
Total Revenue 100.0% 100.0% 100.0% 100.0%
Cost of Commission Revenues 87.9% 42.3% 85.2% 39.7%
Cost of Merchandise Sold 0.8% 0.2% 0.4% 4.5%
Gross Profit 11.3% 57.5% 14.4% 55.8%
Selling, General &
Administrative Expenses 60.9% 42.1% 60.6% 39.4%
Operating Income (49.6)% 15.4% (46.2)% 16.4%
Interest Expense, Net (4.9)% (1.0)% (3.6)% (1.0)%
Other Income/(Expense), Net (0.4)% (1.1)% (0.4)% (0.6)%
Earnings Before Income
Taxes (55.0)% 13.3% (50.2)% 14.8%
Net Income (33.4)% 8.2% (32.8)% 6.0%
</TABLE>
Commission Revenues
Commission Revenues decreased $611,000 for the quarter ended July 31,
1996 compared to the quarter ended July 31, 1995 primarily due to magazine
wholesaler consolidation and the internal consolidation of the operations of the
<PAGE>
once separate entities now comprising the Company. Recently, many wholesalers
were purchased or merged with other wholesalers. These consolidations made it
difficult, if not impossible, at times to gather sales data. These factors
caused the process of filing claims to fall behind schedule which resulted in
less commission revenue than expected during the quarter ended July 31, 1996.
Commission revenue on claims which would have been substantially completed had
it not been for these factors is expected to be recognized during the third
quarter.
Commission Revenues decreased $944,000 for the six months ended July
31, 1996 compared to the six months ended July 31, 1996. This decrease is
largely comprised of a $913,000 decrease in commission revenues from standard
agreements, a $350,000 decrease in space design revenues, and a $323,000
increase in commission revenues from the Advance Pay Program. The decrease in
commission revenues from standard agreements is due to the factors noted in the
previous paragraph, and space design revenues are recognized as front end
display manufacturers ship the displays to the retailers, the timing of which is
not within the Company's control.
Merchandise Revenues
Although Merchandise Revenues increased slightly for the three months
ended July 31, 1996 over the same period in the prior year, Merchandise Revenues
decreased $218,000 for the six months ended July 31, 1996 over the same period
in the prior year. Such decreases are expected to continue as a result of
management's decision to de-emphasize this portion of its business.
Cost of Commission Revenues
The Cost of Commission Revenues increased approximately $349,000 and
$795,000 for the three month period compared to the same period in the prior
year and the six month period compared to the same period in the prior year,
respectively. These increases were primarily the result of the Company's effort
to more precisely identify and reclassify categories of costs as direct costs of
commission revenues. Costs of producing commission revenues are inelastic and,
therefore, are not directly proportional to revenue.
Selling, General and Administrative Expense
As discussed above, the Company has reclassified certain categories of
costs as direct costs of commission revenues. Thus, certain costs included in
selling, general and administrative expense during the prior periods are now
classified as direct costs of commission revenues.
Selling, General and Administrative Expense plus Cost of Commission
Revenues (or "total costs") for the six month period increased $920,000 over the
comparable period in the prior year. Wages accounted for $490,000 of the
increase. New hires, including personnel formerly employed by Magazine
Marketing, Inc., comprised approximately $200,000 of this increase, while the
balance of the increase was the result of raises and bonuses. Bad debt expense
increased approximately $133,000. Accounting and legal expenses increased
$110,000. Rent, telephone and utilities have increased $75,000 as a direct
result of expanding the square footage rented in North Carolina and adding
regional offices in Canada, Arizona and California. Insurance costs increased
$63,000 resulting from increases in premiums due to the addition of equipment
and personnel. Computer hardware and software acquisitions combined with
equipment and furniture acquisitions related to the additional regional offices
contributed to a $19,000 increase in depreciation expense. Auto lease expense
increased $15,000 resulting from the addition of several leased automobiles.
<PAGE>
The total costs for the second quarter increased $348,000 over the
second quarter of the prior year. Wages accounted for $262,000 of the increase.
New hires comprised approximately $110,000 of this increase, while the balance
of the increase was the result of raises and bonuses. Accounting and legal
expenses increased $40,000. Insurance costs increased $30,000 resulting from
increases in premiums due to the addition of equipment and personnel. Rent,
telephone and utilities increased $28,000 as a result of expanding the square
footage rented in North Carolina and adding regional offices in Canada, Arizona,
and California.
Interest Expense
Interest expense for the second quarter and the six month period
increased $48,000 and $67,000, respectively, over the comparable periods in the
prior year. This increase is due primarily to the increased borrowings necessary
to fund the Advance Pay Program.
Provision for Income Taxes
The Provision for Income Taxes for all periods presented differs from
the statutory rate due to non-deductible meals and entertainment, officers' life
insurance, country club dues, and auto lease expense.
Liquidity and Capital Resources
The Company's primary cash requirements are for funding the Company's
Advance Pay Program and selling, general and administrative expenses
(particularly salaries, travel and data entry expenses) incurred in connection
with the solicitation of new clients and the maintenance of existing accounts.
Historically, the Company has financed its business activities through cash flow
from operations, short-term borrowings under available lines of credit and
through the issuance of equity securities.
Net cash used by operating activities was approximately $3,051,000 for
the six months ended July 31, 1996 compared to approximately $626,000 for the
same period in 1995. Cash advanced under the Advance Pay Program increased
approximately $2,318,000 and cash used to pay wages increased approximately
$335,000. The average collection period for the six months ended July 31, 1996
was 314.1 days (calculated as follows: 365 days/(Revenues/Average A/R)) compared
to 119.2 days for the six month period ended July 31, 1995. The primary factor
contributing to the decrease in accounts receivable turnover was a delay in
filing claims caused by wholesaler consolidation and by internal consolidation
of operations of the once separate entities that now comprise the Company.
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, 1996 the Company had no outstanding material commitments
for capital expenditures.
The Company has an agreement with Boatmen's Bank of St. Louis, N.A.
("Boatmen's") providing for two separate revolving loans aggregating $5,000,000.
All borrowings under the agreement mature on July 1, 1997. Borrowings under the
agreement bear interest at an annual rate equal to the Boatmen's Corporate Base
Rate plus 1% (9.25% at July 31, 1996) and are secured by substantially all of
the assets of the Company as well as the personal guarantees of Messrs. S.
Leslie Flegel and William H. Lee and their spouses.
<PAGE>
The first of these loans is a working capital facility based on
eligible Accounts Receivable of the Company. The second facility is reserved to
fund the Company's Advance Pay Program. Under this facility the Company is able
to borrow up to $3,000,000 based on a percentage of its accounts receivable
derived from the Advance Pay Program.
On February 28, 1996, the Company sold 8,000 shares of its common
stock in a private transaction in reliance on Section 4(2) of the Securities Act
and Regulation D promulgated thereunder. The transaction resulted in net
proceeds to the Company of $30,000.
During March 1996, the Company sold an aggregate of 20,000 of its 1996
Series 7% Convertible Preferred Stock, $0.01 par value per share (the "preferred
stock"), in a series of transactions exempt from the registration requirements
of the Securities Act of 1933, as amended. The preferred stock was sold for an
aggregate purchase price of $2,000,000, resulting in net cash proceeds to the
Company of $1,922,075 after deducting commissions and expenses of $77,925.
Additional broker fees of $60,000 were paid through the issuance of another 600
shares of preferred stock.
From time to time, the Company has made cash advances to the Company's
Chief Executive Officer totaling $221,485 at July 31, 1996. The Company has made
similar advances to the Company's Executive Vice President totaling $12,093 at
July 31, 1996. Such advances are evidenced by promissory notes, bear interest at
the rate of 7.34%, and are payable in four remaining equal annual installments.
The Company also made advances to FMG, Inc., a North Carolina corporation in
which Company officers hold a controlling interest. Such advances bore interest
at an annual rate equal to prime plus one-half percent and had a balance at July
31, 1996 of $31,171. Each of the related parties which are indebted to the
Company are current with respect to all payments of principal and interest, and
the Company is unaware of any circumstances which are reasonably likely to
negatively impact the collectibility of such indebtedness.
At July 31, 1996, the Company's total long-term debt obligations were
$384,349, of which $164,531 is due in the next twelve months. The Company
anticipates that the funds necessary to satisfy these obligations will be
derived primarily from cash flows from operations.
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index.
(b) A report on Form 8-K dated June 28, 1996 reporting the acquisition of
Magazine Marketing, Inc. was filed July 10, 1996.
<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 COMPANY
Date: January 22, 1997 /s/ W. Brian Rodgers
----------------------------------
W. Brian Rodgers
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
27 Amended Financial Data Schedule 21
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1997
<PERIOD-START> FEB-01-1996
<PERIOD-END> JUL-31-1996
<CASH> 559,347
<SECURITIES> 5,875
<RECEIVABLES> 5,414,973
<ALLOWANCES> 63,806
<INVENTORY> 0
<CURRENT-ASSETS> 6,657,327
<PP&E> 1,648,414
<DEPRECIATION> (1,082,312)
<TOTAL-ASSETS> 8,654,303
<CURRENT-LIABILITIES> 4,377,503
<BONDS> 0
0
129
<COMMON> 68,097
<OTHER-SE> 2,995,936
<TOTAL-LIABILITY-AND-EQUITY> 8,654,303
<SALES> 2,758,498
<TOTAL-REVENUES> 2,758,498
<CGS> 2,362,346
<TOTAL-COSTS> 1,671,502
<OTHER-EXPENSES> (5,525)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114,178
<INCOME-PRETAX> (1,384,003)
<INCOME-TAX> 478,463
<INCOME-CONTINUING> (905,540)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (905,540)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
