SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required). For the fiscal year ended January 31, 1998.
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required). For the transition period from
_____________ to ______________.
Commission file number 1-13437
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Name of Small Business Issuer in its Charter)
Missouri 43-1710906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11644 Lilburn Park Road
St. Louis, Missouri 63146
(Address of Principal Executive Offices) (Zip Code)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Common Stock, $0.01 par value The Boston Stock Exchange
Securities registered under Section 12(g) of the Act: Common Stock $0.01 par
value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
The issuer's revenues for its most recent fiscal year are $11,803,844.
At March 5, 1998, the aggregate market value of the voting stock held by
non-affiliates of The Source Information Management Company (the "Company") was
approximately $27,700,000, based on the last sale price of the Common Stock
reported by the Nasdaq SmallCap Market on March 5, 1998. At March 5, 1998, the
Company had outstanding 8,016,367 shares of Common Stock.
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TABLE OF CONTENTS
PART I
Page
ITEM 1. Description of Business
ITEM 2. Description of Property
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
ITEM 7. Financial Statements
ITEM 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
ITEM 12. Certain Relationships and Related Transactions
ITEM 13. Exhibits and Reports on Form 8-K
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The information contained in this Form 10-KSB includes statements regarding
matters which are not historical facts (including statements regarding the
plans, beliefs or expectations of The Source Information Management Company (the
"Company")) which are forward-looking statements within the meaning of the
federal securities law. Because such forward-looking statements involve certain
risks and uncertainties, the Company's actual results and the timing of certain
events could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed in the Sections captioned "Description of Business," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Certain Relationships and Related Transactions," those discussed in Exhibit
99.1 and those discussed in the Company's Form SB-2 filed with the Securities
and Exchange Commission on October 7, 1997.
PART I
Item 1. Description of Business.
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 725 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 more than
65,000 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
collects directly from the publishers the claims due to the retailer. In fiscal
1997 and 1998, the Company advanced approximately $15,000,000 and $38,900,000
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 offers and provides subscribing magazine publishers, advertisers and
others with industry-wide, single copy magazine sales information in a user
friendly format. Based on discussions with representatives of magazine
publishers, the Company believes that publishers and advertisers perceive that
PIN provides a valuable basis on which to formulate marketing, distribution,
advertising and other policies.
Formation of the Company
The Company was organized in 1995 by the consolidation of two
significant providers of services to retailers of magazines and other
periodicals. The Company has expanded through the acquisition of businesses and
technologies that addressed additional services or products, market segments or
geographic regions in which the Company was not previously active. These
acquisitions have allowed the Company to expand the services offered to its
clients and enhanced its ability to support existing and planned services. In
1995, the Company acquired the businesses of Dixon's Modern Marketing Concepts,
Inc. and Tri-State Stores, Inc., both of Chicago Heights, Illinois. In 1996, the
Company acquired 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.
Growth Opportunities
Expansion of Services to New Product Categories. The Company's
information services are 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
believes that its future success will be dependent upon its ability to
anticipate the informational needs of existing and potential clients and to
develop and introduce, in a timely manner, new products and services which
address such needs. The Company encourages creativity and originality in its
sales personnel and believes that one of the keys to the growth of the Company
has been the willingness of senior management to implement product and service
solutions suggested by the Company's personnel to address the needs of customers
with whom they interact. In addition, Messrs. Flegel and Lee, as well as various
members of the Company's senior management and sales staff, periodically meet
with its customers to discuss industry trends and informational requirements.
After identifying an unsatisfied customer need, members of the Company's senior
management and sales team meet to design new or enhanced products and services
addressing such need. Thereafter, a team is appointed to develop such products
and services for introduction to the market.
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 improved 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
volume of single copy sales historically is achieved by grocery retailers and
mass merchandise stores. The primary function of the retailer is the display of
available titles in two store locations, at a dedicated section called a
"mainline display" and at displays located within the merchandise checkout area.
Because magazines are frequently purchased on impulse, publishers increasingly
compete for display spaces, referred to as "pockets," at the checkout.
National distributors receive a brokerage fee based on sales and
distribution to local 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. 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 distributors which invoice for distributed copies,
credit retailers for returns and credit national distributors for sales through
a computer-assisted single entry information system.
To provide further incentives to retailers to prominently display their
respective titles, publishers typically enter into Retail Display Allowance
("RDA") programs under which the retailer is entitled to receive, on a quarterly
basis, a cash rebate directly from the publisher equal to a percentage of the
retailer's actual net sales of the publisher's titles upon submission of a
properly documented claim. Conversely, certain publishers of high volume
magazines essentially rent "pocket" space from retailers for the display and
sale of specific titles. Such rent, referred to as "pocket payments" (or "RDP"
payments), is a fixed amount per pocket, per store based on the verified
location and other criteria of the pocket, and is paid quarterly. A majority of
RDA and RDP programs are administered on behalf of the publishers by the
national distributors.
Publishers have 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:
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Claim Submission. Through its information system, the Company assists
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
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 collects 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 $15,000,000 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. Space design services accounted for
approximately 13% of the Company's 1998 revenues.
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, Kmart 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.
Periodical Information Network ("PIN"). The Company's large and
sophisticated database of magazine industry information has resulted in it
becoming a magazine information center which 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
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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. Subscribers
pay service fees equal to a one-time enrollment fee and quarterly update fees.
Subscriptions have a term of one year, which are 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. PIN
accounted for approximately 4% of the Company's 1998 revenues.
Marketing and Promotional Program. As part of its full-service
philosophy, the Company offers its clients advice and suggestions concerning
specialized marketing and promotional programs which may include, for example,
special mainline or checkout displays and cross-promotions of magazines and
products of interest to the readers of such magazines. Such services are offered
to enhance single copy magazine sales by the Company's clients, and thereby
increase 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. 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").
Administrative support services accounted for less than 1% of the Company's 1998
revenues.
Customers/Clients
The Company provides services to approximately 725 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 ten 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 payments 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,
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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.
Management Information Systems
The Company uses a customized information 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 information system. This
sophisticated information system is of a type used by several companies engaged
in the collection of sales incentive payments in the magazine industry. In May
1998, the Company intends to introduce its proprietary SOURCEPRO software which
will enable retailers to visualize alternative checkout configurations in a
three-dimensional graphic environment and analyze relative profit potential.
Management believes that currently none of the Company's competitors utilize
comparable technology to assist retailers in space design. 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.
Employees
As of January 31, 1998, the Company employed 115 persons, of whom 94
were employed on a full-time basis and 21 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 employees to be good.
Item 2. Description of Property.
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; Woodstock, Georgia; Fair Lawn, New Jersey;
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, 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 "Item 12: Certain Relationships and Related Transactions."
Item 3. Legal Proceedings.
The Company is not a party to any legal proceedings, other than routine
claims and lawsuits arising in the ordinary course of business. The Company does
not believe that such claims and lawsuits, individually or in the aggregate,
will have a material adverse effect on the Company's business.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the securityholders during the
fourth quarter of fiscal 1998.
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PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
From June 22, 1995, until February 12, 1996, the Company's Common Stock
was quoted on the Nasdaq OTC Bulletin Board. Beginning on February 12, 1996, the
Common Stock was quoted on the Nasdaq SmallCap Market under the symbol "SORC."
Beginning on October 7, 1997, the Common Stock was listed on the Boston Stock
Exchange. The following table sets forth, for the periods indicated, the high
and low closing bid prices for the Common Stock as reported on the Nasdaq OTC
Bulletin Board or Nasdaq SmallCap Market, as applicable.
Fiscal 1997 High Low
- ----------- ---- ---
First Quarter $6.96 $5.30
Second Quarter $5.75 $4.84
Third Quarter $5.75 $3.18
Fourth Quarter $3.93 $2.72
Fiscal 1998 High Low
- ----------- ---- ---
First Quarter $3.48 $2.58
Second Quarter $3.71 $1.21
Third Quarter $4.75 $3.18
Fourth Quarter $5.38 $3.56
As of March 5, 1998, there were 114 holders of record of the Common
Stock.
The Board of Directors presently intends to retain all of its earnings,
if any, for the development of the Company's business for the foreseeable
future. The declaration and payment of cash dividends in the future will be at
the discretion of the Company's Board of Directors and will depend upon a number
of factors, including among others, future earnings, operations, capital
requirements, the general financial condition of the Company and such other
factors that the Board of Directors may deem relevant.
Sales of Unregistered Shares
In November 1997, the Company issued a warrant to purchase 75,000
shares of Common Stock beginning February, 1998 to Herbert A. Hardt in
connection with a consulting agreement under which Mr. Hardt will provide
$51,750 of consulting services to the Company. The issuance of the warrant was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
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 725 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 more than
65,000 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
collects directly from the publishers the claims due to the retailer. In fiscal
1997 and 1998, the Company advanced approximately $15,000,000 and $38,900,000
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 offers and provides subscribing magazine publishers, advertisers and
others with industry-wide, single copy magazine sales information in a user
friendly format. Based on discussions 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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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 incentive payment
programs offer the retailer a cash rebate, equal to a percentage of the
retailer's 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
publisher quarterly based on 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, which is continuing to represent an increasing
percentage of payments collected, 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,
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 revenue recognized
by the Company represents the difference between the amount advanced to the
retailer customer and the amount claimed against the publisher.
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:
Fiscal Year Ended January 31,
1998 1997
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Service Revenues 99.9% 96.7%
Merchandise Revenues 0.1% 3.3%
Total Revenues 100.0% 100.0%
Cost of Service Revenues 49.4% 66.6%
Cost of Merchandise Sold 0.3% 2.8%
Gross Profit 50.3% 30.6%
Selling, General & Administrative
Expense 19.9% 39.8%
Operating Income (Loss) 30.4% (9.2)%
Interest, Net (5.9)% (3.9)%
Other Income (Expense), Net (0.7)% (0.4)%
Income (Loss) Before Income Taxes 23.8% (13.4)%
Net Income (Loss) 13.5% (8.3)%
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Service Revenues
Increased retailer participation in the Advance Pay Program, the
acquisition of Mike Kessler and Associates, Inc. and the growth in subscriptions
to PIN contributed to an increase in service revenues of approximately
$4,739,000, or 67%, over fiscal 1997. Of the total, claims, PIN and Advance Pay
Program revenue increased approximately $3,898,000, or 61%, over the prior year.
Space design revenue increased from $636,000 in the prior year to $1,477,000 in
the current year, or 132%, resulting from an increase in the number of
reconfiguration programs undertaken by the Company on behalf of its retailer
clients, including the Kmart program. Historically, space design revenues have
fluctuated as a result of 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. Consequently,
variations in the timing and amounts of space design revenues could have a
material positive or negative effect on the operating results of any given
quarter. In May 1998, the Company intends to introduce its proprietary SOURCEPRO
software, which will enable retailers to visualize alternative checkout
configurations in a three-dimensional graphic environment and analyze the
relative profit potential which can be achieved by the retailer from alternative
configurations.
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, at the end of fiscal 1997,
management decided to de-emphasize this portion of its business in order to
dedicate more resources to its core services. As a result, the revenues derived
from merchandising sales declined in fiscal 1998 as the related merchandise
inventory was liquidated.
Cost of Service Revenues and Selling, General and Administrative Expense
("Total Costs")
Despite a 67% increase in Service Revenues, Total Costs increased only
$412,000, or 5%. Increased costs incurred in connection with the acquisitions of
Magazine Marketing, Inc., Readers Choice, Inc. and Mike Kessler and Associates,
Inc., including wages, amortization, rent and depreciation, were more than
offset by the related revenue increases. In addition, wages increased as a
result of bonuses and the hiring of individuals formerly employed by Data-Pros,
Inc., a data processing service company purchased on January 1, 1997. However,
the increase in wages in connection with this acquisition was largely offset by
a decrease in data processing expenses.
Interest Expense
Interest Expense increased $402,000, principally due to increased
borrowings necessary to fund the growth in the Advance Pay Program and, to a
lesser extent, to fund the acquisition of Mike Kessler and Associates, Inc.
Income Tax Expense (Benefit)
The effective income tax rate for fiscal year 1998 was 43.7%. This rate
varied from the federal statutory rate due to state income taxes and expenses
not deductible for income tax purposes. Such non-deductible expenses include
meals and entertainment, goodwill amortization , and officers' life insurance
premiums.
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Earnings Per Share
In calculating earnings per share, net income for the year 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.
Year 2000 Readiness
The Company is aware of the Year 2000 issues associated with the
practice of encoding only the last two digits of four digit years in a
computer-based system. Year 2000 issues, if not properly addressed, could result
in disruptions of operations. Currently, management estimates that the
incremental cost to renovate systems and encoded applications and to test
replacement systems and applications to become Year 2000 ready will not have a
material effect on the Company's financial condition, results of operations or
liquidity. No assurance can be given that the Company will successfully avoid
all problems with the Year 2000 issue.
Liquidity and Capital Resources
The Company's primary cash requirements are for meeting the working
capital required in connection with the costs incurred in obtaining service
revenues, selling, general and administrative expenses (particularly salaries,
travel and entertainment) incurred in the maintenance of existing accounts and
in connection with the solicitation of new clients, and for funding the Advance
Pay Program. 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 $5,520,000 and $6,511,000
during the years ended January 31, 1998 and 1997, respectively. If, and so long
as, the Advance Pay Program continues to grow at the rate experienced in fiscal
1998, management anticipates cash used by operations will continue to exceed
cash provided by operations. However, if and when the conversion of existing and
new customer accounts to the Advance Pay Program has been substantially
completed, management anticipates, based on its existing operations, that cash
provided by operations will exceed cash used by operations.
Accounts receivable increased $5,500,000 as a result of the significant
growth of the Advance Pay Program. The average collection period for 1998 was
136 days (considered to be within an acceptable range by management based on the
nature of the Company's business and historical experience) compared to 153 days
for 1997. 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 January 31, 1998, 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 $15,000,000 with Wachovia Bank, 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 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. At January 31, 1998,
the Company was in compliance with all financial ratios imposed by the credit
agreement.
9
<PAGE>
At January 31, 1998, the Company's total long-term debt obligations
were $8,635,054. Of such amount, $30,997 will mature within 12 months. The
Company anticipates that the funds necessary to satisfy these obligations will
be derived from cash flows from operations.
At January 31, 1998, the Company had total deferred tax assets of
$214,000 and total deferred tax liabilities of $378,000, resulting in a net
deferred tax liability of $164,000 reflecting the net tax effects of temporary
differences between the carrying amount of the assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting. Of
this liability, $316,000 results from a change in accounting method from cash to
accrual by (i) the Company's predecessors in connection with the formation of
the Company, (ii) Magazine Marketing, Inc. and (iii) Mike Kessler and
Associates, Inc. This liability is expected to be paid $222,000, $72,000 and
$22,000 over the next three years, respectively. The Company anticipates that
the funds necessary to satisfy this tax obligation will be derived primarily
from cash flows from operations.
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 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. The exchange resulted in a one-time
constructive dividend of $109,937, which was reported in the fiscal quarter
ended 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. These warrants will vest at a
rate of 25% on August 1, 1998, 25% on November 1, 1998, 25% on February 1, 1999
and 25% on May 1, 1999. The related expense incurred of approximately $54,000
will be recognized ratably over those periods.
The Company believes that it will be necessary to raise additional
funds through the sale of its equity securities in order to achieve management's
goals with respect to (i) expanding the Company's business in new and existing
services, particularly the Advance Pay Program, new products and new geographic
areas, directly or by acquisition, and (ii) increasing its shareholder base and
the market and liquidity of its securities. Accordingly, the Company intends to
offer approximately 1,500,000 shares of its Common Stock to the public through
an underwriter on a firm commitment basis. The Company anticipates that the
offering will commence in June, 1998, and will provide the Company with proceeds
of approximately $9,300,000, after deducting underwriting discounts and
commissions and other offering expenses.
10
<PAGE>
Item 7. Consolidated Financial Statements.
The Report of the Independent Certified Public Accountants
Board of Directors
The Source Information Management Company
St. Louis, Missouri
We have audited the consolidated balance sheet of The Source Information
Management Company as of January 31, 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended January 31, 1998. These consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Source
Information Management Company at January 31, 1998 and the results of its
operations and its cash flows for each of the two years in the period ended
January 31, 1998 in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
St. Louis, Missouri
March 27, 1998
11
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Consolidated Balance Sheet
January 31, 1998
- -------------------------------------------------------------------------------
Assets (Note 2)
Current
Cash $ 31,455
Trade receivables (net of allowance for
doubtful accounts of $460,898) (Note 9) 18,874,764
Income taxes receivable 492,688
Notes receivable - officers (Note 1) 7,351
Other current assets 187,876
- -------------------------------------------------------------------------------
Total Current Assets 19,594,134
- -------------------------------------------------------------------------------
Office equipment and furniture (Note 3) 2,249,688
Less accumulated depreciation and amortization 1,445,005
- ------------------------------------------------------------------------------
Net Office Equipment and Furniture 804,683
- ------------------------------------------------------------------------------
Other Assets
Notes receivable - officers (Note 1) 14,742
Goodwill, net of accumulated amortization of
$250,579 (Note 7) 3,227,354
Other 166,944
- -----------------------------------------------------------------------------
Total Other Assets 3,409,040
- -----------------------------------------------------------------------------
$ 23,807,857
- -----------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
12
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Consolidated Balance Sheet
January 31, 1998
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current
Checks issued against future deposits 132,189
Accounts payable and accrued expenses 680,055
Due to retailers (Note 10) 993,846
Deferred income taxes (Note 6) 769,000
Current maturities of long-term debt
(Note 2) 30,997
- ----------------------------------------------------------------------------
Total Current Liabilities 2,606,087
- ----------------------------------------------------------------------------
Long-term Debt, less current maturities
(Note 2) 8,604,057
- ----------------------------------------------------------------------------
Deferred Income Taxes (Note 6) 103,000
- ----------------------------------------------------------------------------
Total Liabilities 11,313,144
- ----------------------------------------------------------------------------
Commitments (Notes 3 and 4)
- ----------------------------------------------------------------------------
Preferred Stock, $.01 par - shares authorized,
2,000,000; outstanding, none (Note 8) -
Stockholders' Equity
Common Stock, $.01 par - shares authorized,
16,528,925; outstanding 8,016,367 (Note 11) 80,163
Additional paid-in-capital 10,513,949
Retained earnings 1,900,601
- ----------------------------------------------------------------------------
Total Stockholders' Equity 12,494,713
- ----------------------------------------------------------------------------
$ 23,807,857
- ----------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
13
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Consolidated Statements of Operations
Years Ended January 31, 1998 1997
- -------------------------------------------------------------------------------
Service Revenues $ 11,795,496 $ 7,056,270
Merchandise Revenues 8,348 242,177
- -------------------------------------------------------------------------------
11,803,844 7,298,447
- -------------------------------------------------------------------------------
Cost of Service Revenues 5,827,933 4,862,207
Cost of Merchandise Sold 32,720 202,381
- -------------------------------------------------------------------------------
5,860,653 5,064,588
- -------------------------------------------------------------------------------
5,943,191 2,233,859
Selling, General and Administrative
Expense (Notes 1, 3 and 4) 2,350,622 2,904,372
- -------------------------------------------------------------------------------
Operating Income (Loss) 3,592,569 (670,513)
- -------------------------------------------------------------------------------
Other Income (Expense)
Interest income 21,164 30,628
Interest expense (714,404) (311,737)
Other (79,321) (28,883)
- -------------------------------------------------------------------------------
Total Other Income (Expense) (772,561) (309,992)
- -------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 2,820,008 (980,505)
Income Tax (Expense) Benefit (Note 6) (1,231,000) 377,188
- -------------------------------------------------------------------------------
Net Income (Loss) $ 1,589,008 $ (603,317)
- -------------------------------------------------------------------------------
Earnings (Loss) per Share - Basic $ 0.23 $ (0.11)
- -------------------------------------------------------------------------------
Weighted Average of Shares
Outstanding - Basic 6,561,761 5,557,223
- -------------------------------------------------------------------------------
Earnings (Loss) per Share - Diluted $ 0.22 $ (0.11)
- -------------------------------------------------------------------------------
Weighted Average of Shares
Outstanding - Diluted 6,693,666 5,557,223
- -------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.
14
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Consolidated Statements of Stockholders' Equity
As Restated For Reverse Stock Split (Note 11)
<CAPTION>
Common Stock Additional Total
------------------------------ Paid - in Retained Stockholders'
Shares Amount Capital Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1996 5,268,090 $ 52,681 $ 988,021 $ 976,924 $ 2,017,626
Issuance of Common Stock 6,612 66 29,934 - 30,000
Conversion of 7% Preferred Stock to Common
Stock 349,750 3,498 1,396,071 - 1,399,569
Issuance of Common Stock to purchase
Magazine Marketing, Inc. (Note 7) 82,644 826 249,174 - 250,000
Issuance of Common Stock in payment
of services 12,506 125 51,625 - 51,750
Dividend on Preferred Stock 7,863 79 42,382 (42,467) (6)
Net loss for the year - - - (603,317) (603,317)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1997 5,727,465 $ 57,275 $ 2,757,207 $ 331,140 $ 3,145,622
Issuance of Common Stock (Note 11) 2,000,000 20,000 6,700,602 - 6,720,602
Issuance of Common Stock in payment of
services 1,811 18 7,982 - 8,000
Issuance of Common Stock for exercise of
stock options 2,182 21 5,259 - 5,280
Dividend on Preferred Stock 6,381 64 19,480 (19,547) (3)
Exchange of 7% Preferred Stock to Common
Stock (Note 8) 186,667 1,867 520,639 - 522,506
Redeemable Common Stock converted to
Common Stock (Note 7) 91,938 919 502,901 - 503,820
Purchase fractional shares from reverse
stock split (77) (1) (321) - (322)
Issuance of Common Stock Warrants - - 200 - 200
Net income for the year - - - 1,589,008 1,589,008
- ---------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1998 8,016,367 $ 80,163 $ 10,513,949 $ 1,900,601 $ 12,494,713
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Consolidated Statements of Cash Flows
Years Ended January 31, 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 1,589,008 $ (603,317)
Adjustments to reconcile net cash
provided by operating activities:
Depreciation and amortization 432,632 246,599
Loss on disposition of equipment 1,338 299
Provision for losses on accounts
receivable 97,311 224,387
Impairment of investment in
limited partnership 20,000 20,000
Deferred income taxes 470,000 (259,064)
Services received in exchange for
Common Stock 8,000 51,750
Changes in assets and liabilities:
Increase in accounts receivable (5,537,689) (8,789,885)
Increase in other assets (421,882) (230,004)
(Decrease) increase in checks issued
against future deposits (3,093,479) 3,225,668
Increase (decrease) in accounts
payable and accrued expenses 120,614 (513,110)
Increase in amounts due customers 794,271 116,120
- -------------------------------------------------------------------------------------------
Cash Used in Operating Activities (5,519,876) (6,510,557)
- -------------------------------------------------------------------------------------------
Investment Activities
Acquisition of Mike Kessler &
Associates, Inc., net of cash acquired (608,650) -
Acquisition of Magazine Marketing, Inc. - (275,000)
Capital expenditures (344,847) (276,729)
Loans to officers (10,000) -
Collection on officers notes receivable 221,485 29,715
Collections from related party - 53,171
Proceeds from sale of fixed assets 2,000 -
Increase in cash surrender value of
life insurance (55,333) (32,740)
Proceeds from surrender of life insurance
policies 83,959 -
- ----------------------------------------------------------------------------------------
Cash Used in Investing Activities (711,386) (501,583)
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Consolidated Statements of Cash Flows
Years Ended January 31, 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financing Activities
Proceeds from issuance of Common Stock 6,720,602 30,000
Proceeds from issuance of Preferred Stock - 1,922,075
Borrowings under credit facility 37,777,000 9,791,000
Principal payments on credit facility (36,303,000) (2,756,121)
Borrowings under short-term debt agreements - 2,836,366
Repayments under short-term debt agreements (2,221,961) (4,550,081)
Other financing activities 5,155 (6)
- -------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 5,977,796 7,273,233
- -------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash (253,466) 261,093
Cash, beginning of period 284,921 23,828
- -------------------------------------------------------------------------------------------------------
Cash, end of period $ 31,455 $ 284,921
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
17
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Summary of Accounting Policies
Basis of The consolidated financial statements of The Source
Presentation 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.
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 commissions. The Company also obtains 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.
Principles of The consolidated financial statements include the accounts of
Consolidation The Source Information Management Company and its wholly-owned
subsidiaries, all of which are currently inactive. All
material intercompany accounts and transactions have been
eliminated in consolidation.
Concentrations Substantially all of the Company's revenues are derived from
of Credit the services provided in connection with the collection
Risk of payments owed to the Company's retailer clients from
magazine publishers under programs designed by the publishers
to provide incentives to increase single copy magazine sales.
The incentive programs, although part of the publishers'
marketing strategy for over 20 years, are governed by
short-term contracts. If magazine publishers discontinue or
significantly modify the incentive programs in such a manner
which makes the Company's services incompatible with the
modified programs, the Company's results of operations and
financial condition may be materially and adversely affected.
The Company's retailer clients, who are located throughout the
United States and eastern Canada, are periodically evaluated
for extension of unsecured credit. At the balance sheet date,
the Company had no concentration of credit with any individual
retailer client.
In the Advance Pay Program (Note 9), the Company assumes the
risk otherwise borne by the retailer 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 for claims submitted but subject to such a
refusal or inability to pay. However, if a prominent magazine
publisher files a petition in bankruptcy, seeks other
protection from its creditors or otherwise refuses to pay,
this reserve may be inadequate. The results of operations and
the financial condition of the Company could be materially
affected.
18
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Summary of Accounting Policies
Revenue Service revenues are recognized during the period in which
Recognition services are performed. Merchandising revenues are recognized
in the period in which the merchandising services are
provided.
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. The commission revenue
recognized is based on the amount claimed, less an estimated
reserve necessary to maintain an allowance for doubtful
accounts of approximately 2% of trade accounts receivable.
Under the standard arrangement, invoices for claim processing
services are not issued until the Company receives settlement
of the claim. However, under the Advance Pay Program, the
customer is not invoiced for the commission, which is the
difference between the claim and the advance amount.
Equipment and Equipment and furniture are stated at cost. Depreciation is
Furniture 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.
Stock-Based The Company grants stock options for a fixed number of shares
Compensation 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 (SFAS) No.
123, "Accounting for Stock-Based Compensation". 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 options. Pro forma net income
(loss) and earnings (loss) per share, determined as if the
Company had applied the new method, are disclosed within Note
4.
19
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Summary of Accounting Policies
Accounting The preparation of financial statements in conformity with
Estimates 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 In March 1995, SFAS No. 121 "Accounting for the Impairment of
Assets Long-Lived Assets and for Long-Lived Assets Disposed Of" was
issued. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used or
disposed of by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. During fiscal 1997,
the Company adopted this statement. The Company has determined
that no impairment loss need be recognized for applicable
assets of continuing operations.
Earnings Per In February 1997, the Financial Accounting Standards Board
Share issued SFAS No. 128, "Earnings per Share," which requires the
presentation of "basic" earnings per share, computed by
dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the
period, and "diluted" earnings per share, which reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity. The Company
adopted SFAS No. 128 in the fourth quarter of fiscal 1998 and
has restated all prior period earnings per share data
presented. The adoption of SFAS No. 128 did not have a
material effect on the Company's previously reported earnings
per share information.
Reclassi- Certain 1997 amounts have been reclassified to conform to the
fications 1998 presentation.
New Accounting SFAS No. 130, "Reporting Comprehensive Income," was issued in
Standards June 1997. Comprehensive income is defined as net income
plus certain items that are recorded directly to shareholders'
equity, such as unrealized gains and losses on available-
for-sale securities. Components of the Company's comprehensive
income will be included in a financial statement that has the
same prominence as other financial statements starting in the
first quarter of fiscal 1999. SFAS No. 130's disclosure
requirements will have no impact on the Company's financial
condition or results of operations.
SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," is effective for financial statements
for periods beginning after December 15, 1997, but interim
reporting is not required in 1998. An operating segment is
defined under SFAS No. 131 as a component of an enterprise
that engages in business activities that generate revenue and
expense for which operating results are reviewed by the chief
operating decision maker in the determination of resource
allocation and performance. The Company is currently
evaluating the impact of SFAS No. 131 on future financial
statement disclosures.
20
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
1. Related Party The Company purchased data processing services from an
Transactions employment service company owned by certain officers of
the Company. There were approximately $275,000 of such
purchases made during 1997. 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 currently leases certain office space and
from time to time leases an airplane from partnerships
controlled by stockholders of the Company. Amounts paid
for the office space were approximately $223,000 and
$207,000 for 1998 and 1997, respectively. Amounts paid
for the airplane were approximately $12,000 and $0 for
1998 and 1997, 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 $295,293.
Collections on these notes totaled $273,200 through
January 31, 1998, leaving a balance outstanding of
$22,093. The remaining notes bear interest at rates
varying from 6.96% to 7.34% per annum.
2. Long-term Debt Long-term debt consists of:
and Revolving
Credit Facility
January 31, 1998
- -------------------------------------------------------------------------------
Revolving Credit Facility $ 8,598,000
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 9,774
Term note payable in monthly installments of $629
through November 1999, collateralized by an automobile 12,800
Obligations under capital lease (Note 3) 14,480
- -------------------------------------------------------------------------------
Total Long-term Debt 8,635,054
Less current maturities 30,997
- -------------------------------------------------------------------------------
Long-term Debt $ 8,604,057
- -------------------------------------------------------------------------------
21
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
Annual maturities of long-term debt are as follows:
1999 - $30,997; 2000 - $8,604,057.
The Company has an agreement providing for revolving
loans up to $15,000,000. 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
8.4727% at January 31, 1998). Borrowings are secured 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 January 31, 1998.
3. 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 in 2012. 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 $462,000 and
$427,000 for the years ended January 31, 1998 and 1997,
respectively. Amounts paid to related parties included
in total rent expense were approximately $223,000 and
$207,000 for 1998 and 1997, respectively.
Office equipment and furniture includes $71,066 at
January 31, 1998 for equipment leases which have been
capitalized. Accumulated amortization was $63,626 at
January 31, 1998. 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, 1998:
22
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
Capital Operating
Year Ending January 31, leases leases
- ----------------------------------------------------------------------------
1999 $ 15,523 $ 410,569
2000 - 250,584
2001 - 173,148
2002 - 155,215
2003 - 150,300
Thereafter - 1,327,650
- ----------------------------------------------------------------------------
Total minimum lease payments 15,523 $ 2,467,466
------------------------
Amount representing interest 1,043
- -----------------------------------------------------
Present Value of Net Minimum
Lease Payments $ 14,480
- -----------------------------------------------------
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.
Employment agreements
The Company has entered into employment agreements with
certain officers and key employees. These agreements
expire in January 1999 and require annual salary levels
and termination benefits, should a termination occur.
Consulting agreement
On May 31, 1997, the Company entered into a three year
consulting agreement with a company owned by the former
shareholder of Mike Kessler and Associates, Inc. The
agreement requires the Company to make payments
aggregating $75,000, $65,000 and $50,000 annually for
the first, second and third years of the agreement.
23
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
4. 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. There were no
profit sharing contributions charged against operations
for the years ended January 31, 1998 and 1997.
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, 1998 and 1997
pursuant to this Plan were approximately $63,000 and
$50,000, respectively.
Deferred Compensation Plan
During fiscal year 1997, 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 its 1995
Incentive Stock Option Plan for key employees and
reserved 520,661 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.
24
<PAGE>
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
Weighted
Range of Average
Number of Exercise Exercise
Options Prices Price
-----------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at
January 31, 1996 -0- - -
Options granted 227,271 4.84-5.60 5.28
Options expired 61,983 4.84 4.84
-----------------------------------------------------------------
Options outstanding at
January 31, 1997 165,288 5.30-5.60 5.45
Options granted 327,273 1.66-5.60 2.97
Options expired 92,554 2.42-5.60 5.26
Options exercised 2,182 2.42 2.42
-----------------------------------------------------------------
Options outstanding at
January 31, 1998 397,825 1.66-5.60 3.47
-----------------------------------------------------------------
</TABLE>
<TABLE>
The following table summarizes information about the
stock options outstanding at January 31, 1998:
<CAPTION>
Remaining
Number Contractual Options
Exercise Prices Outstanding Life (Months) Exercisable
<S> <C> <C> <C> <C>
1.66 89,256 52 -0-
2.42 75,454 113 15,091
2.42 27,000 113 9,000
2.66 49,091 53 -0-
5.30 82,644 112 82,644
5.60 74,380 36 24,793
------ ------
397,825 131,528
</TABLE>
The options above were issued at exercise prices which
approximate fair market value at the date of grant. At
January 31, 1998, 122,836 shares are available for
grant under the plan.
25
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
As discussed in the Summary of Accounting Policies, the
Company applies APB Opinion No. 25 and related
interpretations in accounting for this plan.
Accordingly, no compensation cost has been recognized
for its incentive stock option plan. Had compensation
cost for the Company's stock- based compensation plan
been determined based on the fair value at the grant
dates for awards under the plan consistent with the
method of SFAS No. 123, the Company's consolidated net
income (loss) and consolidated income (loss) per share
would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Year Ended January 31, 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) As reported $ 1,589,008 (603,317)
Pro forma 1,575,534 (637,373)
Basic earnings (loss) per share As reported .23 (0.11)
Pro forma .22 (0.11)
Diluted earnings (loss) per share As reported .22 (0.11)
Pro forma .22 (0.11)
- --------------------------------------------------------------------------------------
</TABLE>
The pro forma amounts reflected above are not
representative of the effects on reported net income in
future years because in general, the options granted
typically do not vest for several years and additional
awards are made each year. The fair value of each
option grant is estimated on the grant date using the
Black-Scholes option pricing model with the following
assumptions:
Year Ended January 31, 1998 1997
- -------------------------------------------------------------------------------
Dividend yield 0% 0%
Range of expected lives (years) 3.6-10 1
Range of expected volatility 0.40-0.60 0.30
Risk-free interest rate 5.90% 4.88%
- -------------------------------------------------------------------------------
Stock Award Plan
In September 1996, the Company adopted its Stock Award
Plan for all employees and reserved 41,322 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, 8,306 shares of Common Stock
were awarded to certain employees under the plan.
26
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
5. Supplemental Supplemental information on interest and income taxes
Cash Flow paid is as follows:
Information
Years Ended January 31, 1998 1997
- ---------------------------------------------------------------------------
Interest $ 700,000 $ 285,000
Income Taxes $ 1,081,000 $ 264,000
- ---------------------------------------------------------------------------
Capital lease obligations of $15,687 were incurred in
1997 when the Company entered into leases for new
office equipment.
On August 30, 1996, 7,863 shares of Common Stock were
issued as a dividend to the preferred shareholders as
of that date. On February 28, 1997, 6,381 shares of
Common Stock were issued as a dividend to the preferred
shareholders as of that date.
During 1997, in connection with the acquisitions of
Magazine Marketing, Inc. and Readers Choice, Inc., the
Company issued 86,644 shares and 91,938 shares of
Common Stock (Note 7).
As part of the acquisition of Mike Kessler &
Associates, Inc. the Company entered into a short-term
debt agreement for $2,150,000. The obligation was paid
in full at its due date in January 1998.
6. Income Taxes Provision for federal and state income taxes (benefit)
in the consolidated statements of operations consist of
the following components:
Year Ended January 31, 1998 1997
- ------------------------------------------------------------------------------
Current
Federal $ 606,000 $ (102,768)
State 155,000 (15,356)
- ------------------------------------------------------------------------------
Total Current 761,000 (118,124)
- ------------------------------------------------------------------------------
Deferred
Federal 376,000 (225,386)
State 94,000 (33,678)
- ------------------------------------------------------------------------------
Total Deferred 470,000 (259,064)
- -------------------------------------------------------------------------------
Total Income Tax Expense (Benefit) $ 1,231,000 $ (377,188)
- ------------------------------------------------------------------------------
27
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of
the assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
The sources of the temporary differences and their
effect on deferred taxes are as follows:
January 31, 1998
- ----------------------------------------------------------------------
Deferred Tax Assets
Allowance for doubtful accounts $ 165,000
Deferred compensation 33,000
Other 16,000
- ----------------------------------------------------------------------
Total Deferred Tax Assets 214,000
- ----------------------------------------------------------------------
Deferred Tax Liabilities
Internal Revenue Code
Section 83 adjustment 708,000
Income not previously taxed under cash
basis of accounting for income tax purposes 316,000
Depreciation 30,000
Other 32,000
- ---------------------------------------------------------------------
Total Deferred Tax Liabilities 1,086,000
- ---------------------------------------------------------------------
Net Deferred Tax Liability 872,000
- ---------------------------------------------------------------------
Classified as
Current 769,000
Non-current 103,000
- ---------------------------------------------------------------------
Net Deferred Tax Liability $ 872,000
- ---------------------------------------------------------------------
The following summary reconciles income taxes at the
maximum federal statutory rate with the effective rates
for 1998 and 1997:
Year Ended January 31, 1998 1997
- ----------------------------------------------------------------------------
Income tax expense (benefit) at
statutory rate $ 960,000 $ (333,372)
State income tax expense (benefit),
net of federal income tax benefit 200,000 (80,421)
Non-deductible meals and entertainment 30,000 35,320
Non-deductible officers' life insurance 7,000 (3,250)
Non-deductible goodwill amortization 61,000 2,306
Utilization of NOL carryforwards (19,000) -
Other, net (8,000) 2,229
- ----------------------------------------------------------------------------
Income Tax Expense (Benefit) $ 1,231,000 $ (377,188)
- ----------------------------------------------------------------------------
28
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
7. Business Acquisition of Magazine Marketing, Inc.
Combinations
On June 28, 1996, the Company acquired all of the stock
of Magazine Marketing, Inc. in exchange for 82,644
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 91,938 shares of Redeemable 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. 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.
Acquisition of Mike Kessler and Associates, Inc.
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 and
the balance was paid on January 5, 1998 with interest
at 6.25%. 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 exceeded the fair value
of the assets acquired in the amount of $2,382,900 and
is being amortized over 15 years.
Unaudited pro forma results of operations for 1998 and
1997 for the Company and MKA is listed below:
29
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
Year Ended January 31, 1998 1997
- -------------------------------------------------------------------------------
Total Revenues (As reported) $ 11,804,000 $ 7,298,000
(Pro forma) 12,304,000 8,796,000
Net Income (Loss) (As reported) 1,589,000 (603,000)
(Pro forma) 1,637,000 (438,000)
Earnings (Loss) Per Share
Basic (As reported) 0.23 (0.11)
Diluted (As reported) 0.22 (0.11)
Basic (Pro forma) 0.23 (0.08)
Diluted (Pro forma) 0.23 (0.08)
8. Preferred Stock The Company has authorized 2,000,000 shares of $.01 par
Preferred Stock. On March 13, 1996, 65,000 shares were
designated as 1996 Series 7% Convertible Preferred
Stock. Rights and restrictions on the remaining shares
will be established if, and when, any shares are
issued.
Each share of the 1996 Series 7% Convertible Preferred
Stock entitles its holder to receive an annual
dividend, when and as declared by the Board of
Directors, of $7 per share payable in shares of the
Company's Common Stock; to convert it into shares of
Common Stock; to receive $100 per share in the event of
dissolution, liquidation, or winding up of the Company,
whether voluntary or involuntary; and subject to
certain conditions in the Certificate of Designations,
Preferences and Relative Rights of 1996 Series 7%
Convertible Preferred Stock, may be redeemed at the
option of the Company at a price of $100 per share
within 30 days following the effective date of a merger
or consolidation in which the Company is not the
surviving entity.
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
$4.24 nor more than $6.66 per share of Common Stock.
For purposes of such conversion, each share of the 1996
Series 7% Convertible Preferred Stock shall be accepted
by the Company for surrender at its Liquidation Amount
of $100 per share.
During March 1996, the Company issued 20,000 shares of
1996 Series 7% Convertible Preferred Stock for $100 per
share. Commissions and expenses totaling $137,925 were
incurred in connection with the stock issuances of
which $77,925 was paid in cash and $60,000 was paid by
issuance of another 600 shares of Preferred Stock.
On June 3, 1996, an investor converted 5,000 shares of
the Company's 1996 Series 7% Convertible Preferred
Stock into Common Stock of the Company. The conversion
price was $4.30 per share, which resulted in the
issuance of 116,293 shares of Common Stock. This
conversion also resulted in the issuance to certain of
30
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
the Company's financial advisors of warrants to
purchase an additional 2,326 shares of the Common Stock
of the Company. These warrants to purchase Common Stock
are exercisable for a two year period at an exercise
price equal to $5.15 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 $4.42 per share, which resulted in
the issuance of 50,945 and 11,320 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
7,863 shares based on an issuance price of $5.40 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 $4.24 per share, which resulted in
the issuance of 118,064 shares of Common Stock. This
conversion also resulted in the issuance to certain of
the Company's financial advisors of warrants to
purchase an additional 2,361 shares of the Common Stock
of the Company. These warrants to purchase Common Stock
are exercisable for a two year period at an exercise
price equal to $5.08 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 $4.24 per share, which resulted in
the issuance of 53,128 shares of Common Stock.
On February 28, 1997, 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 5,600 shares of such stock outstanding. The
7% dividend resulted in a Common Stock dividend of
6,381 shares based on an issuance price of $3.06 per
share.
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 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. Such
exchange resulted in a constructive dividend, based on
the independently appraised value of the
non-transferable warrants, of $109,937 which was
reported in the fiscal quarter ended July 31, 1997.
9. Advance Pay The Company has established an Advance Pay Program.
Program Under this program the Company advances an agreed upon
percentage of the incentive payments otherwise due the
retailer from magazine publishers upon quarterly
submission of claims for such payments. The claims
otherwise due the retailer become due the Company.
Included in trade receivables at January 31, 1998 is
$14,587,531 due the Company under the Advance Pay
Program (net of $3,859,154 due the program
participants). Service revenues from the program were
approximately $4,576,000 and $1,150,000 during 1998 and
1997, respectively.
31
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
10. 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
$993,846 at January 31, 1998 under such arrangements.
11. Common Stock 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. These warrants will vest at a rate of 25% on
August 1, 1998, 25% on November 1, 1998, 25% on
February 1, 1999 and 25% on May 1, 1999. The related
cost, as determined by independent appraisal, of
approximately $54,000 will be recognized ratably over
those periods.
In October 1997, the Company sold in a public offering
(the "Offering"), 2,000,000 shares of the Company's
Common Stock. Concurrent with the Offering, the Company
effected the 1 for 1.21 reverse stock split previously
approved by the Company's shareholders. The weighted
average number of common shares presented in the
financial statements have been retroactively restated
to give effect to such reverse stock split.
12. Fair Values of The following methods and assumptions were used to
Financial estimate the fair values of each class of financial
Instruments instruments for which it is practicable to estimate
that value:
Trade Receivables
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.
32
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
Long-term Debt and Revolving Credit Facility (Excluding
Obligations Under Capital Leases)
The carrying amount of the long-term debt approximates
the fair value because the financial instrument was
originally recorded at its discounted value.
It is presumed that the carrying amount of the
revolving credit facility 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, 1998 Value Value
- --------------------------------------------------------------------------------
Financial Assets
Trade receivables $ 18,874,764 $ 18,874,764
Notes receivable - officers $ 22,093 $ 20,100
Financial Liabilities
Accounts payable and accrued expenses $ 680,055 $ 680,055
Due to retailers $ 993,846 $ 993,846
Long-term debt (excluding obligations
under capital leases) $ 8,589,577 $ 8,589,577
- --------------------------------------------------------------------------------
13. Earnings Per Share In calculating earnings per share, Net Income for the
year ended January 31, 1998 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.
A reconciliation of the denominators of the basic and
diluted earnings per share computations are as follows:
January 31, 1998 1998 1997
- -------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 6,561,761 5,557,223
Effect of dilutive securities -
stock options and warrants 131,905 -
- -------------------------------------------------------------------------------
Weighted average number of common shares
outstanding - as adjusted
6,693,666 5,557,223
- -------------------------------------------------------------------------------
14. Subsequent Event Subsequent to year end, the Board of Directors approved
a plan in which the Company would sell additional
shares of its Common Stock. The Company will be
required to file a registration statement for the sale
of these securities. It is anticipated that the
aggregate selling price of all of the securities will
approximate $10,500,000. The proposed issue date of
these securities is expected to be in June 1998.
33
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Financial Statements
<TABLE>
<CAPTION>
15. Quarterly Financial Quarters Ended
Data (unaudited)
1998 April 30 July 31 October 31 January 31
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $2,527,879 $2,940,137 $2,943,766 $3,392,062
Gross Profit 1,233,933 1,349,506 1,421,565 1,938,187
Net Income 256,127 333,426 377,256 622,199
Earnings per common
share - Basic .04 .04 .06 .08
Weighted average number
of common shares
outstanding - Basic 5,823,777 5,827,872 6,535,980 8,015,371
Earnings per common
shares - Diluted 0.04 0.04 0.06 0.08
Weighted average number
of common shares
outstanding - Diluted 5,823,777 5,890,443 6,724,638 8,290,369
1997
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 - Basic (0.09) (0.08) 0.01 0.04
Weighted average number of
common shares
outstanding - Basic 5,272,645 5,409,994 5,723,099 5,817,030
Earnings (loss) per common
share - Diluted (0.09) (0.08) 0.01 0.04
Weighted average number of
common shares
outstanding - Diluted 5,272,645 5,409,994 5,809,050 5,946,659
</TABLE>
34
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosures.
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The following table sets forth certain information concerning the
directors and executive officers of the Company:
Name Age Position
S. Leslie Flegel 60 Director, Chairman and Chief
Executive Officer
William H. Lee 47 Director, President and Chief
Operating Officer
John P. Watkins 42 Chief Administrative Officer and
President - Retail Services
Dwight L. DeGolia 53 Executive Vice President
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 69 Director
Harry L. "Terry" Franc, III 62 Director
Aron Katzman 60 Director
Randall S. Minix 48 Director
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 a
member of the Board of Directors of Food Lion, Inc.
Dwight L. DeGolia has served as Executive Vice President of the Company since
its commencement of operations in May 1995. For more than 10 years prior
thereto, Mr. DeGolia served as executive vice president of sales and marketing
for DISC. From 1986 to 1993, Mr. DeGolia also served as a director of Advanced
Marketing Services, a leading supplier of books to wholesale clubs.
35
<PAGE>
W. Brian Rodgers has served as Assistant Secretary of the Company and Chief
Financial Officer since October 1996. Prior to joining the Company, Mr. Rodgers
practiced for seven years as a certified public accountant with BDO Seidman,
LLP.
Jason S. Flegel has served as Senior Vice President of RDA Operations since June
1996. Prior thereto, and since the Company's inception in March 1995, Mr. Flegel
served as Vice President - Western Region. Mr. Flegel was an owner and chief
financial officer of DISC, a predecessor of the Company. Jason S. Flegel is the
son of S. Leslie Flegel.
Stephen E. Borjes has served as President - Display Group since September 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 the 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., ("BIS") a St. Louis, Missouri based provider of
information services to the securities industry and of BIS's subsidiary, Bridge
Trading Company ("BTC"), a registered broker-dealer and member of the New York
Stock Exchange. For more than 20 years, Mr. Franc has served as a director and
an Executive Vice President of BIS and an Executive Vice President of BTC.
Aron Katzman has served as a director of the Company since it commenced
operations in May 1995. Mr. Katzman is the President of New Legends, Inc., one
of St. Louis' leading country club/residential communities. For more than five
years prior to April 1994, when it was sold, Mr. Katzman served as the chairman
and chief executive officer of Roman Company, a manufacturer and distributor of
fashion custom jewelry. Mr. Katzman is a member of the board of directors of
Phonetel Technologies, Inc., a company listed on the American Stock Exchange.
Randall S. Minix has served as a director of the Company since it commenced
operations in May 1995. For more than six years, Mr. Minix has been the managing
partner of Minix, Morgan & Company, LLP, an independent accounting firm
headquartered in Greensboro, North Carolina.
The Board of Directors of the Company consists of six members, each of
whom serve in such capacity for a three year term or until a successor has been
elected and qualified, subject to earlier resignation, removal or death. The
number of directors comprising the Board of Directors may be increased or
decreased by resolution adopted by the affirmative vote of a majority of the
Board of Directors. The Company's Articles of Incorporation and Bylaws provide
for three classes of directorships serving staggered three year terms such that
one-third of the directors are elected at each annual meeting of shareholders.
The terms 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 office 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
36
<PAGE>
which govern employee salaries and benefit plans. The Finance Committee is
comprised of two directors, Messrs. Franc and Katzman. The Finance Committee has
been given the responsibility of monitoring the Company's capital structure,
reviewing available alternatives to satisfy the Company's liquidity and capital
requirements and recommending the firm or firms which will provide investment
banking and financial advisory services to the Company. The Company's
Acquisition Committee is comprised of three directors, presently Messrs. Franc,
Braswell and Katzman, and has been given the responsibility of monitoring the
Company's search for attractive acquisition opportunities, consulting with
members of management to review plans and strategies for the achievement of the
Company's external growth objectives and recommending the firm or firms that
will serve as advisors to the Company in connection with the evaluation of
potential business combinations.
Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company during its most recent fiscal year and Form 5 and amendments
thereto, or written representations that no Form 5 is required, one person, Mr.
Stephen E. Borjes, failed to timely file a Form 3, Initial Statement of
Beneficial Ownership of Securities. Four persons, Messrs. Dixon, Katzman,
Braswell and Franc, failed to timely file Form 4, Statement of Changes in
Beneficial Ownership.
Item 10. Executive Compensation.
The following table summarizes information concerning cash and non-cash
compensation paid to or accrued for the benefit of the named executive officers
for all services rendered in all capacities to the Company and its predecessors.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
Name of Principal Other Annual
Position Year Salary Bonus Compensation(a)
<S> <C> <C> <C> <C>
S. Leslie Flegel 1998 $275,000 $ 76,300 $25,643
Chairman and Chief Executive 1997 $227,500 $176,398 $30,624
Officer 1996 $200,000 $26,543 $30,995
William H. Lee 1998 $255,876 $60,000 $12,629
President and Chief Operating 1997 $224,830 $30,000 $13,944
Officer 1996 $192,646 --- $19,006
Dwight L. DeGolia 1998 $150,000 $29,200 $10,777
Executive Vice President 1997 $140,000 $4,773 $11,223
1996 $134,884 --- $16,739
John P. Watkins 1998 $150,000 $25,000 $9,986
Chief Administrative Officer and 1997 $150,000 --- $11,891
President - Retail Services 1996 --- --- ---
Robert B. Dixon (b) 1998 $150,000 $5,500 $12,797
Executive Vice President and 1997 $150,000 --- $13,907
President - Periodical 1996 $114,000 $50,000 $5,458
Information Management
- ------------------------
37
<PAGE>
<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 1998, the estimated incremental cost to the Company of the
use by Messrs. Flegel, Lee, DeGolia, Watkins and Dixon of Company
automobiles was $9,566, $8,523, $6,312, $7,800 and $8,597,
respectively. In fiscal 1997, such cost to the Company 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 1998, the estimated incremental cost to the Company of the
membership dues paid on behalf of Messrs. Flegel, Lee, DeGolia, Watkins
and Dixon was $6,984, $1,050, $4,465, $1,425 and $4,200, respectively.
In fiscal 1997, such cost to the Company 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 1998, 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 1997, such cost to the Company was $9,093, $3,056, $0, $761 and
$0, respectively. In fiscal 1996, such cost was $8,048, $8,033, $5,628,
$0 and $0, respectively.
(b) Mr. Dixon died February 26, 1998.
</FN>
</TABLE>
<TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<CAPTION>
% of Total
Number of Securities Options/SARS
Underlying Granted to Exercise or
Options/SARS Employees in Base Price Expiration
Name Granted # Fiscal Year ($/Sh) Date
<S> <C> <C> <C>
S. Leslie Flegel 89,256(1) 27% $1.66 5-14-02
William H. Lee 49,091(2) 15 2.66 6-24-02
Dwight L. DeGolia 10,909(3) 3 2.42 6-24-07
John P. Watkins 13,636(3) 4 2.42 6-24-07
John P. Watkins 74,380(4) 23 5.60 2-01-01
Robert B. Dixon 0 0 n/a n/a
- ----------------------------
<FN>
(1) Options were granted May 15, 1997 and are exercisable as follows: 29,572 on
or after May 15, 1998, 29,752 on or after May 15, 1999 and 29,752 on or after
May 15, 2000.
(2) Options were granted June 25, 1997 and are exercisable as follows: 16,364 on
or after June 25, 1998, 16,364 on or after June 25, 1999 and 16,363 on or after
June 25, 2000.
(3) Options were granted June 25, 1997 and are exercisable 20% a year,
cumulatively, for a period of five years.
(4) Options were granted June 25, 1997 and are exercisable as follows: 24,793,
immediately, 16,529 on or after February 1, 1998, 16,529 on or after February 1,
1999, and 16,529 on or after February 1, 2000.
</FN>
</TABLE>
38
<PAGE>
<TABLE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FYE OPTION/SAR VALUES
<CAPTION>
Number of Value of Unexercised
Unexercised In-the Money
Option/SARs at Fiscal Options/SARs at
Shares Year End (#) Fiscal Year End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
S. Leslie Flegel 0 0 0/89,256 0/309,272
William H. Lee 0 0 0/49,091 0/121,009
Dwight L. DeGolia 0 0 2,182/8,727 5,902/23,607
John P. Watkins 0 0 27,520/60,496 7,377/29,509
Robert B. Dixon 0 0 0/0 0/0
</TABLE>
Director Compensation
Under the Company's present policy, each director of the Company who is
not also an employee of the Company will receive $1,000 payable in Common Stock
of the Company, with the exception of Mr. Minix who will be paid in cash, for
each meeting of the Board of Directors attended. Directors are also entitled to
be reimbursed for expenses incurred by them in attending meetings of the Board
of Directors and its committees.
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.
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.
In October, 1997, the Company entered into separate employment
agreements with S. Leslie Flegel, William H. Lee and W. Brian Rodgers, each of
which expire January 31, 1999 (subject to renewal). Under the agreements, 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. 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), the discharged person will be
entitled to an additional bonus of 300% of his then current annual base
compensation. 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.
39
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 5, 1998
concerning the beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to be the beneficial owner of more than five percent
of the outstanding Common Stock, (ii) each executive officer named in the
Summary Compensation Table contained in this Form 10-KSB, and (iii) all
directors and executive officers of the Company as a group. Each person named
has sole voting and investment power with respect to the shares indicated,
except as otherwise stated in the notes to the table:
Beneficial Ownership
Name and Address
of Beneficial Owner Number of Shares Percent
- ------------------- ---------------- -------
S. Leslie Flegel 1,361,470 16.9
11644 Lilburn Park Road
St. Louis, Missouri 63146
William H. Lee 1,095,615 13.6
711 Gallimore Dairy Road
High Point, North Carolina 27265
Cameron Capital Ltd 712,829(a) 8.8
10 Cavendish Rd
Hamilton Hm 19
Bermuda
Timothy A. Braswell 473,131 5.9
711 Gallimore Dairy Road
High Point, North Carolina 27265
Dwight L. DeGolia 149,340(b) 1.9
11644 Lilburn Park Road
St. Louis, Missouri 63146
Aron Katzman 129,941 1.6
10 Layton Terrace
St. Louis, Missouri 63124
John P. Watkins 44,049(c) *
711 Gallimore Dairy Road
High Point, North Carolina 27265
Harry L. Franc, III 33,238 *
19 Briarcliff
St. Louis, Missouri 63124
Randall S. Minix 8,485 *
5502 White Blossom Drive
Greensboro, North Carolina 27410
All directors and executive 3,445,881(d) 42.7
officers as a group (11 persons)
- ------------------------
*Less than 1%
(a) Includes exercisable options to acquire 300,000 shares of Common
Stock at an exercise price of $3.00 per share.
(b) Includes exercisable options to acquire 2,182 shares of Common
Stock at an exercise price of $2.42 per share.
(c) Includes exercisable options to acquire 41,322 shares and 2,727 shares
of Common Stock at an exercise price of $5.60 per share and $2.42 per
share, respectively.
(d) Includes exercisable options not listed separately above to acquire
4,001 shares of Common Stock at an exercise price of $2.42 per share.
40
<PAGE>
Item 12. Certain Relationships and Related Transactions.
From time to time, the Company has engaged in various transactions with
its directors, executive officers and other affiliated parties. The following
paragraphs summarize certain information concerning such transactions and
relationships which have occurred during the past two fiscal years or which are
presently proposed.
S. Leslie Flegel, Chairman and Chief Executive Officer of the Company
and Dwight L. DeGolia, Executive Vice President of the Company, have from time
to time received cash advances from the Company. The largest aggregate amount of
such indebtedness outstanding at any time since February 1, 1997 was $270,675
and $22,093, respectively. At January 31, 1998, the outstanding balances of such
indebtedness were $0 and $22,093, respectively. All such advances are evidenced
by promissory notes in favor of the Company. Such notes bear interest at rates
varying from 6.96% to 7.34% per annum.
On June 28, 1991, PMM entered into a written lease with 711 Gallimore
Partnership, in which William H. Lee, President and Chief Operating Officer of
the Company, is a partner, whereby 711 Gallimore 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 1998 and 1997, the Company paid 711 Gallimore Partnership
$174,888 and $157,498, respectively, in rent.
2532 Partnership, a North Carolina partnership in which Mr. Lee is a
partner has occasionally provided the Company with the use of an airplane. In
fiscal 1998, the Company paid 2532 Partnership $11,692 in consideration for the
use of the airplane.
Data-Pros, Inc. ("Data-Pros"), a corporation in which Mr. Lee is a
shareholder, provided the Company with data processing services. In fiscal 1997,
the Company paid Data-Pros $274,893 for such services. On January 1, 1997 the
Company purchased the assets of Data-Pros for $45,000.
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, 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. Such warrants will vest at a rate of 25% on August 1,
1998, 25% on November 1, 1998, 25% on February 1, 1999 and 25% on May 1, 1999.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits.
See Exhibit Index.
(b) Reports on Form 8-K.
None
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE SOURCE INFORMATION MANAGEMENT COMPANY
Date: May 1, 1998 /S/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
May 1, 1998 /S/ S. LESLIE FLEGEL
--------------------
S. Leslie Flegel
Chief Executive Officers and
Chairman of the Board
(Principal Executive Officer)
May 1, 1998 /S/ W. BRIAN RODGERS
----------------------------------
W. Brian Rodgers
Chief Financial Officer
(Principal Financial and
Accounting Officer)
May 1, 1998 /S/ WILLIAM H. LEE
--------------------------------
William H. Lee
President, Chief Operating Officer
and Director
May 1, 1998 /S/ HARRY L. "TERRY" FRANC, III
--------------------------------
Harry L. "Terry" Franc, III
Director
May 1, 1998 /S/ ARON KATZMAN
-------------------------------
Aron Katzman
Director
May 1, 1998 /S/ RANDALL S. MINIX
-------------------------------
Randall S. Minix
42
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------- ----------- ----
3.1(1) Articles of Incorporation of the Company
3.2(1) Bylaws of the Company
3.3(3) Amendment to Articles of Incorporation of the Company
3.4(3) Amendments to Bylaws of the Company
3.5(2) Amendment to Articles of Incorporation
4.1(3) Form of Common Stock Certificate
4.4(3) Form of Representative's Warrants
4.5(3) Form of Privately Issued Warrant
10.1(1) Form of Promissory Note with Dwight DeGolia
10.2(1) Form of Indemnity Agreement with Officers and Directors
10.3(1) Lease Agreement dated June 28, 1991 with 711 Gallimore
Partnership
10.8(2) Addendum to the Lease Agreement, dated as of
January 1, 1994, with 711 Gallimore Partnership
10.9(2) Addendum to the Lease Agreement, dated as of
January 1, 1996, with 711 Gallimore Partnership
10.10(2) Addendum to the Lease Agreement, dated as of
April 1, 1996, with 711 Gallimore Partnership
10.11(2) Addendum to the Lease Agreement, dated as of
April 25, 1996, with 711 Gallimore Partnership
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 Stock Award Plan.
10.17(5) The Source Company 1995 Incentive Stock Option Plan
10.18(3) Employment Agreement, effective February 1, 1996,
with John P. Watkins
10.19(3) Employment Agreement dated as of August 30, 1995,
with Robert G. Shupe
10.20(3) Agreement with Dwight L. DeGolia.
43
<PAGE>
10.21(3) Front End Management Agreement with Kmart Corporation.
10.22(3) Amendment to Credit Agreement dated July 31, 1997 by
and between The Source Company and Wachovia Bank, N.A.
10.23(3) Form of Financial Consulting Agreement with Donald &
Co. Securities, Inc.
10.24(3) Amendment to Credit Agreement dated May 29, 1997
by and between The Source Company and Wachovia
Bank of North Carolina, N.A.
10.25(3) Form of Employment Agreement with S. Leslie Flegel,
William H. Lee and W. Brian Rodgers
21.1(3) Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
27.1 Financial Data Schedule
99.1(4) Cautionary Statement Identifying Important Factors
that Could Cause the Company's Actual Results
to Differ from those Projected in Forward Looking
Statements
- ----------------------------
(1) Incorporated by reference to Registration Statement on
Form 10-SB (File no. 0-26238).
(2) Incorporated by reference to Form 10-KSB for the fiscal year
ended January 31, 1996.
(3) Incorporated by reference to Registration Statement on
Form SB-2 (file no. 333- ).
(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.
44
Subsidiaries of The Source Information Management Company
Subsidiary Incorporated In
- ---------- ----------------
K-Sub, Incorporated Missouri
L-Sub, Incorporated Missouri
Magazine Marketing, Incorporated Ohio
Readers Choice, Incorporated Ohio
Mike Kessler & Associates, Incorporated New Jersey
The Source-Canada Corporation Ontario, Canada
Consent of Independent Certified Public Accountants
The Source Information Management Company
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Registration
Statement Form S-8 (No. 333-16039) of The Source Information Management Company
(the Company) of our report dated March 27, 1998, relating to the consolidated
financial statements of the Company appearing in the Company's Annual Report on
Form 10-KSB as of and for the year ended January 31, 1998.
/s/ BDO Seidman, LLP
St. Louis, Missouri
April 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 31,455
<SECURITIES> 0
<RECEIVABLES> 18,874,764
<ALLOWANCES> 460,898
<INVENTORY> 0
<CURRENT-ASSETS> 19,594,134
<PP&E> 2,249,688
<DEPRECIATION> 1,445,005
<TOTAL-ASSETS> 23,807,857
<CURRENT-LIABILITIES> 2,606,087
<BONDS> 0
0
0
<COMMON> 80,163
<OTHER-SE> 12,414,550
<TOTAL-LIABILITY-AND-EQUITY> 23,807,857
<SALES> 11,803,844
<TOTAL-REVENUES> 11,803,844
<CGS> 5,860,653
<TOTAL-COSTS> 2,350,622
<OTHER-EXPENSES> (58,157)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 714,404
<INCOME-PRETAX> 2,820,008
<INCOME-TAX> 1,231,000
<INCOME-CONTINUING> 1,589,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,589,008
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</TABLE>
