<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended October 31, 1998
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to _________
Commission file number 0-26238
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Exact Name of Small Business Issuer as Specified in Its Charter)
MISSOURI 43-1710906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11644 LILBURN PARK ROAD
ST. LOUIS, MISSOURI 63146
(Address of Principal Executive Offices)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No []
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 9,625,596 (as of December
8, 1998)
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE> 2
THE SOURCE INFORMATION MANAGEMENT COMPANY
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
ITEM 1. Financial Statements
<S> <C>
Unaudited Balance Sheet as of October 31, 1998 1
Unaudited Statements of Operations for the three
months ended October 31, 1998 and 1997 and for the
nine months ended October 31, 1998 and 1997 3
Unaudited Statements of Cash Flows for the nine
months ended October 31, 1998 and 1997 4
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis 12
PART II - OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 6. Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE> 3
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
UNAUDITED BALANCE SHEET
October 31, 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS (NOTE 3)
CURRENT
Cash $ 8,667
Trade receivables (net of allowance for doubtful accounts of $469,658) (Note 5) 28,638,913
Other current assets 145,916
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 28,793,496
- --------------------------------------------------------------------------------------------------------------------
Office equipment and furniture 2,743,999
Less accumulated depreciation and amortization 1,656,889
- --------------------------------------------------------------------------------------------------------------------
NET OFFICE EQUIPMENT AND FURNITURE 1,087,110
- --------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill (net of accumulated amortization of $464,007) 5,410,074
Other 167,880
- --------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 5,577,954
- --------------------------------------------------------------------------------------------------------------------
$ 35,458,560
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
1 See accompanying notes
to financial statements
<PAGE> 4
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
UNAUDITED BALANCE SHEET
October 31, 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Checks issued against future deposits $ 3,779,247
Accounts payable and accrued expenses 1,289,970
Income taxes payable 299,413
Due to retailers (Note 6) 918,239
Deferred income taxes (Note 7) 867,000
Current maturities of long-term debt (Note 3) 7,170
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,161,039
- --------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 3) 5,041,625
- --------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES (Note 7) 33,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 12,235,664
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Contributed capital:
Common Stock, $.01 par - shares authorized, 16,528,925; 9,610,718 issued, of
which 8,000 are being held as Treasury Stock 96,106
Additional paid-in capital on Common Stock 18,790,899
- --------------------------------------------------------------------------------------------------------------------
Total contributed capital 18,887,005
Retained earnings 4,377,022
- --------------------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 23,264,027
Less: Treasury Stock (8,000 shares at cost) (41,131)
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 23,222,896
- --------------------------------------------------------------------------------------------------------------------
$ 35,458,560
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
2 See accompanying notes
to financial statements
<PAGE> 5
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
UNAUDITED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------- ----------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service Revenues $ 3,960,409 $ 2,943,766 $ 11,136,199 $ 8,411,782
Cost of Service Revenues 1,651,341 1,522,201 4,797,247 4,406,778
- ----------------------------------------------------------------------------------------------------
Gross Profit 2,309,068 1,421,565 6,338,952 4,005,004
Selling, General and Administrative
Expense 612,701 536,058 1,832,621 1,598,231
- ----------------------------------------------------------------------------------------------------
Operating Income 1,696,367 885,507 4,506,331 2,406,773
- ----------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 11,991 1,198 22,270 14,860
Interest expense (46,108) (192,494) (264,986) (680,245)
Other (3,244) (20,955) (9,194) (61,579)
- ----------------------------------------------------------------------------------------------------
Total Other Income (Expense) (37,361) (212,251) (251,910) (645,964)
- ----------------------------------------------------------------------------------------------------
Income Before Income Taxes 1,659,006 673,256 4,254,421 1,751,809
Income Tax Expense (Note 7) 700,000 296,000 1,778,000 785,000
- ----------------------------------------------------------------------------------------------------
Net Income $ 959,006 $ 377,256 $ 2,476,421 $ 966,809
- ----------------------------------------------------------------------------------------------------
Earnings per Share
Basic $ .10 $ .06 $ .28 $ .14
- ----------------------------------------------------------------------------------------------------
Diluted $ .10 $ .06 $ .27 $ .14
- ----------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding
Basic 9,586,239 6,535,980 8,783,125 6,064,476
- ----------------------------------------------------------------------------------------------------
Diluted 10,030,461 6,724,638 9,247,799 6,147,243
- ----------------------------------------------------------------------------------------------------
</TABLE>
3 See accompanying notes
to financial statements
<PAGE> 6
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
UNAUDITED STATEMENTS OF CASH FLOWS
Nine Months Ended October 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,476,421 $ 966,809
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 425,311 307,151
Provision for losses on accounts receivable 8,760 39,224
Impairment of investment in limited partnership 15,000 15,000
Loss on disposition of assets - 1,338
Deferred income taxes 28,000 (161,000)
Services received in exchange for Common Stock 3,000 8,000
Services received in exchange for Common Stock Warrants 13,506 -
Changes in assets and liabilities:
Increase in accounts receivable (9,655,127) (2,284,433)
Decrease (increase) in other assets 551,253 (101,942)
Increase (decrease) in checks issued against future deposits 3,647,058 (2,369,231)
Increase (decrease) in accounts payable and accrued expenses 885,987 (177,711)
Decrease in amounts due customers (75,607) (16,321)
- --------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (1,676,438) (3,773,116)
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Acquisition of Periodical Concepts (2,500,000) -
Acquisition of Mike Kessler & Associates, Inc., net of cash acquired - (349,777)
Capital expenditures (484,899) (205,113)
Loan to affiliate - (38,000)
Collections from affiliate - 27,576
Loan to officer - (10,000)
Collections on loan to officer 22,093 221,485
Proceeds from sale of fixed assets - 2,000
Increase in cash surrender value of life insurance (32,541) (43,564)
Proceeds from surrender of life insurance policies - 83,959
- --------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (2,995,347) (311,434)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
4 See accompanying notes
to financial statements
<PAGE> 7
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
UNAUDITED STATEMENTS OF CASH FLOWS
Nine Months Ended October 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 8,012,651 6,828,797
Borrowings under credit facility 25,775,000 27,051,000
Principal payments on credit facility (29,332,000) (30,019,000)
Repayments under short-term debt agreements (29,259) (43,656)
Proceeds from exercise of stock options 263,536 -
Proceeds from issuance of warrants 200 200
Purchase of treasury stock (41,131) -
Purchase of fractional shares - (322)
Preferred Stock dividends - (3)
- --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 4,648,997 3,817,016
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH (22,788) (267,534)
CASH, beginning of period 31,455 284,921
- --------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 8,667 $ 17,387
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
5 See accompanying notes
to financial statements
<PAGE> 8
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
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<S> <C> <C>
1. UNAUDITED FINANCIAL In the opinion of management, the unaudited financial information as of October
STATEMENTS 31, 1998 contained herein reflects all adjustments (consisting only of normal
recurring adjustments) necessary to fairly present such information in accordance
with generally accepted accounting principles. The results of operations for the
nine months ended October 31, 1998 are not necessarily indicative of the results to
be expected for the entire year.
2. RELATED PARTY The Company currently leases certain office space from businesses controlled by
TRANSACTIONS stockholders of the Company. Amounts paid for the office space were approximately
$199,000 and $169,000 for the nine months ended October 31, 1998 and 1997,
respectively. The Company occasionally charters an airplane owned by a partnership
in which one of the Company's stockholders owns an interest. Amounts paid to the
partnership were $1,800 and $7,400 for the nine months ended October 31, 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 amount of $295,293. These notes have been collected in full at October 31,
1998.
3. LONG-TERM Long-term debt consists of:
DEBT AND REVOLVING
CREDIT FACILITY
October 31, 1998
------------------------------------------------------------------------------------
Revolving Credit Facility $ 5,041,000
Term note payable in monthly installments of $629
through November 1999, collateralized by an automobile 7,795
------------------------------------------------------------------------------------
Total Long-term Debt 5,048,795
Less current maturities 7,170
------------------------------------------------------------------------------------
Long-term Debt $ 5,041,625
------------------------------------------------------------------------------------
The Company has an agreement providing for a revolving loan up to $15,000,000. The
agreement has no termination date; however, 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 8.0938% at October 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
</TABLE>
6
<PAGE> 9
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
indebtedness. The Company was in compliance with such ratios at October 31, 1998.
4. SUPPLEMENTAL CASH FLOW Supplemental information on interest and income taxes paid is as follows:
INFORMATION
Nine Months Ended October 31, 1998 1997
------------------------------------------------------------------------------------
Interest Paid $ 284,000 $ 549,000
Income Taxes Paid $ 953,000 $ 925,000
------------------------------------------------------------------------------------
On February 28, 1997, 7,721 shares of Common Stock were issued as a dividend to the
Preferred Stockholders as of that date.
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.
5. ADVANCE PAY The Company has established an Advance Pay Program. Under this program the Company
PROGRAM advances an agreed upon percentage of the incentive payments otherwise due the
retailer from magazine publishers upon quarterly submission of claims for such
A payments. The claims otherwise due the retailer become due the Company. Included in
trade receivables at October 31, 1998 is $22,146,032 due the Company under the
Advance Pay Program (net of $7,126,487 due the program participants).
6. DUE TO RETAILERS The Company has arrangements with certain of its customers whereby the Company is
authorized to collect and deposit in its own accounts, checks payable to its
customers for incentive payments. The Company retains the commission related to such
payments and pays the customer the difference. The Company owes retailers $918,239
at October 31, 1998 under such arrangements.
</TABLE>
7
<PAGE> 10
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
7. INCOME TAXES Provision for federal and state income taxes in the statements of operations
consist of the following components:
Nine Months Ended October 31, 1998 1997
------------------------------------------------------------------------------------
Current
Federal $ 1,394,000 $ 750,000
State 356,000 196,000
------------------------------------------------------------------------------------
Total Current 1,750,000 946,000
------------------------------------------------------------------------------------
Deferred
Federal 22,000 (128,000)
State 6,000 (33,000)
------------------------------------------------------------------------------------
Total Deferred 28,000 (161,000)
------------------------------------------------------------------------------------
Total Income Tax Expense $ 1,778,000 $ 785,000
------------------------------------------------------------------------------------
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:
October 31, 1998
------------------------------------------------------------------------------------
Deferred Tax Assets
Allowance for doubtful accounts $ 175,000
Deferred compensation 44,000
Other 20,000
------------------------------------------------------------------------------------
Total Deferred Tax Assets 239,000
------------------------------------------------------------------------------------
Deferred Tax Liabilities
Book/Tax differences in accounts receivable 914,000
Income not previously taxed under cash
basis of accounting for income tax purposes 145,000
Depreciation 31,000
Other 21,000
------------------------------------------------------------------------------------
Total Deferred Tax Liabilities 1,111,000
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Net Deferred Tax Liability 872,000
------------------------------------------------------------------------------------
Classified as:
Current 867,000
Non-current 33,000
------------------------------------------------------------------------------------
Net Deferred Tax Liability $ 900,000
------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The following summary reconciles income taxes at the maximum federal statutory rate
with the effective rate for the first nine months of fiscal 1999 and 1998:
Nine Months Ended October 31, 1998 1997
------------------------------------------------------------------------------------
Income tax expense at statutory rate $ 1,447,000 $ 596,000
State income tax expense, net of federal
income tax benefit 235,000 129,000
Non-deductible goodwill amortization 73,000 40,000
Non-deductible meals and entertainment 26,000 15,000
Non-deductible officers' life insurance 8,000 (6,000)
Other, net (11,000) 11,000
------------------------------------------------------------------------------------
Income Tax Expense $ 1,778,000 $ 785,000
------------------------------------------------------------------------------------
8. BUSINESS
COMBINATIONS 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 exceeds the
fair value of the assets acquired in the amount of $2,382,900 and is being amortized
over 15 years.
Periodical Concepts
On July 27, 1998, the Company acquired all the assets of Periodical Concepts, a Texas
general partnership doing business as PC2, for $2,500,000 in cash. Prior to the
acquisition, PC2 provided information and marketing services to retail stores selling
magazines and other periodicals. The Company intends to continue the operation of such
business and does not intend to substantially change the nature of PC2's operation.
This transaction has been accounted for as a purchase, and accordingly, the assets and
liabilities have been recorded at fair market value. Results of operations have been
included as of the effective date of the transaction. The purchase price exceeds the
fair value of the assets acquired by approximately $2,400,000 and is being amortized
over 15 years.
9. PREFERRED STOCK In July 1997, the Company exchanged all 5,600 outstanding shares of the Company's
1996 Series 7% Convertible Preferred Stock for an aggregate of 186,667 shares of Common
Stock and non-transferable warrants expiring in 2000 to purchase 310,709 shares of
Common Stock at an exercise price of $3.00 per share. Such exchange resulted in a
constructive dividend of $109,937, which was reported in the fiscal
</TABLE>
9
<PAGE> 12
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
<S> <C>
quarter ending July 31, 1997.
10. COMMON STOCK 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.
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. Thus, expense of
approximately $54,000 will be recognized ratably over those periods.
In June 1998, the Company sold in a public offering 1,538,334 shares of the Company's
Common Stock for an aggregate price of $9,230,004.
11. EARNINGS PER SHARE In calculating earnings per share, Net Income for the nine months ended October 31
1997 was reduced by a constructive dividend of $109,937, which resulted from the
exchange of all 5,600 outstanding shares of Preferred Stock for 186,667 shares of
Common Stock and non-transferable warrants expiring in 2000 to purchase 310,709 shares
of Common Stock at an exercise price of $3.00 per share.
A reconciliation of the denominators of the basic and diluted earnings per share
computations are as follows:
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------- -------------------------
1998 1997 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted average number of
common shares outstanding
9,586,239 6,535,980 8,783,125 6,064,476
Effect of dilutive
securities - stock options
and warrants 444,222 188,657 464,673 82,767
--------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding
- as adjusted 10,030,461 6,724,638 9,247,799 6,147,243
--------------------------------------------------------------------------------------
12. SUBSEQUENT EVENTS On November 19, 1998, the Company issued a press release announcing that it had signed
letters of intent to acquire the assets and assume specified liabilities of two
front-end manufacturers and their affiliates. The Company expects the acquisition of
MYCO, Inc. and an affiliated real estate holding company to be consummated on January
7, 1999 and expects the acquisition of Chestnut Display Systems, Inc.
</TABLE>
10
<PAGE> 13
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
("Chestnut") and an affiliate of Chestnut to be completed on or around February 1,
1999. The Company expects to acquire the assets of these companies for an aggregate of
approximately $16.25 million cash and approximately $4.5 million in the Company's
stock.
On December 2, 1998, the Company issued a press release announcing that it had signed a
letter of intent to acquire the assets and assume specified liabilities of Yeager
Industries, Inc. ("Yeager"), another front-end fixture manufacturer. The Company
expects to complete this acquisition by January 15, 1999. The Company plans to acquire
the assets of Yeager for approximately $500,000 cash and 142,860 shares of the
Company's stock.
On December 15, 1998, the Company issued a press release announcing that it had signed
a letter of intent to acquire Brand Manufacturing Corporation ("Brand") and affiliated
companies ("Affiliates"), a New York based front-end marketing and manufacturing
company. Brand and Affiliates will be acquired for 3.4 million shares of the Company's
common stock, with a portion of said shares being issuable only upon shareholder
approval.
</TABLE>
11
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information contained in this quarterly report to shareholders includes
statements regarding matters which are not historical facts (including
statements regarding the plans, beliefs or expectations of the Company) which
are forward-looking statements within the meaning of the federal securities law.
When used in this quarterly report, the words "believes," "anticipates,"
"intends," "expects," and similar expressions are intended to identify
forward-looking statements. 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,
increased competition, significant changes in the marketing strategies of
publishers, the inability of the Company to successfully manage its expansion,
assimilate acquired entities and the availability of suitable acquisition
candidates. Investors are also directed to consider other risks and
uncertainties discussed in other reports previously and subsequently filed by
the Company with the Securities and Exchange Commission. Readers are cautioned
not to place undue reliance on forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
OVERVIEW
For more than 20 years, the Company and its predecessors have provided
information gathering, consulting and other information based services to
operators of mass merchandise, grocery, convenience and pharmacy stores located
throughout the United States and eastern Canada. Currently, the Company provides
monitoring and documentation services to more than 825 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 5,000
magazine titles offered in approximately 75,000 stores. As an extension of this
service, the Company established its Advance Pay Program, under which the
Company advances an agreed upon percentage of the incentive payments due to the
retailer from magazine publishers. It then directly collects from the publishers
the claims due to the retailer.
In fiscal 1998 and 1997, the Company advanced approximately $38,900,000
and $15,000,000 under the Advance Pay Program, respectively. During the years
ended January 31, 1998 and 1997, service fees earned under the Advance Pay
Program totaled approximately $4,576,000 and $1,400,000, respectively, and fees
earned under the traditional method totaled approximately $5,257,000 and
$4,638,000, respectively. Service fees derived from the Advance Pay Program and
under the traditional method as a percentage of total revenues were
approximately 39% and 45%, respectively, during the year ended January 31, 1998
and approximately 19% and 64%, respectively, during the year ended January 31,
1997. Payments collected from publishers under the Advance Pay Program as a
percentage of all payments collected from publishers grew from 5.3% during the
year ended January 31, 1997 to 21.9% during the year ended January 31, 1998.
In October 1996, the Company expanded its services and potential client
base with the introduction of the Periodical Information Network ("PIN"), an
information service in which the Company provides subscribing magazine
publishers with industry-wide, single copy magazine sales information in a user
friendly format. Based on 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.
The Company now offers two new products, SourcePro and Interactive
Communications Network (ICN). SourcePro is an intelligent space design program
using digital graphics to help retailers most profitably arrange their front-end
displays. ICN helps retailers manage Universal Product Code (UPC) change
authorizations and provides publishers an avenue to market new product
solicitations.
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
publishers quarterly based
12
<PAGE> 15
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 Service Revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
1998 1997 1998 1997
------------------------------ ---------------------------
<S> <C> <C> <C> <C>
Service Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Service Revenues 41.7% 51.7% 43.1% 52.4%
Gross Profit 58.3% 48.3% 56.9% 47.6%
Selling, General & Administrative Expense 15.5% 18.2% 16.4% 19.0%
Operating Income 42.8% 30.1% 40.5% 28.6%
Interest Expense, Net (0.8)% (6.5)% (2.2)% (7.1)%
Other Income (Expense), Net (0.1)% (0.7)% (0.1)% (0.7)%
Income Before Income Taxes 41.9% 22.9% 38.2% 20.8%
Net Income 24.2% 12.8% 22.2% 11.5%
</TABLE>
SERVICE REVENUES
Increased retailer participation in the Advance Pay Program, the
acquisitions of Mike Kessler and Associates, Inc. ("MKA") and Periodical
Concepts and the growth in subscriptions to PIN contributed to an increase in
Service Revenues during both the quarter and the nine month period ended October
31, 1998 of approximately $1,017,000, or 35%, and $2,724,000, or 32%,
respectively, over the comparable periods in fiscal 1998. The acquisition of MKA
had little impact on the comparison between the quarter ended October 31, 1998
and the quarter ended October 31, 1997 since it was acquired on May 30, 1997. Of
the total, claims, PIN and Advance Pay Program revenues increased approximately
$599,000, or 23%, and $1,881,000, or 25%, respectively, over the comparable
periods in fiscal 1998. Revenue from front-end management services increased
from $287,000 for the quarter ended October 31, 1997 to $705,000 for the quarter
ended
13
<PAGE> 16
October 31, 1998, or 146%, and from $982,000 for the nine month period ended
October 31, 1997 to $1,825,000 for the nine month period ended October 31, 1998,
or 159%. This growth resulted from an increase in the number of reconfiguration
programs undertaken by the Company on behalf of its retailer clients.
Historically, front-end management 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
front-end merchandising fixtures by manufacturers. Consequently, variations in
the timing and amounts of front-end management revenues could have a material
positive or negative effect on the Company's operating results of any given
quarter.
COST OF SERVICE REVENUES AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
("TOTAL COSTS")
Despite a 34% increase in Service Revenues for the quarter ended
October 31, 1998, Total Costs increased only $206,000, or 10%, over the third
quarter of the prior year. The acquisition of Periodical Concepts (PC2) led to
increased costs in amortization, wages and other expenses of approximately
$88,000. Consulting expenses increased approximately $40,000 over the comparable
period of the prior year due to valuation services utilized and for fees paid to
financial and business consultants. Travel and entertainment expenses increased
over the same quarter in the prior year by approximately $26,000 and $20,000,
respectively. An increase in rental rates and the addition of another office
caused rent expense to increase over the prior year's third quarter by
approximately $16,000. Moving expenses were approximately $9,000 during this
quarter due to the relocation of several employees compared to no moving expense
in the prior year. Lastly, the expenses for meetings and seminars increased
approximately $14,000 over the prior year's third quarter.
The year-to-date expenses also increased at a rate lower than revenues.
Despite a 32% increase in Service Revenues for the nine month period ended
October 31, 1998, Total Costs increased only $658,000, or 11%, over the first
nine months of the prior year. The acquisition of PC2 led to increased costs in
amortization, wages and other expenses of approximately $88,000. The acquisition
of Mike Kessler and Associates, Inc. (MKA) led to increased costs, including
wages, amortization and rent of approximately $105,000. Wages, other than MKA's
and PC2's employees, increased approximately $99,000 over the same period of
last year, due primarily to increases in employee compensation. Consulting
expenses increased approximately $129,000 over the comparable period of the
prior year due to valuation services utilized and for fees paid to financial and
business consultants. Approximately $38,000 more bonus expense was accrued
during the first nine months of this year than last year. Equipment leases,
telephone expenses, depreciation and rent increased $18,000, $22,000, $24,000
and $28,000, respectively, over the first nine months of the prior year. Travel
and entertainment expenses also increased over the prior year by $28,000 and
$34,000, respectively. Additionally, costs for personal property taxes increased
approximately $20,000 due to filing 1996, 1997 and 1998 North Carolina returns
during this fiscal year. Moving expenses were approximately $20,000 during this
year due to the relocation of several employees compared to no moving expense in
the prior year. Expenses related to seminars and meetings increased
approximately $26,000. However, bad debt expense decreased approximately $82,000
from last year to partially offset these increases.
INTEREST EXPENSE
Interest Expense decreased for the quarter and the nine month period
ended October 31, 1998 by $146,000 and $343,000, respectively, compared to the
quarter and nine month period ended October 31, 1997. $4,213,000 of the net
proceeds from the Company's public offering of Common Stock on June 19, 1998 was
used to temporarily reduce the balance under the Company's credit facility.
Additionally, as the Advance Pay Program matures, it becomes increasingly funded
by collections under the Program rather than by borrowings.
INCOME TAX EXPENSE
The effective income tax rates for the three months and nine months
ended October 31, 1998 were 42.2% and 41.8%, respectively. These rates varied
from the statutory rate due to expenses not deductible for income tax purposes.
Such non-deductible expenses include meals and entertainment, goodwill
amortization, and officers' life insurance premiums. The effective income tax
rates for the three months and nine months ended October 31, 1998 were lower
than the rates for the comparable periods during the prior year because
non-deductible expenses as a percentage of income before taxes has decreased.
14
<PAGE> 17
YEAR 2000 COMPLIANCE
Over the past several momths, the Company has been analyzing all
systems for possible Y2K problems. Currently there are three types of IT
software in use: proprietary software developed from a third party vendor,
internal software development and off the shelf software. Of these, the most
critical software to the Company is the third party proprietary software. Data
processed from this system feeds various other systems including the software
developed internally and third party systems. The internal software is the
next most critical software since it is used to repackage data collected from
the third party proprietary software.
1. The third party proprietary software has been reviewed and modified
for Y2K problems. Plans are to go to the third party site and run all programs
in year 2000 mode to look for any problems that may still need to be addressed.
This testing is expected to be completed by the end of January 1999.
2. All internal software was developed over the past four years with
the Y2K problem in mind. The Company does not forsee any significant problems
resulting from this software development. There has been minimal testing to
this point. More detailed testing is expected to be completed by April 1999.
3. Updates from off the shelf software vendors are continually
received and implemented. The Company believes there will be few problems with
Y2K compliance for all software in use today.
There have been no significant costs incurred in addressing the Y2K
problem to this point. Regarding the Y2K issues with the third party
proprietary software, the Company has a contract with the third party to
supply programming at a set fee per month. No extra expenditures will be
incurred to resolve any Y2K problems with this third party. Internal staff
develop the in-house software on a salaried basis, therefore no additional
expenditures will be incurred for Y2K problems.
The Company has uncovered several PCs and laptops currently in use
that will not pass Y2K tests. The company plans to assess all hardware for Y2K
compliance by the end of January 1999. Costs are not expected to exceed
$40,000. All hardware upgrades will be completed before the end of 1999.
Several of these upgrades were already anticipated due to the age of the
hardware.
The Company believes that the greatest risk due to internal and/or
external sources not being Y2K compliant would be the inability to meet
deadlines. The Company depends on data from third parties in order to process
information from its clients. If the third parties have problems supplying
data to the Company, then certain deadlines for its clients may not be met. If
internal systems of the Company are not Y2K compliant, information received
from third parties cannot be processed in a timely manner. This again could
lead to missed deadlines, which could have a negative impact on the Company's
relationships with its customers and a material and adverse effect on the
Company's condition and results of operations.
The Company is currently communicating with outside trading partners in
order to assess their Y2K readiness. The majority of the Company's critical
trading partners have indicated that they will be Y2K compliant before the end
of 1999. The Company believes that there will be no significant problems with
these third parties that would impair normal operations. These communications
also include non-IT aspects of operations (i.e., phone systems, data connection
equipment, heating and air, etc.).
Currently the Company has no contingency plan in place for Y2K issues.
Once all evaluations and testing have been completed, contingency plans will
be developed. Contingency planning is scheduled to be finalized by the end of
first quarter 1999.
No assurance can be given that the Company will successfully avoid all
problems associated with the Y2K issue.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for funding the Advance Pay
Program and selling, general and administrative expenses (particularly salaries,
travel and entertainment) incurred in connection with the maintenance of
existing accounts and the solicitation of new clients. Historically, the Company
has financed its business activities through borrowings under available lines of
credit, cash flow from operations and through the issuance of equity securities.
During the quarters ended October 31, 1998 and October 31, 1997, the
Company advanced over $15,650,000 and $9,800,000 , respectively, representing a
60% growth rate. The primary source of funding for advances is the Company's
credit facility which is discussed below. Collections under the Advance Pay
Program are used to pay down the balance under the credit facility. Thus, the
credit facility is primarily used as a tool to manage the timing of payments and
collections under the Advance Pay Program. Growth of the Program is closely
monitored and controlled to ensure that funding will be available either through
cash provided by the Program and/or adjustments to the borrowing limit under the
Company's credit facility,.
Net cash used by operating activities during the nine months ended
October 31, 1998 was $1,676,000 while net cash used by operating activities
during the nine months ended October 31, 1997 was $3,773,000. Investing
activities used $2,995,000 during the nine month period ended October 31, 1998,
primarily to purchase Periodical Concepts. Financing activities provided
$4,649,000 during the nine month period ended October 31, 1998. The proceeds
from the issuance of Common Stock of approximately $8,041,000 were partially
offset by net repayments on the credit facility of $3,557,000.
The average collection period for the nine months ended October 31,
1998 was 132.6 days compared to 134 days for the nine months ended October 31,
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 October 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. The credit agreement has no
termination date; however, 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 October 31, 1998,
the Company was in compliance with all financial ratios imposed by the Credit
Agreement.
At October 31, 1998, the Company's total long-term debt obligations
were $5,049,000. Of such amount, $7,000 matures in the next 12 months. The
Company anticipates that the funds necessary to satisfy these obligations will
be derived from cash flows from operations.
15
<PAGE> 18
On November 19, 1998, the Company issued a press release announcing
that it had signed letters of intent to acquire the assets and assume specified
liabilities of two front-end manufacturers and their affiliates. The Company
expects the acquisition of MYCO, Inc. and an affiliated real estate holding
company to be consummated on January 7, 1999 and expects the acquisition of
Chestnut Display Systems, Inc. ("Chestnut") and an affiliate of Chestnut to be
completed on or around February 1, 1999. The Company expects to acquire the
assets of these companies for an aggregate of approximately $16.25 million cash
and approximately $4.5 million in the Company's stock.
On December 2, 1998, the Company issued a press release announcing that
it had signed a letter of intent to acquire the assets and assume specified
liabilities of Yeager Industries, Inc. ("Yeager"), another front-end fixture
manufacturer. The Company expects to complete this acquisition by January 15,
1999. The Company plans to acquire the assets of Yeager for approximately
$500,000 cash and 142,860 shares of the Company's stock.
On December 15, 1998, the Company issued a press release announcing
that it had signed a letter of intent to acquire Brand Manufacturing Corporation
("Brand") and affiliated companies ("Affiliates"), a New York based front-end
marketing and manufacturing company. Brand and Affiliates will be acquired for
3.4 million shares of the Company's common stock, with a portion of said shares
being issuable only upon shareholder approval.
It is anticipated that the acquisitions will be financed initially
through an increase in the existing credit facility.
16
<PAGE> 19
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of the Shareholders of the Company was held on
October 6, 1998. Of, the 9,564,264 shares entitled to vote at such
meeting, 8,642,252 shares were present at the meeting in person or by
proxy.
(c) The proposal to amend the Company's Bylaws to render inapplicable a
Missouri statute, which restricts certain business combinations, was
approved. The purpose of the Amendment is to prevent the statute from
delaying, deferring, or preventing a change in control of the Company
and/or diminishing the opportunity for shareholders to receive a
premium above the market price for their shares from a potential
acquirer who is unfriendly to the Company's management. The number of
shares voted for, against and withheld were as follows:
For Against Withheld
--- ------- --------
4,950,776 27,461 3,664,015
The proposal to amend the Company's Bylaws to render inapplicable a
Missouri statute, which may impair the voting rights of control shares
upon transfer, was approved. The purpose of the Amendment is to prevent
the statute from delaying, deferring, or preventing a change in control
of the Company and/or diminishing the opportunity for shareholders to
receive a premium above the market price for their shares from a
potential acquirer who is unfriendly to the Company's management. The
number of shares voted for, against and withheld were as follows:
For Against Withheld
--- ------- --------
4,945,311 28,041 3,668,900
Each of the management nominees for director was duly elected to serve
an additional term of three years. The number of shares voted for and
withheld were as follows:
For Withheld
--- --------
S. Leslie Flegel 8,617,071 25,181
William H. Lee 8,618,221 24,031
There were no broker non-votes regarding the election of directors or
the amendments to render inapplicable the Missouri statutes regarding
certain business combinations or impairment of voting rights of control
shares upon transfer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Exhibit Index.
(b) A report on Form 8-K dated July 27, 1998 reporting the acquisition of
Periodical Concepts was filed August 8, 1998.
17
<PAGE> 20
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE SOURCE INFORMATION MANAGEMENT COMPANY
Date: December 18, 1998 /S/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Chief Financial Officer
18
<PAGE> 21
EXHIBIT INDEX
Exhibit
Number Description
- -------- -----------
27.1 Financial Data Schedule (Filed in EDGAR version only)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet at October 31, 1998 (Unaudited) and the Statement of Income for the Nine
Months Ended October 31, 1998 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 8,667
<SECURITIES> 0
<RECEIVABLES> 28,638,913
<ALLOWANCES> 469,658
<INVENTORY> 0
<CURRENT-ASSETS> 28,793,496
<PP&E> 2,743,999
<DEPRECIATION> 1,656,889
<TOTAL-ASSETS> 34,658,560
<CURRENT-LIABILITIES> 7,161,039
<BONDS> 0
0
0
<COMMON> 96,106
<OTHER-SE> 23,126,790
<TOTAL-LIABILITY-AND-EQUITY> 35,458,560
<SALES> 11,136,199
<TOTAL-REVENUES> 11,136,199
<CGS> 4,797,242
<TOTAL-COSTS> 1,832,621
<OTHER-EXPENSES> (13,076)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264,986
<INCOME-PRETAX> 4,254,421
<INCOME-TAX> 1,778,000
<INCOME-CONTINUING> 2,476,421
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,476,421
<EPS-PRIMARY> .28
<EPS-DILUTED> .27
</TABLE>
