<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 July 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: 9,569,718 (as of August 31,
1998) --------------------------
- -----
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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THE SOURCE INFORMATION MANAGEMENT COMPANY
INDEX
PART I - FINANCIAL INFORMATION
Page
----
ITEM 1. Financial Statements
Unaudited Balance Sheet as of July 31, 1998 1
Unaudited Statements of Operations for the three
months ended July 31, 1998 and 1997 and for the
six months ended July 31, 1998 and 1997 3
Unaudited Statements of Cash Flows for the six
months ended July 31, 1998 and 1997 4
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis 11
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 15
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THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
UNAUDITED BALANCE SHEET
July 31, 1998
- --------------------------------------------------------------------------------------------------------------------
ASSETS (NOTE 3)
CURRENT
<S> <C>
Cash $ 60,840
Trade receivables (net of allowance for doubtful accounts of $461,056) (Note 5) 23,424,708
Other current assets 148,037
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 23,633,585
- --------------------------------------------------------------------------------------------------------------------
Office equipment and furniture 2,584,842
Less accumulated depreciation and amortization 1,582,288
- --------------------------------------------------------------------------------------------------------------------
NET OFFICE EQUIPMENT AND FURNITURE 1,002,554
- --------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill (net of accumulated amortization of $366,241) 5,490,644
Other 167,291
- --------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 5,657,935
- --------------------------------------------------------------------------------------------------------------------
$ 30,294,074
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes
to financial statements
</TABLE>
1
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THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
UNAUDITED BALANCE SHEET
July 31, 1998
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT
<S> <C>
Checks issued against future deposits $ 2,341,299
Accounts payable and accrued expenses 1,181,495
Income taxes payable 298,537
Due to retailers (Note 6) 1,079,739
Deferred income taxes (Note 7) 919,000
Current maturities of long-term debt (Note 3) 10,404
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,830,474
- --------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 3) 2,335,472
- --------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES (Note 7) 51,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 8,216,946
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common Stock, $.01 par - shares authorized, 16,528,925; outstanding 9,564,264 95,643
Additional paid-in capital 18,563,469
Retained earnings 3,418,016
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 22,077,128
- --------------------------------------------------------------------------------------------------------------------
$ 30,294,074
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes
to financial statements
</TABLE>
2
<PAGE> 5
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
UNAUDITED STATEMENTS OF OPERATIONS
Three Months Ended July 31, Six Months Ended July 31,
---------------------------------- -----------------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service Revenues $ 3,580,588 $ 2,940,137 $ 7,175,790 $ 5,468,016
Cost of Service Revenues 1,579,499 1,590,631 3,145,906 2,884,577
- --------------------------------------------------------------------------------------------------------------------
Gross Profit 2,001,089 1,349,506 4,029,884 2,583,439
Selling, General and Administrative
Expense 553,247 534,341 1,219,921 1,062,128
- --------------------------------------------------------------------------------------------------------------------
Operating Income 1,447,842 815,165 2,809,963 1,521,311
- --------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 9,692 7,404 10,280 13,662
Interest expense (98,635) (213,614) (218,878) (415,750)
Other (3,131) (21,483) (5,950) (40,625)
- --------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (92,074) (227,693) (214,548) (442,713)
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 1,355,768 587,472 2,595,415 1,078,598
Income Tax Expense (Note 7) 565,000 254,000 1,078,000 489,000
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 790,768 $ 333,472 $ 1,517,415 $ 589,598
- --------------------------------------------------------------------------------------------------------------------
Earnings per Share
Basic $ .09 $ .04 $ .18 $ .08
- --------------------------------------------------------------------------------------------------------------------
Diluted $ .09 $ .04 $ .17 $ .08
- --------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding
Basic 8,720,594 5,827,872 8,375,035 5,825,894
- --------------------------------------------------------------------------------------------------------------------
Diluted 9,238,183 5,890,443 8,865,692 5,857,698
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes
to financial statements
</TABLE>
3
<PAGE> 6
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
UNAUDITED STATEMENTS OF CASH FLOWS
Six Months Ended July 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,517,415 $ 589,598
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Depreciation and amortization 252,944 184,851
Provision for losses on accounts receivable - 38,672
Impairment of investment in limited partnership 10,000 10,000
Loss on disposition of assets - 1,338
Deferred income taxes 98,000 (116,000)
Services received in exchange for Common Stock 3,000 8,000
Changes in assets and liabilities:
Increase in accounts receivable (4,432,162) (1,855,845)
Decrease in other assets 543,440 51,739
Increase (decrease) in checks issued against future deposits 2,209,110 (2,787,480)
Increase in accounts payable and accrued expenses 793,832 399,071
Increase (decrease) in amounts due customers 85,893 (31,834)
- --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,081,472 (3,507,890)
- --------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Acquisition of Periodical Concepts (2,500,000) -
Acquisition of Mike Kessler & Associates, Inc., net of cash acquired - (349,777)
Capital expenditures (325,742) (125,521)
Loan to affiliate - (5,820)
Loan to officer - (10,000)
Collections on loan to officer 22,093 -
Proceeds from sale of fixed assets - 2,000
Increase in cash surrender value of life insurance (21,260) (33,743)
Proceeds from surrender of life insurance policies - 83,959
- --------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (2,824,909) (438,902)
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes
to financial statements
</TABLE>
4
<PAGE> 7
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
UNAUDITED STATEMENTS OF CASH FLOWS
Six Months Ended July 31, 1998 1997
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
<S> <C> <C>
Proceeds from issuance of Common Stock 8,041,062 -
Borrowings under credit facility 16,134,000 17,218,000
Principal payments on credit facility (22,399,000) (13,393,000)
Repayments under short-term debt agreements (24,178) (34,098)
Proceeds from exercise of stock options 20,738 -
Proceeds from issuance of warrants 200 -
Registration costs - (58,310)
Preferred Stock dividends - (3)
- -------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 1,772,822 3,732,589
- -------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 29,385 (214,203)
CASH, beginning of period 31,455 284,921
- --------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 60,840 $ 70,718
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes
to financial statements
</TABLE>
5
<PAGE> 8
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S><C>
1. UNAUDITED FINANCIAL In the opinion of management, the unaudited financial information as of July 31,
STATEMENTS 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 six months
ended July 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 stockholders of
TRANSACTIONS the Company. Amounts paid for the office space were approximately $130,000 and $108,000 for the
six months ended July 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 $1,000 and $5,200 for the six months ended July 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 July 31, 1998.
3. LONG-TERM Long-term debt consists of:
DEBT AND REVOLVING
CREDIT FACILITY
July 31, 1998
-----------------------------------------------------------------------------------
Revolving Credit Facility $ 2,333,000
Term note payable in monthly installments of $629
through November 1999, collateralized by an
automobile 9,497
Obligations under capital lease 3,379
-----------------------------------------------------------------------------------
Total Long-term Debt 2,345,876
Less current maturities 10,404
-----------------------------------------------------------------------------------
Long-term Debt $ 2,335,472
-----------------------------------------------------------------------------------
The Company has an agreement providing for a revolving loan 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 8.418% at July 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.
</TABLE>
6
<PAGE> 9
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S><C>
The revolving loan agreement requires the Company to maintain certain ratios and a specified
level of net worth, restricts payment of dividends, and limits additional indebtedness. The
Company was in compliance with such ratios at July 31, 1998.
4. SUPPLEMENTAL CASH FLOW Supplemental information on interest and income taxes paid is as follows:
INFORMATION
Six Months Ended July 31, 1998 1997
-----------------------------------------------------------------------------------
Interest Paid $ 133,000 $ 359,000
Income Taxes Paid (Refunded) $ 189,000 $ (122,000)
-----------------------------------------------------------------------------------
On February 28, 1997, 7,721 shares of Common Stock were issued as a dividend to the Preferred
Stockholders as of that date.
5. ADVANCE PAY The Company has established an Advance Pay Program. Under this program the Company advances an
PROGRAM agreed upon percentage of the incentive payments otherwise due the retailer from magazine
publishers upon quarterly submission of claims for such payments. The claims otherwise due the
retailer become due the Company. Included in trade receivables at July 31, 1998 is $18,225,605 due
the Company under the Advance Pay Program (net of $6,060,833 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 payments
difference. The Company owes retailers $1,080,000 at July 31, 1998 under such arrangements.
</TABLE>
7
<PAGE> 10
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S><C>
7. INCOME TAXES Provision for federal and state income taxes in the statements of operations
consist of the following components:
Six Months Ended July 31, 1998 1997
-----------------------------------------------------------------------------------
Current
Federal $ 780,000 $ 482,000
State 200,000 123,000
-----------------------------------------------------------------------------------
Total Current 980,000 605,000
-----------------------------------------------------------------------------------
Deferred
Federal 78,000 (93,000)
State 20,000 (23,000)
-----------------------------------------------------------------------------------
Total Deferred 98,000 (116,000)
-----------------------------------------------------------------------------------
Total Income Tax Expense $ 1,078,000 $ 489,000
-----------------------------------------------------------------------------------
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:
July 31, 1998
-----------------------------------------------------------------------------------
Deferred Tax Assets
Allowance for doubtful accounts $ 173,000
Deferred compensation 43,000
Other 19,000
-----------------------------------------------------------------------------------
Total Deferred Tax Assets 235,000
-----------------------------------------------------------------------------------
Deferred Tax Liabilities
Book/Tax differences in accounts receivable 943,000
Income not previously taxed under cash
basis of accounting for income tax purposes 205,000
Depreciation 29,000
Other 28,000
-----------------------------------------------------------------------------------
Total Deferred Tax Liabilities 1,205,000
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
Net Deferred Tax Liability 970,000
-----------------------------------------------------------------------------------
Classified as:
Current 919,000
Non-current 51,000
-----------------------------------------------------------------------------------
Net Deferred Tax Liability $ 970,000
-----------------------------------------------------------------------------------
</TABLE>
8
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THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S><C>
The following summary reconciles income taxes at the maximum federal statutory rate with the
effective rate for the first six months of fiscal 1999 and 1998:
Six Months Ended July 31, 1998 1997
-----------------------------------------------------------------------------------
Income tax expense at statutory rate $ 882,000 $ 367,000
State income tax expense, net of federal
income tax benefit 132,000 80,000
Non-deductible goodwill amortization 39,000 21,000
Non-deductible meals and entertainment 16,000 10,000
Non-deductible officers' life insurance 5,000 2,000
Other, net 4,000 9,000
-----------------------------------------------------------------------------------
Income Tax Expense $ 1,078,000 $ 489,000
-----------------------------------------------------------------------------------
8. BUSINESS Mike Kessler and Associates, Inc.
COMBINATIONS
On May 30, 1997, the Company acquired all of the stock of Mike Kessler and Associates, Inc.
(MKA) for $2,500,000 of which $350,000 was paid upon closing 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.
</TABLE>
9
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THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
<S><C>
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 quarter ending July 31, 1997.
10. COMMON STOCK 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 three months and six months ended July 31,
1997 was reduced by a constructive dividend of $109,937, which resulted from the exchange of all
5,600 outstanding shares of Preferred Stock for 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:
Three Months Ended Six Months Ended
July 31, July 31,
--------------------------- ------------------------
1998 1997 1998 1997
------------------------------------------------------------------------------------
Weighted average number
of common shares
outstanding 8,720,594 5,827,872 8,375,035 5,825,894
Effect of dilutive
securities - stock
options and warrants 517,589 62,571 490,657 31,804
------------------------------------------------------------------------------------
Weighted average number
of common shares
outstanding - as
adjusted 9,238,183 5,890,443 8,865,692 5,857,698
------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
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
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. 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.
Management believes the Company is poised to offer 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 will help retailers manage
Universal Product Code (UPC) change authorizations and provide 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 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
11
<PAGE> 14
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 July 31, Six Months Ended July 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Service Revenues 44.1% 54.1% 43.8% 52.8%
Gross Profit 55.9% 45.9% 56.2% 47.2%
Selling, General & Administrative Expense 15.5% 18.2% 17.0% 19.4%
Operating Income 40.4% 27.7% 39.2% 27.8%
Interest Expense, Net (2.4)% (7.0)% (2.9)% (7.4)%
Other Income (Expense), Net (0.1)% (0.7)% (0.1)% (0.7)%
Income Before Income Taxes 37.9% 20.0% 36.2% 19.7%
Net Income 22.1% 11.3% 21.1% 10.8%
</TABLE>
SERVICE REVENUES
Increased retailer participation in the Advance Pay Program, the
acquisitions of Mike Kessler and Associates, Inc. and Periodical Concepts and
the growth in subscriptions to PIN contributed to an increase in Service
Revenues during both the quarter and the six month period ended July 31, 1998 of
approximately $640,000, or 22%, and $1,708,000, or 31%, respectively, over the
comparable periods in fiscal 1998. Of the total, claims, PIN and Advance Pay
Program revenues increased approximately $473,000, or 19%, and $1,282,000, or
27%, respectively, over the comparable periods in fiscal 1998. Revenue from
front-end management services increased from $385,000 for the quarter ended July
31, 1997 to $552,000 for the quarter ended July 31, 1998, or 44%, and from
$695,000 for the six month period ended July 31, 1997 to $1,121,000 for the six
month period ended July 31, 1998, or 61%. 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-
12
<PAGE> 15
end management revenues could have a material positive or negative effect on the
Company's operating results of any given quarter. In June 1998, the Company
introduced a prototype of its proprietary SourcePro software, which enables
retailers to visualize alternative checkout configurations in a
three-dimensional graphic environment and analyze the relative profit potential
that can be achieved by the retailer from alternative configurations.
COST OF SERVICE REVENUES AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
("TOTAL COSTS")
Total Costs for the quarter ended July 31, 1998 increased only $8,000
over the same quarter of the prior year.
Despite a 31% increase in Service Revenues for the six month period
ended July 31, 1998, Total Costs increased only $419,000, or 11%, over the first
six months of the prior year. The acquisition of Mike Kessler and Associates,
Inc. (MKA) led to increased costs, including wages, amortization and rent of
approximately $193,000. Wages, other than MKA's employees, increased
approximately $56,000 over the same period of last year, due primarily to
increases in employee compensation. Consulting expenses increased approximately
$90,000 over the comparable period of the prior year due to valuation services
utilized and for fees paid to financial and business consultants. Approximately
$66,000 more bonus expense was accrued during the first six months of this year
than last year. Equipment leases, telephone expenses, depreciation and
entertainment expenses increased $19,000, $18,000, $15,000 and $14,000,
respectively, over the first half of the prior year. Additionally, costs for
personal property taxes increased approximately $20,000 due to filing 1996, 1997
and 1998 North Carolina returns during this fiscal year. Lastly, expenses
related to seminars and meetings increased approximately $12,000 due to the
Company's sponsorship of several seminars as well as increased participation in
seminars by the sales representatives. 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 six month period
ended July 31, 1998 by $115,000 and $197,000, respectively, compared to the
quarter and six month period ended July 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.
INCOME TAX EXPENSE
The effective income tax rates for the three months and six months
ended July 31, 1998 were 41.7% and 41.5%, 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.
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 and could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
is in the process of testing both its internal and external systems for Year
2000 compliance by running programs simulating operations in the year 2000; this
process should be completed by the end of the year, and 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. The Company is developing a contingency plan to address
the possibility of Year 2000 failures, and anticipates the plan will be
completed in the first quarter of 1999. No assurance can be given that the
Company will successfully avoid all problems with the Year 2000 issue.
13
<PAGE> 16
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.
Net cash provided by operating activities during the six months ended
July 31, 1998 was $1,081,000 while net cash used by operating activities during
the six months ended July 31, 1997 was $3,508,000. Investing activities used
$2,825,000 during the six month period ended July 31, 1998, primarily to
purchase Periodical Concepts. Financing activities provided $1,773,000 during
the six month period ended July 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 $6,265,000.
The average collection period for the six months ended July 31, 1998 was 124
days compared to 137 days for the six months ended July 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 July 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 July 31, 1998, the
Company was in compliance with all financial ratios imposed by the Credit
Agreement.
At July 31, 1998, the Company's total long-term debt obligations were
$2,346,000. Of such amount, $10,400 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.
14
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Exhibit Index.
(b) No current reports on Form 8-K have been filed during the three months
ended July 31, 1998.
15
<PAGE> 18
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE SOURCE INFORMATION MANAGEMENT COMPANY
Date: September 14, 1998 /S/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Chief Financial Officer
16
<PAGE> 19
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule (Filed in EDGAR version only)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet at July 31, 1998 (Unaudited) and the Statement of Income for the Six
Months Ended July 31, 1998 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 60,840
<SECURITIES> 0
<RECEIVABLES> 23,424,708
<ALLOWANCES> (461,056)
<INVENTORY> 0
<CURRENT-ASSETS> 23,633,585
<PP&E> 2,584,842
<DEPRECIATION> (1,582,288)
<TOTAL-ASSETS> 30,294,074
<CURRENT-LIABILITIES> 5,830,474
<BONDS> 0
0
0
<COMMON> 95,643
<OTHER-SE> 21,981,485
<TOTAL-LIABILITY-AND-EQUITY> 30,294,074
<SALES> 7,175,790
<TOTAL-REVENUES> 7,175,790
<CGS> 3,145,906
<TOTAL-COSTS> 1,219,921
<OTHER-EXPENSES> (4,330)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 218,878
<INCOME-PRETAX> 2,595,415
<INCOME-TAX> 1,078,000
<INCOME-CONTINUING> 1,517,415
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,517,415
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
</TABLE>
