AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1998
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
Under the
SECURITIES ACT OF 1933
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Name of Small Business Issuer in Its Charter)
Missouri 7374 43-1710906
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification
Organization) Code Number) Number)
W. Brian Rodgers
Chief Financial Officer
11644 Lilburn Park Road 11644 Lilburn Park Road 11644 Lilburn Park Road
St. Louis, Missouri 63146 St. Louis, Missouri 63146 St. Louis, Missouri 63146
(314) 995-9040 (314) 995-9040 (Address of Principal
(Address and Telephone Fax: (314) 995-9022 Place of Business or
Number of Principal (Name, Address and Intended Principal
Executive Office Telephone Numbers) Place of Business
of Agent for Service)
Copies of all correspondence to:
Douglas J. Bates, Esq. Michael D. DiGiovanna, Esq.
Gallop, Johnson & Neuman, L.C. Parker Duryee Rosoff & Haft
101 South Hanley Road 529 Fifth Avenue
St. Louis, Missouri 63105 New York, New York 10017
(314) 862-1200 (212) 599-0500
Fax: (314) 862-1219 Fax: (212) 972-9487
Approximate Date of Proposed Sale to the Public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
Amount Proposed maximum Proposed maximum
Title of each class of securities to be to be offering price aggregate offering Amount of
registered registered per share(a) price(a) registration fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value per share 2,300,000(b) $6.53 $ 15,019,000 $4,431
- -----------------------------------------------------------------------------------------------------------------------------------
Warrants to purchase Common Stock issued to
Representative 200,000 $7.18 $ 1,436,000 $ 424
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock $0.01 par value per share issuable
upon the exercise of the Representative's
Warrants(c) 200,000 -- -- (d)
===================================================================================================================================
<FN>
(a) Estimated solely for purposes of calculating the amount of the
registration fee pursuant to Rule 457(c) promulgated under the Securities
Act of 1933, as amended, based on the average of the bid and asked price
as of May 7, 1998, as reported by the Nasdaq SmallCap Market.
(b) Includes 300,000 shares issuable upon exercise of the Representative's
over-allotment option.
(c) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares of Common Stock as may become issuable
as a result of any future anti-dilution adjustments made in accordance
with the terms of the Representative's Warrants.
(d) No separate registration fee required pursuant to Rule 457 promulgated
under the Securities Act of 1933, as amended.
</FN>
</TABLE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
LEGEND
SUBJECT TO COMPLETION, DATED _____________, 1998
PROSPECTUS [LOGO]
2,000,000 Shares
THE SOURCE INFORMATION MANAGEMENT COMPANY
Common Stock
--------------
Of the 2,000,000 shares of Common Stock offered hereby, 1,500,000
shares are being offered by The Source Information Management Company, a
Missouri corporation (the "Company") and 500,000 shares are being offered by
certain shareholders of the Company (the "Selling Shareholders"). See "Principal
and Selling Shareholders." The Company will not receive any of the proceeds from
the sale of Common Stock by the Selling Shareholders.
The Common Stock is quoted on The Nasdaq SmallCap Market ("Nasdaq
SmallCap") under the symbol "SORC" and on The Boston Stock Exchange under the
symbol "SFM." On May 7, 1998, the last sale price of the Common Stock, as
reported on Nasdaq SmallCap, was $6.375 per share. See "PRICE RANGE OF COMMON
STOCK". The Company has applied for approval of the Common Stock for quotation
on the Nasdaq National Market under the symbol "SORC."
The securities offered hereby involve a high degree of risk. See "RISK
FACTORS" commencing on page 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price to Underwriting Proceeds to Proceeds to
Public Discounts(1) Company(2) Selling Shareholders
Per Share $ $ $ $
Total(3) $ $ $ $
(1) Does not include additional compensation payable to Donald & Co.
Securities Inc., acting as representative (the "Representative") of the
several underwriters identified elsewhere herein (the "Underwriters"),
in the form of a non-accountable expense allowance equal to $33,000
plus 1% of the gross proceeds of this offering. The Company has also
agreed to sell the Representative warrants to purchase up to 200,000
shares of Common Stock at an exercise price of $ per share, subject to
adjustment, exercisable over a period of four years commencing one year
from the date hereof (the "Representative's Warrants") and to indemnify
the Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act").
See "UNDERWRITING."
(2) Before deducting expenses estimated to be $425,000 payable by the
Company, including the Representative's nonaccountable expense
allowance, of which $25,000 has been paid to date.
(3) The Selling Shareholders have granted the Representative an option
exercisable within 45 days after the date of this Prospectus (the
"Over-Allotment Option") to purchase up to 300,000 additional shares of
Common Stock solely to cover over-allotments, if any, on the same terms
and conditions as set forth above; provided that the non-accountable
expense allowance shall be reduced to 0.5% of the gross proceeds
derived from the sale of shares of Common Stock upon exercise of the
Over-Allotment Option. If such option is exercised in full, the total
Price to Public, Underwriting Discounts, Proceeds to Company and
Proceeds to Selling Shareholders will be $________, $_________,
$_________ and $__________, respectively. The Company will not receive
any of the proceeds from the sale of Common Stock by the Selling
Shareholders. See "PRINCIPAL AND SELLING SHAREHOLDERS" and
"UNDERWRITING."
<PAGE>
The Common Stock is being offered by the Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters, and subject
to approval of certain legal matters by their counsel and subject to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify this offering and to reject any order in whole or in part. It is expected
that delivery of the certificates evidencing the Common Stock will be made
against payment therefor on or about _____________, 1998 at the offices of
Donald & Co. Securities Inc., New York, New York or through the facilities of
the Depository Trust Company.
DONALD & CO. SECURITIES INC.
The date of this Prospectus is ______________, 1998
[MAP]
The Company is currently a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and furnishes its
shareholders with annual reports containing audited financial statements after
the close of each fiscal year.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING TRANSACTIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
(IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF
THE COMPANY ON THE NASDAQ SMALL-CAP MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the notes related thereto, appearing
elsewhere in this Prospectus. All share and per share data in this Prospectus
(i) have been restated to give effect to a 1-to-1.21 reverse stock split
effected on October 6, 1997 and (ii) assume that the Representative's
Over-Allotment Option, the Representative's Warrants and all other options and
warrants outstanding on the date of this Prospectus will not be exercised.
The Company
For more than 20 years, The Source Information Management Company (the
"Company") and its predecessors have provided information gathering, consulting
and other information based services to operators of mass merchandise, grocery,
convenience and pharmacy stores located throughout the United States and eastern
Canada. Currently, the Company provides monitoring and documentation services to
approximately 725 retailers, such as Wal-Mart Stores, Inc., Kmart Corporation,
Target Stores, Inc., Food Lion, Inc., and W.H. Smith, Inc., in connection with
processing and collection of incentive payments from magazine publishers on
single copy sales of approximately 6,000 magazine titles offered in more than
65,000 stores. As an extension of this service, the Company established its
Advance Pay Program, under which the Company advances an agreed upon percentage
of the incentive payments due to the retailer from magazine publishers. It then
collects directly from the publishers the claims due to the retailer. In fiscal
1997 and 1998, the Company advanced approximately $15 million and $39 million
under the Advance Pay Program, respectively. In October, 1996, the Company
expanded its services and potential client base with the introduction of the
Periodical Information Network ("PIN"), an information service in which the
Company offers and provides subscribing magazine publishers, advertisers and
others with industry-wide, single copy magazine sales information in a user
friendly format. Based on discussions with representatives of magazine
publishers, the Company believes that publishers and advertisers perceive that
PIN provides a valuable basis on which to formulate marketing, distribution,
advertising and other policies.
The Company intends to continue to capitalize on its retailing
experience and extensive database of single copy magazine sales information
through introduction of new and enhanced products and services, application of
the Company's services to new product categories, and acquisition of
complementary businesses. Since the introduction of PIN, most leading publishers
have subscribed, including Time Distribution Services, ICD/The Hearst Corp. and
Globe Marketing Services. In May 1998, the Company began a 90-day beta test of
its uniform product code ("UPC") information service in six retail chains
covering all four major store categories: mass merchandise, grocery, convenience
and pharmacy. This UPC information service will enable subscribing publishers
and retailers to efficiently access the data necessary to verify and correct
price changes and other information contained in the product code of each
magazine. Management expects that publishers will recognize the potential
savings to be realized by using the Company's new UPC information service to
minimize fines imposed by retailers for erroneous product codes and expenses
associated with correcting improperly assigned codes.
The Company's integrated software system is designed to efficiently and
accurately accumulate and manage sales data with respect to sales of low-cost,
high volume consumer products, allowing the Company's retailer clients to
optimize the effectiveness of their marketing effort. While the Company's
software system was developed to aid retailers in the collection of sales
incentive payments and the merchandising of magazines, it has been used in
connection with confections and other consumer products, including high volume
items such as razors and batteries. Such capability has enabled the Company to
launch its front-end management program. Front-end management was introduced in
July 1997 with a contract to manage the front-end of approximately 2,200 Kmart
stores. The Company's front-end management includes ongoing services with
respect to the management of checkout area merchandising, including
reconfiguration and design of fixtures, product selection, plan-o-gramming,
vendor negotiation, vendor billing and collection, fixture prototype review and
supervision of fixture installation. As of the date of this Prospectus, the
number of stores for which the Company is providing front-end management
services has grown from the 2,200 stores initially involved in the Kmart
Corporation contract to more than 10,000, with contracts for an additional 8,000
stores in active negotiation.
3
<PAGE>
The Company was formed by the consolidation of Display Information
Systems Corporation ("DISC") and Periodical Management and Marketing, Inc.
("PMM"), each of which were significant providers of information services to
retailers of magazines. The Company has expanded, and intends to continue to
expand, through the acquisition of businesses and technologies that address
additional services or products, market segments or geographic regions in which
the Company is not currently active and which would allow the Company to expand
the services offered to its clients, or its ability to support existing or
planned services.
Client Services
The Company is dedicated to providing full information services to its
clients. Such services include the following:
Claim Submission. Through its software system, the Company offers to
assist retailers in accurately monitoring, documenting, claiming and
collecting publisher incentive payments. Based on information gathered
with respect to the titles and number of copies actually sold, the
Company prepares publisher supplied claim forms and submits the
documented claim for payment to the appropriate national distributor,
which acts as payment agent for the publisher. Typically, the Company
receives payment to the order of the retailer, records the payment and
forwards it to the retailer. The Company charges the retailer a
negotiated percentage of the cash collected. As an extension of its
claim submission service, the Company has established an Advance Pay
Program. Under this program, the Company advances an agreed upon
percentage of the incentive payments due the retailer from magazine
publishers. It then collects directly from the publishers the claims
due to the retailer. Service revenues earned under the Advance Pay
Program generally exceed those charged under the traditional method.
Periodical Information Network. The Company's large and sophisticated
database of magazine industry information has resulted in it becoming a
magazine information center which management believes is used by many
companies in the magazine industry to formulate and manage their
publishing and distribution strategies. PIN is a comprehensive system
designed to use current computer technologies, including CD ROM, to
effectively manage all elements of its database including information
packaging and efficient inbound, outbound access. The network provides
access to periodically updated historical information concerning the
titles and quantity of each title sold by retailers for analysis
purposes. Most leading publishers have subscribed to PIN.
Front-end Management. The Company assists retailers in maximizing sales
and incentive payment revenues by reconfiguring and designing front-end
merchandising fixtures, supervising fixture installation, selecting
products, negotiating with vendors and performing the burdensome task
of billing and collecting incentive payments from vendors. The Company
utilizes its knowledge of local consumer preferences and incentive
payment programs and its proprietary SOURCEPRO three dimensional
fixture design and imaging system to analyze the retailer's store
layout, customer traffic patterns and available front-end merchandising
alternatives, and develop an appropriate checkout display
configuration. Thereafter, the Company relieves the retailer of the
burden of managing the invoicing and collection of payments due from
the numerous vendors participating in any particular display
configuration.
UPC Information Service. The Company has designed its UPC Information
Service to enable publishers and retailers to efficiently communicate
price changes, product code corrections and changes in the lists of
titles authorized by a retailer for front-end merchandising in any
particular store.
4
<PAGE>
Marketing and Promotional Program. As part of its full-service
philosophy, the Company offers its clients advice and suggestions
concerning specialized marketing and promotional programs which may
include, for example, special mainline and checkout displays and
cross-promotions of magazines and products of interest to readers of
such magazines. Such services are offered to enhance single copy
magazine sales by the Company's clients, and thereby increase service
revenue due the Company in connection with the submission of incentive
payment claims; accordingly, no separate charge is made for these
services.
The Source Information Management Company was organized under the laws
of the State of Missouri on March 22, 1995. Its principal executive offices are
located at 11644 Lilburn Park Road, St. Louis, Missouri 63146, and its telephone
number is (314) 995-9040.
The Offering
Securities offered by
The Company.................... 1,500,000 shares
Selling Shareholders........... 500,000 shares
----------------
Total....................... 2,000,000 shares
Common Stock outstanding
prior to the offering(a)....... 8,016,367 shares
Common Stock outstanding
after the offering............. 9,516,367 shares
Use of Proceeds.................. To fund the expansion of the Company's
Advance Pay Program, the possible
acquisition by the Company of one or more
businesses, the development of new or
enhanced products and services and to fund
working capital and other general corporate
activities, including the continued upgrade
of the Company's computer hardware and
software systems. See "USE OF PROCEEDS."
Risk Factors..................... This offering involves a high degree of
risk. See "RISK FACTORS" beginning on page
7.
Nasdaq SmallCap Trading Symbol(b) SORC
Boston Stock Exchange
Trading Symbol(b).............. SFM
Proposed Nasdaq National Market
Trading Symbol................. SORC
- -------------------
(a) Based on shares outstanding as of March 5, 1998. Excludes shares
reserved for issuance under the Company's stock option and other stock
based plans and upon exercise of the Over-Allotment Option and the
Representative's Warrant, as well as 683,414 reserved for issuance
under other outstanding warrants. See "CAPITALIZATION" and
"UNDERWRITING."
(b) The Company intends to seek delisting of the Common Stock from the
Nasdaq SmallCap and the Boston Stock Exchange concurrent with, or
promptly following, admission of the Common Stock to quotation on
Nasdaq National Market.
5
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data should be read in conjunction with the
consolidated financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
Statements of Operations Data: 1998 1997 1996
------ -------- ------
<S> <C> <C> <C>
Service Revenues................. $11,795,496 $7,056,270 $7,195,176
Merchandise Revenues............. 8,348 242,177 926,008
---------- ---------- ---------
Total Revenue.................. 11,803,844 7,298,447 8,121,184
---------- ---------- ----------
Gross Profit................... 5,943,191 2,233,859 3,711,962
Selling, General &
Administrative Expense......... 2,350,622 2,904,372 2,799,841
---------- ---------- ----------
Operating Income (Loss)........ 3,592,569 (670,513) 912,121
Other Expense, Net .............. 772,561 309,992 314,127
---------- ---------- ----------
Income (Loss) Before Income Taxes 2,820,008 (980,505) 597,994
Net Income (Loss).............. 1,589,008 (603,317) 191,994
Earnings (Loss) Per Share
Basic ........................ $ 0.23 $ (0.11) $ 0.04
Diluted........................ 0.22 (0.11) 0.04
Weighted Average
Outstanding Shares
Basic........................ 6,561,761 5,557,223 5,028,547
Diluted...................... 6,693,666 5,557,223 5,028,547
January 31, 1998
Balance Sheet Data: Actual As Adjusted(1)
Working Capital........................ $ 16,988,047 $16,988,047
Total Assets........................... 23,807,857 23,807,857
Long-term debt, less current
portion.............................. 8,604,057 159,838
Stockholders' Equity................... 12,494,713 20,938,932
<FN>
(1) Based upon an assumed offering price of $6.375 per share. Assumes the
net proceeds of this offering will be applied initially to the
temporary reduction of the outstanding principal balance of the
Company's credit facility resulting in total availability thereunder of
$15,000,000. Any proceeds remaining after repayment of such outstanding
balance in full will be invested in short-term, interest-bearing
securities or deposited in interest-bearing bank accounts and will be
included in working capital.
</FN>
</TABLE>
6
<PAGE>
RISK FACTORS
Any forward-looking statements set forth in this Prospectus are
necessarily subject to significant uncertainties and risks, including, but not
limited to those set forth in "RISK FACTORS." When used in this Prospectus, the
words "believes," "anticipates," "intends," "expects," and similar expressions
are intended to identify forward-looking statements. Actual results could be
materially different as a result of various possibilities, including increased
competition, significant changes in the marketing strategies of publishers, the
inability of the Company to successfully manage its expansion and the
availability of suitable acquisition candidates. Readers are cautioned not to
place undue reliance on forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Prospective investors should consider carefully the following factors,
in addition to the other information contained in this Prospectus, in evaluating
an investment in the Common Stock offered hereby.
Dependence on the Marketing and Distribution Strategy of Publishers
Approximately 80% of the Company's revenues are currently derived from
the service revenues earned in connection with the collection of payments owed
to the Company's retailer clients from magazine publishers under programs
designed by publishers to provide magazine retailers with an incentive to
increase single copy magazine sales. Although these incentive programs have been
offered as part of the publishers' overall marketing strategy for more than 20
years, the incentive programs are governed by short-term contracts and,
accordingly, magazine publishers are under no long-term contractual obligation
to continue the incentive programs in their present form or otherwise. Although
largely unsuccessful, certain magazine publishers have experimented from time to
time with direct distribution of selected titles. Such arrangements replace the
traditional incentive payment programs with discounted sale pricing. If magazine
publishers successfully develop and implement a direct distribution program
which does not include an incentive payment component, or otherwise discontinue
or significantly modify the incentive programs to which the Company's services
relate in a manner which is not compatible with the Company's services, the
Company's results of operations and financial condition may be materially and
adversely affected. See "BUSINESS-The Magazine Industry."
Risk Associated with the Advance Pay Program
The recent increases in revenue and profitability recorded by the
Company result, in part, from the admission of existing retailer clients to the
Advance Pay Program. The profitability of the Advance Pay Program is dependent,
in part, on (a) the difference between the service revenues collected by the
Company with respect to the Advance Pay Program and the interest paid by the
Company for borrowed funds advanced thereunder and (b) the length of the
collection period of the trade accounts receivable associated with the Advance
Pay Program. Interest rates applicable to borrowings made by the Company are
subject to fluctuation and any decrease in the spread between service revenues
collected and interest paid would have a negative effect on the Company's
results of operations and financial condition. The availability of funds under
the Company's credit facility is conditioned on the maintenance of certain
financial ratios. There can be no assurance that the Company will be able to
satisfy such conditions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-Liquidity and Capital Resources."
Additionally, any increase in the average collection period for trade accounts
receivable associated with the Advance Pay Program will increase the Company's
interest expense and have a negative effect on the Company's results of
operations and financial condition.
Furthermore, in connection with the Advance Pay Program, the Company
assumes the risk otherwise borne by the retailer client that magazine publishers
will refuse or be unable to pay the amount of incentive payments claimed. Based
on historical experience, the Company maintains a reserve of 2% of all claims
submitted against such refusal or inability to pay. However, if a prominent
magazine publisher files a petition in bankruptcy or otherwise seeks protection
from its creditors, such reserve may be inadequate and the results of operations
and financial condition of the Company could be materially and adversely
affected.
7
<PAGE>
Risk of Increased Competition
Competition among providers of many of the Company's products and
services, particularly the processing of incentive payment claims, is intense.
While such competition is fragmented, the Company recognizes approximately 32
direct competitors, all of which are closely-held private companies. Based on
its review of the industry and informal discussions with magazine publishers and
retailers, the Company believes that none of its direct competitors have greater
financial, technological, marketing and sales resources than the Company.
However, it is possible that certain services offered by the Company could be
performed directly by its retail customers or otherwise offered or performed in
the future by publishers, distributors or other organizations, such as Nielsen
IRI and Audit Bureau of Circulation. Many of such organizations have greater
financial, technological, marketing and sales resources than the Company.
Additionally, competitors may develop new or different service programs which
are perceived by customers to be of similar or superior quality at the same or
lower prices than the Company's services. There can be no assurance that its
present competitors or companies that choose to enter its marketplace in the
future will not exert significant competitive pressures on the Company resulting
in a deterioration of the business environment in which the Company operates,
including a decrease in the number of clients served by the Company and a
decrease in the service revenues chargeable by the Company. See "BUSINESS-
Competition."
Management of Expansion
The Company intends to continue to implement its expansion strategy
through the acquisition of one or more companies which offer products and
services compatible to those of the Company, some of which may involve products
or services with which management of the Company has little or no experience.
Such acquisitions also could continue to place a significant strain on the
Company's capital and human resources. There can be no assurance that the
Company will be able to adequately manage its expansion successfully, introduce
new services or products, or integrate any business which it may acquire, the
failure of any of which could have a material adverse effect on the Company.
Need to Manage New Service Introduction
The Company believes that its future growth is dependent, in part, on
its ability to anticipate the informational needs of existing and potential
clients and develop and introduce, in a timely manner, new services that
adequately address such needs. There can be no assurance that the Company will
be successful in developing, introducing and marketing new services. If the
Company is unable to introduce new services or if the Company's new services do
not receive sufficient market acceptance, the Company's ability to achieve its
financial objectives may be adversely affected.
Unspecified Acquisitions
The Company has allocated $2,000,000 (or 20.9%) of the net proceeds of
this offering to acquire businesses. At the date of this Prospectus, the Company
has no commitments or contracts to acquire any businesses. Furthermore,
management has not selected any specific business for investment of any of the
proceeds of this offering and there can be no assurance that the Company will be
able to identify suitable acquisition candidates or consummate any such
acquisitions on acceptable terms. Purchasers of Common Stock will not have the
opportunity to vote on any such potential acquisitions or review the financial
status of any business to be acquired. Shareholders of the Company must rely
upon management for prudent expenditure of the funds of the Company in making
such acquisitions. Management of the Company does not anticipate seeking
independent appraisals of any businesses which it may acquire.
8
<PAGE>
Shares Eligible for Future Sale; Preferred Stock; Registration Rights
Of the 8,016,367 shares of Common Stock outstanding on March 5, 1998,
4,620,718 shares are currently eligible for sale to the public by persons who
are not "affiliates" of the Company without restriction. All the remaining
shares of Common Stock outstanding are "restricted" within the meaning of Rule
144 under the Securities Act of 1933, as amended (the "Securities Act"), and may
not be sold in the absence of registration under the Securities Act or an
exemption therefrom. However, the executive officers, directors and certain
other shareholders of the Company, who as of March 5, 1998 beneficially held an
aggregate of 4,208,104 Common Stock, have agreed that they will not without the
prior consent of the Representative, sell or otherwise dispose of any shares of
Common Stock beneficially owned by them for a period ending on October 7, 1998.
Thereafter, such persons are entitled to sell, without the consent of the
Representative, an increasing portion of the shares beneficially owned by them,
subject in some cases to the volume and other conditions of Rule 144.
Pursuant to authority granted by its Articles of Incorporation, the
Company's Board of Directors (the "Board") has authority to issue up to
2,000,000 shares of Preferred Stock and to determine the price, rights,
preferences, privileges and restrictions thereof, including voting rights,
without any further vote or action by the Company's shareholders. The voting and
other rights of the holders of Common Stock will be subject to and may be
adversely affected by the rights of the holders of any Preferred Stock that may
be issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with obtaining necessary capital resources
and for other corporate purposes, could have the effect of delaying, deferring
or preventing a change of control of the Company. The Company has no current
arrangements to issue any additional shares of Preferred Stock. See "DESCRIPTION
OF CAPITAL STOCK."
The Company has filed a registration statement under the Securities Act
to register an aggregate of 520,661 shares of Common Stock issued or reserved
for issuance under the Company's 1995 Incentive Stock Option Plan and 41,322
shares issued or reserved for issuance under the Company's Stock Award Plan. In
addition, the Company intends to file a registration statement under the
Securities Act to register an aggregate of 600,000 shares of Common Stock
reserved for issuance under the Company's 1998 Omnibus Plan. Certain holders of
the Company's securities have the right to require the Company to file a
registration statement with respect to the sale of approximately 225,722 shares
of Common Stock held by them. No prediction can be made as to the effect, if
any, that future sales of Common Stock or the availability of such shares for
sale will have on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of Common Stock, or the perception that such
sales might occur, could adversely affect the prevailing market price of the
Common Stock. See "CAPITALIZATION" and "SHARES ELIGIBLE FOR FUTURE SALE."
Continued Control By Management
Upon completion of this offering, the Company's executive officers and
directors will beneficially own approximately 31.9% ( 29.8% if the
Over-Allotment Option is exercised in full) of the outstanding shares of Common
Stock. As a result, the Company's executive officers and directors will have
effective voting control of the Company and the practical ability to elect all
of the Company's directors and determine the vote on any matter being voted on
by the Company's shareholders, including any merger, sales of assets or other
change of control of the Company. The Company's Articles of Incorporation and
Bylaws do not provide for cumulative voting in the election of directors. See
"PRINCIPAL AND SELLING SHAREHOLDERS" and "CERTAIN PROVISIONS OF THE ARTICLES OF
INCORPORATION AND BYLAWS."
Related Party Transactions; Potential Conflicts of Interest
From time to time prior to the commencement of the Company's operations
in May 1995, the Company's predecessors engaged in various transactions with its
directors, executive officers and other affiliated parties. The terms and
conditions of such transactions were not negotiated on an arms-length basis and
inherently involve conflicts of interest between the predecessor and the related
party. However, since May 1995, all transactions between the Company and its
officers, directors, principals, shareholders and affiliates have been, and all
future transactions are required to be, approved by a majority of the
independent and disinterested outside directors and must be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties
under similar circumstances.
9
<PAGE>
Dependence on Key and Other Personnel
The Company believes that its success is dependent, in part, on the
efforts of its key executives, including S. Leslie Flegel and William H. Lee.
The Company has entered into employment agreements with all its key executives.
Although the Company believes that the loss of no single executive will have a
material adverse effect on the Company, certain events, many of which are beyond
the control of the Company, could result in the loss of the services of such
executives. The Company has procured and intends to maintain policies of
insurance on the lives of certain members of its senior management, including
Messrs. Flegel and Lee. See "MANAGEMENT."
No Dividends With Respect to Common Stock
The Company currently anticipates that it will retain all its future
earnings, if any, for use in the expansion and operation of its business, and
does not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. There can be no assurance that the Company will pay cash
dividends at any time with respect to the Common Stock, or that the failure to
pay dividends for a period of time will not adversely affect the market price
for the Company's Common Stock.
See "PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY."
Anti-Takeover Effects of Articles of Incorporation and Bylaws
The Board has authority to issue up to 2,000,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions thereof, including voting rights, without any further vote or
action by the Company's shareholders. The voting and the rights of the holders
of Common Stock will be subject to and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing desirable flexibility in connection
with obtaining necessary capital resources and other corporate purposes, could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no current arrangements to issue any additional shares
of preferred stock. See "DESCRIPTION OF CAPITAL STOCK." In addition, the
Company's Articles of Incorporation and Bylaws include certain provisions
providing for the staggered election of directors and restrictions on the
ability of shareholders to call special meetings of shareholders. See "CERTAIN
PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS." The Company is
currently subject to the Missouri Takeover Bid Disclosure Act, which under
certain circumstances may prohibit a business combination between the Company
and a shareholder owning 20% or more of the outstanding voting power of the
Company. The Board has adopted a resolution which, if approved by the
shareholders of the Company at the 1998 annual meeting of shareholders, would
amend the Bylaws to include an express election of the Company to not be subject
to such provisions to the extent allowable under Missouri law. If such
resolution is not adopted, such provisions could have the effect of delaying,
deferring or preventing a change in control of the Company.
10
<PAGE>
Representative's Warrants
In connection with an October 1997 public offering of its Common Stock,
the Company sold to the Representative, for nominal consideration, a warrant to
purchase from the Company up to 200,000 shares of Common Stock at a purchase
price of $4.80 per share (the "1997 Warrants"). Upon consummation of this
offering, the Company has agreed to sell to the Representative and/or its
designees, for nominal consideration, the Representative's Warrants to purchase
from the Company up to an additional 200,000 shares of Common Stock. The
Representative's Warrants are exercisable for a period of four years commencing
on the first anniversary of the date of this Prospectus, at an exercise price
equal to $_____ per share. For the life of the 1997 Warrants and the
Representative's Warrants, the holders are given, at nominal cost, the
opportunity to profit from a rise in the market price for the securities of the
Company without assuming the risk of ownership, with a resulting dilution in the
interest of other security holders. As long as the 1997 Warrants and the
Representative's Warrants remain unexercised, the terms under which the Company
could obtain additional capital may be adversely affected. Moreover, the holders
of the 1997 Warrants and the Representative's Warrants may be expected to
exercise them at a time when the Company would, in all likelihood, be able to
obtain any needed capital by a new offering of its securities on terms more
favorable than those provided by the 1997 Warrants and the Representative's
Warrants. Additionally, if the holders of the 1997 Warrants and the
Representative's Warrants should exercise their registration rights to effect a
distribution of the 1997 Warrants and the Representative's Warrants or
underlying securities, the Representative, prior to and during such
distribution, will be unable to make a market in the Company's securities and
will be required to comply with other limitations on trading set forth in Rules
101, 103, and 104 of Regulation M promulgated under the Exchange Act. Such rules
restrict the solicitation of purchasers of a security when a person is
interested in the distribution of such security and also limit market making
activities by an interested person until the completion of the distribution. If
the Representative must cease making a market, the market and market price for
such securities may be adversely affected and the holders of such securities may
be unable to sell such securities. See "UNDERWRITING."
USE OF PROCEEDS
The following table sets forth the Company's anticipated use of
proceeds, expressed in dollars and as a percentage of gross proceeds.
Amount Percentage
------ ----------
Gross proceeds $9,562,500 100.0%
Less:
Underwriting discounts 693,281 7.25%
Offering expenses 425,000 4.4%
---------- ------
Net proceeds $ 8,444,219 88.3%
----------- ------
Use of Proceeds:
Expansion of Advance Pay Program 6,000,000 62.75%
Acquisition of one or more
businesses 2,000,000 20.9%
Development of new or enhanced
products and services 200,000 2.1%
Working Capital and general corporate
purposes, including the continued
upgrade of the Company's computer
hardware and software systems 244,219 2.55%
---------- -------
Total Use of Proceeds $8,444,219 88.3%
========== ======
11
<PAGE>
Pending the use of the net proceeds from the sale of the shares of
Common Stock as described above such funds will be used to temporarily reduce
the principal balance under the Company's credit facility. Such credit facility
provides for the availability of up to $15,000,000 of borrowings until
termination by Wachovia Bank on not less than 13 months prior notice. At January
31, 1998, the outstanding principal balance under this credit facility was
$8,598,000, the effective interest rate thereon was 8.48% and the unused
availability thereunder was approximately $6,402,000. After application of the
net proceeds of this offering to the temporary repayment of the outstanding
principal balance on its credit facility, the Company intends to make additional
borrowings under the credit facility for the foregoing purposes.
The foregoing represents the Company's present intentions for the use
of the proceeds of this offering based on its currently contemplated operations,
business plan and currently prevailing economic and industry conditions. The
Company's business plan contemplates that the Company may acquire businesses or
introduce additional products and services. Although the Company has had and
will continue to have discussions with potential acquisition candidates it does
not have any present agreements or understandings with respect to any
significant acquisitions. Changes in the proposed expenditures may be made in
response to, among other things, requirements of and opportunities related to
the Advance Pay Program, the ability of the Company to complete a strategic
acquisition, and changes in the Company's plans, future revenues and
expenditures, as well as changes in general industry conditions and technology.
The Company believes that the net proceeds of this offering, cash flow
from operations, trade credit and existing lines of credit will be sufficient to
meet its immediate cash needs and finance its plans for expansion for the
indefinite future, and in any case for not less than twelve months from the date
of this Prospectus. This belief is based upon certain assumptions regarding the
Company's business and cash flow as well as prevailing industry and economic
conditions. The Company's funding requirements may vary significantly, depending
on how rapidly management seeks to expand the business and the expansion
strategies elected. Accordingly, the Company may, in the future, require
additional financing to continue to expand its business. There is no assurance
that the Company will be successful in obtaining additional financing, if
required, on favorable terms, or at all. If the Company were unable to obtain
additional financing, its ability to meet its current plan for expansion could
be materially and adversely affected. See "CAPITALIZATION" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
12
<PAGE>
PRICE RANGE OF COMMON STOCK
From June 22, 1995 until February 12, 1996, the Company's Common Stock
was quoted on the Nasdaq OTC Bulletin Board. Beginning on February 12, 1996, the
Common Stock was quoted on Nasdaq SmallCap under the symbol "SORC." Beginning on
October 7, 1997, the Common Stock was listed on the Boston Stock Exchange. The
following table sets forth, for the periods indicated, the high and low closing
bid prices for the Common Stock as reported by the OTC Bulletin Board and Nasdaq
SmallCap, as applicable.
High Low
Fiscal 1997
First Quarter $ 6.96 $5.30
Second Quarter $ 5.75 $4.84
Third Quarter $ 5.75 $3.18
Fourth Quarter $ 3.93 $2.72
Fiscal 1998
First Quarter $ 3.48 $2.58
Second Quarter $ 3.71 $1.21
Third Quarter $ 4.75 $3.18
Fourth Quarter $ 5.38 $3.56
Fiscal 1999
First Quarter $ 6.69 $5.13
The foregoing quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not necessarily represent actual
transactions. On May 7, 1998, the last sale price for the Common Stock as
reported by Nasdaq SmallCap was $6.375 per share. As of March 5, 1998, there
were 114 holders of record of the Common Stock.
DIVIDEND POLICY
During the last two years, the Company has not declared or paid any
cash dividends on its Common Stock. The Board presently, and for the foreseeable
future, intends to retain all its earnings, if any, for the development of the
Company's business. The declaration and payment of cash dividends in the future
will be at the discretion of the Board and will depend upon a number of factors,
including among others, future earnings, operations, funding requirements, the
general financial condition of the Company and such other factors that the Board
may deem relevant.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as
of January 31, 1998 and (ii) as adjusted to reflect the sale by the Company of
the shares of Common Stock offered hereby and the application of the estimated
net proceeds therefrom. This table should be read in conjunction with the
financial statements of the Company, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "DESCRIPTION OF CAPITAL
STOCK" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
January 31, 1998
Actual As Adjusted(a)
<S> <C> <C>
Long-term debt (less current portion).................... $ 8,604,057 $ 159,838
------------ -----------
Stockholders' equity:
Common Stock, par value $0.01 per share, 16,528,925
authorized 8,016,367 shares outstanding actual,
9,516,367 shares outstanding as adjusted ........... 80,163 95,163
Additional paid-in capital ............................. 10,513,949 18,943,168
Retained earnings ...................................... $ 1,900,601 $ 1,900,601
----------- -----------
Total stockholders' equity ..................... 12,494,713 $20,938,932
----------- -----------
Total capitalization ........................... $ 21,098,770 $21,098,770
============ ===========
<FN>
(a) Based upon an assumed offering price of $6.375 per share. Assumes the net
proceeds of this offering will be applied to the temporary reduction in the
outstanding principal balance of the Company's credit facility resulting in
total availability thereunder of $15,000,000. Any proceeds remaining after
repayment of such outstanding balance in full will be invested in
short-term, interest-bearing securities or deposited in interest-bearing
bank accounts and will be included in working capital.
</FN>
</TABLE>
SELECTED FINANCIAL DATA
The selected financial data as of and for the periods presented below have been
derived from the financial statements of the Company. The financial statements
of the Company as of and for the fiscal years ended January 31, 1998 and 1997
have been audited by BDO Seidman, LLP, and its report thereon is included
elsewhere herein. The selected financial data should be read in conjunction with
the financial statements, including the notes thereto, appearing elsewhere in
this Prospectus and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS."
14
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
Statements of Operations Data: 1998 1997 1996
------ -------- ------
<S> <C> <C> <C>
Service Revenues............................... $11,795,496 $7,056,270 $7,195,176
Merchandise Revenues........................... 8,348 242,177 926,008
---------- ---------- ---------
Total Revenue................................ 11,803,844 7,298,447 8,121,184
---------- ---------- ----------
Gross Profit................................. 5,943,191 2,233,859 3,711,962
Selling, General &
Administrative Expense....................... 2,350,622 2,904,372 2,799,841
---------- ---------- ----------
Operating Income (Loss)...................... 3,592,569 (670,513) 912,121
Other Expense, Net ............................ 772,561 309,992 314,127
---------- ---------- ----------
Income (Loss) Before Income Taxes.............. 2,820,008 (980,505) 597,994
Net Income (Loss)............................ 1,589,008 (603,317) 191,994
Earnings (Loss) Per Share
Basic ...................................... $ 0.23 $ (0.11) $ 0.04
Diluted...................................... 0.22 (0.11) 0.04
Weighted Average
Outstanding Shares
Basic...................................... 6,561,761 5,557,223 5,028,547
Diluted.................................... 6,693,666 5,557,223 5,028,547
January 31,
1998
Balance Sheet Data: Actual As Adjusted(1) 1997 1996
------ ----------- -------- ------
Working Capital................................ $ 16,988,047 $16,988,047 $2,322,778 $1,305,679
Total Assets................................... 23,807,857 23,807,857 15,569,649 5,346,384
Long-term debt, less current portion........... 8,604,057 159,838 22,814 32,341
Stockholders' Equity........................... 12,494,713 20,938,932 3,145,622 2,017,626
<FN>
(1) Based upon an assumed offering price of $6.375 per share. Assumes the
net proceeds of this offering will be applied initially to the
temporary reduction of the outstanding principal balance of the
Company's credit facility resulting in total availability thereunder of
$15,000,000. Any proceeds remaining after repayment of such outstanding
balance in full will be invested in short-term, interest-bearing
securities or deposited in interest-bearing bank accounts and will be
included in working capital.
</FN>
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
For more than 20 years, The Source Information Management Company (the
"Company") and its predecessors have provided information gathering, consulting
and other information based services to operators of mass merchandise, grocery,
convenience and pharmacy stores located throughout the United States and eastern
Canada. Currently, the Company provides monitoring and documentation services to
approximately 725 retailers, such as Wal-Mart Stores, Inc., Kmart Corporation,
Target Stores, Inc., Food Lion, Inc., and W.H. Smith, Inc., in connection with
processing and collection of incentive payments from magazine publishers on
single copy sales of approximately 6,000 magazine titles offered in more than
65,000 stores. As an extension of this service, the Company established its
Advance Pay Program, under which the Company advances an agreed upon percentage
of the incentive payments due to the retailer from magazine publishers. It then
collects directly from the publishers the claims due to the retailer. In fiscal
1997 and 1998, the Company advanced approximately $15 million and $39 million
under the Advance Pay Program, respectively. In October 1996, the Company
expanded its services and potential client base with the introduction of the
Periodical Information Network ("PIN"), an information service in which the
Company offers and provides subscribing magazine publishers, advertisers and
others with industry-wide, single copy magazine sales information in a user
friendly format. Based on discussions with representatives of magazine
publishers, the Company believes that publishers and advertisers perceive that
PIN provides a valuable basis on which to formulate marketing, distribution,
advertising and other policies.
A majority of the Company's revenues are derived from service fees
earned in connection with the collection of incentive payments owed to the
Company's retailer clients from magazine publishers. Most incentive payment
programs offer the retailer a cash rebate, equal to a percentage of the
retailer's net sales of the publisher's titles, which is payable quarterly upon
submission of a properly documented claim. Under agreements with its retailer
clients, the Company gathers sales data, submits claims for payment, collects
payments and receives a percentage of the aggregate payments collected on the
retailers' behalf. Claims for incentive payments are generally submitted to the
publisher quarterly based on net sales of the publishers' titles recorded in the
previous calendar quarter. Except in connection with its Advance Pay Program,
the Company does not guarantee to its retailer clients any payments due to the
client from magazine publishers, and accordingly, does not assume any credit
risk associated with such incentive payments. In substantially all the contracts
under the Advance Pay Program, which is continuing to represent an increasing
percentage of the 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.
16
<PAGE>
Results of Operations
The following table sets forth, for the periods presented, certain
information relating to the operations of the Company expressed as a percentage
of Total Revenues:
Fiscal Year Ended January 31,
1998 1997
---- ----
Service Revenues 99.9% 96.7%
Merchandise Revenues 0.1 3.3
----- -----
Total Revenues 100.0 100.0
Cost of Service Revenues 49.4 66.6
Cost of Merchandise Sold 0.3 2.8
----- -----
Gross Profit 50.3 30.6
Selling, General & Administrative
Expense 19.9 39.8
----- -----
Operating Income (Loss) 30.4 (9.2)
Interest, Net (5.9) (3.9)
Other Income (Expense), Net (0.7) (0.4)
----- ------
Income (Loss) Before Income Taxes 23.8 (13.4)
Net Income (Loss) 13.5% (8.3)%
Service Revenues
Increased retailer participation in the Advance Pay Program, the
acquisition of Mike Kessler and Associates, Inc. and the growth in subscriptions
to PIN contributed to an increase in service revenues of approximately
$4,739,000, or 67%, over fiscal 1997. Of the total, claims, PIN and Advance Pay
Program revenues increased approximately $3,898,000, or 61% over the prior year.
Revenue from front-end management services increased from $636,000 in the prior
year to $1,477,000 in fiscal 1998, or 132%, resulting from an increase in the
number of reconfiguration programs undertaken by the Company on behalf of its
retailer clients, including the Kmart program. Historically, 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. In May 1998, the
Company introduced its proprietary SOURCEPRO software, which enables retailers
to visualize alternative checkout configuration in a three-dimensional graphic
environment and analyze the relative profit potential which can be achieved by
the retailer from alternative configurations.
Merchandise Revenues and Cost of Merchandise Sold
As a result of its relationships with the leading retailers in the
United States, the Company has had opportunities from time to time to purchase
merchandise, such as gift and greeting cards, caps and other leisure time
products for resale to its retailer clients. However, at the end of fiscal 1997,
management decided to de-emphasize this portion of its business in order to
dedicate more resources to its core services. As a result, the revenues derived
from merchandising sales declined in fiscal 1998 as the related merchandise
inventory was liquidated.
Cost of Service Revenues and Selling, General and Administrative
Expense ("Total Costs")
Despite a 67% increase in Service Revenues, Total Costs increased only
$412,000, or 5%. Increased costs incurred in connection with the acquisitions of
Magazine Marketing, Inc., Readers Choice, Inc. and Mike Kessler and Associates,
Inc., including wages, amortization, rent and depreciation, were more than
offset by the related revenue increases. In addition, wages increased as a
result of bonuses and the hiring of individuals formerly employed by Data-Pros,
Inc., a data processing service company purchased on January 1, 1997. However,
the increase in wages in connection with the acquisition was largely offset by a
decrease in data processing expenses.
17
<PAGE>
Interest Expense
Interest Expense increased $402,000 principally due to increased
borrowings necessary to fund the growth in the Advance Pay Program and, to a
lesser extent, to fund the acquisition of Mike Kessler and Associates, Inc.
Income Tax Expense (Benefit)
The effective income tax rate for fiscal year 1998 was 43.7%. This rate
varied from the federal statutory rate due to state income taxes and expenses
not deductible for income tax purposes. Such non-deductible expenses include
meals and entertainment, goodwill amortization, and officers' life insurance
premiums.
Earnings Per Share
In calculating earnings per share, net income for the year was reduced
by a constructive dividend of $109,937, which resulted from the exchange of all
5,600 outstanding shares of Preferred Stock for 186,667 shares of Common Stock
and non-transferable warrants, expiring in 2000, to purchase 310,709 shares of
Common Stock at an exercise price of $3.00 per share.
Year 2000 Readiness
The Company is aware of the Year 2000 issues associated with the
practice of encoding only the last two digits of four digit years in
computer-based system. Year 2000 issues, if not properly addressed, could result
in disruptions of operations. Currently, management estimates that the
incremental cost to renovate other applications and test replacement
applications and system to become year 2000 ready will not have a material
effect on the Company's financial condition results of operations or liquidity.
No assurance can be given that the Company will successfully avoid all problems
with the Year 2000 issue.
Liquidity and Capital Resources
The Company's primary cash requirements are for meeting the working
capital required in connection with the costs incurred in obtaining service
revenues, selling, general and administrative expenses (particularly salaries,
travel and entertainment) incurred in the maintenance of existing accounts and
in connection with the solicitation of new clients, and for funding the Advance
Pay Program. Historically, the Company has financed its business activities
through cash flow from operations, short-term borrowings under available lines
of credit and through the issuance of equity securities.
Net cash used by operating activities was $5,520,000 and $6,511,000
during the years ended January 31, 1998 and 1997, respectively. If, and so long
as the Advance Pay Program grows at the rate experienced in fiscal 1998,
management anticipates cash used by operations will continue to exceed cash
provided by operations. However, if and when the conversion of existing and new
customer accounts to the Advance Pay Program has been substantially completed,
management anticipates, based on its existing operations, that cash provided by
operations will exceed cash used by operations.
Accounts receivable increased $5,500,000 as a result of the significant
growth of the Advance Pay Program. The average collection period for 1998 was
136 days (considered to be within an acceptable range by management based on the
nature of the Company's business and historical experience) compared to 153 days
for 1997. The collection periods were calculated as follows: 365 days/(Revenues/
Average Accounts Receivable), where accounts receivable includes all trade
accounts receivable, but only the service fee portion of amounts due from
publishers in association with the Advance Pay Program.
The Company is primarily engaged in the business of providing services
to its retailer clients; therefore, its capital expenditure requirements are
minimal. At January 31, 1998, the Company had no outstanding material
commitments for capital expenditures.
18
<PAGE>
The Company has a credit agreement that provides for a revolving loan
of up to $15,000,000 with Wachovia Bank, N.A. Wachovia Bank has the right to
terminate the agreement upon not less than thirteen months prior written notice.
Borrowings bear interest at a rate related to the monthly LIBOR index rate plus
a percentage ranging from 2.5% to 3.5% depending upon the ratio of funded debt
to earnings before interest, taxes, depreciation and amortization. Borrowings
are secured by a security interest in substantially all of the Company's assets
including receivables, inventory, equipment, goods and fixtures, software,
contract rights, notes, and general intangibles. Under the credit agreement, the
Company is required to maintain certain financial ratios. At January 31, 1998,
the Company was in compliance with all financial ratios imposed by the credit
agreement.
At January 31, 1998, the Company's total long-term debt obligations
were $8,635,054. Of such amount, $30,997 will mature within 12 months. The
Company anticipates that the funds necessary to satisfy these obligations will
be derived from cash flows from operations.
At January 31, 1998, the Company had total deferred tax assets of
$214,000 and total deferred tax liabilities of $1,086,000 resulting in a net
deferred tax liability of $872,000 reflecting the net tax effects of temporary
differences between the carrying amount of the assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting. Of
this liability, $316,000 results from a change in accounting method from cash to
accrual by (i) the Company's predecessors in connection with the formation of
the Company, (ii) Magazine Marketing, Inc. and (iii) Mike Kessler and
Associates, Inc. This liability is expected to be paid $222,000, $72,000 and
$22,000 over the next three years, respectively. The Company anticipates that
the funds necessary to satisfy this tax obligation will be derived primarily
from cash flows from operations.
In July 1997, the holders of the Company's 1996 Series 7% Convertible
Preferred Stock exchanged all 5,600 outstanding shares for 186,667 shares of
Common Stock at an effective price of $3.00 per share and non-transferable
warrants, expiring in 2000, to purchase 310,709 shares of Common Stock at an
exercise price of $3.00 per share. The exchange resulted in a one-time
constructive dividend of $109,937, which was reported in the fiscal quarter
ended July 31, 1997.
In September 1997, the Company issued to Aron Katzman, Harry L. Franc,
III and Timothy A. Braswell, each a director of the Company, non-transferable
warrants, expiring in 2000, to purchase an aggregate of 89,289 shares of Common
Stock at an exercise price of $3.00 per share. These warrants will vest at a
rate of 25% on August 1, 1998, 25% on November 1, 1998, 25% on February 1, 1999
and 25% on May 1, 1999. The related expense incurred of approximately $54,000
will be recognized ratably over those periods.
New Accounting Standards
SFAS No. 130, "Reporting Comprehensive Income," was issued in June
1997. Comprehensive income is defined as net income plus certain items that are
recorded directly to shareholders' equity, such as unrealized gains and losses
on available-for- sale securities. Components of the Company's comprehensive
income will be included in a financial statement that has the same prominence as
other financial statements starting in the first quarter of fiscal 1999. SFAS
No. 130's disclosure requirements will have no impact on the Company's financial
condition or results of operations.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997, but interim reporting is not required in 1998. An operating
segment is defined under SFAS No. 131 as a component of an enterprise that
engages in business activities that generate revenue and expense for which
operating results are reviewed by the chief operating decision maker in the
determination of resource allocation and performance. The Company is currently
evaluating the impact of SFAS No. 131 on future financial statement disclosures.
19
<PAGE>
BUSINESS
Overview
For more than 20 years, The Source Information Management Company (the
"Company") and its predecessors have provided information gathering, consulting
and other information based services to operators of mass merchandise, grocery,
convenience and pharmacy stores located throughout the United States and eastern
Canada. Currently, the Company provides monitoring and documentation services to
approximately 725 retailers, such as Wal-Mart Stores, Inc., Kmart Corporation,
Target Stores, Inc., Food Lion, Inc., and W.H. Smith, Inc., in connection with
processing and collection of incentive payments from magazine publishers on
single copy sales of approximately 6,000 magazine titles offered in more than
65,000 stores. As an extension of this service, the Company established its
Advance Pay Program, under which the Company advances an agreed upon percentage
of the incentive payments due to the retailer from magazine publishers. It then
collects directly from the publishers the claims due to the retailer. In fiscal
1997 and 1998, the Company advanced approximately $15 million and $39 million
under the Advance Pay Program, respectively. In October, 1996, the Company
expanded its services and potential client base with the introduction of the
Periodical Information Network ("PIN"), an information service in which the
Company offers and provides subscribing magazine publishers, advertisers and
others with industry-wide, single copy magazine sales information in a user
friendly format. Based on discussions with representatives of magazine
publishers, the Company believes that publishers and advertisers perceive that
PIN provides a valuable basis on which to formulate marketing, distribution,
advertising and other policies.
Formation of the Company
The Company was organized in 1995 by the consolidation of two
significant providers of services to retailers of magazines and other
periodicals. The Company has expanded through the acquisition of businesses and
technologies that addressed additional services or products, market segments or
geographic regions in which the Company was not previously active. These
acquisitions have allowed the Company to expand the services offered to its
clients and enhanced its ability to support existing and planned services. In
1995, the Company acquired the business of Dixon's Modern Marketing Concepts,
Inc. and Tri-State Stores, Inc., both of Chicago Heights, Illinois. In 1996, the
Company acquired the businesses of Magazine Marketing, Inc. of Canton, Ohio and
Readers Choice, Inc., a subsidiary of United Magazine Company located in
Columbus, Ohio. In May 1997, the Company acquired the business of Mike Kessler
and Associates, Inc. of Fair Lawn, New Jersey.
The Magazine Industry
Based on its knowledge of the industry and discussions with magazine
publishers and retailers, management of the Company believes that magazine
publishers are placing an increasing degree of importance on revenues derived
from single copy newsstand sales and that the emphasis placed on single copy
sales by publishers will continue to increase as: (i) mailing costs continue to
rise with respect to subscription distribution; and (ii) magazine advertisers
continue to value the improved target market accuracy achieved through single
copy sales.
The distribution of the approximately 6,000 magazine titles currently
published for single copy sales on a national basis is dominated by six national
distributors, which distribute to over 200 local independent distributors, which
in turn supply copies to magazine retailers. Although the nature of the
businesses in which magazine retailers are engaged is wide ranging, the largest
volume of single copy sales historically is achieved by grocery retailers and
mass merchandise stores. The primary function of the retailer is the display of
available titles in two store locations, at a dedicated section called a
"mainline display" and at displays located within the merchandise checkout area.
Because magazines are frequently purchased on impulse, publishers increasingly
compete for display spaces, referred to as "pockets," at the checkout.
National distributors receive a brokerage fee based on sales and
distribution to local distributors. Local distributors purchase copies at a
discount to the suggested retail price and resell to retailers, also at a
discount to the suggested retail price. Unsold copies are returnable by the
retailer for full credit to all parties in the distribution chain, such that
payments are made only with respect to copies actually sold. All accounting for
copies is done by the local distributors which invoice for distributed copies,
credit retailers for returns and credit national distributors for sales through
a computer-assisted single entry information system.
20
<PAGE>
To provide further incentives to retailers to prominently display their
respective titles, publishers typically enter into Retail Display Allowance
("RDA") programs under which the retailer is entitled to receive, on a quarterly
basis, a cash rebate directly from the publisher equal to a percentage of the
retailer's actual net sales of the publisher's titles upon submission of a
properly documented claim. Conversely, certain publishers of high volume
magazines essentially rent "pocket" space from retailers for the display and
sale of specific titles. Such rent, referred to as "pocket payments" (or "RDP"
payments), is a fixed amount per pocket, per store based on the verified
location and other criteria of the pocket, and is paid quarterly. A majority of
RDA and RDP programs are administered on behalf of the publishers by the
national distributors.
Publishers have also implemented programs to encourage retailers to
upgrade their checkout and mainline display fixtures by making one-time
incentive payments, based on the pockets allocated to their respective titles.
Similar to RDA and RDP, such payments are made only upon submission of a
properly documented claim.
Client Services
The Company is dedicated to providing full information services to its
clients. Such services include the following:
Claim Submission. Through its information system, the Company assists
retailers in accurately monitoring, documenting, claiming and collecting
publisher incentive payments. The claim submission process begins at the end of
each calendar quarter when the Company obtains information from the local
distributors detailing the titles and number of copies actually sold by the
client retailer. Based on this information, the Company prepares publisher
supplied claim forms and submits the documented claim to the appropriate
national distributor, which acts as payment agent for the publisher. After
verification of the claim, the national distributor remits payment to the order
of the retailer in care of the Company, which records the payment and forwards
it to the retailer. The Company charges the retailer a negotiated percentage of
the cash collected.
As an extension of its claim submission service, the Company has
established an Advance Pay Program. Under the provisions of the written
agreement signed by each participating retailer, the Company collects the
incentive payments otherwise due the retailer directly from magazine publishers
with respect to the sale and display of magazines. In return, the Company pays
to the retailer a negotiated fixed percentage of the total incentive payments
otherwise due the retailer with respect to each calendar quarter generally not
later than ninety days after the end of each such quarter. The funds necessary
to make such payments are derived from cash flow from operations and borrowings
under the Company's existing $15.0 million credit facility. Typically, the
agreement provides for a minimum term of one year and thereafter is terminable
by either party on not less than ninety days notice. This service relieves the
retailer from the burdensome administrative task of processing multitudes of
small publisher checks. Service fees earned under the Advance Pay Program
generally exceed those charged under the traditional method; however the Company
generally assumes the risk of uncollectibility of the incentive payments. Based
on historical experience, the Company maintains a reserve for doubtful accounts
equal to approximately 2% of outstanding accounts receivable. The Company
believes such reserve will be adequate.
Periodical Information Network (PIN). The Company's large and
sophisticated database of magazine industry information has resulted in it
becoming a magazine information center which management believes is used by many
companies in the magazine industry to formulate their publishing and
distribution strategies. PIN is a comprehensive system designed to use current
computer technologies, including CD-ROM, to effectively manage all elements of
the Company's database including information packaging and efficient inbound,
outbound access. The network provides access to periodically updated historical
information concerning the titles and quantity of each title sold by retailers
for analysis purposes. Most leading publishers have subscribed to PIN. The PIN
subscription agreement provides that the Company will furnish each subscriber
21
<PAGE>
with a historical database of sales information and quarterly updates capable of
generating three general types of reports: total sales, sales by class of trade,
and sales by retailer. Each report ranks titles in order of sales volume, and
provides other sales related information, including sales efficiencies, category
contributions and total sales ranking. Subscribers pay service fees equal to a
one-time enrollment fee and quarterly update fees. Subscriptions have a term of
one year, which are automatically renewed for successive one-year terms unless
either party terminates by notice to the other not later than ninety days before
commencement of the next renewal term. PIN accounted for approximately 4% of the
Company's 1998 revenues.
Front-End Management. The Company assists retailers in maximizing sales
and incentive payment revenues by reconfiguring and designing front-end
merchandising fixtures, supervising fixture installation, selecting products,
negotiating with vendors and performing the burdensome task of billing and
collecting incentive payments from vendors. The Company utilizes its knowledge
of local consumer preferences and incentive payment programs and its newly
developed SOURCEPRO three dimensional fixture design and imaging system to
analyze the retailer's store layout, customer traffic patterns and available
front-end merchandising alternatives, and develop an appropriate checkout
display configuration. Thereafter, the Company relieves the retailer of the
burden of managing the invoicing and collection of payments due from the
numerous vendors participating in any particular display configuration.
Front-end management was introduced in July 1997 with a contract to manage the
front-end of approximately 2,200 Kmart stores. The Company's front-end
management includes ongoing services with respect to the management of checkout
area merchandising, including reconfiguration and design of fixtures, product
selection, plan-o-gramming, vendor negotiation, vendor billing and collection,
fixture prototype review and supervision of fixture installation. As of the date
of this Prospectus, the number of stores for which the Company is providing
front-end management services has grown to more than 10,000, and involves
arrangements with other prominent retailers such as SuperValu, Hills, Southland
and Cub Foods. The Company is currently in active negotiation to provide
front-end management services with several prominent retailers who operate
approximately 8,000 stores. Front-end management services accounted for
approximately 13% of the Company's 1998 revenues.
UPC Information Service. The Company's UPC Information Service is an
interactive, internet-based information center designed to enable publishers and
retailers to efficiently communicate price changes, product code corrections and
changes in the lists of titles authorized by a retailer for front-end
merchandising in any particular store. Subscribers customize the package of
services perceived to have the greatest value under their respective
circumstances from a menu of services which include downloadable daily updates
of product code data and corrections and real time listings of titles authorized
for sale in each retail chain serviced by the Company. In May 1998, the Company
began a 90-day beta test of its uniform product code ("UPC") information service
in six retail chains covering all four major store categories: mass merchandise,
grocery, convenience and pharmacy. Management believes that publishers will
recognize the potential savings to be realized by using the Company's new UPC
information service to minimize fines imposed by retailers for erroneous product
codes and expenses associated with correcting improperly assigned codes.
Marketing and Promotional Program. As part of its full-service
philosophy, the Company offers its clients advice and suggestions concerning
specialized marketing and promotional programs which may include, for example,
special mainline or checkout displays and cross-promotions of magazines and
products of interest to the readers of such magazines. Such services are offered
to enhance single copy magazine sales by the Company's clients, and thereby
increase service revenues due the Company in connection with the submission of
incentive payment claims; accordingly, no separate charge is made for these
services.
22
<PAGE>
Growth Opportunities
Expansion of Services to New Product Categories. The Company's
information services are designed to efficiently and accurately accumulate and
manage sales data with respect to sales of low cost, high volume consumer
products. While the Company's services, including PIN and the Advance Pay
Program, were developed for use in the magazine industry, the Company has been
engaged to provide its services in connection with integrated magazine and
confections and expects to offer its services for use in connection with other
consumer products, such as razors and batteries.
Development of New and Enhanced Products and Services. The Company
believes that its future success will be dependent upon its ability to
anticipate the informational needs of existing and potential clients and to
develop and introduce, in a timely manner, new products and services which
address such needs. A portion of the proceeds of this offering are expected to
be used to continue the Company's development of new and enhanced products and
services. The Company encourages creativity and originality in its sales
personnel and believes that one of the keys to the growth of the Company has
been the willingness of senior management to implement product and service
solutions suggested by the Company's personnel to address the needs of customers
with whom they interact. In addition, Messrs. Flegel and Lee, as well as various
members of the Company's senior management and sales staff, periodically meet
with its consumers to discuss industry trends and informational requirements.
After identifying an unsatisfied consumer need, members of the Company's senior
management and sales team meet to design new or enhanced products and services
addressing such need. Thereafter, a team is appointed to develop such products
and services for introduction to the market.
Customers/Clients
The Company provides services to approximately 725 operators of mass
merchandise, grocery, convenience and pharmacy stores located throughout the
United States and eastern Canada. Such retailers include Wal-Mart Stores, Inc.,
Kmart Corporation, Target Stores, Inc., Food Lion, Inc. and W.H. Smith, Inc. In
addition, the Company provides market data to publishers, including Time
Distribution Services, ICD/The Hearst Corp. and Globe Marketing Services. All of
the Company's services are rendered pursuant to short term contracts and,
accordingly, the Company's clients are under no long term contractual obligation
to continue to employ the Company's services.
Marketing and Sales
The Company markets its services through its own direct sales force.
The Company's sales group consists of ten regional managers and three divisional
vice presidents. Each manager is assigned to a specific geographic territory and
is responsible for the preparation of quotations, program presentations and the
general development of sales, as well as maintenance of existing accounts,
within his or her assigned territory.
Competition
Competition among providers of many of the Company's products and
services, particularly the processing of incentive payment claims, is intense.
While such competition is fragmented, the Company recognizes approximately 32
direct competitors, all of which are closely-held private companies. The Company
believes that, in virtually all cases, it is the sole provider of magazine
incentive payments claim services to its clients, the Company's clients do not
perform such services on their own behalf and that none of the Company's
competitors currently provide the range of services offered by the Company.
Furthermore, the Company believes that none of its direct competitors have
greater financial, technological, marketing and sales resources than the
Company. However, it is possible that certain services offered by the Company
could be performed directly by its retail customers or otherwise offered or
performed in the future by publishers, distributors or other organizations, such
as Nielsen, IRI and Audit Bureau of Circulation. Many of such organizations have
greater financial, technological, marketing and sales resources than the
Company. Additionally, competitors may develop new or different service programs
which are perceived by customers to be of similar or superior quality at the
same or lower prices than the Company's services.
Management further believes that the principal competitive factors in
the retail information industry include information access, technological
support, accuracy, system flexibility, financial stability, customer service and
reputation. The Company believes it competes effectively with respect to each of
the above factors.
23
<PAGE>
Properties
The Company conducts its operations from 11 office facilities, located
in St. Louis, Missouri; New York, New York; Chicago Heights, Illinois;
Schaumburg, Illinois; Oklahoma City, Oklahoma; San Antonio, Texas; Cranberry
Township, Pennsylvania; Canton, Ohio; Woodstock, Georgia; Fair Lawn, New Jersey;
and Mississauga, Ontario, Canada. These facilities contain an aggregate of
approximately 19,000 square feet of space. Each of the facilities is occupied by
the Company under leases containing terms and conditions believed to be
comparable to those prevailing in the market in which the facility is located.
The Company believes that each of such facilities may be relocated without
material expense or delay, and that suitable alternative office facilities are
available in each market on comparable terms, if required.
In addition, the Company's data processing center, located in High
Point, North Carolina, contains approximately 13,900 square feet and is occupied
under a written lease with 711 Gallimore Partnership, a North Carolina general
partnership expiring in 2012. Such lease provides for the payment of monthly
rent of approximately $14,000, subject to adjustment for taxes, insurance and
utilities. See "MANAGEMENT-Certain Relationships and Related Transactions."
Management Information Systems
The Company uses a customized information system to accumulate and
manage sales data in connection with its processing of claims and maintenance of
the PIN database under a license from a third party which has been retained by
the Company to service and upgrade the Company's information system. This
sophisticated information system is of a type used by several companies engaged
in the collection of sales incentive payments in the magazine industry. In May
1998, the Company introduced its proprietary SOURCEPRO software, which enables
retailers to visualize alternative checkout configurations in a three
dimensional graphic environment and analyze relative profit potential.
Management believes that currently none of the Company's competitors utilize
comparable technology to assist retailers in space design.
Intellectual Property Rights
Although the Company uses several service marks in connection with its
business, it believes that its business is not dependent on the strength of its
service marks or any of its intellectual property rights.
Legal Proceedings
The Company is not a party to any legal proceedings, other than routine
claims and lawsuits arising in the ordinary course of business. The Company does
not believe that such claims and lawsuits, individually or in the aggregate,
will have a material adverse effect on the Company's business.
Employees
As of April 30, 1998, the Company employed 111 persons, of whom
approximately 85% were employed on a full-time basis and approximately 15% were
employed on a part-time basis. Of such persons, 27 are engaged in administrative
activities, two devote at least a portion of their efforts to research and
development activities and the remaining employees are engaged in sales,
customer support and data processing. The Company's employees are not subject to
a collective bargaining agreement. The Company considers its relations with its
employees to be good.
24
<PAGE>
MANAGEMENT
The following table sets forth certain information concerning the
directors and executive officers of the Company:
Name Age Position
S. Leslie Flegel 60 Director, Chairman and Chief
Executive Officer
William H. Lee 47 Director, President and Chief
Operating Officer
John P. Watkins 42 Chief Administrative Officer and
President-Retail Services
Dwight L. DeGolia 53 Executive Vice President
W. Brian Rodgers 32 Assistant Secretary and Chief
Financial Officer
Jason S. Flegel 32 Sr. Vice President of RDA Operations
Stephen E. Borjes 48 President--Front-End Merchandising
Group
Timothy A. Braswell 69 Director
Harry L. "Terry" Franc, III 62 Director
Aron Katzman 60 Director
Randall S. Minix 48 Director
Each of the Executive Officers is a full-time employee of the Company.
Non-employee directors of the Company devote such time to the affairs of the
Company as is necessary and appropriate. Set forth below are descriptions of the
backgrounds of the Executive Officers and Directors of the Company:
S. Leslie Flegel has been a director, Chairman and Chief Executive Officer of
the Company since its inception in March 1995. For more than 14 years prior
thereto, Mr. Flegel was the principal owner and chief executive officer of
Display Information Systems Company ("DISC"), a predecessor of the Company.
William H. Lee has been a director, President and Chief Operating Officer of the
Company since its inception in March 1995. For approximately 14 years prior
thereto, Mr. Lee was the principal owner and chief executive officer of
Periodical Marketing and Management, Inc. ("PMM"), a predecessor of the Company.
John P. Watkins has served as Chief Administrative Officer and President-Retail
Services since February 1, 1996. For more than 16 years prior thereto, Mr.
Watkins served in several senior management positions with Food Lion, Inc., a
seven billion dollar retail grocery chain. From September 1992 to July 1995, Mr.
Watkins served as Senior Vice President and Chief Operating Officer and a member
of the board of directors of Food Lion, Inc.
Dwight L. DeGolia has served as Executive Vice President of the Company since
its commencement of operations in May 1995. For more than ten years prior
thereto, Mr. DeGolia served as Executive Vice President of Sales and Marketing
for DISC. From 1986 to 1993, Mr. DeGolia also served as a director of Advanced
Marketing Services, a leading supplier of books to wholesale clubs.
W. Brian Rodgers has served as Assistant Secretary of the Company and Chief
Financial Officer since October 1996. Prior to joining the Company, Mr. Rodgers
practiced for seven years as a Certified Public Accountant with BDO Seidman,
LLP.
Jason S. Flegel has served as Senior Vice President of RDA Operations since June
1996. Prior thereto, and since the Company's inception in March 1995, Mr. Flegel
served as Vice President - Western Region. For more than two years prior
25
<PAGE>
thereto, Mr. Flegel was an owner and the Chief Financial Officer of DISC. Jason
S. Flegel is the son of S. Leslie Flegel.
Stephen E. Borjes has served as President of Front-End Merchandising Group since
September, 1997. For more than 20 years, Mr. Borjes held several positions with
Dixie News Co. ("Dixie News") and the News Group, which purchased Dixie News in
1994. His latest position at News Group was Vice President of Operations for the
distribution centers in Charlotte and Winston- Salem, North Carolina, and
Johnston City, Tennessee.
Timothy A. Braswell has been a director of the Company since it commenced
operations in May 1995. He established Braswell Investment Company, a consultant
and broker of wholesale magazine businesses in 1994 and is its owner. For more
than five years prior thereto, Mr. Braswell was the principal owner and chief
executive officer of City News Co. and Dixie News, each of which is a wholesale
periodical company.
Harry L. "Terry" Franc, III, has been a director of the Company since it
commenced operations in May 1995. Mr. Franc is one of the founders of Bridge
Information Systems, Inc. ("BIS"), a global provider of information services to
the securities industry and of BIS's subsidiary, Bridge Trading Company ("BTC"),
a registered broker-dealer and member of the New York Stock Exchange. For more
than 20 years, Mr. Franc served as a director and an Executive Vice President of
BIS and an Executive Vice President of BTC.
Aron Katzman has served as a director of the Company since it commenced
operations in May 1995. For more than five years prior to May 1994, when it was
sold, Mr. Katzman served as the Chairman and Chief Executive Officer of Roman
Company, a manufacturer and distributor of fashion custom jewelry. Mr. Katzman
is a member of the board of directors of Phonetel Technologies, a company listed
on the American Stock Exchange.
Randall S. Minix has served as a director of the Company since it commenced
operations in May 1995. For more than six years, Mr. Minix has been the managing
partner of Minix, Morgan & Company, L.L.P., an independent accounting firm
headquartered in Greensboro, North Carolina.
The Board consists of six members, each of whom serve in such capacity
for a three year term or until a successor has been elected and qualified,
subject to earlier resignation, removal or death. The number of directors
comprising the Board may be increased or decreased by resolution adopted by the
affirmative vote of a majority of the Board. The Company's Articles of
Incorporation and Bylaws provide for three classes of directorships serving
staggered three year terms such that one-third of the directors are elected at
each annual meeting of shareholders. The terms of Messrs. Flegel and Lee will
continue until the 1998 annual meeting of shareholders, the terms of Messrs.
Katzman and Minix will continue until the 1999 annual meeting of shareholders
and the terms of Messrs. Braswell and Franc will continue until the 2000 annual
meeting of shareholders.
The Board has established an Audit Committee, a Compensation Committee,
a Finance Committee and an Acquisition Committee. The Audit Committee is
comprised of two non-employee directors, presently Messrs. Minix and Katzman,
and has the responsibility of recommending the firm that will serve as the
Company's independent auditors, reviewing the scope and results of the audit and
services provided by the Company's independent accountants, and meeting with the
financial staff of the Company to review accounting procedures and policies. The
Compensation Committee is comprised of three non-employee directors, presently
Messrs. Katzman, Braswell and Franc, and has been given the responsibility of
reviewing the financial records of the Company to determine overall compensation
and benefits for executive officers of the Company and to establish and
administer the policies which govern employee salaries and benefit plans. The
Finance Committee is comprised of two directors, Messrs. Franc and Katzman. The
Finance Committee has been given the responsibility of monitoring the Company's
capital structure, reviewing available alternatives to satisfy the Company's
liquidity and capital requirements and recommending the firm or firms which will
provide investment banking and financial advisory services to the Company. The
Company's Acquisition Committee is comprised of three directors, presently
Messrs. Franc, Braswell and Katzman, and has been given the responsibility of
monitoring the Company's search for attractive acquisition opportunities,
consulting with members of management to review plans and strategies for the
achievement of the Company's external growth objectives and recommending the
firm or firms that will serve as advisors to the Company in connection with the
evaluation of potential business combinations.
26
<PAGE>
Executive Compensation
The following table summarizes information concerning cash and non-cash
compensation paid to or accrued for the benefit of the named executive officers
for all services rendered in all capacities to the Company and its predecessors.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation
Name of Principal Other Annual
Position Year Salary Bonus Compensation(a)
<S> <C> <C> <C> <C>
S. Leslie Flegel 1998 $ 255,000 $ 96,300 $ 25,643
Chairman and Chief Executive 1997 227,500 176,398 30,624
Officer 1996 200,000 26,543 30,995
William H. Lee 1998 $ 255,876 $ 60,000 $ 12,629
President and Chief Operating 1997 224,830 30,000 13,944
Officer 1996 192,646 - 19,006
Dwight L. DeGolia 1998 $ 150,000 $ 29,200 $10,777
Executive Vice President 1997 140,000 4,773 11,223
1996 134,884 - 16,739
John P. Watkins 1998 $ 150,000 $ 25,000 $ 9,986
Chief Administrative Officer and 1997 150,000 - 11,891
President-Retail Services 1996 - - -
Robert B. Dixon(b) 1998 $ 150,000 $ 5,500 $ 12,797
Executive Vice President and 1997 150,000 - 13,907
President-Periodical Information 1996 114,000 $ 50,000 5,458
Management
<FN>
(a) Reflects personal benefits derived by Messrs. Flegel, Lee, DeGolia,
Watkins and Dixon primarily in connection with personal use of Company
automobiles, country club membership dues and life insurance premiums.
In fiscal 1998 the estimated incremental cost to the Company of the use
by Messrs. Flegel, Lee, DeGolia, Watkins and Dixon of Company
automobiles was $9,566, $8,523, $6,312, $7,800 and $8,597,
respectively. In fiscal 1997, such cost to the Company was $10,339,
$8,650, $6,090, $7,800 and $8,597, respectively. In fiscal 1996, such
cost was $11,444, $6,234, $6,360, $-0-, and $3,158, respectively.
In fiscal 1998, the estimated incremental cost to the Company of the
membership dues paid on behalf of Messrs. Flegel, Lee, DeGolia, Watkins
and Dixon was $6,984, $1,050, $4,465, $1,425 and $4,200, respectively.
In fiscal 1997, such cost to the Company was $11,192, $2,239, $5,133,
$3,330 and $5,310, respectively. In fiscal 1996, such cost was $11,503,
$4,738, $4,751, $-0- and $2,300, respectively.
In fiscal 1998, the estimated incremental cost to the Company of life
insurance premiums paid on behalf of Messrs. Flegel, Lee, DeGolia,
Watkins and Dixon was $9,093, $3,056, $-0-, $761 and $-0-,
respectively. In fiscal 1997, such cost to the Company was $9,093,
$3,056, $-0-, $761 and $-0-, respectively. In fiscal 1996, such cost
was $8,048, $8,033, $5,628, $-0- and $-0-, respectively.
(b) Regrettably, Mr. Dixon died on February 26, 1998.
</FN>
</TABLE>
27
<PAGE>
<TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Base Price Expiration
Name Granted Fiscal Year ($/Sh) Date
---- ------- ------------ -------- -----
<S> <C> <C> <C> <C>
S. Leslie Flegel 89,256(1) 27% $1.66 5-14-02
William H. Lee 49,091(2) 15% $2.66 6-24-02
Dwight L. DeGolia 10,909(3) 3% $2.42 6-24-07
John P. Watkins 13,636(3) 4% $2.42 6-24-07
74,380(4) 23% $5.60 2-01-01
Robert B. Dixon 0 0 N/A N/A
- ----------------------------
<FN>
(1) Options were granted May 15, 1997 and are exercisable as follows: 29,752 on
or after May 15, 1998, 29,752 on or after May 15, 1999 and 29,752 on or
after May 15, 2000.
(2) Options were granted June 25, 1997 and are exercisable as follows:16,364 on
or after June 25, 1998, 16,364 on or after June 25, 1999, and 16,363 on or
after June 25, 2000.
(3) Options were granted June 25, 1997 and are exercisable 20% a year,
cumulatively, for a period of five years.
(4) Options were granted June 25, 1997 and are exercisable as follows: 24,793,
immediately, 16,529 on or after February 1, 1998, 16,529 on or after
February 1, 1999, and 16,529 on or after February 1, 2000.
</FN>
</TABLE>
<TABLE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FYE OPTION/SAR VALUES
<CAPTION>
Number of Value of Unexercised
Unexercised In-the Money
Option/SARs at Fiscal Options/SARs at
Shares Year End (#) Fiscal Year End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
S. Leslie Flegel 0 0 0/89,256 0/309,272
William H. Lee 0 0 0/49,091 0/121,009
Dwight L. DeGolia 0 0 2,182/8,727 5,902/23,607
John P. Watkins 0 0 27,520/60,496 7,377/29,509
Robert B. Dixon 0 0 0/0 0/0
</TABLE>
Director Compensation
Under the Company's present policy, each director of the Company who is
not also an employee of the Company receives $1,000 payable in shares of Common
Stock, with the exception of Mr. Minix, who is paid in cash, for each meeting of
the Board attended. Directors are also entitled to be reimbursed for expenses
incurred by them in attending meetings of the Board and its committees.
Employment Agreements with Named Executive Officers.
Under the terms of a written agreement with the Company, Dwight L.
DeGolia has agreed to refrain from disclosing information confidential to the
Company or engaging directly or indirectly, in any activity which is competitive
with the business of the Company during the term of his employment and for two
years thereafter.
28
<PAGE>
In October 1997, the Company entered into separate employment
agreements with S. Leslie Flegel, William H. Lee and W. Brian Rodgers, each of
which expires January 31, 1999 (subject to renewal). Under the agreements, Mr.
Flegel will serve as the Chairman of the Board and Chief Executive Officer of
the Company in exchange for annual base compensation of $255,000, Mr. Lee will
serve as President and Chief Operating Officer of the Company in exchange for
annual base compensation of $240,573, and W. Brian Rodgers will serve as Chief
Financial Officer of the Company in exchange for annual base compensation of
$100,000, subject to annual adjustment by the Compensation Committee of the
Board (the "Base Compensation"). In the event the employment of any such person
with the Company is terminated for reasons other than for cause, permanent
disability or death or there occurs a significant reduction in the position,
duties or responsibilities thereof (a "Termination") within two years following
a "Change of Control" (as defined in the agreement and which does not include
this offering), the discharged person will be entitled to an additional bonus of
300% of his then current annual Base Compensation. Such person also will agree
to refrain from disclosing information confidential to the Company or engaging,
directly or indirectly, in the rendition of services competitive with those
offered by the Company during the term of his employment agreement and for two
years thereafter, without the prior written consent of the Company.
Certain Relationships and Related Transactions.
From time to time, the Company and its predecessors have engaged in
various transactions with its directors, executive officers and other affiliated
parties. The following paragraphs summarize certain information concerning such
transactions and relationships which have occurred during the past two fiscal
years or which are presently proposed.
Predecessor Transactions
S. Leslie Flegel, Chairman and Chief Executive Officer of the Company
and Dwight L. DeGolia, Executive Vice President of the Company, have from time
to time received cash advances from the Company and DISC, a subchapter S
predecessor of the Company. The largest aggregate amount of such indebtedness
outstanding at any time since February 1, 1997 was $270,675 and $22,093,
respectively. In October, 1997, Mr. Flegel repaid in full all indebtedness due
by him to the Company. As a result, at January 31, 1998, such outstanding
balances were $-0- and $22,093, respectively. All advances to Mr. DeGolia are
evidenced by promissory notes in favor of the Company. Such notes bear interest
at rates varying from 6.96% to 7.34% per annum and mature from 2001 to 2003.
On June 28, 1991, PMM entered into a written lease with 711 Gallimore
Partnership in which Mr. William H. Lee, President and Chief Operating Officer
of the Company, is a partner, whereby 711 Gallimore Partnership leases to the
Company certain office space in High Point, North Carolina. The lease, as
amended in January 1996, provides for annual rent of $168,072 and expires in
2012. In fiscal 1998 and 1997, the Company paid 711 Gallimore Partnership
$174,888 and $157,498, respectively, in rent.
Company Transactions
Data-Pros, Inc. ("Data-Pros"), a corporation in which Mr. Lee is a
shareholder, provided the Company with data processing services. In fiscal 1997,
the Company paid Data-Pros $274,893 for such services. On January 1, 1997, the
Company purchased the assets of Data-Pros for $45,000.
2532 Partnership, a North Carolina partnership in which Mr. Lee is a
partner, has occasionally provided the Company with the use of an airplane. In
fiscal 1998, the Company paid 2532 Partnership $11,692 in consideration for the
use of the airplane.
In July, 1997, the holders of the Company's 1996 Series 7% Convertible
Preferred Stock exchanged all 5,600 outstanding shares for 186,667 shares of
Common Stock at an effective exchange price of $3.00 per share and
non-transferable warrants, expiring in 2000, to purchase 310,709 shares of
Common Stock at an exercise price of $3.00 per share.
In September 1997, the Company issued to Messrs. Katzman, Franc and
Braswell, non-transferable warrants, expiring in 2000, to purchase an aggregate
of 89,289 shares of Common Stock at an exercise price of $3.00 per share. Such
warrants will vest at a rate of 25% on August 1, 1998, 25% on November 1, 1998,
25% on February 1, 1999 and 25% on May 1, 1999.
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<PAGE>
The terms of the foregoing transactions were not negotiated on an
arms-length basis, but were ratified by a majority of the independent and
disinterested outside directors who had access, at the Company's expense, to the
Company's legal counsel. All future transactions between the Company and its
officers, directors, principal shareholders and affiliates will be approved by a
majority of the independent and disinterested outside directors, who will have
access, at the Company's expense, to the Company's legal counsel, and must be on
terms no less favorable to the Company than could be obtained from unaffiliated
third parties under similar circumstances.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of March 5, 1998,
concerning the beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to be the beneficial owner of more than five percent
of the outstanding Common Stock, (ii) all directors, (iii) each executive
officer named in the Summary Compensation Table contained in this Prospectus,
and (iv) all directors and executive officers of the Company as a group. Each
person named has sole voting and investment power with respect to the shares
indicated, except as otherwise stated in the notes to the table:
<TABLE>
<CAPTION>
Beneficial Ownership Number of Shares Beneficial Ownership
Prior to Offering Being Offered After the Offering
Name and Address -------------------- ---------------- --------------------
of Beneficial Owner Amount Percent Amount Percent
- ------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
S. Leslie Flegel 1,361,470 17.0% 125,000 1,236,470 13.0%
11644 Lilburn Park Road
St. Louis, Missouri 63146
William H. Lee 1,095,615 13.7 130,000 965,615 10.1
711 Gallimore Dairy Road
High Point, North Carolina 27265
Cameron Capital Ltd. 712,829(a) 8.6 100,000 612,829(a) 6.2
10 Cavendish Road
Hamilton, HM 19, Bermuda
Timothy A. Braswell 473,131 5.9 100,000 373,131 3.9
711 Gallimore Dairy Road
High Point, North Carolina 27265
Aron Katzman 129,941 1.6 129,941 1.4
10 Layton Terrace
St. Louis, Missouri 63124
Dwight L. DeGolia 149,340(b) 1.9 35,000(c) 114,340(b) 1.2
11644 Lilburn Park Road
St. Louis, Missouri 63146
Jason S. Flegel 148,430(d) 1.9 10,000 138,430(d) 1.5
711 Gallimore Dairy Road
High Point, North Carolina 27265
Harry L. Franc, III 33,238 * 33,238 *
19 Briarcliff
St. Louis, Missouri 63124
John P. Watkins 44,049(e) * 44,049(e) *
711 Gallimore Dairy Road
High Point, North Carolina 27265
30
<PAGE>
Randall S. Minix 8,485 * 8,485 *
5502 White Blossom Drive
Greensboro, North Carolina 27410
All directors and
executive officers
as a group (11 persons) 3,449,881(f) 42.7 400,000 3,049,881(f) 31.9
<FN>
*Less than 1%
(a) Includes exercisable options to acquire 300,000 shares of Common Stock
at an exercise price of $3.00 per share.
(b) Includes exercisable options to acquire 2,182 shares of Common Stock at
an exercise price of $2.42 per share.
(c) A portion of the proceeds from the sale of such shares will be used
to repay in full the indebtedness of Mr. DeGolia to the Company.
Accordingly, the Company will indirectly receive the proceeds from the
sale of these shares. Mr. DeGolia is the Executive Vice President of
the Company. See "MANAGEMENT."
(d) Includes exercisable options to acquire 1,819 shares of Common Stock at
an exercise price of $2.42 per share.
(e) Includes exercisable options to acquire 8,930 shares of Common Stock at
an exercise price of $3.00 per share.
(f) Includes exercisable options not listed separately above to acquire
6,182 shares of Common Stock at an exercise price of $2.42 per share.
</FN>
</TABLE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
The Company's Articles of Incorporation (the "Articles") provide for
authorized capital of 18,528,925 shares, consisting of 16,528,925 shares of
Common Stock, $0.01 par value per share and 2,000,000 shares of preferred stock,
$0.01 par value per share ("Preferred Stock"). At March 5, 1998, 8,016,367
shares of Common Stock and no shares of Preferred Stock were outstanding. The
following summary description of the capital stock of the Company is qualified
in its entirety by reference to the Articles.
Common Stock
The holders of Common Stock are entitled to cast one vote for each
share of record on all matters to be voted on by shareholders, including the
election of directors. The Company's Articles (and Bylaws) provide for a
classified Board with three classes serving staggered three year terms so that
approximately one-third of the directors will be elected at each annual meeting.
This provision could have the effect of delaying, deferring or preventing a
change in control of the Company. Subject to payment or provision for full
cumulative dividends in respect of any outstanding shares of Preferred Stock,
the holders of Common Stock are entitled to receive dividends when and if
declared by the Board out of legally available funds. In the event of
liquidation, dissolution or winding up of the affairs of the Company, the
holders of the Common Stock are entitled to share ratably in all remaining
assets available for distribution to them after the payment of liabilities and
after provision has been made for each class of stock, including the Preferred
Stock, having preference over the Common Stock. Holders of shares of Common
Stock, as such, have no conversion, preemptive or other subscription rights, and
there are no redemption provisions generally applicable to the Common Stock.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of Preferred
Stock. The Board has the authority to issue Preferred Stock in one or more
series and to fix the number of shares constituting any such series, the voting
powers, designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions thereof,
including the dividend rights, dividend rate, terms of redemption, redemption
31
<PAGE>
price or prices, conversion and voting rights and liquidation preferences of the
shares constituting any series, without any further vote or action by the
shareholders of the Company. The issuance of Preferred Stock by the Board could
adversely affect the rights of holders of Common Stock. For example, issuance of
Preferred Stock could result in a series of securities outstanding that would
have preferences over the Common Stock with respect to dividends and in
liquidation and that could (upon conversion or otherwise) enjoy all of the
rights appurtenant to the Common Stock.
The authority possessed by the Board to issue Preferred Stock could
potentially be used to discourage attempts by others to obtain control of the
Company through merger, tender offer, proxy or consent solicitation or otherwise
by making such attempt more difficult to achieve or more costly. The Board may
issue Preferred Stock without shareholder approval and with voting rights that
could adversely affect the voting power of holders of Common Stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services, L.L.C.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
The Articles and Bylaws of the Company contain certain provisions
regarding the rights and privileges of shareholders, some of which may have the
effect of discouraging certain types of transactions that involve an actual or
threatened change of control of the Company, diminishing the opportunities for a
shareholder to participate in tender offers, including tender offers at a price
above the then current market value of the Common Stock or over a shareholder's
cost basis in the Common Stock, and inhibiting fluctuations in the market price
of the Common Stock that could result from takeover attempts. These provisions
of the Articles and Bylaws are summarized below.
Size of Board, Election of Directors and Classified Board
The Articles provide that the number of directors shall be fixed from
time to time as provided in the Bylaws. The Bylaws provide for a minimum of
three and a maximum of nine persons to serve on the Board. The number of
directors may be increased or decreased by a resolution adopted by the
affirmative vote of a majority of the Board. The Articles further provide that
the Board may amend the Bylaws by action taken in accordance with such Bylaws,
except to the extent that any matters under the Articles or applicable law are
specifically reserved to the shareholders.
The Bylaws provide that the Board will be divided into three classes of
directors, with the classes to be as nearly equal in number as possible, and one
of each such classes shall be elected each year to serve for a three-year term.
Shareholder Nominations and Proposals
The Company's Bylaws provide for advance notice requirements for
shareholder nominations and proposals at annual meetings of the Company.
Shareholders may nominate directors or submit other proposals only upon written
notice to the Company not less than 120 days nor more than 150 days prior to the
date of the notice to shareholders of the previous year's annual meeting. A
shareholder's notice also must contain certain additional information, as
specified in the Bylaws. The Board may reject any proposals that are not made in
accordance with the procedures set forth in the Bylaws or that are not proper
subjects of shareholder action in accordance with the provisions of applicable
law.
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<PAGE>
Calling Shareholder Meetings; Action by Shareholders Without a Meeting
Matters to be acted upon by the shareholders at special meetings are
limited to those which are specified in the notice thereof. A special meeting of
shareholders may be called by the Board, the Chairman or the President of the
Company or at the request in writing of shareholders holding at least ten
percent (10%) of the outstanding shares entitled to vote at such meeting. As
required by Missouri law, the Bylaws provide that any action by written consent
of shareholders in lieu of a meeting must be signed by the holders of all
outstanding shares of Common Stock.
The foregoing provisions contained in the Articles and Bylaws are designed
in part to make it more difficult and time consuming to obtain majority control
of the Board or otherwise to bring a matter before shareholders without the
Board's consent, and therefore to reduce the vulnerability of the Company to an
unsolicited takeover proposal. These provisions are designed to enable the
Company to develop its business in a manner which will foster its long-term
growth without the threat of a takeover not deemed by the Board to be in the
best interests of the Company and its shareholders, and to reduce, to the extent
practicable, the potential disruption entailed by such a threat. However, these
provisions may have an adverse effect on the ability of shareholders to
influence the governance of the Company and the possibility of shareholders
receiving a premium above the market price for their securities from a potential
acquirer who is unfriendly to management.
Indemnification of Directors and Officers
Sections 351.355(1) and (2) of The General and Business Corporation Law
of the State of Missouri provide that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful, except that, in the case of an action or suit by or in the right of
the corporation, the corporation may not indemnify such persons against
judgments and fines and no person shall be indemnified as to any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of the person's duty to the
corporation, unless and only to the extent that the court in which the action or
suit was brought determines upon application that such person is fairly and
reasonably entitled to indemnity for proper expenses. Section 351.355(3)
provides that, to the extent that a director, officer, employee or agent of the
corporation has been successful in the defense of any such action, suit or
proceeding or in defense of any claim, issue or matter therein, the person shall
be indemnified against expenses, including attorney's fees, actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Section 351.355(7) provides that a corporation may provide
additional indemnification to any person indemnifiable under subsection (1) of
(2), provided such additional indemnification is authorized by the corporation's
articles of incorporation or an amendment thereto or by a shareholder-approved
bylaw or agreement, and provided further that no person shall thereby be
indemnified against conduct which was finally adjudged to have been knowingly
fraudulent, deliberately dishonest or willful misconduct or which involves an
accounting for profits pursuant to Section 16(b) of the Exchange Act. Paragraph
9 of the Articles of Incorporation of the Company permits the Company to enter
into agreements with its directors, officers, employees and agents to provide
such indemnification as deemed appropriate. Paragraph 9 also provides that the
Company may extend to its directors and executive officers such indemnification
and additional indemnification.
33
<PAGE>
The Company has entered into an indemnification agreements with certain
of its directors and officers. The form of indemnity agreement provides that
each such person will be indemnified to the full extent permitted by applicable
law against all expenses (including attorneys' fees), judgments, fines,
penalties and amounts paid in settlement of any threatened, pending or completed
action, suit or proceeding, on account of his services as a director and officer
of the Company or any other company or enterprise in which he is serving at the
request of the Company, or as a guarantor of any debt of the Company. To the
extent the indemnification provided under the agreement exceeds that permitted
by applicable law, such indemnification may be unenforceable or may be limited
to the extent it is found by a court of competent jurisdiction to be contrary to
public policy.
The Company has procured and intends to maintain a policy of insurance
under which the directors and officers of the Company will be insured, subject
to the limits of the policy, against certain losses arising from claims made
against such directors and officers by reason of any acts or omissions covered
under such policy in their respective capacities as directors or officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
SHARES ELIGIBLE FOR FUTURE SALE
Based on shares outstanding as of March 5, 1998, the Company will have
outstanding 9,516,367 shares of Common Stock upon completion of this offering.
Of the shares, approximately 6,124,557 shares, including those offered for sale
in this offering, will be tradeable without restriction under the Securities
Act. The remaining 3,391,810 shares of Common Stock held by existing
shareholders are "restricted" within the meaning of Rule 144. Subject to
compliance with the provisions of Rule 144, all of such shares presently are
eligible for sale to the public, notwithstanding the fact that such shares have
not been registered under the Securities Act.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one year but less than two
years, will be entitled to sell in any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
common stock (approximately 95,000 shares immediately after this offering) or
(ii) the average weekly trading volume during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale and who has beneficially
owned his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
In accordance with the provisions of an agreement which each director,
executive officer and holder of more than 5% of the Common Stock has executed
and delivered to the Representative, certain restrictions prohibiting the sale
of the 4,208,104 shares of Common Stock beneficially held by such persons have
been imposed. The restrictions imposed by these agreements remain in effect for
a period ending on October 7, 1998 and for a period of 12 months thereafter,
such persons are prohibited from selling more than twenty-five percent (25%) of
such shares in any calendar quarter, subject in some cases to the volume and
other conditions of Rule 144. The agreements to be executed by the existing
directors, officers, and shareholders of the Company will have no effect on the
date on which shares become eligible for sale pursuant to Rule 144.
34
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Donald & Co. Securities Inc. is
acting as representative (the "Representative"), have severally agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase from the
Company and the Selling Shareholders a total of 2,000,000 shares of Common
Stock. The number of shares of Common Stock that each Underwriter has agreed to
purchase is set forth opposite its name:
Number of
Underwriter Shares
Donald & Co. Securities Inc.
2,000,000
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain legal matters by counsel to the
Underwriters and various other conditions precedent, and that the Underwriters
are obligated to purchase all of the shares of Common Stock offered by this
Prospectus (other than the shares of Common Stock covered by the over-allotment
option described below), if any are purchased.
The Company has been advised by the Representative that the
Underwriters propose to offer the shares of Common Stock to the public at the
initial offering price set forth on the cover page of this Prospectus and to
certain dealers (who may include Underwriters) at that price less a concession
not in excess of $_____ per share of Common Stock. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $_____ per share of
Common Stock to certain other dealers. After the initial public offering, the
offering price and other selling terms may be changed by the Representative.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has also agreed to pay to the Representative an expense
allowance on a nonaccountable basis equal to $33,000 plus 1% of the gross
proceeds derived from the sale of the shares of Common Stock underwritten.
The Selling Shareholders have granted to the Representative an option,
exercisable during the 45-day period after the date of this Prospectus, to
purchase from the Selling Shareholders at the offering price, less underwriting
discounts and a nonaccountable expense allowance of 0.5%, up to an aggregate of
300,000 additional shares of Common Stock for the sole purpose of covering
over-allotments, if any.
35
<PAGE>
The Representative acted as underwriter in connection with the
Company's October 1997 public offering of 2,000,000 shares of Common Stock. As
compensation for such services, the Representative received (a) $640,000 in
underwriting discounts, (b) a non-accountable expense allowance of $160,000, (c)
a warrant to purchase up to 200,000 shares of Common Stock at an exercise price
of $4.80 per share, subject to adjustment, exercisable over a four-year period
commencing on October 7, 1998, (d) a contractual right to provide financing
consulting services to the Company until October 7, 1999 for a total fee of
$72,000, (e) the right (as described below) to have a designee present at
meetings of the Board and each of its committees, and to receive the same
compensation as a result thereof as is payable to directors of the Company, and
(f) a right of first refusal exercisable until October 7, 2000 to act as
underwriter or placement agent in any public or private offerings of equity or
debt securities by the Company or its affiliates.
The Company has granted the Representative for a period ending on
October 7, 2000 the right to have the Representative's designee present at
meetings of the Board and each of its committees subject to the right of the
Company to exclude such designee under certain circumstances. Such designee will
be entitled to the same notices and communications sent by the Company to its
directors and to attend directors' and committees' meetings, but will not be
entitled to vote thereat. Such designee will also be entitled to receive the
same compensation payable to directors as members of the Board and its
committees and all reasonable expenses in attending such meetings. The
Representative has not named such designee as of the date of this Prospectus.
In connection with this offering, the Company has agreed to sell to the
Representative, for nominal consideration, the right to purchase up to an
aggregate of 200,000 shares of Common Stock (the "Representative's Warrants").
The Representative's Warrants are exercisable initially at $7.18 per share of
Common Stock (the "Exercise Price") for a period of four years commencing one
year from the date hereof. The Representative's Warrants contain antidilution
provisions providing for adjustment of the Exercise Price upon the occurrence of
certain events, including (i) the issuance of Common Stock, or securities
exercisable or convertible into Common Stock, at a price less than the Exercise
Price and (ii) any recapitalization, reclassification, stock dividend, stock
split, stock combination or similar transaction. In addition, the
Representative's Warrants grant to the holders thereof certain demand and
"piggyback" rights for periods of four and six years, respectively, commencing
one year from the date of this Prospectus with respect to the registration under
the Securities Act of the Common Stock issuable upon exercise of the
Representative's Warrants.
Upon closing of this offering, the Company and the Representative have
agreed (a) to terminate the right of first refusal previously granted to the
Representative by the Company, and (b) to extend the engagement of the
Representative as financial consultant to the Company for an additional two year
period.
In connection with this offering, certain Underwriters and selling
group members (if any) who are qualified market makers on The Nasdaq Stock
Market may engage in passive market making transactions in the Common Stock on
The Nasdaq Stock Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the five business days prior
to the pricing of the offering before the commencement of offers or sales of the
Common Stock. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid for
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.
36
<PAGE>
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids or effecting syndicate covering
transactions. A stabilizing bid means the placing of any bid or effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of the
common stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. Such transactions may
be effected on The Nasdaq Stock Market, in the over-the-counter market, or
otherwise. Such stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the Securities offered hereby and certain other legal
matters in connection with the sale of the shares of Securities offered hereby
will be passed upon for the Company by Gallop, Johnson & Neuman, L.C., St.
Louis, Missouri. Certain legal matters relating to this offering will be passed
upon for the Underwriters by Parker Duryee Rosoff & Haft, a professional
corporation.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of said firm
as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange of 1934 as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy or information statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy or information statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following Regional Offices of the Commission: 7 World Trade Center, Suite
1500, New York, New York 10048; and Northwestern Atrium Center, Suite 1400, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can be
obtained at prescribed rates from the public reference section of the Commission
at 450 Fifth Street N.W., Washington, D.C. 20549 or retrieved electronically via
the internet at the Commission's web site (http://www.sec.gov). In addition,
reports, proxy statements and other information concerning the Company may be
inspected at the offices of The Nasdaq Stock Market, 1735 K Street N.W.,
Washington, D.C. 20549 on which the Common Stock is quoted. The Company has
filed with the Commission a registration statement on Form SB-2 herein,
(together with all amendments and exhibits, referred to as the "Registration
Statement") under the Securities Act of 1933, as amended, with respect to the
shares of Common Stock offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents and each such statement is qualified in
its entirety by reference to the copy of the applicable document filed with the
Commission.
37
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Audited Consolidated Financial Statements
The Report of the Independent Certified Public Accountants F-2
Consolidated Balance Sheet as of January 31, 1998 F-3
Consolidated Statements of Operations for the fiscal years
ended January 31, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows for the fiscal years
ended January 31, 1998 and 1997 F-7
Summary of Accounting Policies F-9
Notes to Financial Statements F-12
F-1
<PAGE>
Item 7. Consolidated Financial Statements.
The Report of the Independent Certified Public Accountants
Board of Directors
The Source Information Management Company
St. Louis, Missouri
We have audited the consolidated balance sheet of The Source Information
Management Company as of January 31, 1998 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended January 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Source
Information Management Company at January 31, 1998 and the results of its
operations and its cash flows for each of the two years in the period ended
January 31, 1998 in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
St. Louis, Missouri
March 27, 1998
F-2
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Consolidated Balance Sheet
January 31, 1998
- --------------------------------------------------------------------------------
Assets (Note 2)
Current
Cash $ 31,455
Trade receivables (net of allowance for
doubtful accounts of $460,898) (Note 9) 18,874,764
Income taxes receivable 492,688
Notes receivable - officers (Note 1) 7,351
Other current assets 187,876
- -------------------------------------------------------------------------------
Total Current Assets 19,594,134
- -------------------------------------------------------------------------------
Office equipment and furniture (Note 3) 2,249,688
Less accumulated depreciation and amortization 1,445,005
- -------------------------------------------------------------------------------
Net Office Equipment and Furniture 804,683
- -------------------------------------------------------------------------------
Other Assets
Notes receivable - officers (Note 1) 14,742
Goodwill, net of accumulated amortization
of $250,579 (Note 7) 3,227,354
Other 166,944
- -------------------------------------------------------------------------------
Total Other Assets 3,409,040
- -------------------------------------------------------------------------------
$ 23,807,857
- -------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-3
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Consolidated Balance Sheet
January 31, 1998
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current
Checks issued against future deposits 132,189
Accounts payable and accrued expenses 680,055
Due to retailers (Note 10) 993,846
Deferred income taxes (Note 6) 769,000
Current maturities of long-term debt
(Note 2) 30,997
- ------------------------------------------------------------------------------
Total Current Liabilities 2,606,087
- ------------------------------------------------------------------------------
Long-term Debt, less current maturities
(Note 2) 8,604,057
- ------------------------------------------------------------------------------
Deferred Income Taxes (Note 6) 103,000
- ------------------------------------------------------------------------------
Total Liabilities 11,313,144
- ------------------------------------------------------------------------------
Commitments (Notes 3 and 4)
- ------------------------------------------------------------------------------
Preferred Stock, $.01 par - shares authorized,
2,000,000; outstanding, none (Note 8) -
Stockholders' Equity
Common Stock, $.01 par - shares authorized,
16,528,925; outstanding 8,016,367 (Note 11) 80,163
Additional paid-in-capital 10,513,949
Retained earnings 1,900,601
- ------------------------------------------------------------------------------
Total Stockholders' Equity 12,494,713
- ------------------------------------------------------------------------------
$ 23,807,857
- ------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-4
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Consolidated Statements of Operations
Years Ended January 31, 1998 1997
- --------------------------------------------------------------------------------
Service Revenues $ 11,795,496 $ 7,056,270
Merchandise Revenues 8,348 242,177
- --------------------------------------------------------------------------------
11,803,844 7,298,447
- --------------------------------------------------------------------------------
Cost of Service Revenues 5,827,933 4,862,207
Cost of Merchandise Sold 32,720 202,381
- --------------------------------------------------------------------------------
5,860,653 5,064,588
- --------------------------------------------------------------------------------
5,943,191 2,233,859
Selling, General and Administrative
Expense (Notes 1, 3 and 4) 2,350,622 2,904,372
- --------------------------------------------------------------------------------
Operating Income (Loss) 3,592,569 (670,513)
- --------------------------------------------------------------------------------
Other Income (Expense)
Interest income 21,164 30,628
Interest expense (714,404) (311,737)
Other (79,321) (28,883)
- --------------------------------------------------------------------------------
Total Other Income (Expense) (772,561) (309,992)
- --------------------------------------------------------------------------------
Income (Loss) Before Income Taxes 2,820,008 (980,505)
Income Tax (Expense) Benefit (Note 6) (1,231,000) 377,188
- --------------------------------------------------------------------------------
Net Income (Loss) $ 1,589,008 $ (603,317)
- --------------------------------------------------------------------------------
Earnings (Loss) per Share - Basic $ 0.23 $ (0.11)
- --------------------------------------------------------------------------------
Weighted Average Number of Shares
Outstanding - Basic 6,561,761 5,557,223
- --------------------------------------------------------------------------------
Earnings (Loss) per Share - Diluted $ 0.22 $ (0.11)
- --------------------------------------------------------------------------------
Weighted Average Number of Shares
Outstanding - Diluted 6,693,666 5,557,223
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-5
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Consolidated Statements of Stockholders' Equity
As Restated For Reverse Stock Split (Note 11)
<CAPTION>
Additional Total
Common Stock Paid - in Retained Stockholders'
------------------------------
Shares Amount Capital Earnings Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1996 5,268,090 $ 52,681 $ 988,021 $ 976,924 $ 2,017,626
Issuance of Common Stock 6,612 66 29,934 - 30,000
Conversion of 7% Preferred Stock to Common
Stock 349,750 3,498 1,396,071 - 1,399,569
Issuance of Common Stock to purchase
Magazine Marketing, Inc. (Note 7) 82,644 826 249,174 - 250,000
Issuance of Common Stock in payment
of services 12,506 125 51,625 - 51,750
Dividend on Preferred Stock 7,863 79 42,382 (42,467) (6)
Net loss for the year - - - (603,317) (603,317)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1997 5,727,465 $ 57,275 $ 2,757,207 $ 331,140 $ 3,145,622
Issuance of Common Stock (Note 11) 2,000,000 20,000 6,700,602 - 6,720,602
Issuance of Common Stock in payment of
services 1,811 18 7,982 - 8,000
Issuance of Common Stock for exercise of
stock options 2,182 21 5,259 - 5,280
Dividend on Preferred Stock 6,381 64 19,480 (19,547) (3)
Exchange of 7% Preferred Stock to Common
Stock (Note 8) 186,667 1,867 520,639 - 522,506
Redeemable Common Stock converted to
Common Stock (Note 7) 91,938 919 502,901 - 503,820
Purchase fractional shares from reverse
stock split (77) (1) (321) - (322)
Issuance of Common Stock Warrants - - 200 - 200
Net income for the year - - - 1,589,008 1,589,008
- ---------------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1998 8,016,367 $ 80,163 $ 10,513,949 $ 1,900,601 $ 12,494,713
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-6
<PAGE>
<TABLE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended January 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income (loss) $ 1,589,008 $ (603,317)
Adjustments to reconcile net cash
provided by operating activities:
Depreciation and amortization 432,632 246,599
Loss on disposition of equipment 1,338 299
Provision for losses on accounts
receivable 97,311 224,387
Impairment of investment in limited
partnership 20,000 20,000
Deferred income taxes 470,000 (259,064)
Services received in exchange for
Common Stock 8,000 51,750
Changes in assets and liabilities:
Increase in accounts receivable (5,537,689) (8,789,885)
Increase in other assets (421,882) (230,004)
(Decrease) increase in checks issued
against future deposits (3,093,479) 3,225,668
Increase (decrease) in accounts payable
and accrued expenses 120,614 (513,110)
Increase in amounts due customers 794,271 116,120
- -----------------------------------------------------------------------------------------------------
Cash Used in Operating Activities (5,519,876) (6,510,557)
- -----------------------------------------------------------------------------------------------------
Investment Activities
Acquisition of Mike Kessler and Associates,
Inc., net of cash acquired (608,650) -
Acquisition of Magazine Marketing, Inc. - (275,000)
Capital expenditures (344,847) (276,729)
Loans to officers (10,000) -
Collection on officers notes receivable 221,485 29,715
Collections from related party - 53,171
Proceeds from sale of fixed assets 2,000 -
Increase in cash surrender value of
life insurance (55,333) (32,740)
Proceeds from surrender of life
insurance policies 83,959 -
- -----------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (711,386) (501,583)
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-7
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Consolidated Statements of Cash Flows
Years Ended January 31, 1998 1997
- --------------------------------------------------------------------------------
Financing Activities
Proceeds from issuance of Common
Stock 6,720,602 30,000
Proceeds from issuance of Preferred
Stock - 1,922,075
Borrowings under credit facility 37,777,000 9,791,000
Principal payments on credit facility (36,303,000) (2,756,121)
Borrowings under short-term debt
agreements - 2,836,366
Repayments under short-term debt
agreements (2,221,961) (4,550,081)
Other financing activities 5,155 (6)
- --------------------------------------------------------------------------------
Cash Provided by Financing Activities 5,977,796 7,273,233
- --------------------------------------------------------------------------------
(Decrease) Increase in Cash (253,466) 261,093
Cash, beginning of period 284,921 23,828
- --------------------------------------------------------------------------------
Cash, end of period $ 31,455 $ 284,921
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-8
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Summary of Accounting Policies
Basis of The consolidated financial statements of The Source
Presentation Information Management Company reflect the accounts of
companies formerly known as Display Information Systems
Corporation (DISC), Periodical Management & Marketing, Inc.
(PMM) and Dixon's Modern Marketing Concepts, Inc. and
Tri-State Stores, Inc. (MMC). DISC and PMM merged on
February 1, 1995 and the net assets of MMC were merged on
June 15, 1995.
Business The Source Information Management Company (the Company) is
a provider of merchandise management information and
related services primarily in connection with the display
and marketing of magazines and other periodicals. The
Company assists retailers in monitoring, documenting,
claiming and collecting incentive payments, primarily from
publishers of periodicals, and performs consulting and
other services in exchange for commissions. The Company
also obtains revenue from (a) consulting and other services
rendered to clients on other than a commission basis and
(b) the sale, as principal or broker, of merchandise to the
Company's retailer clients for resale by them.
Principles of The consolidated financial statements include the accounts
Consolidation of The Source Information Management Company and its
wholly-owned subsidiaries, all of which are currently
inactive. All material intercompany accounts and
transactions have been eliminated in consolidation.
Concentrations Substantially all of the Company's revenues are derived
of Credit Risk from the services provided in connection with the
collection of payments owed to the Company's retailer
clients from magazine publishers under programs designed by
the publishers to provide incentives to increase single
copy magazine sales. The incentive programs, although part
of the publishers' marketing strategy for over 20 years,
are governed by short-term contracts. If magazine
publishers discontinue or significantly modify the
incentive programs in such a manner which makes the
Company's services incompatible with the modified programs,
the Company's results of operations and financial condition
may be materially and adversely affected.
The Company's retailer clients, who are located throughout
the United States and eastern Canada, are periodically
evaluated for extension of unsecured credit. At the balance
sheet date, the Company had no concentration of credit with
any individual retailer client.
In the Advance Pay Program (Note 9), the Company assumes
the risk otherwise borne by the retailer that magazine
publishers will refuse or be unable to pay the amount of
incentive payments claimed. Based on historical experience,
the Company maintains a reserve for claims submitted but
subject to such a refusal or inability to pay. However, if
a prominent magazine publisher files a petition in
bankruptcy, seeks other protection from its creditors or
otherwise refuses to pay, this reserve may be inadequate.
The results of operations and the financial condition of
the Company could be materially affected.
F-9
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Summary of Accounting Policies
Revenue Service revenues are recognized during the period in which
Recognition services are performed. Merchandising revenues are
recognized in the period in which the merchandising
services are provided.
Under both the standard arrangement and the Advance Pay
Program, commission revenue is recognized at the time
claims for incentive payments are substantially completed
for submission to the publishers. The commission revenue
recognized is based on the amount claimed, less an
estimated reserve necessary to maintain an allowance for
doubtful accounts of approximately 2% of trade accounts
receivable. Under the standard arrangement, invoices for
claim processing services are not issued until the Company
receives settlement of the claim. However, under the
Advance Pay Program, the customer is not invoiced for the
commission, which is the difference between the claim and
the advance amount.
Equipment and Equipment and furniture are stated at cost. Depreciation
Furniture is computed using the straight-line method for financial
reporting and accelerated methods for income tax purposes
over the estimated useful lives of 5 to 7 years.
Income Taxes Income taxes are calculated using the asset and liability
method specified by Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
Goodwill Goodwill represents the excess of the cost of a company
acquired over the fair value of the net assets acquired
which is amortized over 15 years.
Stock-Based The Company grants stock options for a fixed number of
shares to employees with an exercise price greater than or
equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants in accordance
with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB Opinion No.
25). That Opinion requires that compensation cost related
to fixed stock option plans be recognized only to the
extent that the fair value of the shares at the grant date
exceeds the exercise price. Accordingly, the Company
recognizes no compensation expense for its stock option
grants.
In October 1995, the Financial Accounting Standards Board,
issued Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation". SFAS
No. 123 allows companies to continue to account for their
stock option plans in accordance with APB Opinion No. 25,
but encourages the adoption of a new accounting method
based on the estimated fair value of employee stock
options. Pro forma net income (loss) and earnings (loss)
per share, determined as if the Company had applied the new
method, are disclosed within Note 4.
F-10
<PAGE>
Accounting The preparation of financial statements in conformity with
Estimates generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Long-Lived Assets In March 1995, SFAS No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets Disposed Of"
was issued. SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles to be held and used or
disposed of by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
During fiscal 1997, the Company adopted this statement. The
Company has determined that no impairment loss need be
recognized for applicable assets of continuing operations.
Earnings Per Share In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings per Share," which requires
the presentation of "basic" earnings per share, computed by
dividing net income available to common shareholders by the
weighted average number of common shares outstanding for
the period, and "diluted" earnings per share, which
reflects the potential dilution that could occur if
securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings
of the entity. The Company adopted SFAS No. 128 in the
fourth quarter of fiscal 1998 and has restated all prior
period earnings per share data presented. The adoption of
SFAS No. 128 did not have a material effect on the
Company's previously reported earnings per share
information.
Reclassifications Certain 1997 amounts have been reclassified to conform to
the 1998 presentation.
New Accounting SFAS No. 130, "Reporting Comprehensive Income," was issued
Standards in June 1997. Comprehensive income is defined as net income
plus certain items that are recorded directly to
shareholders' equity, such as unrealized gains and losses
on available- for-sale securities. Components of the
Company's comprehensive income will be included in a
financial statement that has the same prominence as other
financial statements starting in the first quarter of
fiscal 1999. SFAS No. 130's disclosure requirements will
have no impact on the Company's financial condition or
results of operations.
SFAS No. 131, "Disclosure about Segments of an Enterprise
and Related Information," is effective for financial
statements for periods beginning after December 15, 1997,
but interim reporting is not required in 1998. An operating
segment is defined under SFAS No. 131 as a component of an
enterprise that engages in business activities that
generate revenue and expense for which operating results
are reviewed by the chief operating decision maker in the
determination of resource allocation and performance. The
Company is currently evaluating the impact of SFAS No. 131
on future financial statement disclosures.
F-11
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Consolidated Financial Statements
1. Related Party The Company purchased data processing services from an
Transactions employment service company owned by certain officers of the
Company. There were approximately $275,000 of such
purchases made during 1997. The Company purchased this
employment service company for $45,000 on January 1, 1997.
One of the Company's stockholders also owns a majority of
the stock of FMG, Inc., primarily an investing company. At
January 31, 1996, the Company had a receivable from FMG of
$53,171 at prime plus .5%. The receivable was collected in
full on November 5, 1996.
The Company currently leases certain office space and from
time to time leases an airplane from partnerships
controlled by stockholders of the Company. Amounts paid for
the office space were approximately $223,000 and $207,000
for 1998 and 1997, respectively. Amounts paid for the
airplane were approximately $12,000 and $0 for 1998 and
1997, respectively.
Certain officers of the Company, have from time to time,
received cash advances from the Company. The officers
executed promissory notes in favor of the Company in the
aggregate amounts of $295,293. Collections on these notes
totaled $273,200 through January 31, 1998, leaving a
balance outstanding of $22,093. The remaining notes bear
interest at rates varying from 6.96% to 7.34% per annum.
2. Long-term Debt Long-term debt consists of:
and Revolving
Credit Facility
January 31, 1998
- -------------------------------------------------------------------------------
Revolving Credit Facility $ 8,598,000
Unsecured note payable to stockholder (former owner
of Magazine Marketing, Inc.), non-interest bearing,
payable in eight quarterly installments of $10,000,
discounted based on the Company's effective borrowing rate 9,774
Term note payable in monthly installments of $629
through November 1999, collateralized by an automobile 12,800
Obligations under capital lease (Note 3) 14,480
- -------------------------------------------------------------------------------
Total Long-term Debt 8,635,054
Less current maturities 30,997
- -------------------------------------------------------------------------------
Long-term Debt $ 8,604,057
- -------------------------------------------------------------------------------
F-12
<PAGE>
Annual maturities of long-term debt are as follows: 1999 -
$30,997; 2000 - $8,604,057.
The Company has an agreement providing for revolving loans
up to $15,000,000. The bank has the right to terminate the
agreement upon not less than thirteen months prior written
notice. Borrowings bear interest at a rate related to the
monthly LIBOR index rate plus a percentage ranging from
2.5% to 3.5%, depending upon the ratio of funded debt to
earnings before interest, taxes, depreciation and
amortization (effectively 8.4727% at January 31, 1998).
Borrowings are secured by a security interest in
substantially all the Company's assets including
receivables, inventory, equipment, goods and fixtures,
software, contract rights, notes, and general intangibles.
The revolving loan agreement requires the Company to
maintain certain ratios and a specified level of net worth,
restricts payment of dividends, and limits additional
indebtedness. The Company was in compliance with such
ratios at January 31, 1998.
3. Commitments Leases
The Company leases office space, an apartment, computer
equipment, and vehicles under leases that expire over the
next five years. The Company also leases an administrative
facility from a related party under an operating lease that
expires in 2012. In most cases, management expects that in
the normal course of business, leases will be renewed or
replaced with other leases. Rent expense was approximately
$462,000 and $427,000 for the years ended January 31, 1998
and 1997, respectively. Amounts paid to related parties
included in total rent expense were approximately $223,000
and $207,000 for 1998 and 1997, respectively.
Office equipment and furniture includes $71,066 at January
31, 1998 for equipment leases which have been capitalized.
Accumulated amortization was $63,626 at January 31, 1998.
Lease amortization is included in depreciation and
amortization expense.
Future minimum payments, by year and in the aggregate,
under capital leases and noncancelable operating leases
with initial or remaining terms of one year or more
consisted of the following at January 31, 1998:
F-13
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Consolidated Financial Statements
Capital Operating
Year Ending January 31, leases leases
- ------------------------------------------------------------------------------
1999 $ 15,523 $ 410,569
2000 - 250,584
2001 - 173,148
2002 - 155,215
2003 - 150,300
Thereafter - 1,327,650
- ------------------------------------------------------------------------------
Total minimum lease payments 15,523 $ 2,467,466
------------------------
Amount representing interest 1,043
- -------------------------------------------------------
Present Value of Net Minimum
Lease Payments $ 14,480
- -------------------------------------------------------
Litigation
The Company has pending certain legal actions and claims
incurred in the normal course of business and is actively
pursuing the defense thereof. In the opinion of management,
these actions and claims are either without merit or are
covered by insurance and will not have a material adverse
effect on the Company's financial position.
Employment agreements
The Company has entered into employment agreements with
certain officers and key employees. These agreements expire
in January 1999 and require annual salary levels and
termination benefits, should a termination occur.
Consulting agreement
On May 31, 1997, the Company entered into a three year
consulting agreement with a company owned by the former
shareholder of Mike Kessler and Associates, Inc. The
agreement requires the Company to make payments aggregating
$75,000, $65,000 and $50,000 annually for the first, second
and third years of the agreement.
F-14
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Consolidated Financial Statements
4. Employee Profit Sharing and 401(k) Plan
Benefit Plans
The Company has a combined profit sharing and 401(k) Plan.
Annual contributions to the profit sharing portion of the
Plan are determined by the Board of Directors and may not
exceed the amount that may be deducted for federal income
tax purposes. There were no profit sharing contributions
charged against operations for the years ended January 31,
1998 and 1997.
Under the 401(k) portion of the Plan, all eligible
employees may elect to contribute 2% to 20% of their
compensation up to the maximum allowed under the Internal
Revenue Code. The Company matches one half of an employee's
contribution, not to exceed 5% of the employee's salary.
The amounts matched by the Company during the years ended
January 31, 1998 and 1997 pursuant to this Plan were
approximately $63,000 and $50,000, respectively.
Deferred Compensation Plan
During fiscal year 1997, the Company established an
unfunded deferred compensation plan for certain officers,
who elect to defer a percentage of their current
compensation. The Company does not make contributions to
the plan and is responsible only for the administrative
costs associated with the plan. Benefits are payable to the
participating officers upon their death or termination of
employment. From the deferred funds, the Company has
purchased certain life insurance policies. However, the
proceeds and surrender value of these policies are not
restricted to pay deferred compensation benefits when they
are due.
Stock Option Plan
In August 1995, the Company established its 1995 Incentive
Stock Option Plan for key employees and reserved 520,661
shares of Common Stock for such plan. Under the plan, the
Stock Option Committee may grant stock options to key
employees at not less than one hundred percent (100%) of
the fair market value of the Company's Common Stock at the
date of grant. The durations and exercisability of the
grants vary according to the individual options granted.
F-15
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Consolidated Financial Statements
Weighted
Range of Average
Number of Exercise Exercise
Options Prices Price
---------------------------------------------------
Options outstanding at
January 31, 1996 -0- - -
Options granted 227,271 4.84-5.60 5.28
Options expired 61,983 4.84 4.84
---------------------------------------------------
Options outstanding at
January 31, 1997 165,288 5.30-5.60 5.45
Options granted 327,273 1.66-5.60 2.97
Options expired 92,554 2.42-5.60 5.26
Options exercised 2,182 2.42 2.42
---------------------------------------------------
Options outstanding at
January 31, 1998 397,825 1.66-5.60 3.47
---------------------------------------------------
The following table summarizes information about the stock
options outstanding at January 31, 1998:
Remaining
Exercise Number Contractual Options
Prices Outstanding Life (Months) Exercisable
-------- ----------- ------------- -----------
1.66 89,256 52 -0-
2.42 75,454 113 15,091
2.42 27,000 113 9,000
2.66 49,091 53 -0-
5.30 82,644 112 82,644
5.60 74,380 36 24,793
------ ------
397,825 131,528
The options above were issued at exercise prices which
approximate fair market value at the date of grant. At
January 31, 1998, 122,836 shares are available for grant
under the plan.
As discussed in the Summary of Accounting Policies, the
Company applies APB Opinion No. 25 and related
interpretations in accounting for this plan. Accordingly,
no compensation cost has been recognized for its incentive
stock option plan. Had compensation cost for the Company's
stock- based compensation plan been determined based on the
fair value at the grant dates for awards under the plan
consistent with the method of SFAS No. 123, the Company's
consolidated net income (loss) and consolidated income
(loss) per share would have been reduced to the pro forma
amounts indicated below:
F-16
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Consolidated Financial Statements
Year Ended January 31, 1998 1997
- --------------------------------------------------------------------------------
Net income (loss) As reported $ 1,589,008 (603,317)
Pro forma 1,575,534 (637,373)
Basic earnings (loss) per share As reported .23 (0.11)
Pro forma .22 (0.11)
Diluted earnings (loss) per share As reported .22 (0.11)
Pro forma .22 (0.11)
- --------------------------------------------------------------------------------
The pro forma amounts reflected above are not
representative of the effects on reported net income in
future years because in general, the options granted
typically do not vest for several years and additional
awards are made each year. The fair value of each option
grant is estimated on the grant date using the
Black-Scholes option pricing model with the following
assumptions:
Year Ended January 31, 1998 1997
- ----------------------------------------------------------------------------
Dividend yield 0% 0%
Range of expected lives (years) 3.6-10 1
Range of expected volatility 0.40-0.60 0.30
Risk-free interest rate 5.90% 4.88%
- ----------------------------------------------------------------------------
Stock Award Plan
In September 1996, the Company adopted its Stock Award Plan
for all employees and reserved 41,322 shares of Common
Stock for such plan. Under the plan, the Stock Award
Committee, appointed by the Board of Directors of the
Company, shall determine the employees to whom awards shall
be granted.
On September 18, 1996, 8,306 shares of Common Stock were
awarded to certain employees under the plan.
F-17
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Consolidated Financial Statements
5. Supplemental Supplemental information on interest and income taxes paid
Cash Flow is as follows:
Information
Years Ended January 31, 1998 1997
- -------------------------------------------------------------------------
Interest $ 700,000 $ 285,000
Income Taxes $ 1,081,000 $ 264,000
- -------------------------------------------------------------------------
Capital lease obligations of $15,687 were incurred in 1997
when the Company entered into leases for new office
equipment.
On August 30, 1996, 7,863 shares of Common Stock were
issued as a dividend to the preferred shareholders as of
that date. On February 28, 1997, 6,381 shares of Common
Stock were issued as a dividend to the preferred
shareholders as of that date.
During 1997, in connection with the acquisitions of
Magazine Marketing, Inc. and Readers Choice, Inc., the
Company issued 86,644 shares and 91,938 shares of Common
Stock (Note 7).
As part of the acquisition of Mike Kessler and Associates,
Inc. the Company entered into a short-term debt agreement
for $2,150,000. The obligation was paid in full at its due
date in January 1998.
6. Income Taxes Provision for federal and state income taxes (benefit) in
the consolidated statements of operations consist of the
following components:
Year Ended January 31, 1998 1997
- -------------------------------------------------------------------------------
Current
Federal $ 606,000 $ (102,768)
State 155,000 (15,356)
- -------------------------------------------------------------------------------
Total Current 761,000 (118,124)
- -------------------------------------------------------------------------------
Deferred
Federal 376,000 (225,386)
State 94,000 (33,678)
- -------------------------------------------------------------------------------
Total Deferred 470,000 (259,064)
- --------------------------------------------------------------------------------
Total Income Tax Expense (Benefit) $ 1,231,000 $ (377,188)
- -------------------------------------------------------------------------------
F-18
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Consolidated Financial Statements
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amount of the
assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The sources of
the temporary differences and their effect on deferred
taxes are as follows:
January 31, 1998
- --------------------------------------------------------------------------
Deferred Tax Assets
Allowance for doubtful accounts $ 165,000
Deferred compensation 33,000
Other 16,000
- --------------------------------------------------------------------------
Total Deferred Tax Assets 214,000
- --------------------------------------------------------------------------
Deferred Tax Liabilities
Book/Tax difference in accounts receivable 708,000
Income not previously taxed under cash
basis of accounting for income tax purposes 316,000
Depreciation 30,000
Other 32,000
- -------------------------------------------------------------------------
Total Deferred Tax Liabilities 1,086,000
- -------------------------------------------------------------------------
Net Deferred Tax Liability 872,000
- -------------------------------------------------------------------------
Classified as
Current 769,000
Non-current 103,000
- -------------------------------------------------------------------------
Net Deferred Tax Liability $ 872,000
- -------------------------------------------------------------------------
The following summary reconciles income taxes at the
maximum federal statutory rate with the effective rates for
1998 and 1997:
Year Ended January 31, 1998 1997
- --------------------------------------------------------------------------------
Income tax expense (benefit) at statutory rate $ 960,000 $ (333,372)
State income tax expense (benefit), net of
federal income tax benefit 200,000 (80,421)
Non-deductible meals and entertainment 30,000 35,320
Non-deductible officers' life insurance 7,000 (3,250)
Non-deductible goodwill amortization 61,000 2,306
Utilization of NOL carryforwards (19,000) -
Other, net (8,000) 2,229
- --------------------------------------------------------------------------------
Income Tax Expense (Benefit) $ 1,231,000 $ (377,188)
- --------------------------------------------------------------------------------
F-19
<PAGE>
7. Business Acquisition of Magazine Marketing, Inc.
Combinations
On June 28, 1996, the Company acquired all of the stock of
Magazine Marketing, Inc. in exchange for 82,644 shares of
Common Stock of the Company and $275,000 in cash. In
addition, the Company shall pay $10,000 at the end of each
quarter for a two year period following the closing date
(or a total of $80,000).
The transaction has been accounted for as a purchase and,
accordingly, the assets and liabilities have been recorded
at fair market value. Results of operations have been
included as of the effective date of the transaction. The
purchase price of the transaction exceeded the fair value
of the assets acquired in the amount of $704,748 and is
being amortized over 15 years.
Acquisition of Readers Choice, Inc.
On June 30, 1996, the Company acquired all of the issued
and outstanding shares of Readers Choice, Inc., a wholly
owned subsidiary of United Magazine Company, in exchange
for 91,938 shares of Redeemable Common Stock of the
Company. This transaction has been accounted for as a
purchase and accordingly, the assets and liabilities have
been recorded at fair market value. Results of operations
have been included as of the effective date of the
transaction. The purchase price of the transaction exceeded
the fair value of the assets acquired in the amount of
$280,507 and is being amortized over 15 years.
Acquisition of Mike Kessler and Associates, Inc.
On May 30, 1997, the Company acquired all of the stock of
Mike Kessler and Associates, Inc. (MKA) for $2,500,000 of
which $350,000 was paid upon closing and the balance was
paid on January 5, 1998 with interest at 6.25%. The seller
operated MKA as a business engaged in the collection of
retail display allowances for retail store chains. The
Company has continued the operation of such business and
has continued servicing MKA's customer base.
This transaction has been accounted for as a purchase, and
accordingly, the assets and liabilities have been recorded
at fair market value. Results of operations have been
included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets
acquired in the amount of $2,382,900 and is being amortized
over 15 years.
Unaudited pro forma results of operations for 1998 and 1997
for the Company and MKA is listed below:
F-20
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Consolidated Financial Statements
Year Ended January 31, 1998 1997
- --------------------------------------------------------------------------------
Total Revenues (As reported) $ 11,804,000 $ 7,298,000
(Pro forma) 12,304,000 8,796,000
Net Income (Loss) (As reported) 1,589,000 (603,000)
(Pro forma) 1,637,000 (438,000)
Earnings (Loss) Per Share
Basic (As reported) 0.23 (0.11)
Diluted (As reported) 0.22 (0.11)
Basic (Pro forma) 0.23 (0.08)
Diluted (Pro forma) 0.23 (0.08)
8. Preferred Stock The Company has authorized 2,000,000 shares of $.01 par
Preferred Stock. On March 13, 1996, 65,000 shares were
designated as 1996 Series 7% Convertible Preferred Stock.
Rights and restrictions on the remaining shares will be
established if, and when, any shares are issued.
Each share of the 1996 Series 7% Convertible Preferred
Stock entitles its holder to receive an annual dividend,
when and as declared by the Board of Directors, of $7 per
share payable in shares of the Company's Common Stock; to
convert it into shares of Common Stock; to receive $100 per
share in the event of dissolution, liquidation, or winding
up of the Company, whether voluntary or involuntary; and
subject to certain conditions in the Certificate of
Designations, Preferences and Relative Rights of 1996
Series 7% Convertible Preferred Stock, may be redeemed at
the option of the Company at a price of $100 per share
within 30 days following the effective date of a merger or
consolidation in which the Company is not the surviving
entity.
Each share of the 1996 Series 7% Convertible Preferred
Stock shall be convertible, at the option of the holder
thereof, into shares of the Common Stock of the Company, at
the conversion price equal to 80% of the current market
price of the Common Stock, provided, however, the
conversion price shall not be less than $4.24 nor more than
$6.66 per share of Common Stock. For purposes of such
conversion, each share of the 1996 Series 7% Convertible
Preferred Stock shall be accepted by the Company for
surrender at its Liquidation Amount of $100 per share.
During March 1996, the Company issued 20,000 shares of 1996
Series 7% Convertible Preferred Stock for $100 per share.
Commissions and expenses totaling $137,925 were incurred in
connection with the stock issuances of which $77,925 was
paid in cash and $60,000 was paid by issuance of another
600 shares of Preferred Stock.
On June 3, 1996, an investor converted 5,000 shares of the
Company's 1996 Series 7% Convertible Preferred Stock into
Common Stock of the Company. The conversion price was $4.30
per share, which resulted in the issuance of 116,293 shares
of Common Stock. This conversion also resulted in the
issuance to certain of the Company's financial advisors of
warrants to purchase an additional 2,326 shares of the
Common Stock of the Company. These warrants to purchase
Common Stock are exercisable for a two year period at an
exercise price equal to $5.15 per share.
F-21
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Consolidated Financial Statements
On July 29, 1996, two investors converted 2,250 and 500
shares of the Company's 1996 Series 7% Convertible
Preferred Stock into Common Stock of the Company. The
conversion price was $4.42 per share, which resulted in the
issuance of 50,945 and 11,320 shares, respectively, of
Common Stock.
On August 30, 1996, the Company issued a Common Stock
dividend to investors who held the Company's 1996 Series 7%
Convertible Preferred Stock. At this date there were 12,850
shares of such stock outstanding. The 7% dividend resulted
in a Common Stock dividend of 7,863 shares based on an
issuance price of $5.40 per share.
On September 11, 1996, an investor converted 5,000 shares
of the Company's 1996 Series 7% Convertible Preferred Stock
into Common Stock of the Company. The conversion price was
$4.24 per share, which resulted in the issuance of 118,064
shares of Common Stock. This conversion also resulted in
the issuance to certain of the Company's financial advisors
of warrants to purchase an additional 2,361 shares of the
Common Stock of the Company. These warrants to purchase
Common Stock are exercisable for a two year period at an
exercise price equal to $5.08 per share.
On September 22, 1996, an investor converted 2,250 shares
of the Company's 1996 Series 7% Convertible Preferred Stock
into Common Stock of the Company. The conversion price was
$4.24 per share, which resulted in the issuance of 53,128
shares of Common Stock.
On February 28, 1997, the Company issued a Common Stock
dividend to investors who held the Company's 1996 Series 7%
Convertible Preferred Stock. At this date there were 5,600
shares of such stock outstanding. The 7% dividend resulted
in a Common Stock dividend of 6,381 shares based on an
issuance price of $3.06 per share.
In July 1997, the Company exchanged all 5,600 outstanding
shares of the Company's 1996 Series 7% Convertible
Preferred Stock for an aggregate of 186,667 shares of
Common Stock and non-transferable warrants, expiring in
2000, to purchase 310,709 shares of Common Stock at an
exercise price of $3.00 per share. Such exchange resulted
in a constructive dividend, based on the independently
appraised value of the non-transferable warrants, of
$109,937 which was reported in the fiscal quarter ended
July 31, 1997.
9. Advance Pay The Company has established an Advance Pay Program. Under
Program this program, the Company advances an agreed upon
percentage of the incentive payments otherwise due the
retailer from magazine publishers upon quarterly submission
of claims for such payments. The claims otherwise due the
retailer become due the Company. Included in trade
receivables at January 31, 1998 is $14,587,531 due the
Company under the Advance Pay Program (net of $3,859,154
due the program participants). Service revenues from the
program were approximately $4,576,000 and $1,150,000 during
1998 and 1997, respectively.
10. Due to The Company has arrangements with certain of its customers
Retailers whereby the Company is authorized to collect and deposit in
its own accounts, checks payable to its customers for
incentive payments. The Company retains the commission
related to such payments and pays the customer the
difference. The Company owes retailers $993,846 at January
31, 1998 under such arrangements.
F-22
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Consolidated Financial Statements
11. Common Stock In September 1997, the Company issued to Aron Katzman,
Harry L. Franc, III and Timothy A. Braswell, each a
director of the Company, non-transferable warrants,
expiring in 2000, to purchase an aggregate of 89,289 shares
of Common Stock at an exercise price of $3.00 per share.
These warrants will vest at a rate of 25% on August 1,
1998, 25% on November 1, 1998, 25% on February 1, 1999 and
25% on May 1, 1999. The related cost, as determined by
independent appraisal, of approximately $54,000 will be
recognized ratably over those periods.
In October 1997, the Company sold in a public offering,
2,000,000 shares of the Company's Common Stock. Concurrent
with the offering, the Company effected the 1 for 1.21
reverse stock split previously approved by the Company's
shareholders. The weighted average number of common shares
presented in the financial statements have been
retroactively restated to give effect to such reverse stock
split.
12. Fair Values of The following methods and assumptions were used to estimate
Instruments the fair values of each class of financial instruments for
which it is practicable to estimate that value:
Trade Receivables
The carrying amounts approximate fair value because of the
short maturity of those instruments.
Notes Receivable - Officers
The fair value is estimated by discounting the future cash
flows using the current interest rates at which similar
loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Accounts Payable and Accrued Expenses, and Amounts Due to
Retailers
Carrying amounts are reasonable estimates of fair value due
to the relatively short period between origination and
expected repayment of these instruments.
Long-term Debt and Revolving Credit Facility (Excluding
Obligations Under Capital Leases)
The carrying amount of the long-term debt approximates the
fair value because the financial instrument was originally
recorded at its discounted value.
It is presumed that the carrying amount of the revolving
credit facility is a reasonable estimate of fair value
because the financial instrument bears a variable interest
rate.
The estimated fair values of the Company's financial
instruments are as follows:
F-23
<PAGE>
THE SOURCE INFORMATION MANAGEMENT COMPANY
Notes to Consolidated Financial Statements
Carrying Fair
January 31, 1998 Value Value
- ---------------- -------- ------
Financial Assets
Trade receivables $ 18,874,764 $ 18,874,764
Notes receivable - officers $ 22,093 $ 20,100
Financial Liabilities
Accounts payable and accrued
expenses $ 680,055 $ 680,055
Due to retailers $ 993,846 $ 993,846
Long-term debt (excluding
obligations under capital leases) $ 8,589,577 $ 8,589,577
13. Earnings Per In calculating earnings per share, Net Income for the year
Share ended January 31, 1998 was reduced by a constructive
dividend of $109,937, which resulted from the exchange of
all 5,600 outstanding shares of Preferred Stock for 186,667
shares of Common Stock and non-transferable warrants.
A reconciliation of the denominators of the basic and
diluted earnings per share computations are as follows:
January 31, 1998 1998 1997
- --------------------------------------------------------------------------------
Weighted average number of common
shares outstanding 6,561,761 5,557,223
Effect of dilutive securities - stock
options and warrants 131,905 -
- --------------------------------------------------------------------------------
Weighted average number of common shares
outstanding - as adjusted 6,693,666 5,557,223
- --------------------------------------------------------------------------------
14. Subsequent Subsequent to year end, the Board of Directors approved a
Event plan in which the Company would sell additional shares of
its Common Stock. The Company will be required to file a
registration statement for the sale of these securities. It
is anticipated that the aggregate selling price of all of
the securities will approximate $10,500,000. The proposed
issue date of these securities is expected to be in June
1998.
F-24
<PAGE>
15. Quarterly Financial Quarters Ended
Data (unaudited)
1998 April 30 July 31 October 31 January 31
-------------------------------------------------------------------------------
Net Sales $2,527,879 $2,940,137 $2,943,766 $3,392,062
Gross Profit 1,233,933 1,349,506 1,421,565 1,938,187
Net Income 256,127 333,426 377,256 622,199
Earnings per common
share - Basic .04 .04 .06 .08
Weighted average number
of common shares
outstanding - Basic 5,823,777 5,827,872 6,535,980 8,015,371
Earnings per common
shares - Diluted 0.04 0.04 0.06 0.08
Weighted average number
of common shares
outstanding - Diluted 5,823,777 5,890,443 6,724,638 8,290,369
1997
----
Net Sales $1,453,968 $1,304,530 $2,100,190 $2,439,759
Gross Profit 249,130 147,022 795,390 1,042,317
Net Income (Loss) (470,229) (435,311) 62,410 239,813
Earnings (loss) per common
share - Basic (0.09) (0.08) 0.01 0.04
Weighted average number of
common shares
outstanding - Basic 5,272,645 5,409,994 5,723,099 5,817,030
Earnings (loss) per common
share - Diluted (0.09) (0.08) 0.01 0.04
Weighted average number of
common shares
outstanding - Diluted 5,272,645 5,409,994 5,809,050 5,946,659
F-25
<PAGE>
No underwriter, dealer, salesperson or other person has been authorized to give
any information or to make any representations other than those contained in
this p ospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Company or any
Underwriter. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any date subsequent to the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make such offer or solicitation.
--------------------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ......................................
Risk Factors.............................................
Use of Proceeds .........................................
Price Range of Common Stock..............................
Dividend Policy..........................................
Capitalization ..........................................
Selected Financial Data .................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................................
Business ................................................
Management ..............................................
Principal and Selling Shareholders ......................
Description of Capital Stock ............................
Certain Provisions of the Articles of
Incorporation and Bylaws...............................
Shares Eligible for Future Sale .........................
Underwriting ............................................
Legal Matters ...........................................
Experts .................................................
Available Information ...................................
Index to Financial Statements ...........................
[LOGO] THE SOURCE INFORMATION MANAGEMENT COMPANY
2,000,000 SHARES
COMMON STOCK
----------
PROSPECTUS
----------
DONALD & CO. SECURITIES, INC.
__________, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Sections 351.355(1) and (2) of The General and Business Corporation Law
of the State of Missouri provide that a corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact that he is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe such person's conduct was
unlawful, except that, in the case of an action or suit by or in the right of
the corporation, the corporation may not indemnify such persons against
judgments and fines and no person shall be indemnified as to any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of the person's duty to the
corporation, unless and only to the extent that the court in which the action or
suit was brought determines upon application that such person is fairly and
reasonably entitled to indemnity for proper expenses. Section 351.355(3)
provides that, to the extent that a director, officer, employee or agent of the
corporation has been successful in the defense of any such action, suit or
proceeding or in defense of any claim, issue or matter therein, the person shall
be indemnified against expenses, including attorney's fees, actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Section 351.355(7) provides that a corporation may provide
additional indemnification to any person indemnifiable under subsection (1) of
(2), provided such additional indemnification is authorized by the corporation's
articles of incorporation or an amendment thereto or by a shareholder-approved
bylaw or agreement, and provided further that no person shall thereby be
indemnified against conduct which was finally adjudged to have been knowingly
fraudulent, deliberately dishonest or willful misconduct or which involves an
accounting-for profits pursuant to Section 16(b) of the Exchange Act. Paragraph
9 of the Articles of IncorporationCof the Company permits the Company to enter
into agreements with its directors, officers, employees and agents to provide
such indemnification as deemed appropriate. Paragraph 9 also provides that the
Company may extend to its directors and executive officers such indemnification
and additional indemnification.
The Company has entered into an indemnification agreement with its
directors and certain of its executive officers. The form of indemnity agreement
provides that such persons will be indemnified to the full extent permitted by
applicable law against all expenses (including attorneys' fees), judgments,
fines, penalties and amounts paid in settlement of any threatened, pending or
completed action, suit or proceeding, on account of such person's services as a
director or executive officer of the Company or any other company or enterprise
in which he is serving at the request of the Company, or as a guarantor of any
debt of the Company. To the extent the indemnification provided under the
agreement exceeds that permitted by applicable law, indemnification may be
unenforceable or may be limited to the extent it is found by a court of
competent jurisdiction to be contrary to public policy.
The Company has procured and intends to maintain a policy of insurance
under which the directors and officers of the Company will be insured, subject
to the limits of the policy, against certain losses arising from claims made
against such directors and officers by reason of any acts or omissions covered
under such policy in their respective capacities as directors or officers.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the shares of Common Stock offered hereby,
all of which will be paid by the Company:
SEC Registration fee.................................. $ 4,855
NASD Filing fee....................................... 2,107
Listing fees.......................................... 79,000
Transfer agent fees and expenses...................... 5,000
Printing and engraving................................ 65,000
Legal fees and expenses............................... 75,000
Accounting fees and expenses.......................... 28,000
Non-accountable expense allowance..................... 160,500
Miscellaneous......................................... 5,538
--------
Total............................................. $ 425,000
- ---------------------------
Item 26. Recent Sales of Unregistered Securities
During February 1996, the Company issued 6,612 shares of Common Stock
to Dennis Mensch for $4.54 per share in a transaction exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
During March 1996, the Company issued 15,000, 2,250, 2,250 and 500
shares of 1996 Series 7% Convertible Preferred Stock for $100 per share to
Cameron Capital, Ltd., Messrs. Aron Katzman, Timothy A. Braswell and Harry L.
Franc, III, respectively. The sale to Cameron Capital, Ltd. was made in reliance
on Regulation S of the Securities Act, and all other such sales were made in
reliance on Section 4(2) of the Securities Act of 1933. Each share of the 1996
Series 7% Convertible Preferred Stock entitles its holder to receive an annual
dividend, when and as declared by the Board of $7 per share payable in shares of
the Company's Common Stock; to convert it into shares of common stock subject to
the conversion rights described in the Certificate of Designations, Preferences
and Relative Rights of 1996 Series 7% Convertible Preferred Stock (the
"Certificate"); to receive $100 per share in the event of dissolution,
liquidation, or winding up of the Company, whether voluntary or involuntary; and
subject to certain conditions in the Certificate, may be redeemed at the option
of the Company at a price of $100 per share within 30 days following the
effective date of a merger or consolidation in which the Company is not the
surviving entity. In connection with such sale, the Company issued an additional
600 shares of 1996 Series 7% Convertible Preferred Stock to DJ Ltd. in reliance
on Regulation S.
In June 1996, an investor converted 5,000 shares of 1996 Series 7%
Convertible Preferred Stock into 116,293 shares of Common Stock in reliance on
Section 3(a)(9) and the Company issued warrants to purchase up to 2,326 shares
of Common Stock in reliance on Regulation S and Section 4(2).
In July 1996, two investors converted 2,250 and 500 shares of 1996
Series 7% Convertible Preferred Stock into 50,945 and 11,320 shares,
respectively, of Common Stock in reliance on Section 3(a)(9).
In August 1996, the Company issued a 7,863 share Common Stock dividend
to its preferred stockholders in reliance upon Section 4(2) and Regulation S.
II-2
<PAGE>
In a series of transactions, taking place in August 1996 and September
1996, exempt from registration pursuant to Section 4(2) of the Securities Act of
1933, the Company issued 4,200 shares of Common Stock to Financial Power Network
in exchange for $21,600 of marketing services.
During June 1996, the Company issued 82,644 shares of Common Stock to
James W. Looman in connection with the purchase of Magazine Marketing, Inc. in a
transaction exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933.
During June 1996, the Company issued 91,938 shares of Common Stock to
United Magazine Company in connection with the purchase of Readers Choice, Inc.
in a transaction exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In September 1996, two investors converted 5,000 and 2,250 shares of
1996 Series 7% Convertible Preferred Stock into a total of 171,192 shares of
Common stock in reliance on Section 3(a)(9) and the Company issued warrants to
purchase up to 2,361 shares of Common Stock in reliance on Regulation S and
Section 4(2).
In February 1997, the Company issued a 6,381 share common stock
dividend to its preferred stockholders in reliance upon Section 4(2) and
Regulation S.
In July, 1997, the Company issued 186,667 shares of Common Stock and
warrants expiring 2000 to purchase 310,709 shares of Common Stock at a price of
$3.00 per share, to the holders of the Company's 1996 7% Convertible Preferred
Stock in exchange for all of the issued and outstanding shares of such Preferred
Stock. Such transactions were made in reliance on Regulation S and Section 4(2).
In September 1997, the Company issued non-transferable warrants to
certain of its directors for the purchase of up to 89,289 shares of Common Stock
at a purchase price of $3.00 per share in reliance on Section 4(2).
In November 1997, the Company issued a warrant to purchase up to 75,000
shares of Common Stock to a consultant in reliance on Section 4(2). Such warrant
was surrendered by the holder thereof in May 1998 in consideration of a cash
payment by the Company of $17,250.
Item 27. Exhibits
Exhibit
Number Description
- ------ -----------
1.1 Form Underwriting Agreement
3.1 Articles of Incorporation of the Company
3.2 Bylaws of the Company
3.3 Amendment to Articles of Incorporation of the Company
3.4 Amendments to Bylaws of the Company (filed herewith)
3.5 Amendment to Articles of Incorporation of the Company
(filed herewith)
4.1 Form of Common Stock Certificate
4.4 Representative's Warrant
4.5 Form of Privately Issued Warrant
4.6 Form of Representative's Warrant
5.1 Opinion of Gallop, Johnson & Neuman, L.C.
10.1 Form of Promissory Notes with Dwight DeGolia
10.2 Form of Indemnity Agreement with Officers and Directors
II-3
<PAGE>
10.3 Lease Agreement dated June 28, 1991 with 711 Gallimore
Partnership
10.8 Addendum to the Lease Agreement, dated as of
January 1, 1994, with 711 Gallimore Partnership
10.9 Addendum to the Lease Agreement, dated as of
January 1, 1996, with 711 Gallimore Partnership
10.10 Addendum to the Lease Agreement, dated as of
April 1, 1996, with 711 Gallimore Partnership
10.11 Addendum to the Lease Agreement, dated as of
April 25, 1996, with 711 Gallimore Partnership
10.13 $8,700,000 Credit Agreement dated as of November 14,
1996 between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.14 Amendment to Credit Agreement dated December 19, 1996
by and between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.15 Amendment to Credit Agreement dated January 31, 1997
by and between the Company and Wachovia Bank of
North Carolina, N.A.
10.16 The Company's Common Stock Award Plan
10.17 The Company's Amended and Restated 1995 Incentive
Stock Option Plan.
10.18 Employment Agreement, effective February 1, 1996, with
John P. Watkins
10.19 Employment Agreement dated as of August 30, 1995, with
Robert G. Shupe
10.20 Agreement with Dwight L. DeGolia
10.21 Front-End Management Agreement with Kmart Corporation
10.22 Amendment to Credit Agreement dated July 31, 1997 by
and between the Company and Wachovia Bank, N.A.
10.23 Form of Financial Consulting Agreement with Donald & Co.
Securities Inc.
10.24 Amendment to Credit Agreement dated May 29, 1997
by and between the Company and Wachovia Bank of North
Carolina, N.A.
10.25 Form of Employment Agreement with S. Leslie Flegel,
William H. Lee and W. Brian Rodgers
10.26 Amendment to Credit Agreement dated October 31, 1997
by and between the Company and Wachovia Bank of North
Carolina, N.A.
10.27 Form of Amendment to Financial Consulting Agreement with
Donald & Co. Securities, Inc.
10.28 The Company's 1998 Omnibus Plan
21.1 Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
23.3 Consent of Gallop, Johnson & Neuman, L.C.
(included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
II-4
<PAGE>
Item 28. Undertakings
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) If the issuer relies on Rule 430A under the Securities Act, that
the small business issuer will:
(1) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the small business issuer under Rule
424(b)(1), or (4), or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it
Effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at the time
as the initial bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Amendment to
Registration Statement to be signed on its behalf by the undersigned, in the
County of St. Louis, State of Missouri, on the _____th day of May, 1998.
THE SOURCE INFORMATION MANAGEMENT COMPANY
By: /s/ W. Brian Rodgers
W. Brian Rodgers
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ S. Leslie Flegel Chief Executive Officer and
S. Leslie Flegel Chairman of the Board
(principal executive officer)
/s/ W. Brian Rodgers Chief Financial Officer
W. Brian Rodgers (principal financial and
accounting officer)
/s/ William H. Lee President, Chief Operating
William H. Lee Officer and Director
/s/ Timothy A. Braswell Director
Timothy A. Braswell
/s/ Harry L. "Terry" Franc, III Director
Harry L. "Terry" Franc, III
/s/ Aron Katzman Director
Aron Katzman
/s/ Randall Minix Director
Randall Minix
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Page
- ------- ----------- ----
1.1 Form Underwriting Agreement
3.1(1) Articles of Incorporation of the Company
3.2(1) Bylaws of the Company
3.3(2) Amendment to Articles of Incorporation of the Company
3.4(3) Amendments to Bylaws of the Company (filed herewith)
3.5(3) Amendment to Articles of Incorporation of the Company
(filed herewith)
4.1(3) Form of Common Stock Certificate
4.4(3) Representative's Warrant
4.5(3) Form of Privately Issued Warrant
4.6 Form of Representative's Warrant
5.1 Opinion of Gallop, Johnson & Neuman, L.C.
10.1(1) Form of Promissory Notes with Dwight DeGolia
10.2(1) Form of Indemnity Agreement with Officers and Directors
10.3(1) Lease Agreement dated June 28, 1991 with 711 Gallimore
Partnership
10.8(2) Addendum to the Lease Agreement, dated as of
January 1, 1994, with 711 Gallimore Partnership
10.9(2) Addendum to the Lease Agreement, dated as of
January 1, 1996, with 711 Gallimore Partnership
10.10(2) Addendum to the Lease Agreement, dated as of
April 1, 1996, with 711 Gallimore Partnership
10.11(2) Addendum to the Lease Agreement, dated as of
April 25, 1996, with 711 Gallimore Partnership
10.13(4) $8,700,000 Credit Agreement dated as of November 14,
1996 between The Source Company and Wachovia Bank of
North Carolina, N.A.
10.14(4) Amendment to Credit Agreement dated December 19, 1996
by and between the Company and Wachovia Bank of
North Carolina, N.A.
10.15(4) Amendment to Credit Agreement dated January 31, 1997
by and between the Company and Wachovia Bank of
North Carolina, N.A.
10.16(5) The Company's Common Stock Award Plan
10.17 The Company's Amended and Restated 1995 Incentive Stock
Option Plan
10.18(3) Employment Agreement, effective February 1, 1996, with
John P. Watkins
10.19(3) Employment Agreement dated as of August 30, 1995, with
Robert G. Shupe
10.20(3) Agreement with Dwight L. DeGolia
10.21(3) Front-End Management Agreement with Kmart Corporation
10.22(3) Amendment to Credit Agreement dated July 31, 1997 by
and between the Company and Wachovia Bank, N.A.
10.23(3) Form of Financial Consulting Agreement with Donald &
Co. Securities Inc.
10.24(3) Amendment to Credit Agreement dated May 29, 1997 by and
between the Company and Wachovia Bank of North
Carolina, N.A.
10.25(3) Form of Employment Agreement with S. Leslie Flegel,
William H. Lee and W. Brian Rodgers
E-2
<PAGE>
10.26(6) Amendment to Credit Agreement dated October 31, 1997
by and between the Company and Wachovia Bank of North
Carolina, N.A.
10.27 Form of Amendment to Financial Consulting Agreement with
Donald & Co. Securities, Inc.
10.28 The Company's 1998 Omnibus Plan
21.1(3) Subsidiaries of the Company
23.1 Consent of BDO Seidman, LLP
23.3 Consent of Gallop, Johnson & Neuman, L.C. (included in
Exhibit 5.1)
24.1 Power of Attorney (included on signature page)
- --------------------
(1) Incorporated by reference to Registration Statement on Form 10-SB
(File No. 0-26238) first filed on June 12, 1995.
(2) Incorporated by reference to Form 10-KSB for the fiscal year ended
January 31, 1996.
(3) Incorporated by reference to Registration Statement on Form SB-2
(File No. 333-32733).
(4) Incorporated by reference to Form 10-KSB for the fiscal year ended
January 31, 1997.
(5) Incorporated by reference to Form S-8 (File No. 333-16039) filed on
November 13, 1996.
(6) Incorporated by reference to Form 10-QSB for the quarter ended
October 31, 1997.
E-3
2,000,000 Shares
The Source Information Management Company
Common Stock
UNDERWRITING AGREEMENT
_______ __ , 1998
Donald & Co. Securities Inc.
As Representative of the Underwriters
named in Schedule I hereto
65 East 55th Street
New York, New York 10022
Dear Sirs:
The Source Information Management Company, a Missouri corporation (the
"Company"), and the shareholders of the Company named in Schedule II hereto
(collectively the "Selling Shareholders") hereby confirms its agreement with
Donald & Co. Securities Inc. (being referred to herein variously as "you" or the
"Representative") and the other underwriters named in Schedule I hereto (the
"Representative" and the other underwriters being collectively called the
"Underwriters") as follows:
1. Introductory. Pursuant to the terms of this Underwriting Agreement
(this "Agreement"), the Company and the Selling Shareholders propose to issue
and sell, severally and not jointly, to the Underwriters 1,500,000 and 500,000
(the "Firm Stock") shares of Common Stock, $.01 par value, of the Company (the
"Common Stock"), respectively. In addition, solely for the purpose of covering
over-allotments, the Selling Shareholders propose to grant to the Representative
the option to purchase up to an additional 300,000 shares of Common Stock
("Additional Stock"). The Common Stock is more fully described in the Prospectus
referred to below.
1
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2. Representations and Warranties
The Company represents and warrants to the Underwriters that:
(1) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and amendments thereto,
on Form SB-2 (File No. 333-_____), including any related preliminary prospectus
("Preliminary Prospectus"), for the registration of the Firm Stock and the
Additional Stock under the Securities Act of 1933, as amended (the "Act"). The
Company will not, before the registration statement becomes effective (the
"Effective Date"), file any other amendment to said registration statement to
which you shall reasonably object in writing after being furnished with a copy
thereof. Copies of such registration statement and all amendments thereto, and
all forms of the related Preliminary Prospectus contained therein, previously
filed by the Company with the Commission, have heretofore been delivered to you.
Except as the context may otherwise require, such registration statement, as
amended, on file with the Commission at the time the registration statement
becomes effective (including the prospectus, financial statements, exhibits and
all other documents filed as a part thereof and all information deemed to be a
part thereof as of such time pursuant to paragraph (b) of Rule 430A of the
General Rules and Regulations of the Commission under the Act (the
"Regulations")) is herein called the "Registration Statement". The prospectus in
the form filed with the Commission pursuant to Rule 424(b) of the Regulations is
herein called the "Prospectus".
(2) Neither the Commission nor any "Blue Sky" or securities
authority of any jurisdiction has issued an order preventing or suspending the
use of any Preliminary Prospectus relating to the proposed offering of the Stock
and Additional Stock or has instituted proceedings for that purpose. Each
Preliminary Prospectus, at the time of filing with the Commission, contained all
material statements which are required to be stated therein in accordance with
the Act and the Regulations, and conformed in all material respects with the
requirements of the Act and the Regulations and did not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The Registration
Statement at the time it becomes effective and the Prospectus at the time it is
filed with the Commission pursuant to Rule 424(b) and on the Closing Date (and
the Additional Closing Date, if any, determined as hereinafter provided in
Section 3) will contain all material statements which are required to be stated
therein in accordance with the Act and the Regulations, and will in all material
respects conform to the requirements of the Act and the Regulations, and the
Registration Statement and the Prospectus will not, on such dates, include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that no
representations or warranties are made with respect to statements or omissions
made in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through the Representative
expressly for use in the Registration Statement or Prospectus or any amendment
or supplement thereto.
2
<PAGE>
(3) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Missouri. Each of
K-Sub, Inc., L-Sub, Inc., Readers Choice, Inc., Magazine Marketing, Inc., The
Source-Canada Corp. and Mike Kessler and Associates, Inc. is a subsidiary of the
Company (collectively, the "Subsidiaries") and has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation. The Company owns, directly or indirectly, all
of the capital stock of each of the Subsidiaries. All such shares of capital
stock so owned are validly issued and outstanding, fully paid and nonassessable
and are owned free and clear of any liens, encumbrances or other restrictions.
The Company and each of the Subsidiaries are duly qualified and in good standing
as foreign corporations in all jurisdictions where the character or location of
their properties (owned or leased) or the nature of their business makes such
qualification necessary, except where the failure so to qualify would not have a
material adverse effect on the business, properties, results of operations,
condition (financial or otherwise), affairs or prospects of the Company and the
Subsidiaries, taken as a whole (a "Material Adverse Effect"). The Company and
each of the Subsidiaries have all requisite corporate power and authority, and
all necessary authorizations, approvals, orders, licenses, certificates and
permits of and from all governmental regulatory officials and bodies, to own
their respective properties and conduct their respective businesses as described
in the Prospectus, and the Company has all such power, authority,
authorizations, approvals, orders, licenses, certificates and permits to enter
into this Agreement and to carry out the provisions and conditions hereof. The
Company and each of the Subsidiaries own, or possess adequate rights to use, all
patents, trademarks, service marks and other rights necessary for the conduct of
their business as described in the Prospectus and neither the Company, nor any
of the Subsidiaries nor any officer or director of the Company or any of the
Subsidiaries has received any notice of conflict with the asserted rights of
others in any respect which would have a Material Adverse Effect, and none knows
any basis therefor. The Company has no subsidiaries other than the Subsidiaries.
(4) The Company and the Subsidiaries have either good and
marketable title in fee simple to, or valid and enforceable leasehold estates
in, all items of real property and personal property which are stated in the
Prospectus to be owned or leased by it, in each case free and clear of all
liens, encumbrances, claims, security interests, subleases and defects, other
than those referred to in the Prospectus and those which do not have a Material
Adverse Effect. Each of the Company and the Subsidiaries has the right to
operate all of its facilities in their present locations and the operation of
such facilities does not violate in any material respect the provisions of any
lease with respect thereto which the Company, any of the Subsidiaries or any
third party is a party.
(5) There is no litigation or governmental proceeding pending or,
to the knowledge of the Company or any of the Subsidiaries, threatened against,
or involving the properties or business of, the Company or any of the
Subsidiaries, nor are there any actions, suits or proceedings related to
environmental matters or related to discrimination on the basis of age, sex,
religion or race and no labor disturbance by the employees of the Company exist,
which could have a Material Adverse Effect, except as referred to in the
Prospectus.
3
<PAGE>
(6) All contracts, agreements, documents and other instruments
required to be filed as exhibits to the Registration Statement have been filed
with the Commission as exhibits thereto.
(7) The consolidated financial statements together with the related
notes of the Company and the Subsidiaries included in the Registration Statement
and Prospectus present fairly the consolidated financial position and the
consolidated results of operations of the Company and the Subsidiaries at the
respective dates and for the respective periods to which they apply; and such
financial statements and related notes have been prepared in conformity with
generally accepted accounting principles, consistently applied throughout the
periods involved. The capitalization of the Company, as set forth under the
caption "Capitalization" in the Prospectus, was as so described on the date of
which it is set forth therein.
(8) BDO Seidman, LLP, whose reports are filed with the Commission
as a part of the Registration Statement, are independent accountants as required
by the Act and the Regulations.
(9) Except for the shares of capital stock of the Subsidiaries,
neither the Company nor any of the Subsidiaries owns, directly or indirectly,
any shares of stock or any other securities of any corporation nor does the
Company or any of the Subsidiaries have any equity interest in any firm,
partnership, joint venture, association or other entity, except as referred to
in the Prospectus.
(10) Subsequent to the respective dates as of which information is
set forth in the Registration Statement and the Prospective, there has been no
material adverse change in the business, properties, results of operations,
condition (financial or otherwise), affairs or prospects of the Company and the
Subsidiaries, taken as a whole, except as referred to therein; and the
outstanding debt, the property and the business of the Company and each of the
Subsidiaries conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(11) No default exists, and no event has occurred which with notice
or lapse of time, or both, would constitute a default, in the due performance
and observance of any term, covenant or condition of any indenture, mortgage,
deed of trust, note, bank loan or credit agreement or any other agreement or
instrument to which the Company or any of the Subsidiaries is a party or by
which any of them or any of their property may be bound or affected, which
default would have a Material Adverse Effect.
(12) Neither the Company nor any of the Subsidiaries is in breach
of any term or provision of its Certificate of Incorporation, by-laws or other
charter documents and in violation of any franchise, license, permit, judgment,
decree, order, statute, rule or regulation, which violation is a Material
Adverse Effect. Neither the Company nor any of the Subsidiaries is in
4
<PAGE>
violation of any laws, ordinances, governmental rules or regulations to which
any of them is subject, which violation is a Material Adverse Effect. Neither
the Company nor any of the Subsidiaries has not failed to obtain any licenses,
permits, franchises or other governmental authorizations materially necessary to
the ownership of its property or to the conduct of its business.
(13) Neither the execution and delivery of this Agreement, the
Representative's Warrant Agreement (as defined in Section 3(h) hereof) and the
amendment to the Financial Consulting Agreement (as defined in Section 5(t)
hereof) (the "Amendment"), the consummation of the transactions herein or
therein contemplated, nor compliance with the terms and provisions hereof or
thereof will conflict with, or result in a breach of any of the terms,
provisions or conditions of the Certificate of Incorporation, by-laws or other
charter documents of the Company or any of the Subsidiaries. The execution and
delivery of this Agreement, the Representative's Warrant Agreement and the
Amendment to the Financial Consulting Agreement, the consummation of the
transactions herein or therein contemplated, and compliance with the terms and
provisions hereof or thereof will not conflict with, or result in a breach of,
or constitute a default under any of the terms, provisions or conditions of any
agreement or instrument to which the Company or any of the Subsidiaries is a
party or by which any of them or any of their properties is bound, except where
such conflict, breach or default would not have a Material Adverse Effect, or
violate any franchise, license, permit, judgment, decree, order, statute, rule
or regulation of any government, governmental authority or court having
jurisdiction over the Company or any of its Subsidiaries, except where such
violation would not have a Material Adverse Effect.
(14) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement, the
Representative's Warrant Agreement and the Amendment to the Financial Consulting
Agreement and this Agreement, the Representative's Warrant Agreement and the
Amendment to the Financial Consulting Agreement have been duly authorized,
executed and delivered by the Company and constitute legal, valid and binding
agreements of the Company and are enforceable against the Company in accordance
with their respective terms except as enforceability may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally, and except insofar as the enforceability of the
indemnification and contribution terms may be limited by applicable law or
public policy.
(15) All of the issued shares of Common Stock, including the
Additional Stock, have been duly authorized and validly issued and are fully
paid and nonassessable and free of preemptive rights; the Firm Stock has been
duly authorized and, when issued and delivered in accordance with this
Agreement, will be validly issued, fully paid and nonassessable and free of
preemptive rights. The Company's capital stock conforms in all material respects
to all statements in relation thereto contained in the Registration Statement
and Prospectus. The Company has no outstanding capital stock other than the
Common Stock. None of the Certificate of Incorporation, the by-laws, nor any
contract or other instrument contain provisions regarding preemptive rights.
5
<PAGE>
(16) The warrants that will be issued pursuant to the terms of the
Representative's Warrant Agreement (the "Representative's Warrants") have been
duly and validly authorized by the Company and upon delivery to you against
payment therefore and otherwise in accordance with this Agreement and the
Representative's Warrant Agreement will be duly issued and legal, valid and
binding obligations of the Company enforceable against the Company in accordance
with their terms except as enforceability may be limited by bankruptcy,
insolvency, reorganization or other similar laws affecting creditors' rights
generally.
(17) The Common Stock underlying the Representative's Warrants (the
"Representative's Warrant Stock") has been duly authorized and reserved for
issuance upon exercise of the Representative's Warrants, and, when issued upon
payment of the exercise price therefor, will be validly issued, fully paid and
nonassessable shares of Common Stock and free of pre-emptive rights.
(18) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as may otherwise
be indicated or contemplated herein or therein, neither the Company nor any of
the Subsidiaries has (i) issued any securities except securities issued under
the Company's employee benefit plans and as provided herein or in the
Registration Statement, or incurred any liability or obligation, direct or
contingent, for borrowed money (except under the Company's credit facility in a
manner consistent with past practice), (ii) entered into any material
transaction not in the ordinary course of business, (iii) entered into any
transaction with an affiliate of the Company other than one or more of the
Subsidiaries, or (iv) declared or paid any dividend on its shares of Common
Stock.
(19) No consent, authorization or approval is required to be
obtained by the Company from any Federal, state or local governmental agency or
body in order to consummate the transactions contemplated herein or in the
Registration Statement, other than such consents, authorizations or approvals as
have been obtained.
(20) No person holds a right to require or participate in the
registration under the Act of any securities of the Company to be effected by
the Registration Statement, which right has not been duly waived by the holder
thereof as of the date hereof. The Company does not have outstanding, and at the
Closing Date and the Additional Closing Date, if any, will not have outstanding,
any options to purchase, or any rights or warrants to subscribe for, or any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its Common Stock or any such warrants, convertible
securities or obligations, except as referred to in the Prospectus.
(21) The Company and each of the Subsidiaries has timely filed all
Federal, state, and local tax returns which are required to be filed and has
paid all taxes shown on such returns and all assessments received by it to the
extent that the same have become due, except any being contested in good faith.
6
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(22) To the knowledge and belief of the Company's officers and
directors (such officers and directors having made reasonable investigation with
respect thereto), neither the Company, nor any of the Subsidiaries nor any
officer, director or employee of the Company or any of the Subsidiaries has made
any payment of funds of the Company or any of the Subsidiaries or purchased any
property with funds of the Company or any of the Subsidiaries in a manner
prohibited by law, and no funds of the Company or any of the Subsidiaries or
property purchased with funds of the Company or any of the Subsidiaries has been
set aside to be used for any payment prohibited by law.
(23) Except as set forth in the Registration Statement and
Prospectus, the Company does not know of any claims for services in the nature
of a finders fee, brokerage fee or otherwise with respect to this offering for
which the Company, any of the Subsidiaries or you may be responsible.
(24) The Company has obtained from such key executives as are
designated by the Representative (the "Key Employees") new or modified
employment agreements upon terms agreeable to the Company and the
Representative, including, without limitation, the term, compensation,
arrangement and restrictive covenants. The Company has obtained key man life
insurance upon the lives of the Key Employees in face amounts mutually agreeable
to the Company and the Representative.
(25) Application for quotation of the Common Stock on The Nasdaq
National Market has been approved, subject to notice of issuance.
(b) Each of the Selling Shareholders, severally and not jointly,
represents and warrants to the Representative and the Company that:
(1) All consents, approvals, authorizations and orders necessary
for the execution and delivery by such Selling Shareholder of this Agreement and
the Power of Attorney (the "Power of Attorney") and the Custody Agreement (the
"Custody Agreement") hereinafter referred to, and for the sale and delivery of
the Firm Stock and the Additional Stock to be sold by such Selling Shareholder
hereunder, have been obtained; and such Selling Shareholder has full right,
power and authority to enter into this Agreement, the Power of Attorney and the
Custody Agreement and to sell, assign, transfer and deliver the Additional Stock
to be sold by such Selling Shareholder hereunder.
(2) The sale of the Firm Stock and the Additional Stock to be sold
by such Selling Shareholder hereunder and the performance of this Agreement, the
Power of Attorney and the Custody Agreement and the consummation of the
transactions herein and therein contemplated do not and will not conflict with
or result in a breach or violation of any of the terms or provisions of, or
7
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constitute a default under or give rise to rights of termination under, any
indenture, mortgage, deed of trust, voting agreement, loan agreement, note
or other evidence of indebtedness, lease, sublease, contract or other agreement
or instrument to which such Selling Shareholder is a party or by which such
Selling Shareholder or any of such Selling Shareholder's properties is bound,
the certificate or articles of incorporation and by-laws of such Selling
Shareholder if such Selling Shareholder is a corporation, the partnership
agreement of such Selling Shareholder if such Selling Shareholder is a
partnership, or any applicable law, rule, regulation, judgment, order or decree
of any court, government or governmental instrumentality, domestic or foreign,
having jurisdiction over such Selling Shareholder or the property of such
Selling Shareholder.
(3) Such Selling Shareholder has, and at the Additional Closing
Date (as defined in Section 3 hereof), such Selling Shareholder will have, good
and valid title to the Firm Stock and the Additional Stock to be sold by such
Selling Shareholder hereunder, free and clear of all liens, encumbrances,
equities or claims; and, upon delivery of such Firm Stock and Additional Stock
and payment therefor pursuant hereto, good and valid title to such Firm Stock
and Additional Stock free and clear of all liens, encumbrances, equities or
claims, will pass to the Representative.
(4) Such Selling Shareholder has delivered to the Representative on
or before the date of this Agreement, an agreement satisfactory in form and
substance to the Representative, whereby such Selling Shareholder agrees not to
offer, sell, contract to sell or grant an option relating to, or otherwise
dispose of any shares of Common Stock, directly or indirectly, without the
Representative's prior written consent.
(5) Such Selling Shareholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has constituted
or which might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Firm Stock and the Additional Stock.
(6) All information regarding such Selling Shareholder contained in
the Registration Statement and the Prospectus and any amendment or supplement
thereto does not and will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading.
In order to document the Representative's compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal Responsibility
Act of 1982 with respect to the transactions herein contemplated, each of
Selling Shareholders agrees to deliver to the Representative prior to or at the
Additional Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by Treasury
Department regulations in lieu thereof).
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Each of the Selling Shareholders represents and warrants that
certificates in negotiable form representing all of the Additional Stock to be
sold by such Selling Shareholder hereunder have been placed in custody under a
Custody Agreement, in the form heretofore furnished to the Representative, duly
executed and delivered by such Selling Shareholder to Chase Mellon Shareholder
Services, as custodian (the "Custodian"), and that such Selling Shareholder has
duly executed and delivered a Power of Attorney, in the form heretofore
furnished to the Representative, appointing the persons indicated in Schedule
III hereto, and each of them, as such Selling Shareholder's attorneys-in-fact
(the "Attorneys-in-Fact") with authority to execute and deliver this Agreement
on behalf of such Selling Shareholder, to determine the purchase price to be
paid by the Representative to the Selling Shareholders as provided in Section 3
hereof, to authorize the delivery of the Additional Stock to be sold by such
Selling Shareholder hereunder and otherwise to act on behalf of such Selling
Shareholder in connection with the transactions contemplated by this Agreement
and the Custody Agreement.
Each of the Selling Shareholders specifically agrees that the
Additional Stock represented by the certificates held in custody for such
Selling Shareholder under the Custody Agreement are subject to the interests of
the Representative hereunder, and that the arrangements made by such Selling
Shareholder for such custody and the appointment by such Selling Shareholder of
the Attorneys-in-Fact by the Power of Attorney, are to that extent irrevocable.
Each of the Selling Shareholders specifically agrees that the obligations of the
Selling Shareholders hereunder shall not be terminated by operation of law,
whether by the death or incapacity of any individual Selling Shareholder or, in
the case of a corporation, partnership, joint venture or business association,
by the merger, reorganization or dissolution of such Selling Shareholder, or by
the occurrence of any other event. If any individual Selling Shareholder should
die or become incapacitated, or in the case of a Selling Shareholder which is a
corporation, partnership, joint venture or business association such Selling
Shareholder should merge, reorganize or dissolve, or if any such other event
should occur before the delivery of the Additional Stock hereunder, certificates
representing the Additional Stock shall be delivered by or on behalf of the
Selling Shareholders in accordance with the terms and conditions of this
Agreement and the Custody Agreement, and actions taken by the Attorneys-in-Fact
pursuant to the Powers of Attorney shall be as valid as if such death,
incapacity, merger, reorganization or dissolution or other event had not
occurred, regardless of whether or not the Custodian, the Attorneys-in-Fact, or
any of them, shall have received notice of such death, incapacity, merger,
reorganization, dissolution or other event.
3. Purchase, Sale and Delivery of the Firm Stock and Additional Stock.
(1) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the Company
and the Selling Shareholders agree to sell, as set forth in Schedule I,
severally and not jointly, to the Underwriters, and the Underwriters, severally
and not jointly, agree to purchase from the Company, at a purchase price of
$____ per share, the number of shares of Firm Stock set forth opposite the
Company and the Selling Stockholder respective names in Schedule II.
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(a) Payment of the purchase price for, and delivery of, the
Firm Stock shall be made at your discretion by wire transfer or by certified or
official bank check in New York Clearing House funds or similar next day funds,
payable to the order of the Company at the offices of Donald & Co. Securities
Inc., 65 East 55th Street, New York, New York, through the facilities of the
Depository Trust Company, or such other place as shall be agreed upon between
us. Such delivery and payment shall be made at 9:00 A.M., New York time, on the
third business day following the Effective Date; provided, however, that such
date may be extended for not more than an additional five business days by the
Representative or in accordance with the provisions of Section 9(c) hereof. The
hour and date of such delivery and payment are herein called the "Closing Date".
(b) Certificates evidencing the Firm Stock shall be registered
in such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Closing Date. The Company
and the Selling Shareholders will permit you to examine and package said
certificates at least one full business day prior to the Closing Date.
(c) In addition, on the basis of the representations and
warranties herein contained, but subject to the terms and conditions herein set
forth, the Selling Shareholders, as and to the extent indicated on Schedule III,
hereby grant, severally and not jointly, to you the option to purchase all or a
portion of the Additional Stock as may be necessary to cover over-allotments at
the same purchase price per share to be paid by the Underwriters to the Company
for the Firm Stock as determined in this Section 3. Of the aggregate number of
shares of Additional Stock the Representative may have elected to purchase the
Additional Stock shall be purchased from the Selling Shareholders, pro rata
based on the number of shares of Additional Stock to be sold by the Selling
Shareholders. This option may be exercised only to cover over-allotments in the
sale of shares of Firm Stock by the Underwriters. This option may be exercised
at any time or from time to time on or before the forty-fifth (45th) day
following the Effective Date by written notice by the Representative to the
Attorneys-in-Fact acting on behalf of the Selling Shareholders. Such notice
shall set forth the aggregate number of shares of Additional Stock as to which
the option is being exercised, the name or names in which the shares of
Additional Stock are to be registered, the denominations in which the Additional
Stock is to be issued, and the date and time, as reasonably determined by you,
when the Additional Stock is to be delivered (such date and time being herein
sometimes referred to as the "Additional Closing Date"); provided, however, that
the Additional Closing Date shall not be earlier than the Closing Date nor
earlier than the third business day after the date on which the option shall
have been exercised nor later than the eighth business day after the day on
which the option shall have been exercised.
(d) Payment of the purchase price for, and delivery of, the
Additional Stock shall be made at your discretion by wire transfer or by
certified or official bank checks in New York Clearing House funds or similar
next day funds, payable to the order of the Company with respect to the shares
of Additional Stock sold by ____________ and to the order of the Custodian with
respect to the remaining Selling Shareholders at the offices of Donald & Co.
Securities Inc., 65 East 55th Street, New York, New York, through the facilities
of the Depository Trust Company or such other place as shall be agreed upon
between you, the Company and the Custodian.
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(e) Certificates evidencing the Additional Stock shall be
registered in such name or names and in such authorized denominations as you may
request in writing at least two full business days prior to the Additional
Closing Date. The Custodian will permit you to examine and package said
certificates for delivery at least one full business day prior to the Additional
Closing Date.
(f) The Company and the Selling Shareholders shall not be
obligated to sell or deliver any shares of Firm Stock or Additional Stock, as
the case may be, except upon tender of payment by the Representative for all the
Firm Stock or Additional Stock, as the case may be, agreed to be purchased from
it hereunder.
(g) On the Closing Date, the Company shall issue and sell to
the Representative, at a purchase price of $0.001 per Warrant, the
Representative's Warrants. The Representative's Warrants shall be exercisable
for a period of four (4) years commencing one (1) year from the Effective Date
at an initial exercise price equal to one hundred ten percent (110%) of the
initial public offering price of the Firm Stock. The Representative's Warrants
shall be issued pursuant to the terms and provisions of the Representative's
Warrant Agreement substantially in the form of the Representative's Warrant
Agreement filed as Exhibit 4.4 to the Registration Statement (the
"Representative's Warrant Agreement").
4. Offering. You are to make a public offering of the Firm Stock as
soon, on or after the effective date of the Registration Statement, as you deem
it advisable so to do. The Firm Stock is to be initially offered to the public
at the initial public offering price set forth on the cover page of the
Prospectus (such price being herein called the "public offering price"). You may
from time to time increase or decrease the public offering price after the
initial public offering to such extent as you may determine.
5. Covenants of the Company.
The Company covenants that it will:
(a) Use its best efforts to cause the Registration Statement to
become effective and will notify you immediately, and confirm the notice in
writing, (i) when the Registration Statement, or any post-effective amendment
thereto, shall have become effective, (ii) of the issuance by the Commission of
any stop order or of the initiation or the threatening of any proceedings for
that purpose, and (iii) of the receipt of any comments by the Commission. The
Company will prepare and timely file with the Commission under Rule 424(b) of
the Regulations a Prospectus containing information previously omitted on the
Effective Date in reliance of Rule 430A of the Regulations. The Company will use
its best efforts to prevent the issuance of any stop order or any order
preventing or suspending the use of the Registration Statement or Prospectus
and, if such order is issued, to obtain the lifting thereof as promptly as
possible.
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(b) During the time when a prospectus is required to be delivered
under the Act, comply so far as it is able with all requirements imposed upon it
by the Act, as now and hereafter amended, and by the Regulations, as from time
to time in force, so far as necessary to permit the continuance of sales or of
dealings in the Firm Stock and the Additional Stock in accordance with the
provisions hereof and the Prospectus. If at any time when a prospectus relating
to the Firm Stock or the Additional Stock is required to be delivered under the
Act any event shall have occurred as a result of which, in the reasonable
opinion of counsel for the Company or your counsel, the Registration Statement
or Prospectus as then amended or supplemented includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or it is necessary at any time to
amend or supplement the Registration Statement or Prospectus to comply with the
Act, the Company will notify you promptly and prepare and file with the
Commission an appropriate amendment or supplement (in form reasonably
satisfactory to you).
(c) Deliver to you such number of copies of each Preliminary
Prospectus as you may reasonably request and, deliver to you two signed copies
of the Registration Statement, including exhibits, and all post-effective
amendments thereto and such number of copies of the Prospectus, the Registration
Statement and amendments and supplements thereto, if any, without exhibits, as
you may reasonably request for the purposes contemplated by the Act.
(1) Endeavor in good faith, in cooperation with you, at or prior to
the time the Registration Statement becomes effective, to qualify the Firm Stock
and the Additional Stock for offering or sale of the Firm Stock and the
Additional Stock of such jurisdictions as you may reasonably designate; provided
that no such qualification shall be required in any jurisdiction where, as a
result thereof, the Company would be subject to service of general process or
would be required to become qualified to do business as a foreign corporation
doing business in such jurisdiction. In each jurisdiction where the
qualification of the Firm Stock and Additional Stock shall be effected, the
Company will, unless you agree that such action is not at the time necessary or
advisable, file and make such statements or reports at such times as are or may
be reasonably required by the laws of such jurisdiction.
(2) Make generally available to its security holders and to the
Representative as soon as practicable, but not later than the last day of the
fifteenth full calendar month following the Effective Date, an earnings
statement (which need not be certified by independent auditors unless required
by the Act or the Regulations, but which shall satisfy the provisions of Section
ll(a) of the Act) covering a period of at least twelve months beginning after
the Effective Date.
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(d) For a period of 180 days after the Effective Date, not issue,
sell, contract to sell, grant an option for the sale of or otherwise dispose of,
directly or indirectly, any shares of Common Stock of the Company (or any shares
of securities convertible into or exercisable for such Common Stock) other than
the Firm Stock and Additional Stock being sold by the Company and securities
issued pursuant to the Company's employee benefit plans or as otherwise referred
to in the Prospectus, without your prior written consent.
(3) For a period of five years from the effective date of the
Registration Statement, furnish you the following:
(i) as soon as practicable after they have been filed with the
Commission, two copies of each annual, quarterly and current report on Form
10-K, Form 10-Q or Form 8-K (to the extent the Company shall be required to file
such reports pursuant to the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder (collectively the "Exchange Act") and, as
soon as practicable after they have been sent by the Company to its security
holders, two copies of any communications sent by it to its public security
holders generally;
(ii) as soon as practicable, two copies of every press release
and every material news item and article with respect to the Company or its
affairs which was released by the Company; and
(iii) such additional non-confidential documents and
information with respect to the Company and its affairs as you may from time to
time reasonably request.
(4) Apply the net proceeds from the offering received by the
Company in the manner set forth under "Use of Proceeds" in the Prospectus and
comply with Rule 463 under the Act.
(5) Furnish to you as early as practicable prior to the Closing
Date and Additional Closing Date, as the case may be, but no later than two full
business days prior thereto, a copy of the latest available unaudited interim
financial statements of the Company, if any, which have been reviewed by the
Company's independent auditors, as stated in their letters to be furnished
pursuant to Section 7(f) hereof.
(6) Not file any amendment or supplement to the Registration
Statement or Prospectus after the Effective Date to which you shall reasonably
object in writing after being furnished a copy thereof.
(e) If any action or proceeding shall be brought by you in order to
enforce any right or remedy under this Agreement, the Company hereby consents
to, and agrees that it will submit to, the jurisdiction of the courts of the
State of New York and of any Federal court sitting in the United States District
Court for the Southern District of New York. The Company agrees that process in
any such action or proceeding may be served in that manner provided by New York
law for service on foreign corporations.
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(f) Comply with all registration, filing and reporting requirements
of the Exchange Act which may from time to time be applicable to the Company.
(g) Make all filings required, including registration under the
Exchange Act, to obtain and keep the quotation of its Common Stock in The Nasdaq
National Market, and effect and maintain such quotation and listing for the
Common Stock for at least five (5) years from the date of this Agreement.
(h) Maintain its publication in Standard & Poors Corporations
Manual and continue to be included in such Manual for at least five (5) years
from the Effective Date.
(7) Not later than three months following the date of this
Agreement, cause to be delivered to you and to your counsel, Parker Duryee
Rosoff & Haft, four (4) bound volumes containing therein all filings, including
exhibits, and correspondence to and from the Commission, the National
Association of Securities Dealers, Inc. ("NASD") and all states or other
jurisdictions concerning the offering of the Firm Stock, underwriting documents
and closing documents, plus any other relevant material.
(8) For a period of three (3) years from the Closing Date, engage
your designee as an advisor (the "Advisor") to the Company's Board of Directors.
The Advisor shall be permitted to attend meetings of the Board and each of its
committees and receive no more or less compensation as is equal to the
entitlement of the Directors including, without limitation, all compensation
payable to Directors as members of the committees of the Board or in connection
with any other Board activities; provided, however, that the Company may require
as a condition precedent that any such Advisor shall agree to hold in confidence
and trust and to act in a fiduciary manner with respect to all information,
including, but not limited to, trade secrets, so received during such meetings
and may require that such Advisor sign a confidentiality agreement with the
Company; and, provided, further, that the Company reserves the right not to
provide information and to exclude such Advisor from any meeting or portion
thereof if attendance at such meeting by such Advisor or dissemination of any
information at such meeting to such Advisor would compromise or adversely affect
the attorney-client privilege between the Company and its counsel, or would, in
the good faith judgment of the Board of Directors, result in a conflict of
interest situation. The Company shall use its reasonable efforts to promptly
bring to the attention of such Advisor any agenda item that, in the good faith
judgment of the Board of Directors, would result in such a trade secret,
privileged matter or conflict of interest and the Board of Directors may exclude
such Advisor (or alternatively, the Advisor shall be entitled to exclude himself
or herself) from any deliberation or discussion of the Board of Directors
concerning such trade secret (if the Advisor has not executed a confidentiality
agreement), privileged matter or conflict of interest matter and as a recipient
in the dissemination of any such information. If such Advisor in his or her good
faith judgment believes that an item to be discussed by the Board of Directors
would result in any conflict of interest, such Advisor shall promptly bring such
conflict to the attention of the Chairman of the Board. In no event shall any
provision of this paragraph waive any obligation of confidentiality to the
Company owed by any such Advisor or the Representative. In addition, the Advisor
shall be entitled to receive reimbursement for all reasonable costs incurred in
attending such meetings including, but not limited to, food, lodging, and
transportation; such costs to be subject to approval of the Company which will
not be unreasonably withheld.
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(9) For a period of three (3) years from the Closing Date, there
will be no less than four (4) formal, "in person" or "telephonic" meetings, of
the Company's Board of Directors in each such year at which meetings the Advisor
shall be permitted to attend or participate, as the case may be in accordance
with the provisions of Section 5(p); said meetings shall be held quarterly each
year and ten (10) days' advance notice of such meetings shall be given to the
Advisor. The Advisor shall receive notice of special meetings of the Board of
Directors at the same time and manner as the members of the Board.
(10) Indemnify and hold the Representative and the Advisor
harmless, to the full extent allowed by applicable laws, against any and all
claims, actions, awards and judgments arising solely out of the attendance and
participation of the Advisor at any meeting described in Section 5(p) of this
Agreement. In the event the Company maintains a liability insurance policy
affording coverage for the acts of its officers and directors, the Company
agrees, if possible, to include the Representative and the Advisor as an insured
under such policy.
(11) Establish and maintain during the period that the Common Stock
is listed on The Nasdaq National Market, an independent audit and compensation
committee of the Company's Board of Directors, which committee shall meet the
requirements of The Nasdaq National Stock Market.
(i) The Amendment amends the financial consulting agreement (the
"Financial Consulting Agreement") between the Representative and the Company
dated as of October 7, 1997.
6. Payment of Expenses.
(1) The Company hereby agrees to pay, whether or not the
transactions contemplated hereunder are consummated, all expenses (other than
fees of your counsel, except as provided in (iv) below) in connection with (i)
the preparation, printing, filing and mailing of the Registration Statement and
the Prospectus, including the cost of all copies thereof and of the Preliminary
Prospectus and of the Prospectus and any amendments or supplements thereto
supplied to you in quantities as hereinabove stated, (ii) the issuance, transfer
and delivery of the Firm Stock and the Additional Stock, including any transfer
or other taxes payable thereon, (iii) printing of this Agreement, the Agreement
Among Underwriters, the Selected Dealer Agreement, the Underwriters'
Questionnaire, the Power of Attorney and the certificates evidencing the Common
Stock, (iv) the qualification of the Firm Stock and the Additional Stock under
state or foreign securities or Blue Sky laws, including the costs of printing
and mailing the "Blue Sky Survey," and the fees of counsel to the Underwriters
and disbursements in connection therewith, (v) filing fees payable to the
Commission, the NASD, the Boston Stock Exchange and The Nasdaq SmallCap Market,
(vi) arranging and holding due diligence meetings with prospective underwriters
and selected dealers, (vii) reasonable travel and lodging incurred by the
Representative and its counsel in connection with meetings outside of New York
City, (viii) tombstone advertising not exceeding $14,000 and (ix) the
preparation, production and delivery of plaques and bound volumes.
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(b) The Company further agrees that, in addition to the expenses
payable pursuant to subsection (a) of this Section 6, will pay to the
Representative a non-accountable expense allowance equal to two percent (1.5%)
of the gross proceeds received by the Company and the Selling Shareholders from
the sale of Firm Stock, of which $25,000 has been paid to date, and the Company
will pay the balance on the Closing Date by certified or bank cashier's check
or, at the election of the Representative, by deduction from the proceeds of the
offering contemplated herein. The Selling Shareholders agree that they will pay
to the Representative a non-accountable expense allowance equal to one half
percent (.5%) of the gross proceeds received by such Selling Shareholders from
the sale of the Additional Stock on the Additional Closing Date by certified or
bank cashier's check or, at the election of the Representative, by deduction
from the proceeds of the offering contemplated herein.
7. Conditions of Your Obligations. The obligation of the several
Underwriters hereunder to purchase and pay for the Firm Stock and the Additional
Stock, as provided herein, shall be subject to the continuing accuracy in all
material respects of the representations and warranties of the Company as of the
date hereof and as of the Closing Date (or the Additional Closing Dare, as the
case may be), to the performance by the Company in all material respects of its
obligations hereunder and to the following conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M., New York City time, on the date of this Agreement or such
later date and time as shall be consented to in writing by you and, at the
Closing Date and Additional Closing Date, no stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued or proceeding therefor initiated or threatened by the
Commission;
(b) At the Effective Date, the Closing Date and the Additional
Closing Date, as the case may be, you shall have received the favorable opinion
of Gallop, Johnson & Neuman, L.C., counsel for the Company, dated the Effective
Date, the Closing Date or the Additional Closing Date, as the case may be,
addressed to the Underwriters and in form and scope satisfactory to counsel of
the Underwriters, to the effect that:
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(i) each of the Company and the Subsidiaries (A) is a
corporation duly organized and validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation and (B) has
full corporate power and authority and all necessary authorizations, approvals,
orders, licenses, certificates and permits of and from all governmental
regulatory officials and bodies to own its properties and to conduct its
business as now being conducted as described in the Prospectus; to the best of
such counsel's knowledge, neither the Company nor any of the Subsidiaries has
received any notice of proceedings related to the revocation or modification of
any authorization, approval, order, license, certificate, franchise, or permit
issued to any of them which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect;
nothing has come to the attention of such counsel that would lead such counsel
to believe that the Company and the Subsidiaries taken as a whole are not
conducting their business in all material respects in compliance with applicable
federal, state and local laws, rules and regulations; the disclosures in the
Registration Statement concerning the effects of federal, state and local laws,
rules and regulations on the Company's and the Subsidiaries' business as
currently conducted (or as proposed in the Registration Statement or the
Prospectus to be conducted) are correct in all material respects and do not omit
to state a fact necessary to make the statements contained therein not
misleading in light of the circumstances in which they were made;
(ii) each of the Company and the Subsidiaries is duly
qualified as a foreign corporation and in good standing in each jurisdiction in
which its ownership or leasing of property or the conduct of its business
requires such qualification, except where the failure to be so qualified would
not have a Material Adverse Effect;
(iii) the Company owns of record, directly or indirectly, all
of the capital stock of each of the Subsidiaries; all such shares of capital
stock so owned are validly issued and outstanding, fully paid and nonassessable
and, to the knowledge of such counsel after inquiry, are owned free and clear of
any liens, encumbrances or other claims or restrictions whatsoever;
(iv) the Company has authorized and outstanding the capital
stock as set forth in the Prospectus; all the issued shares of Common Stock of
the Company, including the Additional Stock, have been duly and validly
authorized and issued and to, the knowledge of such counsel after inquiry, are
fully paid; all the issued shares of Common Stock of the Company are
nonassessable; none of the issued shares of Common Stock of the Company,
including the Additional Stock, nor the Firm Stock are subject to any preemptive
rights; the Firm Stock, the Additional Stock and the other capital stock of the
Company conform as to legal matters to the description thereof contained under
the caption "Description of Securities" in the Prospectus;
(v) the Representative's Warrant Stock has been duly
authorized and reserved for issuance and, when issued and delivered in
accordance with the terms of the Representative's Warrant Agreement will be duly
and validly issued, fully paid and nonassessable;
(vi) the Company and, to the knowledge of such counsel after
inquiry, the Selling Shareholders have conveyed to the Underwriters good and
valid title to the Firm Stock and Additional Stock, as the case may be, being
sold hereunder, free and clear of any liens, encumbrances, security interests
and claims whatsoever; the Firm Stock and Additional Stock as the case may be,
shall be validly issued and fully paid and nonassessable when issued and paid
for in accordance with the terms of this Agreement, and the certificates
evidencing the Firm Stock and the Additional Stock are in due and proper form;
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(vii) this Agreement, the Representative's Warrant Agreement
and the Amendment to the Financial Consulting Agreement have been duly and
validly authorized, executed and delivered by the Company and each is a valid
and binding agreement of the Company enforceable in accordance with its terms,
except insofar as indemnification and contribution provisions may be limited by
applicable law (including, but not limited to, Federal or state securities laws)
or equitable principles, and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally or by general equitable principles;
(viii) to the knowledge of such counsel, there are no
contracts or other documents which are required to be filed as exhibits to the
Registration Statement, as it may then be amended or supplemented, or required
to be described in the Registration Statement or Prospectus as it may then be
amended or supplemented that are not filed or described as required;
(ix) to the knowledge of such counsel after inquiry, there are
no legal or governmental proceedings pending or, threatened against the Company
or any of the Subsidiaries, and no statutes or regulations applicable to the
Company or any of the Subsidiaries, of a character that are required to be
disclosed in the Registration Statement and Prospectus, which have not been so
disclosed and properly described therein;
(x) the statements in the Registration Statement and
Prospectus, insofar as they are descriptions of contracts, agreements or other
documents, or refer to statements of law or legal conclusions, are accurate in
all material respects and present fairly the information required to be shown
with respect to such contracts, agreements or other documents;
(xi) the execution and delivery of this Agreement, the
Representative's Warrant Agreement and the Amendment to the Financial Consulting
Agreement, the consummation of the transactions contemplated in this Agreement,
the Representative's Warrant Agreement and the Amendment to the Financial
Consulting Agreement, and compliance with the terms of this Agreement, the
Representative's Warrant Agreement and the Amendment to the Financial Consulting
Agreement do not and will not (A) conflict with or result in a breach of any of
the terms or provisions of, or constitute a default (or an event which with
notice or lapse of time or both would constitute a default or acceleration)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any material property or assets of the Company or any of the
Subsidiaries pursuant to the terms of any agreement or instrument known to such
counsel and to which the Company or any of the Subsidiaries is a party or by
which the Company or any of the Subsidiaries may be bound or to which any of the
material properties or assets of the Company or any of the Subsidiaries is
subject, or any statute or any order, rule or regulation applicable to the
Company or any of the Subsidiaries of any court or of any Federal, state or
other regulatory authority or other governmental body having jurisdiction over
the Company or any of the Subsidiaries (provided, however, that such counsel may
render such opinion on state (other than Missouri), regulatory or other
governmental bodies, to such counsel's knowledge) or (B) result in any violation
of provisions of the Certificate of Incorporation, by-laws or other charter
documents of the Company or any of the Subsidiaries;
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(xii) no consent, approval, authorization or order of any
court or governmental agency or body is required in connection with the
consummation of the transactions contemplated by this Agreement, the
Representative's Warrant Agreement and the Amendment to the Financial Consulting
Agreement, except such as have been obtained or made or as may be required under
the Act or state securities or Blue Sky laws;
(xiii) (A) neither the Company nor any of the Subsidiaries is
in violation of any term or provision of its Certificate of Incorporation,
by-laws or other charter documents; (B) to such counsel's knowledge, neither the
Company nor any of the Subsidiaries is currently in material breach of, or in
material default (nor has an event occurred which with notice, lapse of time or
both would constitute such a material default or acceleration) under any
indenture, mortgage, deed of trust, note, bank loan or credit agreement or (in
any respect that is material in light of the financial condition of the Company
and the Subsidiaries, taken as a whole) any other agreement or instrument, known
to such counsel after inquiry, to which the Company or any of the Subsidiaries
is a party or by which either of them or any of their property may be bound or
affected, or to such counsel's knowledge, in violation of any franchise,
license, permit, judgment, decree, order, statute, rule or regulation, which
violation would have a Material Adverse Effect; and (C) to such counsel's
knowledge, neither the Company nor any of the Subsidiaries has received notice
of conflict with the asserted rights of others in respect of patents,
trademarks, service marks and rights necessary for the conduct of its business;
(xiv) the Company has the right to operate all of its
facilities in their present locations and the operation of its facilities in
such locations as described in the Prospectus does not violate the provisions of
any lease with respect thereto to which the Company is a party;
(xv) the Registration Statement and the Prospectus and any
amendments or supplements thereto (other than the financial statements and other
financial and statistical data included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the requirements of
the Act and the Regulations and nothing has come to the attention of such
counsel which would lead them to believe that the Registration Statement or the
Prospectus, as amended or supplemented, if amended or supplemented (other than
the financial statements and other financial and statistical data included
therein as to which no opinion need be rendered) contains any untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading; and
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(xvi) the Registration Statement is effective under the Act,
and to the best of such counsel's knowledge, no proceedings for a stop order are
pending or threatened under the Act.
In rendering the opinions set forth above, such counsel may
rely upon certificates of officers of the Company and of public officials as to
matters of fact. In giving the foregoing opinions, such counsel may rely on such
other counsel as it deems advisable; provided that such counsel shall state
that, in such counsel's opinion, you are justified in relying on such opinions
of such other counsel. Copies of all such opinions and certificates shall be
furnished to your counsel on the Closing Date or the Additional Closing Date, as
the case may be.
(1) On or prior to the Closing Date and the Additional Closing
Date, as the case may be, you shall have been furnished such documents,
certificates and opinions as you may reasonably require for the purpose of
enabling you to review the matters referred to in subsection (b) of this Section
7, and in order to evidence the accuracy, completeness or satisfaction of any of
the representations, warranties or conditions herein contained.
(c) Prior to the Closing Date and the Additional Closing Date,
as the case may be, (i) there shall have been no material adverse change in the
business, properties, results of operations, condition (financial or otherwise),
affairs or prospects, of the Company and the Subsidiaries from that as of the
latest date as of which such condition is set forth in the Registration
Statement and Prospectus; (ii) there shall have been no transaction, not in the
ordinary course of business, entered into by the Company or the Subsidiaries,
from the latest date as of which the financial condition of the Company and the
Subsidiaries is set forth in the Registration Statement and Prospectus, other
than transactions referred to or contemplated therein or to which you have given
your written consent; (iii) neither the Company nor the Subsidiaries shall be in
default (nor shall an event have occurred which, with notice, or lapse of time
or both would constitute a default or acceleration) under any provision of, any
agreement, understanding or instrument relating to any indebtedness; (iv) no
material amount of the consolidated assets of the Company and the Subsidiaries
shall have been pledged or mortgaged, except as set forth in the Registration
Statement and Prospectus; and (v) no action, suit or proceeding, at law or in
equity, shall have been pending or, to the knowledge of the Company, threatened
against the Company or the Subsidiaries, or affecting any of their properties or
business before or by any court or federal, state or other jurisdictional
commission, board or other administrative agency wherein an unfavorable
decision, ruling or finding would materially adversely affect the business,
operations, prospects or financial condition or income of the Company and the
Subsidiaries, except as set forth in the Registration Statement and Prospectus.
(d) At the Closing Date and Additional Closing Date, as the
case may be, you shall have received a certificate of the Chief Executive
Officer and the Chief Financial Officer of the Company, dated the Closing Date
and Additional Closing Date, as the case may be, (i) to the effect that the
conditions set forth in subsections (a) and (d) above have been satisfied and
(ii) as to the accuracy, as of the Closing Date and Additional Closing Date, as
the case may be, of the representations and warranties of the Company set forth
in Section 2 (a) hereof.
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(e) At the time this Agreement is executed and at the Closing
Date and Additional Closing Date, as the case may be, you shall have received a
letter, addressed to you in form and substance satisfactory to you in all
respects (including the non-material nature of the changes or decreases, if any,
referred in to clause (iii) below), from BDO Seidman, LLP, dated as of the date
of this Agreement and as of the Closing Date and Additional Closing Date, as the
case may be:
(i) confirming that they are independent accountants with
respect to the Company within the meaning of the Act and the
applicable published Regulations;
(ii) stating that in their opinion, the financial
statements of the Company and the Subsidiaries included in the
Registration Statement examined by them comply as to form in
all material respects with the applicable accounting
requirements of the Act and the published Regulations;
(iii) stating that, on the basis of procedures (but not
an audit in accordance with generally accepted auditing
standards), which included a reading of the latest available
unaudited consolidated interim financial statements of the
Company and the Subsidiaries (with an indication of the date
of the latest available unaudited interim financial
statements), a reading of the latest available minutes of the
stockholders and board of directors of the Company and the
Subsidiaries and committees of such boards and inquiries to
certain officers and other employees of the Company and the
Subsidiaries responsible for financial and accounting matters
and other specified procedures and inquiries, nothing has come
to their attention that would cause them to believe that (A)
the unaudited consolidated financial statements of the Company
and the Subsidiaries included in the Registration Statement
(i) do not comply as to form in all material respects with the
applicable accounting requirements of the Act and Regulations,
or (ii) were not fairly presented in conformity with generally
accepted accounting principles on a basis substantially
consistent with that of the audited financial statements
included in the Registration Statement; (B) at the date of the
latest available interim financial statements and at a
specified date not more than five days prior to the date of
such letter, there was any change in long-term debt or capital
stock of the Company and its Subsidiaries, as compared with
the amounts shown in the July 31, 1997 consolidated balance
sheet of the Company and its Subsidiaries, included in the
Registration Statement and Prospectus, other than as set forth
in or contemplated by the Registration Statement and
Prospectus, or, if there was any change, setting forth the
amount of such change; or (C) during the period from July 31,
1997 to a specified date not more than five days prior to the
date of such letter, there was any decrease in revenues or in
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operating income, net income or net income per share of the
Company and its Subsidiaries, as compared with the
corresponding period in the preceding year, other than as set
forth in or contemplated by the Registration Statement and
Prospectus, or, if there was any decrease or increase,
respectively, setting forth the amount of such decrease or
increase; and
(iv) stating that they have compared specific dollar
amounts, numbers of shares, percentages of dollar amounts and
shares and other information pertaining to the Company set
forth in the Prospectus, which have been specified by you
prior to the date of this Agreement, to the extent that such
amounts, numbers, percentages and other information may be
derived from the general accounting records of the Company and
excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of
specified readings, inquiries and other appropriate procedures
(which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set
forth in the letter, and found them to be in agreement.
(f) All proceedings taken in connection with the sale of the
Firm Stock and the Additional Stock as herein contemplated shall have been
reasonably satisfactory in form and substance to you and your counsel.
(g) The Company shall have furnished to the Representative
such further certificates and documents confirming the representations and
warranties contained herein, the performance of covenants prior to the Closing
Date and the Additional Closing Date, as the case may be, and related matters as
the Representative may reasonably have requested.
(h) There shall have been duly tendered to you certificates
representing all the Firm Stock and the Additional Stock, as the case may be,
agreed to be sold by the Company and the Selling Shareholders on the Closing
Date and the Additional Closing Date, as the case may be.
(i) Each Selling Shareholder shall have furnished to the
Representative at the Additional Closing Date, if any, a certificate, dated the
Additional Closing Date, signed by such Selling Shareholder in form and
substance satisfactory to the Representative, to the effect that the
representations, warranties and agreements of such Selling Shareholder in
Section 2 (b) hereof were when originally made and are at the time such
certificate is dated true and correct and such Selling Shareholder has complied
with all of such Selling Shareholder's agreements contained herein.
(j) No order suspending the sale of the Firm Stock or the
Additional Stock, as the case may be, in any jurisdiction designated by you
pursuant to subsection (d) of Section 5 hereof, shall have been issued on the
Closing Date or the Additional Closing Date, as the case may be, and no
proceedings for that purpose shall have been instituted or to your knowledge or
that of the Company shall be contemplated.
(k) At the Additional Closing Date, if any, you shall have
received the favorable opinion of Gallop, Johnson & Newman, L.C. counsel for
each of the Selling Shareholders, with respect to each of the Selling
Shareholders, dated the Additional Closing Date, if any, addressed to you and in
form and scope satisfactory to your counsel, to the effect that:
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(i) A Power of Attorney and a Custody Agreement have been
duly authorized (where such Selling Shareholder is not an individual), executed
and delivered by each Selling Shareholder and constitute valid and binding
agreements of such Selling Shareholder in accordance with their respective
terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
or by general equitable principles;
(ii) This Agreement has been duly authorized (where such
Selling Shareholder is not an individual), executed and delivered by or on
behalf of each Selling Shareholder and constitutes a valid and binding agreement
of such Selling Shareholder enforceable in accordance with its terms, except as
rights to indemnity and contribution hereunder may be limited by the securities
laws of the United States and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws or equitable principles
affecting the enforcement of creditors' rights generally; and the sale of the
Firm Stock and the Additional Stock to be sold by each Selling Shareholder
hereunder and the performance of this Agreement, the Power of Attorney and the
Custody Agreement and the consummation of the transactions herein and therein
contemplated will not conflict with or result in a breach or violation of any
terms or provisions of, or constitute a default under, or give rise to rights of
termination under, any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement or other agreement or instrument known to such counsel
to which such Selling Shareholder is a party or by which such Selling
Shareholder or any of such Selling Shareholder's properties is bound, the
articles or certificate of incorporation and by-laws if such Selling Shareholder
(if such Selling Shareholder is a corporation), the partnership agreement of
such Selling Shareholder (if such Selling Shareholder is a partnership), or any
applicable law, rule or regulation, judgment, order or decree of any court,
government or governmental instrumentality having jurisdiction over such Selling
Shareholder or the property of such Selling Shareholder;
(iii) Except for the order of the Commission making the
Registration Statement effective (which is in effect) and permits or similar
authorization required under the securities or Blue Sky laws of certain
jurisdictions and by the NASD (as to which such counsel need express no
opinion), no consent, approval, authorization, license or order of any
regulatory body, administrative agency or other governmental body is legally
required for the execution, delivery and performance of this Agreement by the
Selling Shareholders, other than any such consents, approvals, authorizations,
licenses, and orders as have been obtained and are in full force and effect;
(iv) To the knowledge of such counsel after inquiry,
immediately prior to the Additional Closing Date, if any, such Selling
Shareholder had good and valid title to the Firm Stock and the Additional Stock
to be sold by such Selling Shareholder under this Agreement, free and clear of
all liens, encumbrances, equities or claims, and full right, power and authority
to sell, assign, transfer and deliver the Additional Stock to be sold by such
Selling Shareholder hereunder; and
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(v) To the knowledge of such counsel after inquiry, good
and valid title to the Firm Stock and the Additional Stock sold by the Selling
Shareholders, free and clear of all liens, encumbrances, equities or claims, has
been transferred to the Representative who has purchased such Firm Stock and
Additional Stock in good faith and without notice of any such lien, encumbrance,
equity or claim or any other adverse claim within the meaning of the Uniform
Commercial Code.
In rendering the opinion of clause (iv), such counsel may rely
upon a certificate of such Selling Shareholder as to matters of fact as to
ownership of and liens, encumbrances, equities or claims on the Firm Stock and
the Additional Stock sold by such Selling Shareholder, provided that such
counsel shall state that they believe that both the Representative and they are
justified in relying upon such certificate.
(l) Any certificate signed by any duly authorized officer of
the Company in such capacity and delivered to you or your counsel shall be
deemed a representation and warranty by the Company to you as to the statements
made therein. If any condition to your obligations hereunder to be fulfilled
prior to or at the Closing Date or the Additional Closing Date, as the case may
be, is not so fulfilled, you may terminate this Agreement or, if you so elect,
waive any such conditions which have not been fulfilled or extend the time for
their fulfillment.
8. Indemnification.
(a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless each of the Underwriters, each of the
officers and directors of the Underwriters and each person, if any, who controls
any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act, against any and all loss, liability, claim, damage and expense
whatsoever (including, but not limited to any and all expense whatsoever
reasonably incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever)("collectively,
"Damages") arising out of or based upon (i) the inaccuracy or breach of any
representation or warranty of the Company or the breach of any covenant made by
the Company in this Agreement or (ii) any untrue statement or alleged untrue
statement of a material fact contained (x) in any Preliminary Prospectus, the
Registration Statement or the Prospectus (as from time to time amended and
supplemented) or (y) in any application or other document (in this Section 8,
collectively called "Application") executed by or on behalf of the Company or
based upon written information furnished by or on behalf of the Company filed in
any jurisdiction in order to qualify the Firm Stock or the Additional Stock
under the Blue Sky or securities laws thereof or filed with the Commission or
any securities exchange, such as the Nasdaq SmallCap Market and the Boston Stock
Exchange, or (iii) the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; unless such statement or omission was made in reliance upon and in
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conformity with written information furnished to the Company with respect to the
Underwriters by or on behalf of any Underwriter expressly for use in the
Preliminary Prospectus, the Registration Statement or Prospectus, or any
amendment or supplement thereof, or in any Application or in any communication
to the Commission, as the case may be. With respect to any Damages arising out
of or based upon any untrue statement or alleged untrue statement made in, or
omission or alleged omission from, any Preliminary Prospectus, the indemnity
agreement contained in this Section 8(a) with respect to such Preliminary
Prospectus shall not inure to the benefit of the Underwriters (or the benefit of
any person controlling any Underwriter), if the Prospectus (or the Prospectus as
amended or supplemented if the Company shall have made any amendments thereof or
supplements thereto which shall have been furnished to you prior to the time of
confirmation of such sale) does not contain such statement, alleged statement,
omission or alleged omission, a sufficient number of copies of such Prospectus
were provided to the Underwriters and a copy of such Prospectus shall not have
been sent or given to the person asserting such Damages at or prior to the
written confirmation of such sale to such person.
(b) Each Selling Shareholder agrees, severally and not
jointly, that it will indemnify and hold harmless the Representative, each of
the officers and directors of the Representative, and each person, if any, who
controls the Representative within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, and each of them, to the same extent as the
foregoing indemnity from the Company to the Underwriters, but only with respect
to (i) statements or omissions made in the Registration Statement (or any
amendment thereto) or a Preliminary Prospectus or the Prospectus (or any
amendment or supplement thereto) made in reliance on and in conformity with
information relating to such Selling Shareholder furnished to the Company by or
on behalf of such Selling Shareholder expressly for inclusion in the
Registration Statement (or any amendment thereto) or a Preliminary Prospectus or
the Prospectus (or any amendment or supplement thereto), and (ii)
representations and warranties of such Selling Shareholder contained in Section
2(b) of this Agreement or contained in certificates of such Selling Shareholder
submitted pursuant to Section 7(n) of this Agreement. Such Selling Shareholder's
obligation to indemnify the Representative shall be limited to the amount of
proceeds (net of the Representative's discount) of the sale of Additional Stock
sold by such Selling Shareholder. The Representative acknowledges that the
statements set forth under the heading "Principal and Selling Stockholders"
(insofar as such information relates to any Selling Shareholder) in any
Preliminary Prospectus and the Prospectus constitute the only information
relating to such Selling Shareholder furnished to the Company by or on behalf of
such Selling Shareholder expressly for inclusion in the Registration Statement.
The indemnity agreement contained in this Section 8(b) is in addition to any
liability that each Selling Shareholder may otherwise have to the Representative
or any controlling person of the Underwriter.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company, each of the directors of the Company,
each of the officers of the Company who shall have signed the Registration
Statement and each other person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act for all
Damages with respect to statements or omissions, or alleged statements or
omissions, if any, made in any Preliminary Prospectus, Registration Statement or
Prospectus or any amendment or supplement thereto or any Application in reliance
upon, and in conformity with, written information furnished to the Company with
respect to the Underwriters by or on behalf of any Underwriter for use in any
Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or in any application, as the case may be.
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(d) The Representative agrees that it will indemnify and hold
harmless each Selling Shareholder against any and all loss, liability, claim,
damage, expense or action, joint or several, to the same extent as the foregoing
indemnity from the Underwriters to the Company but only with respect to
statements or omissions made in the Registration Statement (or any amendment
thereto) or a Preliminary Prospectus or the Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with information
furnished in writing by the Representative to the Company expressly for use in
the Registration Statement (or any amendment thereto). The indemnity agreement
contained in this Section 8(d) is in addition to any liability which the
Representative may otherwise have to the Selling Shareholders. The Selling
Shareholders acknowledge that the statements set forth under the heading
"Underwriting" (insofar as such information relates to the Representative) and
in the last paragraph of text on the outside front cover page of any Preliminary
Prospectus and the Prospectus constitute the only information furnished in
writing by the Representative expressly for inclusion in the Registration
Statement, any Preliminary Prospectus or the Prospectus.
(e) If any action is brought against an indemnified party
under subsection (a) or (b) above (the "Indemnified Party") in respect of which
indemnity may be sought against the indemnifying party under subsection (a) or
(b) above (the "Indemnifying Party"), such Indemnifying Party shall promptly
notify in writing the party or parties against whom indemnification is to be
sought of the institution of such action and the Indemnifying Parties shall
assume the defense of such action, including the employment of counsel
(reasonably satisfactory to such Indemnified Party) and payment of expenses.
Such Indemnified Party shall have the right to employ it or their own counsel in
any such case, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Party unless the employment of such counsel shall have been
authorized in writing by the Indemnifying Parties in connection with the defense
of such action or the Indemnifying Parties shall not have employed counsel to
have charge of the defense of such action or such Indemnified Party or parties
shall have reasonably concluded that there may be defenses available to the
Indemnifying Parties which are different or additional to those available to the
Indemnifying Parties (in which case the Indemnifying Parties shall not have the
right to direct the defense of such action on behalf of the Indemnified Party or
Parties), in any of which events such fees and expenses shall be borne by the
Indemnifying Parties. Anything in this paragraph to the contrary
notwithstanding, the Indemnifying Party shall not be liable for any settlement
of any such claim or action effected without its written consent. The
Indemnifying Party agrees promptly to notify the Indemnified Party of the
commencement of any litigation or proceedings against the Indemnifying Party or
any of its officers or directors in connection with the issue and sale of the
Firm Stock and the Additional Stock or in connection with such Preliminary
Prospectus, Registration Statement or Prospectus, or any amendment or supplement
thereto, or any such Application.
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(f) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an Indemnified Party in respect of
any losses, claims, damages or liabilities (or actions in respect thereof)
referred to therein, then each Indemnifying Party shall contribute to the amount
paid or payable to such Indemnified Party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Selling Shareholders on the one hand and the Underwriters on the other from the
offering of the Firm Stock and Additional Stock. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law or if the Indemnified Party failed to give the notice required above in this
Section 8, then each Indemnifying Party shall contribute to such amount paid or
payable by such Indemnified Party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company and the Selling Shareholders on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Selling Shareholders on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
and the Selling Shareholders bear to the total underwriting discounts received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company and the Selling Shareholders on the one hand
or the Underwriters on the other and the parties relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this subsection
(d) were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this subsection (d). The amount paid or payable by an Indemnified Party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this subsection (d) shall be deemed to include any
legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) the Underwriters
shall not be required to contribute any amount in excess of the amount by which
the total price at which the Firm Stock and Additional Stock underwritten by the
Underwriters and distributed to the public were offered to the public exceeds
the amount of any damages which the Underwriters have otherwise been required to
pay by reason of such untrue statement or omission and (ii) no person guilty of
fraudulent misrepresentation (within the meaning of Section 11 of the Act) shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
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9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in its or
their obligations to purchase the Firm Stock hereunder, and if the number of
shares of Firm Stock with respect to which such default relates does not exceed
in the aggregate 10% of the number of shares of Firm Stock which all
Underwriters have agreed to purchase hereunder, then such Firm Stock to which
the default relates shall be purchased by the non-defaulting Underwriters in
proportion to their respective commitments hereunder.
(b) In the event that such default relates to more than 10% of
the number of shares of Firm Stock, you may in your discretion arrange for
yourself or for another party or parties to purchase such Firm Stock to which
such default relates on the terms contained herein. If within one (1) business
day after such default relating to more than 10% of the number of shares of Firm
Stock, you do not arrange for the purchase of such Firm Stock, then the Company
shall be entitled to a further period of one (1) business day within which to
procure another party or parties satisfactory to you to purchase said Firm Stock
on such terms. In the event that neither you nor the Company arrange for the
purchase of the Firm Stock to which a default relates as provided in this
Section 9, this Agreement may be terminated by you or the Company (except as
provided in Section 6 and Section 8(a) hereof) or the several Underwriters, but
nothing herein shall relieve a defaulting Underwriter of its liability, if any,
to the other several Underwriters and to the Company for damages occasioned by
its default hereunder.
(c) In the event that the Firm Stock to which the default
relates is to be purchased by the non-defaulting Underwriters, or is to be
purchased by another party or parties as aforesaid, you or the Company shall
have the right to postpone the Closing Date for a reasonable period but not in
any event exceeding five (5) business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus or
in any other documents and arrangements, and the Company agrees to file promptly
any amendment to the Registration Statement or the Prospectus which in the
opinion of counsel for the Underwriters may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 9 with like effect as if it had originally been a party to
this Agreement with respect to such Firm Stock.
10. Representations and Agreements to Survive Delivery. Except as the
context otherwise requires, all representations, warranties and agreements
contained in this Agreement shall be deemed to be representations, warranties
and agreements at the Closing Date and the Additional Closing Date, and such
representations, warranties and agreements of you and the Company, including the
indemnity and contribution agreements contained in Section 8 hereof, shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of you or any controlling person, or by or on behalf of the
Company or any controlling person, and shall survive termination of this
Agreement and/or delivery of the Firm Stock and the Additional Stock to you.
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11. Effective Date of This Agreement and Termination Thereof.
(a) This Agreement shall become effective at 9:30 A.M., New
York Time, on the first full business day following the day on which the
Registration Statement becomes effective or at the time of the initial public
offering by you of the Firm Stock, whichever is earlier. The time of the initial
public offering, for the purpose of this Section 11, shall mean the time, after
the Registration Statement becomes effective, of the release by you for
publication of the first newspaper advertisement which is subsequently published
relating to the Firm Stock or the time, after the Registration Statement becomes
effective, when the Firm Stock is first released by you for offering by the
Underwriters or dealers by letter or telegram, whichever shall first occur. You
or the Company may prevent this Agreement from becoming effective without
liability of any party to any other party, except as noted below, by giving the
notice indicated below in Section 11(d) before the time this Agreement becomes
effective.
(b) You shall have the right to terminate this Agreement at
any time prior to the Closing Date or the Additional Closing Date, as the case
may be, if, after the date of this Agreement, any domestic or international
event or act or occurrence has materially disrupted or, in the exercise of your
reasonable judgment, will in the immediate future materially disrupt, securities
markets in the United States; or trading on the New York Stock Exchange shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for securities shall have been required on
the New York Stock Exchange by the New York Stock Exchange or by order of the
Commission or any other governmental authority having jurisdiction; or the
United States shall have become involved in a war or major hostilities; or a
banking moratorium has been declared by a New York or Federal authority; or the
Company shall have sustained a material loss by fire, flood, accident,
hurricane, earthquake, theft, sabotage or other calamity or malicious act which,
whether or not said loss shall have been insured, will, in your opinion,
interfere materially and adversely with the conduct of the business and
operations of the Company.
(c) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 11, the
Company shall be notified promptly by you by telephone or telegram, confirmed by
letter. If the Company elects to prevent this Agreement from becoming effective,
you shall be notified promptly by the Company by telephone or telegram,
confirmed by letter.
(d) Anything in this Agreement to the contrary notwithstanding
if this Agreement shall not become effective by reason of an election of the
Company pursuant to this Section 11, or if this Agreement shall not be carried
out within the time specified herein by reason of any failure on the part of the
Company to perform any undertaking or satisfy any condition of this Agreement by
it to be performed or satisfied, the sole liability of the Company to you, in
addition to the obligations assumed by the Company pursuant to Section 6 hereof,
will be to reimburse you for such actual out-of-pocket expenses (including the
fees and disbursements of your counsel) as shall have been incurred in
connection with this Agreement and the proposed purchase of the Firm Stock and
Additional Stock, and upon demand the Company will pay the full amount thereof
to you. If this Agreement shall not become effective by reason of an election by
you pursuant to this Section 11 or if this Agreement shall be terminated or
otherwise not carried out within the time specified herein for any reason other
than the failure on the part of the Company to perform any undertaking or
satisfy any condition of this Agreement by it or them to be performed or
satisfied, the Company shall have no liability to you other than for obligations
assumed by the Company pursuant to Section 6 hereof; provided, however, that you
may retain any sums heretofore paid to you by the Company as provided in Section
3 hereof to the extent that such sums are for your actual out-of-pocket expenses
(including the fees and disbursements of your counsel) as shall have been
incurred in connection with this Agreement and the proposed purchase of the Firm
Stock and Additional Stock.
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Notwithstanding any election hereunder or any termination of
this Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Section 8 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
12. Notices. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to any Underwriter,
shall be mailed, delivered or telegraphed and confirmed to Donald & Co.
Securities Inc., 65 East 55th Street, New York, New York 10022, Att: Stephen A.
Blum, President, with a copy to Parker Duryee Rosoff & Haft, 529 Fifth Avenue,
New York, New York 10017-4608, Attn: Michael DiGiovanna; and if sent to the
Company, shall be mailed, delivered or telegraphed and confirmed to The Source
Information Management Company, 11644 Lilburn Park Road, St. Louis, Missouri,
63146, Attn: S. Leslie Flegel, Chief Executive Officer, with a copy to Gallop
Johnson & Neuman, L.C., 101 South Hanley Road, St. Louis, Missouri 63105, Attn:
Douglas J. Bates, Esq.
13. Modification of the Previous Underwriting Agreement. Upon the
Closing Date, this Agreement will supersede Sections 5(m) and 5(u) of the
underwriting agreement between the Representative and the Company dated as of
October 7, 1997, which agreement shall retain full force and effect in all other
respects.
14. Parties. This Agreement shall be binding upon, you, the Company,
and the controlling persons, directors and officers referred to in Section 8
hereof, and their respective successors, legal representatives and assigns, and
no other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained.
15. Construction. This Agreement shall be construed in accordance with
the laws of the State of New York.
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If the foregoing correctly sets forth the understanding between you,
the Company and the Selling Shareholders, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
THE SOURCE INFORMATION MANAGEMENT COMPANY
By:
S. Leslie Flegel, Chief Executive Officer
SELLING SHAREHOLDERS
By:__________________________________________
S. Leslie Flegel, As Attorney-in-Fact, acting
on behalf of each of the Selling Shareholders
named in Schedule III hereto
Accepted as of the date first above written:
DONALD & CO. SECURITIES INC.
As Representative of the Underwriters
named in Schedule II hereto
By:
Stephen A. Blum, President
31
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SCHEDULE I
Firm Stock Sellers Number of Shares of Firm Stock
------------------ ------------------------------
TOTAL 2,000,000
32
<PAGE>
SCHEDULE II
Underwriters Number of Shares of Firm Stock
------------ ------------------------------
TOTAL 2,000,000
33
<PAGE>
SCHEDULE III
Number of Shares
Selling Shareholder (1) of Additional Stock (2)
----------------------- -----------------------
Total 300,000
(1) Each Selling Shareholder has appointed S. Leslie Flegel and W.
Brian Rodgers as Attorneys-in-Fact
(2) Represents the maximum number of Additional Stock to be sold by
each Selling Shareholder, assuming the exercise in full of the Representative's
over-allotment option.
34
REPRESENTATIVE'S WARRANT AGREEMENT (the "Warrant Agreement"), dated as
of _______ __, 1998, between THE SOURCE INFORMATION MANAGEMENT COMPANY, a
Missouri corporation (the "Company"), and DONALD & CO. SECURITIES INC.
(hereinafter referred to variously as the "Holder" or the "Representative").
The Company proposes to issue to the Representative warrants (the
"Warrants") to purchase up to 200,000 shares of the Company's common stock, par
value $.01 per share (the "Common Stock");
The Representative has agreed, pursuant to the underwriting agreement
(the "Underwriting Agreement") dated ______ __, 1998 among the Company, the
Representative and the other underwriters named in Schedule II thereof
(collectively with the Representative, the "Underwriters") to act as the
representative of the Underwriters in connection with the Company's proposed
public offering (the "Public Offering") of 2,000,000 shares of Common Stock (the
"Stock") at an initial public offering price of $____ per share; and
The Warrants to be issued pursuant to this Agreement will be issued on
the Closing Date (as such term is defined in the Underwriting Agreement) by the
Company to the Representative in consideration for, and as part of the
compensation in connection with, the Representative acting as representative of
the Underwriters pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of TWO HUNDRED DOLLARS AND NO CENTS ($200.00), the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. Grant. The Holder (as hereinafter defined) is hereby granted the
right to purchase, at any time from __________ __, 1999 until 5:00 p.m., St.
Louis, Missouri time, on _______ __, 2003, up to 200,000 shares of Common Stock
(the "Warrant Stock") at an initial exercise price (subject to adjustment as
provided in Article 8 hereof) of $____ per share of Warrant Stock, subject to
the terms and conditions of this Agreement.
2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") delivered and to be delivered pursuant to this Agreement shall be
in the form set forth in Exhibit A, attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
1
<PAGE>
3. Exercise of Warrant. The Warrants initially are exercisable at the
initial exercise price per share of Warrant Stock set forth in Section 6 hereof,
payable by wire transfer, or certified or official bank check (or by cashless
exercise as provided below), subject to adjustment as provided in Section 8
hereof. Upon surrender of a Warrant Certificate with the annexed Form of
Election to Purchase duly executed, together with payment of the Exercise Price
(as hereinafter defined) for the Warrant Stock purchased at the Company's
principal offices (presently located at 11644 Lilburn Park Road, St. Louis,
Missouri 63146) the registered holder of a Warrant Certificate ("Holder" or
"Holders") shall be entitled to receive a certificate or certificates for the
shares of Warrant Stock so purchased. The purchase rights represented by each
Warrant Certificate are exercisable at the option of the Holder thereof, in
whole or in part (but not as to fractional shares of the Warrant Stock
underlying the Warrants). In the case of the purchase of less than all the
securities purchasable under any Warrant Certificate, the Company shall cancel
said Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the
securities purchasable thereunder.
The Holder may, at its option, exchange the Warrants, in whole or in
part (a "Warrant Exchange"), into the number of shares of Warrant Stock
determined in accordance with this paragraph, by surrendering the Warrant
Certificate representing the Warrants at the Company's principal office,
accompanied by a notice stating (i) such Holder's intent to effect such
exchange, (ii) the number of shares of Warrant Stock subject to the Warrants as
to which the exchange is to be effected and (iii) the date on which the Holder
requests that such Warrant Exchange occur (the "Notice of Exchange"). The
Warrant Exchange shall take place on the date specified in the Notice of
Exchange or if the date the Notice of Exchange is received by the Company is
later than three (3) business days prior to the date specified in the Notice of
Exchange, the date which is three (3) business days after the date of receipt
(the "Exchange Date"). Certificates for the shares of Warrant Stock issuable
upon such Warrant Exchange and, if applicable, a new warrant of like tenor
evidencing the balance of the shares of Warrant Stock remaining subject to the
Warrants, shall be issued as of the Exchange Date and delivered to the Holder
within three (3) business days following the Exchange Date. In connection with
any Warrant Exchange, the Warrants shall represent the right to subscribe for
and acquire the number of shares of Warrant Stock (rounded to the next highest
integer) equal to (i) the number of shares of Warrant Stock specified by the
Holder in its Notice of Exchange (the "Total Number") less (ii) the number of
shares of Warrant Stock equal to the quotient obtained by dividing (A) the
product of the Total Number and the existing Exercise Price of the Warrants by
(B) the average market price of a share of Common Stock for the ten (10) trading
days ending on the Exchange Date; and, in the case of any Warrant Exchange for
less than all of the shares of Warrant Stock purchasable under the Warrants, the
Company shall execute and deliver a new Warrant Certificate of like tenor for
the balance of the Shares purchasable thereunder. By way of example, if a Holder
of Warrants submits a Notice of Exchange relating to 60,000 of the 200,000
shares of Warrant Stock subject to the Warrants and the current average market
price of a share of Common Stock for the ten trading day period ending on the
Exchange Date is $8.00, the holder will be entitled to receive 24,000 shares of
Warrant Stock, along with a new Warrant Certificate entitling the Holder to
purchase 140,000 shares of Warrant Stock.
2
<PAGE>
4. Issuance of Certificates. Upon the exercise of the Warrants, the
issuance of certificates for the shares of Warrant Stock or other securities,
properties or rights underlying such Warrants, shall be made forthwith (and in
any event within five (5) business days thereafter) without charge to the Holder
thereof including, without limitation, any tax which may be payable in respect
of the issuance thereof, and such certificates shall (subject to the provisions
of Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the shares
of Warrant Stock or other securities, property or rights shall be executed on
behalf of the Company by the manual or facsimile signature of the Chairman of
the Board of Directors, or the President or any executive officer of the Company
under its corporate seal reproduced thereon, attested to by the manual or
facsimile signature of the Treasurer or Assistant Treasurer or the Secretary or
Assistant Secretary of the Company. Warrant Certificates shall be dated the date
of execution by the Company upon initial issuance, division, exchange,
substitution or transfer.
5. Restriction On Transfer of Warrants. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
may not be sold, transferred, assigned, hypothecated or otherwise disposed of,
in whole or in part, except to officers and directors of the Representative.
6. Exercise Price.
6.1 Initial and Adjusted Exercise Price. The initial exercise price of
each Warrant shall be $____ per share of Warrant Stock. The adjusted exercise
price shall be the price which shall result from time to time from any and all
adjustments of the initial exercise price in accordance with the provisions of
Section 8 hereof.
6.2 Exercise Price. The term "Exercise Price" herein shall mean the
initial exercise price or the adjusted exercise price, depending upon the
context.
7. Registration Rights.
7.1 Registration Under the Securities Act of 1933. The Warrants and the
shares of Warrant Stock have been registered under the Securities Act of 1933,
as amended (the "Securities Act"). Upon exercise, in part or in whole, of the
Warrants, certificates representing the shares of Warrant Stock and any other
securities issuable upon exercise of the Warrants (collectively, the "Warrant
Securities") shall bear the following legend:
3
<PAGE>
The securities represented by this certificate may not be
offered or sold except pursuant to (i) an effective
registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), (ii) to the extent applicable,
Rule 144 under the Securities Act (or any similar rule under
the Securities Act relating to the disposition of securities),
or (iii) an opinion of counsel, if such opinion shall be
reasonably satisfactory to counsel for the issuer, that an
exemption from registration under the Securities Act is
available.
7.2 Piggyback Registration. If, at any time commencing on _____ __,
1998 and expiring six (6) years thereafter, the Company proposes to register any
of its securities under the Securities Act (other than in connection with a
transaction contemplated by Rule 145(a) promulgated under the Securities Act or
pursuant to Form S-4, Form S-8 or any successor form thereto), it will give
written notice by registered or certified mail at least twelve (12) business
days prior to the filing of each such registration statement, to all Holders of
the Warrants and/or Warrant Securities of its intention to do so. If the Holders
of the Warrants and/or Warrant Securities notify the Company in writing not more
than ten (10) business days after receipt of such notice of their desire to
include any such securities in such proposed registration statement, the Company
shall afford such Holders of the Warrants and/or Warrant Securities the
opportunity to have any such Warrant Securities registered under such
registration statement. Notwithstanding the provisions of this Section 7.2, the
Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7.2 (irrespective of whether a written request
for inclusion of any such securities shall have been made) to elect not to file
any such proposed registration statement, or to withdraw the same after the
filing but prior to the effective date thereof. Furthermore, if the managing
underwriter of any such offering shall advise the Company in writing that, in
its opinion, the distribution of all or a portion of the Warrant Securities
requested to be included in the registration statement concurrently with the
securities being registered by the Company would materially and adversely affect
the distribution of such securities by the Company for its own account, then the
Warrant Securities shall nevertheless be included in such registration statement
but withheld from the market for a period not to exceed sixty (60) days, which
period the managing underwriter reasonably determines as necessary in order to
effect the underwritten public offering.
7.3 Demand Registration.
(a) At any time commencing on ______ __, 1999 and
expiring four (4) years thereafter, the Holders of Warrants
and/or Warrant Securities representing more than 50% of such
securities at that time outstanding (assuming the exercise of
all of the Warrants), shall have the right (which right is in
addition to the registration rights under Section 7.2 hereof),
exercisable by written notice to the Company, to have the
Company prepare and file with the Securities and Exchange
Commission, on two occasions, a registration statement and
such other documents, including a prospectus, as may be
necessary in the opinion of both counsel for the Company and
counsel for the Representative and Holders in order to comply
with the provisions of the Securities Act, so as to permit a
public offering and sale of their respective Warrant
Securities for nine (9) consecutive months by such Holders and
any other Holders of the Warrants and/or Warrant Securities
who notify the Company within ten (10) business days after
receiving notice from the Company of such request.
4
<PAGE>
(b) The Company covenants and agrees to give written
notice of any registration request under this Section 7.3 by
the majority of the Holders to all other registered Holders of
the Warrants and the Warrant Securities within ten (10)
business days from the date of the receipt of any such
registration request.
(c) In addition to the registration rights under
Section 7.2 and subsection (a) of this Section 7.3, at any
time commencing on ______ __, 1999 and expiring four (4) years
thereafter, the Holders of Warrants and/or Warrant Securities
representing more than 50% of such securities at the time
outstanding (assuming the exercise of all of the Warrants)
shall have the right, exercisable by written request to the
Company, to have the Company prepare and file, on one
occasion, with the Commission a registration statement so as
to permit a public offering and sale for nine (9) consecutive
months by any such Holders of their Warrant Securities;
provided, however, that the provisions of Section 7.5(b)
hereof shall not apply to any such registration request and
registration and all costs incident thereto shall be at the
expense of the Holder or Holders making such request.
7.4 Covenants of the Company With Respect to
Registration. In connection with any registration under Section 7.2 or 7.3
hereof, the Company covenants and agrees as follows:
(a) The Company shall file a registration statement as
promptly as practicable after receipt of any demand pursuant
to Section 7.3, but in no event later than forty-five (45)
days after receipt of such demand, and shall use its best
efforts to have any registration statements declared effective
at the earliest practicable time, and shall furnish each
Holder desiring to sell Warrant Securities such number of
prospectuses as shall reasonably be requested. Notwithstanding
the foregoing sentence, the Company shall not be obligated to
file a registration statement pursuant to Section 7.3 (i)
during the period when the Warrant Securities are withheld
from the market as set forth in Section 7.2 and (ii) if any
demand pursuant to Section 7.3 is made within ninety (90) days
following the fiscal year end of the Company when the
conditions set forth in Rule 3-01(c) of Regulation S-X are not
met for filings made after forty-five (45) days but within
ninety (90) days of the end of the Company's final year. Upon
the occurrence of the event set forth in Section 7.4(a)(i),
the Company shall file the registration statement as promptly
as practicable after the conclusion of the period when the
Warrant Securities were withheld from the market, but in no
event later than forty-five (45) days after the conclusion of
such period. Upon the occurrence of the event set forth in
Section 7.4(a)(ii), the Company shall file the registration
statement as promptly as practicable after the earlier of the
date when the Company files its annual report on Form 10-K or
10-KSB with the Securities and Exchange Commission or ninety
days (90) days following the fiscal year end of the Company,
but in no event later than forty-five (45) days after the
earlier of such dates.
5
<PAGE>
(b) The Company shall pay all costs (excluding
transfer taxes, if any, and fees and expenses of Holder(s)'
counsel and any underwriting or selling commissions), fees and
expenses in connection with the first registration statement
filed pursuant to Sections 7.2 and 7.3(a) hereof including,
without limitation, the Company's legal and accounting fees,
printing expenses, blue sky fees and expenses. The Holder(s)
will pay all costs, fees and expenses in connection with any
registration statement filed pursuant to Section 7.3(c). If
the Company shall fail to comply with the provisions of
Section 7.4(a), the Company shall, in addition to any other
equitable or other damages or relief available to the
Holder(s), be liable for any and all incidental, special and
consequential damages and damages due to loss of profit
sustained by the Holder(s) requesting registration of their
Warrant Securities.
(c) The Company shall use its best efforts to qualify
or register the Warrant Securities included in a registration
statement for offering and sale under the securities or blue
sky laws of such states as reasonably are requested by the
Holder(s), provided that the Company shall not be obligated to
execute or file any general consent to service of process or
to qualify as a foreign corporation to do business under the
laws of any such jurisdiction, and further provided that if
any jurisdiction in which the Warrant Securities shall be
qualified shall require that expenses incurred in connection
with the qualification of the securities in that jurisdiction
shall be borne by selling stockholders, then such expenses
shall be payable by the selling stockholders pro rata to the
extent required by such jurisdiction.
(d) To the extent permitted by law, the Company shall
indemnify the Holder(s) of the Warrant Securities to be sold
pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section
15 of the Securities Act or Section 20(a) of the Exchange Act
against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which
any of them may become subject under the Securities Act, the
Exchange Act or otherwise, arising from such registration
statement but only to the same extent and with the same effect
as the provisions contained in Section 8 of the Underwriting
Agreement pursuant to which the Company has agreed to
indemnify the Underwriters.
6
<PAGE>
(e) The Company shall not require the Holder(s) to
exercise their Warrants prior to the initial filing of any
registration statement or the effectiveness thereof.
(f) The Company shall not permit the inclusion of any
securities other than the Warrant Securities to be included in
the registration statement filed pursuant to Section 7.3(a)
hereof, without the prior written consent of the
Representative.
(g) The Company shall furnish to the Representative
on behalf of each Holder participating in the offering and to
the managing underwriter, if any, a signed counterpart,
addressed to the Representative on behalf on each Holder and
to the managing underwriter, if any, (i) an opinion of counsel
to the Company, dated the effective date of such registration
statement if there is no managing underwriter or the date of
the closing under the underwriting agreement if there is a
managing underwriter, and (ii) a "cold comfort" letter, dated
the effective date of such registration statement and the date
of the closing under the underwriting agreement if there is a
managing underwriter, signed by the independent public
accountants who have issued a report on the Company's
financial statements included in such registration statement,
in each case covering substantially the same matters with
respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants'
letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions
of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(h) The Company shall as soon as practicable after
the effective date of the registration statement, and in any
event within 15 months thereafter, make "generally available
to its security holders" (within the meaning of Rule 158 under
the Securities Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Securities Act
and covering a period of at least 12 consecutive months
beginning after the effective date of the registration
statement.
(i) The Company shall deliver promptly to each Holder who
so requests and the managing underwriter, if any, copies of
all correspondence between the Commission and the Company, its
counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to any
registration statement filed pursuant to this Agreement, and
permit each Holder who so requests and the managing
underwriter, if any, to do such investigation, upon reasonable
advance notice, with respect to information contained in or
omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules
of the National Association of Securities Dealers, Inc.
("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the
business of the Company with its officers and independent
auditors, all to such reasonable extent and at such reasonable
times and as often as each Holder and the managing
underwriter, if any, shall reasonably request.
7
<PAGE>
(j) With respect to a registration statement filed
pursuant to Section 7.3, the Company shall enter into an
underwriting agreement with the managing underwriter,
reasonably satisfactory to the Company, selected for such
underwriting by Holders holding a majority of the Warrant
Securities requested to be included in such underwriting. Such
agreement shall be satisfactory in form and substance to the
Company, each Holder and such managing underwriters, and shall
contain such representations, warranties and covenants by the
Company and such other terms as are customarily contained in
agreements of that type used by the managing underwriter. The
Holders shall be parties to any underwriting agreement
relating to an underwritten sale of their Warrant Securities
and may, at their option, require that any or all of the
representations, warranties and covenants of the Company to or
for the benefit of such underwriters shall also be made to and
for the benefit of such Holders. Such Holders shall not be
required to make any representations or warranties to or
agreements with the Company or the underwriters except as they
may relate to such Holders and their intended methods of
distribution.
7.6 Covenants of the Holder(s) With Respect to
Registration. The Holder(s) of the Warrant Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act, against all loss, claim,
damage or expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Securities Act, the Exchange Act or otherwise,
arising from information furnished by or on behalf of such Holders, or their
successors or assigns, for specific inclusion in such registration statement to
the same extent and with the same effect as the provisions contained in Section
8 of the Underwriting Agreement pursuant to which the Underwriters have agreed
to indemnify the Company.
7.7 Agreement by Holder to Participate in Registration.
Notwithstanding anything to the contrary contained herein, no Holder shall have
any rights under this Section 7 unless such Holder (i) shall furnish to the
Company information concerning the number of Warrant Securities held by him and
the intended method of disposition of such Warrant Securities, (ii) executes a
written agreement stating that the information set forth in the registration
statement concerning the Holder is correct and that the Holder will not violate
Regulation M promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and (iii) delivers such written agreement (as executed by
such Holder) to the Company within 20 days after the Company delivers the form
of such written agreement to such Holder.
8
<PAGE>
8. Adjustments to Exercise Price and Number of Securities.
8.1 Computation of Adjusted Exercise Price. In case the
Company shall at any time after the date hereof issue or sell any shares of
Common Stock (other than the issuances or sales referred to in Section 8.7
hereof), including shares held in the Company's treasury and shares of Common
Stock issued upon the exercise of any options, rights or warrants to subscribe
for shares of Common Stock and shares of Common Stock issued upon the direct or
indirect conversion or exchange of securities for shares of Common Stock, for a
consideration per share less than the "Exercise Price" on the date immediately
prior to the issuance or sale of such shares, or without consideration, then
forthwith upon such issuance or sale, the Exercise Price shall (until another
such issuance or sale) be reduced to the price (calculated to the nearest full
cent) equal to the quotient derived by dividing (A) an amount equal to the sum
of (X) the product of (a) the Exercise Price on the date immediately prior to
the issuance or sale of such shares, multiplied by (b) the total number of
shares of Common Stock outstanding immediately prior to such issuance or sale
plus, (Y) the aggregate of the amount of all consideration, if any, received by
the Company upon such issuance or sale, by (B) the total number of shares of
Common Stock outstanding immediately after such issuance or sale; provided,
however, that in no event shall the Exercise Price be adjusted pursuant to this
computation to an amount in excess of the Exercise Price in effect immediately
prior to such computation, except in the case of a combination of outstanding
shares of Common Stock, as provided by Section 8.3 hereof.
For the purposes of any computation to be made in accordance
with this Section 8.1, the following provisions shall be applicable:
(i) In case of the issuance or sale of shares of
Common Stock for a consideration part or all of which shall be
cash, the amount of cash consideration therefor shall be
deemed to be the amount of cash received by the Company for
such shares (or, if shares of Common Stock are offered by the
Company for subscription, the subscription price, or if either
of such securities shall be sold to underwriters or dealers
for public offering without a subscription offering, the
initial public offering price) before deducting therefrom any
compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or
others performing similar services, or any expenses incurred
in connection therewith.
(ii) In case of the issuance or sale (otherwise than
as a dividend or other distribution on any stock of the
Company) of shares of Common Stock for a consideration part or
all of which shall be other than cash, the amount of the
consideration therefor other than cash shall be deemed to be
the value of such consideration as determined in good faith by
the Board of Directors of the Company.
(iii) Shares of Common Stock issuable by way of
dividend or other distribution on any stock of the Company
shall be deemed to have been issued immediately after the
opening of business on the day following the record date for
9
<PAGE>
the determination of stockholders entitled to receive such
dividend or other distribution and shall be deemed to have
been issued without consideration.
(iv) The reclassification of securities of the
Company other than shares of the Common Stock into securities
including shares of Common Stock shall be deemed to involve
the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close
of business on the date fixed for the determination of
security holders entitled to receive such shares, and the
value of the consideration allocable to such shares of Common
Stock shall be determined as provided in subsection (ii) of
this Section 8.1.
(v) The number of shares of Common Stock at any one
time outstanding shall include the aggregate number of shares
issued or issuable (subject to readjustment upon the actual
issuance thereof) upon the exercise of options, rights,
warrants and upon the conversion or exchange of convertible or
exchangeable securities; provided, however, that shares
issuable upon the exercise of the Warrants shall not be
included in such calculation.
8.2 Options, Rights, Warrants and Convertible and
Exchangeable Securities. In case the Company shall at any time after the date
hereof issue options, rights or warrants to subscribe for shares of Common
Stock, or issue any securities convertible into or exchangeable for shares of
Common Stock, for a consideration per share less than the Exercise Price
immediately prior to the issuance of such options, rights or warrants, or such
convertible or exchangeable securities, or without consideration, the Exercise
Price in effect immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, as the case may be,
shall be reduced to a price determined by making a computation in accordance
with the provision of Section 8.1 hereof, provided that:
(a) The aggregate maximum number of shares of Common
Stock, as the case may be, issuable under such options, rights
or warrants shall be deemed to be issued and outstanding at
the time such options, rights or warranties were issued, and
for a consideration equal to the minimum purchase price per
share provided for in such options, rights or warrants at the
time of issuance, plus the consideration (determined in the
same manner as consideration received on the issue or sale of
shares in accordance with the terms of the Warrants), if any,
received by the Company for such options, rights or warrants.
(b) The aggregate maximum number of shares of Common
Stock issuable upon conversation or exchange of any
convertible or exchangeable securities shall be deemed to be
issued and outstanding at the time of issuance of such
securities, and for a consideration equal to the consideration
(determined in the same manner as consideration received on
the issue or sale of shares of Common Stock in accordance with
the terms of the Warrants) received by the Company for such
securities, plus the minimum consideration, if any, receivable
by the Company upon the conversion or exchange thereof.
10
<PAGE>
(c) If any change shall occur in the price per share
provided for in any of the options, rights or warrants
referred to in subsection (a) of this Section 8.2, or in the
price per share at which the securities referred to in
subsection (b) of this Section 8.2 are convertible or
exchangeable, such options, rights or warrants or conversion
or exchange rights, as the case may be, shall be deemed to
have expired or terminated on the date when such price change
became effective in respect of shares not theretofore issued
pursuant to the exercise or conversation or exchange thereof,
and the Company shall be deemed to have issued upon such date
new options, rights or warrants or convertible or exchangeable
securities at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants
or the conversion or exchange of such convertible or
exchangeable securities.
(d) If any options, rights or warrants referred to in
subsection (a) of this Section 8.2, or any convertible or
exchangeable securities referred to in subsection (b) of this
Section 8.2, expire or terminate without exercise or
conversion, as the case may be, then the Exercise Price of the
remaining outstanding Warrants shall be readjusted as if such
options, rights or warrants or convertible or exchangeable
securities, as the case may be, had never been issued.
8.3 Subdivision and Combination. In case the Company
shall at any time subdivide or combine the outstanding shares of Common Stock,
the Exercise Price shall forthwith be proportionately decreased in the case of
subdivision or increased in the case of combination.
8.4 Adjustment in Number of Securities. Upon each
adjustment of the Exercise Price pursuant to the provisions of this Section 8,
the number of shares of Warrant Stock issuable upon the exercise of each Warrant
shall be adjusted to the nearest full amount by multiplying a number equal to
the Exercise Price in effect immediately prior to such adjustment by the number
of shares of Warrant Stock issuable upon exercise of the Warrants immediately
prior to such adjustment and dividing the product so obtained by the adjusted
Exercise Price.
8.5 Definition of Common Stock. For the purpose of this
Agreement, the term "Common Stock" shall mean (i) the class of stock designated
as Common Stock in the Certificate of Incorporation of the Company as it may be
amended as of the date hereof, or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting solely
of changes in par value, or from par value to no par value, or from no par value
to par value.
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8.6 Merger or Consolidation. In case of any consolidation
of the Company with, or merger of the Company with, or merger of the Company
into, another corporation (other than a consolidation or merger which does not
result in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental warrant agreement providing that the Holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
Warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such warrant might have been
exercised immediately prior to such consolidation, merger, sale or transfer.
Such supplemental warrant agreement shall provide for adjustments which shall be
identical to the adjustments provided in Section 8. The above provision of this
Subsection shall similarly apply to successive consolidations or mergers.
8.7 No Adjustment of Exercise Price in Certain Cases. No
adjustment of the Exercise Price shall be made:
(a) Upon the issuance or sale of the
Warrants, the shares of Warrant Stock issuable upon the
exercise of the Warrants or shares of Common Stock issuable
upon exercise of options outstanding on the date hereof and
described in the prospectus relating to the Public Offering;
(b) Upon the issuance or sale of shares of
Common Stock upon the exercise of options, rights or warrants,
or upon the conversion or exchange of convertible or
exchangeable securities, in any case where the Exercise Price
was adjusted at the time of issuance of such options, rights
or warrants, or convertible or exchangeable securities, as
contemplated by Section 8.2 hereof;
(c) Upon the issuance of any shares of
Common Stock pursuant to the Company's Stock Award Plan
described in the prospectus relating to the Public Offering,
if the value attributable to such shares is equal to or
greater than the market value of the Common Stock (based on
the last sales price of the Common Stock on the date of
issuance of such shares);
(d) Upon the grant of options pursuant to
the Company's 1995 Incentive Stock option Plan described in
the prospectus relating to the Public Offering, if the
exercise price of such options is equal to or greater than the
market value of the Common Stock (based on the last sales
price of the Common Stock on the date of grant of such
options);
(e) Upon the issuance to a non-employee director
of the Company as compensation for attendance at a Board of
Directors meeting of shares of Common Stock having a market
value (based on the last sales price on the date of the
meeting) no greater than $1,000; or
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(f) If the amount of said adjustment shall
be less than 2 cents ($.02) per share of Warrant Stock;
provided, however, that in such case any adjustment that would
otherwise be required then to be made shall be carried forward
and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so
carried forward, shall amount to at least 2 cents ($.02) per
share of Warrant Stock.
8.8 Dividends and Other Distributions. In the event that
the Company shall at any time prior to the exercise of all Warrants declare a
dividend (other than a dividend consisting solely of shares of Common Stock) or
otherwise distribute to its stockholders any assets, property, rights, evidences
of indebtedness, securities (other than shares of Common Stock), whether issued
by the Company or by another, or any other thing of value, the Holders of the
unexercised Warrants shall thereafter be entitled, in addition to the shares of
Common Stock or other securities and property receivable upon the exercise
thereof, to receive, upon the exercise of such Warrants, the same property,
assets, rights, evidences of indebtedness, securities or any other thing of
value that they would have been entitled to receive at the time of such dividend
or distribution as if the Warrants had been exercised immediately prior to such
dividend or distribution. At the time of any such dividend or distribution, the
Company shall make appropriate reserves to ensure the timely performance of the
provisions of this subsection 8.5. Nothing contained herein shall provide for
the receipt or accrual by a Holder of cash dividends prior to the exercise by
such Holder of the Warrants.
9. Exchange and Replacement of Warrant Certificates. Each
Warrant Certificate is exchangeable without expense, upon the surrender thereof
by the registered Holder at the principal executive office of the Company, for a
new Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of shares of Warrant Stock in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrants, if mutilated, the Company will make and deliver a new Warrant
Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not
be required to issue certificates representing fractions of shares of Warrant
Stock upon the exercise of the Warrants, nor shall it be required to issue scrip
or pay cash in lieu of fractional interests, it being the intent of the parties
that all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Warrant Stock or other securities,
properties or rights.
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11. Reservation and Listing. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Warrants, such number of
shares of Warrant Stock or other securities, properties or rights as shall be
issuable upon the exercise thereof. The Company covenants and agrees that, upon
exercise of the Warrants and payment of the Exercise Price therefor, all shares
of Warrant Stock and other securities issuable upon such exercise shall be duly
and validly issued, fully paid, non-assessable and not subject to the preemptive
rights of any stockholder. As long as the Warrants shall be outstanding, the
Company shall use its best efforts to cause all shares of Warrant Stock issuable
upon the exercise of the Warrants to be listed (subject to official notice of
issuance) on all securities exchanges on which the Common Stock issued to the
public in connection herewith may then be listed and/or quoted on The Nasdaq
Stock Market.
12. Notices to Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and their exercise, any of the following
events shall occur:
(a) the Company shall take a record of the holders of
its shares of Common Stock for the purpose of entitling them
to receive a dividend or distribution payable otherwise than
in cash, or a cash dividend or distribution payable otherwise
than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the
books of the Company; or
(b) the Company shall offer to all the holders of its
Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the
Company (other than in connection with a consolidation or
merger) or a sale of all or substantially all of its property,
assets and business as an entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend, or the issuance of any convertible or exchangeable securities, or
subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
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<PAGE>
13. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
duly made when delivered, or mailed by registered or certified mail, return
receipt requested:
(a) If to the registered Holder of the Warrants, to
the address of such Holder as shown on the books of the
Company; or
(b) If to the Company, to the address set forth in
Section 3 hereof or to such other address as the Company may
designate by notice to the Holders.
14. Supplements and Amendments. The Company and the
Representative may from time to time supplement or amend this Agreement without
the approval of any Holders of Warrant Certificates (other than the
Representative) in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Representative may deem
necessary or desirable and which the Company and the Representative deem shall
not adversely affect the interests of the Holders of Warrant Certificates.
15. Successors. All the covenants and provisions of this
Agreement shall be binding upon and inure to the benefit of the Company, the
Holders and their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close
of business on _______ __, 2005. Notwithstanding the foregoing, the
indemnification provisions of Section 7 shall survive such termination until the
close of business on _______ __, 2008.
17. Governing Law; Submission to Jurisdiction. This Agreement
and each Warrant Certificate issued hereunder shall be deemed to be a contract
made under the laws of the State of New York and for all purposes shall be
construed in accordance with the laws of said State without giving effect to the
rules of said State governing the conflicts of laws. The Company, the
Representative and the Holders hereby agree that any action, proceeding or claim
against it arising out of, or relating in any way to, this Agreement shall be
brought and enforced in the courts of the State of New York or of the United
States District Court for the Southern District of New York, and irrevocably
submits to such jurisdiction, which jurisdiction shall be exclusive. The
Company, the Representative and the Holders hereby irrevocably waive any
objection to such exclusive jurisdiction or inconvenient forum. Any such process
or summons to be served upon any of the Company, the Representative and the
Holders (at the option of the party bringing such action, proceeding or claim)
may be served by transmitting a copy thereof, by registered or certified mail,
return receipt requested, postage prepaid, addressed to it at the address set
forth in Section 13 hereof. Such mailing shall be deemed personal service and
shall be legal and binding upon the party so served in any action, proceeding or
claim. The Company, the Representative and the Holders agree that the prevailing
party(ies) in any such action or proceeding shall be entitled to recover from
the other part(ies) all of its/their reasonable legal costs and expenses
relating to such action or proceeding and/or incurred in connection with the
preparation therefor.
15
<PAGE>
18. Entire Agreement; Modification. This Agreement (including
the Underwriting Agreement to the extent portions thereof are referred to
herein) contains the entire understanding between the parties hereto with
respect to the subject matter hereof and may not be modified or amended except
by a writing duly signed by the party against whom enforcement of the
modification or amendment is sought.
19. Severability. If any provision of this Agreement shall be
held to be invalid or unenforceable, such invalidity or unenforceability shall
not affect any other provision of this Agreement.
20. Captions. The caption headings of the Sections of this
Agreement are for convenience of reference only and are not intended, nor should
they be construed as, a part of this Agreement and shall be given no substantive
effect.
21. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company
and the Representative and any other registered Holder(s) of the Warrant
Certificates or Warrant Securities any legal or equitable right, remedy or claim
under this Agreement; and this Agreement shall be for the sole and exclusive
benefit of the Company and the Representative and any other Holder(s) of the
Warrant Certificates or Warrant Securities.
22. Counterparts. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and such counterparts shall together constitute but one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
THE SOURCE INFORMATION MANAGEMENT COMPANY
By:_______________________________________
Name: S. Leslie Flegel
Title: Chairman and Chief Executive Officer
Attest:
______________________________
Douglas J. Bates
Assistant Secretary
DONALD & CO. SECURITIES INC.
By:___________________________________
Name: Stephen A. Blum
Title: President
16
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER THE
SECURITIES ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION
OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE
REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT
AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., ST. LOUIS TIME, ________ __, 2003
No. W- _________ Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that ________, or registered
assigns, is the registered holder of _____________ Warrants to purchase
initially, at any time from ______ __, 1999 until 5:00 P.M. St. Louis, Missouri
time on ______ __, 2003 ("Expiration Date"), up to _________ fully paid and
non-assessable shares of common stock, $.01 par value ("Common Stock"), of THE
SOURCE INFORMATION MANAGEMENT COMPANY, a Missouri corporation (the "Company"),
at the initial exercise price, subject to adjustment in certain events (the
"Exercise Price"), of $____ per share, upon surrender of this Warrant
Certificate and payment of the Exercise Price at an office or agency of the
Company, but subject to the conditions set forth herein and in the
Representative's Warrant Agreement dated as of ______ __, 1998 between the
Company and Donald & Co. Securities Inc. (the "Representative's Warrant
Agreement"). Payment of the Exercise Price shall be made by wire transfer, or
certified or official bank check payable to the order of the Company.
1
<PAGE>
No Warrant may be exercised after 5:00 p.m., St. Louis,
Missouri time, on the Expiration Date, at which time all Warrants evidenced
hereby, unless exercised prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Representative's
Warrant Agreement, which Representative's Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants.
The Representative's Warrant Agreement provides that upon the
occurrence of certain events the Exercise Price and the type and/or number of
the Company's securities issuable thereupon may, subject to certain conditions,
be adjusted. In such event, the Company will, at the request of the holder,
issue a new Warrant Certificate evidencing the adjustment in the Exercise Price
and the number and/or type of securities issuable upon the exercise of the
Warrants; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair,
the rights of the holder as set forth in the Representative's Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Representative's Warrant Agreement, without any charge except
for any tax or other governmental charge imposed in connection with such
transfer.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Representative's Warrant Agreement shall have the meanings assigned to
them in the Representative's Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated as of ________, 199__
THE SOURCE INFORMATION MANAGEMENT COMPANY
By:_______________________________________
Name: S. Leslie Flegel
Title: Chairman and Chief Executive Officer
Attest:
_______________________________
Douglas J. Bates
Assistant Secretary
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<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase __________ shares of
Common Stock and herewith tenders in payment for such securities wire transfer,
or a certified or official bank check payable to the order of THE SOURCE
INFORMATION MANAGEMENT COMPANY in the amount of $___________, all in accordance
with the terms hereof. The undersigned requests that a certificate for such
securities be registered in the name of ______________________________ whose
address is __________________________ and that such Certificate be delivered to
___________________ whose address is ____________________________.
Dated: Signature:___________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
(Insert Social Security or Other Identifying
Number of Holder)
Signature Guarantee
-----------------------------------
<PAGE>
[FORM OF ASSIGNMENT]
(To be exercised by the registered holder if
such holder desires to transfer the Warrant
Certificate.)
FOR VALUE RECEIVED
hereby sells, assigns and transfers unto
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________________
Attorney, to transfer the within Warrant Certificate on the books of the
within-named Company, and full power of substitution.
Dated: Signature:__________________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant Certificate.)
(Insert Social Security or Other Identifying
Number of Assignee)
Signature Guarantee
----------------------------------------
May 14, 1998
The Source Information Management Company
11644 Lilburn Park Road
St. Louis, MO 63114
Re: Registration Statement on Form SB-2 (File No. 333-__________)
Ladies and Gentlemen:
We have acted as counsel for The Source Information Management Company,
a Missouri corporation (the "Company"), in connection with the various legal
matters relating to the filing of a Registration Statement on Form SB-2, File
No. 333-__________ (the "Registration Statement") under the Securities Act of
1933, as amended, relating to 2,000,000 shares of the common stock of the
Company, $0.01 par value per share (the "Common Stock") consisting of up to
1,500,000 shares to be sold by the Company and up to 800,000 shares to be sold
by certain shareholders of the Company (the "Selling Shareholders"), including
300,000 shares subject to an option to purchase granted to the several
underwriters to cover over-allotments; a warrant to purchase 200,000 shares of
Common Stock (the "Warrant") to be issued by the Company to Donald & Co.
Securities, Inc. as representative of the several underwriters; and 200,000
shares of Common Stock issuable upon the exercise of the Warrant (the "Warrant
Shares").
We have examined such corporate records of the Company, such laws and
such other information as we have deemed relevant, including the Company's
Articles of Incorporation, Bylaws, resolutions adopted by the Board of Directors
of the Company relating to such offering and certificates received from state
officials and from officers of the Company. In delivering this opinion, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to the originals of all documents
submitted to us as certified, photostatic or conformed copies, and the
correctness of all statements submitted to us by officers of the Company.
Based solely on the foregoing, the undersigned is of the opinion that:
1. The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Missouri.
2. The Common Stock, the Warrant and the Warrant Shares being
offered by the Company, if sold and issued in the manner
described in the Registration Statement, will be validly
issued and outstanding and will be fully paid and
non-assessable.
3. The Common Stock being offered by each of the Selling
Shareholders are validly issued, fully paid and
non-assessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Registration Statement.
We also consent to your filing copies of this opinion as an exhibit to the
Registration Statement with agencies of such states as you deem necessary in the
course of complying with the laws of such states regarding the issuance of the
Common Stock sold.
Very truly yours,
/s/ GALLOP, JOHNSON & NEUMAN, L.C.
GALLOP, JOHNSON & NEUMAN, L.C.
THE SOURCE COMPANY
AMENDED AND RESTATED
1995 INCENTIVE STOCK OPTION PLAN
1. Purpose of the Plan
The Source Company 1995 Incentive Stock Option Plan ("Plan") is
intended to provide additional incentive to certain valued and trusted employees
of The Source Company, a Missouri corporation (the "Company"), by encouraging
them to acquire shares of the $.01 par value common stock of the Company (the
"Stock") through options to purchase Stock granted under the Plan ("Options").
The purpose for granting such Options and making the purchase of the Stock
possible is to increase the proprietary interest of such employees in the
business of the Company and provide them with an increased personal interest in
the continued success and progress of the Company. The intended result is to
promote the interests of both the Company and its shareholders.
Options granted under the Plan may be either Options intended to
qualify as "incentive stock options" ("ISOs") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified
stock options ("NQSOs"). Each employee granted an Option will receive and be
required to accept a Stock Option Agreement with the Company (the "Option
Agreement"), which sets forth the terms and conditions of the Option, in
accordance with this Plan.
2. Administration of Plan
The Plan will be administered by the Compensation Committee (the
"Committee") of the Board of Directors of the Company ("Board"), to be composed
of at least two (2) members. Each member of the Committee shall be a
"non-employee director" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rule or
regulation. Each member of the Committee shall serve at the pleasure of the
Board. Any vacancy occurring in the membership of the Committee shall be filled
by appointment by the Board. If there are less than two members of the Board who
qualify as "non-employee directors" within the meaning of Rule 16b-3 under the
Exchange Act, then the full Board shall be deemed to be the administrators of
the Plan and shall be endowed with all of the rights and responsibilities
attributed to the Committee herein:
The Committee shall have the sole power:
(a) subject to the provisions of the Plan, to grant Options; to
determine the type of Option (NQSO or ISO); to determine the terms and
conditions of all Options; to construe and interpret the Plan and Options
granted under it; to determine the time or times an Option may be exercised, the
number of shares as to which an Option may be exercised at any one time, and
when an Option may terminate; to establish, amend and revoke rules and
regulations relating to the Plan and its administration; and to correct any
defect, supply any omission, or reconcile any inconsistency in the Plan, or in
any Option Agreement, in a manner and to the extent it shall deem necessary, all
of which determinations and interpretations made by the Committee shall be
conclusive and binding on all Optionees and on their legal representatives and
beneficiaries; and
<PAGE>
(b) to determine all questions of policy and expediency that may arise
in the administration of the Plan and generally exercise such powers and perform
such acts as are deemed necessary or expedient to promote the best interests of
the Company.
The day-to-day administration of the Plan may be carried out by such
officers and employees of the Company as shall be designated from time to time
by the Committee. All expenses and liabilities incurred by the Committee in
connection with the administration of the Plan shall be borne by the Company.
The Committee may employ attorneys, consultants, accountants, appraisers,
brokers or other persons, and the Committee, the Board, the Company and the
officers and employees of the Company shall be entitled to rely upon the advice,
opinions or valuations of any such persons. The interpretation and construction
by the Committee of any provision of the Plan and any determination by the
Committee under any provision of the Plan shall be final and conclusive for all
purposes. Neither the Committee nor any member thereof shall be liable for any
act, omission, interpretation, construction or determination made in connection
with the Plan in good faith, and the members of the Committee shall be entitled
to indemnification and reimbursement by the Company in respect of any claim,
loss, damage or expense (including attorneys' fees) arising therefrom to the
fullest extent permitted by law.
3. Shares Subject to the Plan
Subject to the provisions of paragraph 13, the Stock that may be issued
pursuant to Options granted under the Plan shall not exceed in the aggregate Six
Hundred Thirty Thousand (630,000) shares of $.01 par value common stock of the
Company. If any Options granted under the Plan terminate, expire or are
surrendered without having been exercised in full, the number of shares of Stock
not purchased under such Options shall be available again for the purpose of the
Plan. The Stock to be offered for purchase upon the grant of an Option may be
authorized but unissued Stock or Stock previously issued and outstanding and
reacquired by the Company.
4. Persons Eligible for Options
All employees of the Company who are not members of the Committee shall
be eligible to receive the grant of Options under the Plan. The Committee shall
determine the employees to whom Options shall be granted, the time or times such
Options shall be granted, the number of shares to be subject to each Option and
the times when each Option may be exercised. The Committee shall seek
information, advice and recommendations from management to assist the Committee
in its independent determination as to the employees to whom Options shall be
granted. An employee who has been granted an Option (an "Optionee"), if he or
she is otherwise eligible, may be granted additional Options.
-2-
<PAGE>
5. Purchase Price
The purchase price of each share of Stock covered by each Option
("Purchase Price") shall not be less than one hundred percent (100%) of the Fair
Market Value Per Share (as defined below) of the Stock on the date the Option is
granted. However, if and when an ISO is granted the Optionee receiving the ISO
owns or will be considered to own, by reason of Section 424(d) of the Code, more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company, the purchase price of the Stock covered by the ISO shall
not be less than one hundred and ten percent (110%) of the Fair Market Value Per
Share of the Stock on the date the ISO is granted.
"Fair Market Value Per Share" of the Stock shall mean: (i) if the Stock
is traded only otherwise than on a securities exchange and is quoted on the
National Association of Securities Dealers, Inc. Automated Quotation System
("NASDAQ"), the closing quoted selling price of the Stock on the date of grant
of the Option, as reported by the Wall Street Journal; (ii) if the Stock is
admitted to trading on a securities exchange, the closing quoted selling price
of the Stock on the date of grant of the Option, as reported in the Wall Street
Journal; or (iii) if the Stock is traded only otherwise than on a securities
exchange and is not quoted on NASDAQ, the closing quoted selling price of the
Stock on the date of grant of the Option as quoted in the "pink sheets"
published by the National Daily Quotation Bureau. In any case, if there were no
sales of the Stock on the date of the grant of an Option, the Fair Market Value
Per Share shall be determined by the Committee in accordance with Section
20.2031-2 of the Federal Estate Tax Regulations.
6. Duration of Options
Any outstanding Option and all unexercised rights thereunder shall
expire and terminate automatically upon the earliest of: (i) the cessation of
the employment or engagement of the Optionee by the Company for any reason other
than retirement (under normal Company policies), death or disability; (ii) the
date which is three months following the effective date of the Optionee's
retirement from the Company's service; (iii) the date which is one year
following the date on which the Optionee's service with the Company ceases due
to death or disability; (iv) the date of expiration of the Option determined by
the Committee at the time the Option is granted and specified in such Option; or
(v) the tenth (10th) annual anniversary date of the granting of the Option, or,
if and when an ISO is granted the Optionee owns (or would be considered to own
by reason of Section 424(d) of the Code) more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company, then on the
fifth (5th) such anniversary. However, the Committee shall have the right, but
not the obligation, to extend the expiration of the Options held by an Optionee
whose service with the Company has ceased for any reason to the end of their
original terms, notwithstanding that such Options may no longer qualify as ISOs
under the Code.
-3-
<PAGE>
7. Exercise of Options
(a) An Option may be exercisable in installments or otherwise upon such
terms as the Committee shall determine when the Option is granted.
(b) No Option will be exercisable (and any attempted exercise will be
deemed null and void) if such exercise would create a right of recovery for
"short-swing profits" under Section 16(b) of the Securities Exchange Act of
1934.
(c) No Option will become exercisable if the exercisability of such
Option would cause the aggregate fair market value (as determined at the time of
grant in accordance with the provisions of paragraph 5 hereof) of the Stock with
respect to which Option issued by the Company are first exercisable during such
calendar year to exceed $100,000. If the grant of an Option hereunder would
cause a violation of the foregoing limitation, the exercisability of the portion
of the Option granted hereunder shall be reduced to the extent necessary such
that no violation of the foregoing limitation will occur. Any Option with
respect to which exercisability has been deferred shall become first exercisable
on the first day of the calendar year in which such exercisability would not
cause a violation of the limitations contained in Section 422(b)(7) of the Code;
provided, however, if the exercisability is required to be deferred beyond the
expiration of such Option, the grant of such Option shall be null and void.
8. Method of Exercise
(a) When the right to purchase shares accrues, Options may be exercised
by giving written notice to the Company stating the number of shares for which
the Option is being exercised, accompanied by payment in full by cash or its
equivalent, as is acceptable to the Company, of the purchase price for the
shares being purchased. The Company shall issue a separate certificate or
certificates of Stock for each Option exercised by an Optionee.
(b) In the Committee's discretion, determined at the time an Option is
granted, payment of the purchase price for shares may be made in whole or in
part with other shares of Stock of the Company which are free and clear of all
liens and encumbrances. The value of the shares of Stock tendered in payment for
the shares being purchased shall be the Fair Market Value Per Share on the date
of the Optionee's notice of exercise.
(c) Notwithstanding the foregoing, the Company shall have the right to
postpone the time of delivery of any shares for such period as may be required
for the Company, with reasonable diligence, to comply with any applicable
listing requirements of any national securities exchange or the National
Association of Securities Dealers, Inc. or any Federal, state or local law. If
the Optionee, or other person entitled to exercise an Option, fails to timely
accept delivery of and pay for the shares specified in such notice, the
Committee shall have the right to terminate the Option and the exercise thereof
with respect to such shares.
-4-
<PAGE>
9. Nontransferability of Options
No Option granted under the Plan shall be assignable or transferable by
the Optionee, either voluntarily or by operation of law, other than by will or
the laws of descent and distribution, and, during the lifetime of the Optionee,
shall be exercisable only by the Optionee.
10. Continuance of Employment
Nothing contained in the Plan or in any Option granted under the Plan
shall confer upon any Optionee any rights with respect to the continuation of
employment by the Company or interfere in any way with the right of the Company
(subject to the terms of any separate employment agreement to the contrary) at
any time to terminate such employment or to increase or decrease the
compensation of the Optionee from the rate in existence at the time of the
granting of any Option.
11. Restrictions on Shares
If the Company shall be advised by counsel that certain requirements
under Federal or state securities laws must be met before Stock may be issued
under the Plan, the Company shall notify all persons who have been issued
Options, and the Company shall have no liability for the failure to issue Stock
under any exercise of Options because of any delay while such requirements are
being met or the inability of the Company to comply with such requirements.
12. Privilege of Stock Ownership
No person entitled to exercise any Option granted under the Plan shall
have the rights or privileges of a stockholder of the Company for any shares of
Stock issuable upon exercise of such Option until such person has become the
holder of record of such shares. No adjustment shall be made for dividends or
other rights for which the record date is prior to the date on which such person
becomes the holder of record, except as provided in paragraph 13.
13. Adjustment
(a) If the number of outstanding shares of Stock are increased or
decreased, or such shares are exchanged for a different number or kind of shares
or securities of the Company, through reorganization, merger, recapitalization,
reclassification, stock dividend, stock split, combination of shares, or other
similar transaction, the aggregate number of shares of Stock subject to the
Plan, as provided in paragraph 3, and the shares of Stock subject to issued and
outstanding Options under the Plan shall be appropriately and proportionately
adjusted by the Committee. Any such adjustment in an outstanding Option shall be
made without change in the aggregate purchase price applicable to the
unexercised portion of the Option but with an appropriate adjustment in the
price for each share or other unit of any security covered by the Option.
-5-
<PAGE>
(b) Notwithstanding paragraph (a), upon: (i) the dissolution or
liquidation of the Company, (ii) a reorganization, merger or consolidation of
the Company with one or more corporations in which the Company is not the
surviving corporation, (iii) a sale of substantially all of the assets of the
Company or (iv) the transfer of more than 80% of the then outstanding Stock of
the Company to another entity or person, in a single transaction or series of
transactions, the Board shall accelerate the time in which any outstanding
Options granted under the Plan may be exercised to a time prior to the
consummation of the transaction, and the Plan shall terminate upon such
consummation of the transaction. However, the acceleration of the time of
exercise of such Options and the termination of the Plan shall not occur if
provision is made in writing in connection with the transaction, in a manner
acceptable to the Board, for: (A) the continuance of the Plan and assumption of
outstanding Options, or (B) the substitution for such Options of new options to
purchase the stock of a successor corporation (or parent or subsidiary thereof),
with appropriate adjustments as to number and kind of shares and option price.
The Board of Directors shall have the authority to amend this paragraph to
provide for a requirement that a successor corporation assume any outstanding
Options.
(c) Adjustments under this paragraph 13 shall be made by the Committee,
whose determination as to what adjustments shall be made, and the extent thereof
shall be final, binding and conclusive. No fractional shares of Stock shall be
issued under the Plan or in connection with any such adjustment.
14. Investment Purpose
Each Option granted hereunder may be issued on the condition that any
purchase of Stock by the exercise of an Option which is not the subject of a
registration statement permitting the sale or other distribution thereof shall
be for investment purposes and not with a view to resale or distribution (the
"Restricted Stock"). If requested by the Company, each Optionee must agree, at
the time of the purchase of any Restricted Stock, to execute an "investment
letter" setting forth such investment intent in the form acceptable to the
Company and must consent to any stock certificate issued to him thereunder
bearing a restrictive legend setting forth the restrictions applicable to the
further resale, transfer or other conveyance thereof without registration under
the Securities Act of 1933, as amended, and under the applicable securities or
blue sky laws of any other jurisdiction (together, the "Securities Laws"), or
the availability of exemptions from registration thereunder and to the placing
of transfer restrictions on the records of the transfer agent for such stock. No
Restricted Stock may thereafter be resold, transferred or otherwise conveyed
unless:
(1) an opinion of the Optionee's counsel is received, in form and
substance satisfactory to counsel for the Company, that
registration under the Securities Laws is not required; or
(2) such Stock is registered under the applicable Securities Laws; or
-6-
<PAGE>
(3) A "no action" letter is received from the staff of the Securities
and Exchange Commission and from the administrative agencies
administering all other applicable securities or blue sky laws,
based on an opinion of counsel for Optionee in form and substance
reasonably satisfactory to counsel for the Company, advising that
registration under the Securities Laws is not required.
15. Amendment and Termination of Plan
(a) The Board of Directors of the Company may, from time to time, with
respect to any shares at the time not subject to Options, suspend or terminate
the Plan or amend or revise the terms of the Plan; provided that any amendment
to the Plan shall be approved by a majority of the shareholders of the Company
if the amendment would (i) materially increase the benefits accruing to
participants under the Plan; (ii) increase the number of shares of Stock which
may be issued under the Plan, except as provided under the provisions of
paragraph 13; or (iii) materially modify the requirements as to eligibility for
participation in the Plan.
(b) Subject to the provisions of paragraph 13, the Plan shall terminate
ten (10) years from the earlier of the adoption of the Plan by the Board of
Directors or its approval by the shareholders.
(c) Subject to the provisions of paragraph 13, no amendment, suspension
or termination of this Plan shall, without the consent of each Optionee, alter
or impair any rights or obligations under any Option granted to such Optionee
under the Plan.
16. Effective Date of Plan
The Plan shall become effective upon adoption by the Board of Directors
of the Company and approval by the Company's shareholders; provided, however,
that prior to approval of the Plan by the Company's shareholders but after
adoption by the Board of Directors, Options may be granted under the Plan
subject to obtaining such approval.
17. Term of Plan
No Option shall be granted under the Plan after ten (10) years from the
earlier of the date of adoption of the Plan by the Board of Directors of the
Company or the date of approval by the Company's shareholders.
Adopted by the Board of Directors as of the 26th day of June, 1997.
THE SOURCE COMPANY
By:
S. Leslie Flegel, Chairman
of the Board and Chief
Executive Officer|WP-3:27316.2
-7-
FIRST AMENDMENT
TO THE
FINANCIAL CONSULTING AGREEMENT
BETWEEN
DONALD & CO. SECURITIES INC.
AND
THE SOURCE INFORMATION MANAGEMENT COMPANY
This amendment amends the Financial Consulting Agreement , dated as of
October 7, 1997 (the "Agreement"), between Donald & Co. Securities Inc., a New
Jersey corporation (the "Consultant"), and The Source Information Management
Company, a Missouri corporation (the "Company").
WHEREAS: the Consultant and the Company desire to extend the consulting
period of the Agreement:
NOW THEREFORE BE IT
RESOLVED, that Section 1 of the Agreement be, and it hereby is, amended
to read as follows:
"1. Engagement of the Consultant. The Company hereby engages and
retains the Consultant to render to the Company the financial services described
in Section 2 hereof (the "Financial Services") for the period of four years
commencing on the consummation of the Offering (the "Consulting Period')."
IN WITNESS WHEREOF, we have set our hands as of this __ day of May,
1998.
THE SOURCE INFORMATION MANAGEMENT COMPANY
By:
S. Leslie Flegel
Chief Executive Officer
DONALD & CO. SECURITIES INC.
By:
Stephen A. Blum
President
THE SOURCE INFORMATION MANAGEMENT COMPANY
1998 OMNIBUS PLAN
Article I
Purpose of the Plan
The Source Information Management Company 1998 Omnibus Plan ("Plan") is
intended to provide additional incentive to certain valued and trusted
employees, officers, and directors of, The Source Information Management
Company, a Missouri corporation (the "Company"), by encouraging them to acquire
shares of the $0.01 par value common stock of the Company (the "Stock") through
options to purchase Stock granted pursuant to the Plan ("Options"), and, in the
case of directors, conversion of their director retainer fees into Stock for
payment, thereby increasing such employees', officers', and directors' interest
in the business of the Company and providing them with an increased personal
interest in the continued success and progress of the Company, the result of
which will promote both the interests of the Company and its shareholders.
Article II
Administration of Plan
2.1 The entire Board of Directors of the Company ("Board") will
administer the Plan.
2.2 The Board shall have the sole power:
(a) subject to the provisions of the Plan, to determine the terms and
conditions of all Options; to construe and interpret the Plan and Options
granted under it; to establish, amend and revoke rules and regulations relating
to the Plan and its administration; to determine the time or times an Option may
be exercised, the number of shares as to which an Option may be exercised at any
one time, to accelerate the time or times at which an Option may be exercised
and increase the number of shares as to which an Option may be exercised at any
one time, and when an Option may terminate; and to correct any defect, supply
any omission, or reconcile any inconsistency in the Plan, or in any Option
Agreement, in a manner and to the extent it shall deem necessary, all of which
determinations and interpretations made by the Board shall be conclusive and
binding on all Optionees and on their legal representatives and beneficiaries;
and
(b) to determine all questions of policy and expediency that may arise
in the administration of the Plan and generally exercise such powers and perform
such acts as are deemed necessary or expedient to promote the best interests of
the Company.
2.3 The day-to-day administration of the Plan may be carried out by
such officers and employees of the Company as shall be designated from time to
time by the Board. All expenses and liabilities incurred by the Board in
connection with the administration of the Plan shall be borne by the Company.
The Board may employ attorneys, consultants, accountants, appraisers, brokers or
other persons, and the Board, the Company and the officers and employees of the
Company shall be entitled to rely upon the advice, opinions or valuations of any
such persons. The interpretation and construction by the Board of any provision
of the Plan and any determination by the Board under any provision of the Plan
shall be final and conclusive for all purposes. Neither the Board nor any member
thereof shall be liable for any act, omission, interpretation, construction or
determination made in connection with the Plan in good faith, and the members of
the Board shall be entitled to indemnification and reimbursement by the Company
in respect of any claim, loss, damage or expense (including attorneys' fees)
arising therefrom to the fullest extent permitted by law.
<PAGE>
Article III
Shares Subject to the Plan
Subject to the provisions of Article IX below, the Stock which may be
issued under the Plan shall not exceed in the aggregate 600,000 shares, which
Stock may be authorized but unissued Stock or Stock previously issued and
outstanding and reacquired by the Company. If any Options granted under the Plan
terminate, expire or are surrendered without having been exercised in full, the
number of shares of Stock not purchased under such Options shall be available
again for the Plan.
Article IV
Nonqualified Stock Options
4.1 All employees, officers, and directors of the Company shall be
eligible to receive the grant of Options under the Plan. The Board shall
determine the employees, officer and directors to whom Options shall be granted,
the time or times such Options shall be granted, the number of shares to be
subject to each Option and the times when each Option may be exercised. The
Board shall seek information, advice and recommendations from management to
assist the Board in its independent determination as to the persons to whom
Options shall be granted. An employee, officer or director who has been granted
an Option (an "Optionee"), if he or she is otherwise eligible, may be granted
additional Options. Each Optionee shall enter into an agreement with the Company
(the "Option Agreement") setting forth the terms and conditions of the
Optionee's Option, as determined in accordance with this Plan.
4.2 Options granted under the Plan are not intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
4.3 The purchase price of each share of Stock covered by each Option
("Purchase Price") shall not be less than one hundred percent (100%) of the Fair
Market Value Per Share (as defined in Section 10.1) of the Stock on the date the
Option is granted.
4.4 Any outstanding Option and all unexercised rights thereunder shall
expire and terminate automatically upon the earliest of: (i) the cessation of
the employment or engagement of the Optionee by the Company for any reason other
than retirement (under normal Company policies), death or disability; (ii) the
date which is three months following the effective date of the Optionee's
retirement from the Company's service; (iii) the date which is one year
following the date on which the Optionee's service with the Company ceases due
to death or disability; (iv) the date of expiration of the Option determined by
the Board at the time the Option is granted and specified in such Option; or (v)
the tenth (10th) annual anniversary date of the granting of the Option. However,
the Board shall have the discretion, but not the obligation, to extend the
expiration of the Options held by an Optionee whose service with the Company has
ceased for any reason to the end of their original terms. Such discretion may be
exercised at the time of grant by express statement in the Option Agreement or
prior to expiration and termination of the Option by resolution duly adopted by
the Board.
<PAGE>
4.5 An Option may be exercisable in installments or otherwise upon such
terms as the Board shall determine when the Option is granted. In the event that
an Option is exercisable only in installments, such Option shall become fully
exercisable upon the termination of employment of the Optionee by reason of
retirement (under normal Company policies), death, disability or a Change in
Control (as defined in Section 10.2).
4.6 Upon exercise of an Option, the full Exercise Price for the shares
with respect to which the Option is being exercised shall be payable to the
Company: (i) in cash or by check payable and acceptable to the Company; (ii) if
expressly permitted in the Option Agreement, by tendering to the Company shares
of Stock owned by the Optionee having an aggregate Fair Market Value Per Share
as of the date of exercise that is not greater than the full Exercise Price for
the shares with respect to which the Option is being exercised and by paying any
remaining amount of the Exercise Price as provided in (i) above; or (iii) if
expressly permitted in the Option Agreement and to such instructions as the
Board may specify, at the Optionee's written request the Company may deliver
certificates for the shares of Stock for which the Option is being exercised to
a broker for sale on behalf of the Optionee, provided that the Optionee has
irrevocably instructed such broker to remit directly to the Company on the
Optionee's behalf the full amount of the Exercise Price from the proceeds of
such sale. In the event that the Optionee elects to make payment as allowed
under clause (ii) above, the Board may, upon confirming that the Optionee owns
the number of shares of Stock being tendered, authorize the issuance of a new
certificate for the number of shares being acquired pursuant to the exercise of
the Option less the number of shares being tendered upon the exercise and return
to the Optionee (or not require surrender of) the certificate for the shares of
Stock being tendered upon the exercise. Payment instruments will be received
subject to collection.
4.7 No shares will be issued upon exercise of an Option until the
Company has received full payment of the Exercise Price for the shares. The
Optionee shall have no rights as a stockholder until the shares are reflected as
issued on the Company's stock transfer records.
4.8 Notwithstanding the foregoing, the Company shall have the right to
postpone the time of delivery of any shares for such period as may be required
for the Company, with reasonable diligence, to comply with any applicable
listing requirements of any national securities exchange or the Nasdaq Stock
Market or any Federal, state or local law. If the Optionee, or other person
entitled to exercise an Option, fails to timely accept delivery of and pay for
the shares specified in such notice, the Board shall have the right to terminate
the Option and the exercise thereof with respect to such shares.
<PAGE>
4.9 No Option granted under the Plan shall be assignable or
transferable by the Optionee, either voluntarily or by operation of law, other
than by will or the laws of descent and distribution, and, during the lifetime
of the Optionee, shall be exercisable only by the Optionee, except as otherwise
provided in this paragraph. If the Optionee becomes disabled, the Option will be
exercisable either by the Optionee's attorney-in-fact under a Durable Power of
Attorney or by a duly appointed legal representative.
Article V
Directors' Retainer Stock
5.1 Subject to the availability of shares of Stock under the Plan, each
present or future member of the Board of Directors of the Company who is not
also an employee of the Company or of any subsidiary of the Company shall,
unless such director shall elect not to participate in this Plan, receive, in
the form of Stock, all amounts payable from time to time for service on the
Board, including any amounts payable with respect to service as chairperson of
any committee of the Board or attendance at any meeting of the Board of
Directors or any committee (collectively, "Retainer Fees").
5.2 A director may elect not to participate in the Plan by filing a
written election ("the Election Agreement") with the Company before the
beginning of each fiscal year of the Company. Any person who becomes a director
during a fiscal year, and who was not a director prior to the beginning of such
fiscal year, may file an Election Agreement to withdraw from participation in
the Plan for fiscal year before his term begins. The Election Agreement shall
continue until the director terminates or modifies such election by filing a new
Election Agreement with the Company. An Election Agreement, once made by a
director, shall be irrevocable with respect to all Retainer Fees otherwise
payable while such Election Agreement is in effect. No Election Agreement, or
any modification or termination thereof, shall apply to any portion of the
Retainer Fee otherwise payable within six months of the date of such Election
Agreement, modification or termination.
5.3 The Company shall establish and maintain a Stock Account for each
participating director, which shall reflect all entries required to be made
pursuant to the terms and conditions of the Plan. Credits made pursuant to
Section 5.4 shall be reflected on the books and records of the Company as an
obligation to issue and deliver a number of shares of Stock on the specified
payment date. No stock certificate shall be created or registered until the
payment date.
5.4 As of each date that any portion of the Retainer Fee would
otherwise be payable to a participating director, the Company shall credit to
such director's Stock Account a number of shares (rounded to the nearest whole
share) equal to portion of the director's Retainer Fee divided by the Fair
Market Price Per Share on such day.
5.5 The Company shall provide each participating director with an
annual statement indicating the number of shares of Stock credited to his Stock
Account as of the end of the preceding fiscal year.
<PAGE>
5.6 Stock credited to a participating director's Stock Account shall
not be subject to forfeiture for any reason.
5.7 Stock credits to a participating director's Stock Account shall be
payable not later than ninety (90) days after the end of the Company's fiscal
year. Upon the occurrence of a Change of Control, the Stock credits to a
participating director's Stock Account as of the day immediately prior to the
effective date of the event constituting the Change of Control shall be paid in
full on such date.
Article VI
Continuance of Employment
Nothing contained in the Plan or in any Option granted under the Plan
shall confer upon any participant any rights with respect to the continuation of
employment or engagement by the Company or interfere in any way with the right
of the Company (subject to the terms of any separate employment agreement to the
contrary) at any time to terminate such employment, to remove any director or to
increase or decrease the compensation of the participant from the rate in
existence at the time of the granting of any Option or the credit of any Stock
to any Stock Account.
Article VII
Restrictions on Shares
If an Optionee gives notice to the Company of the exercise of any
Option under the Plan or any Stock credits are payable under the Plan and the
Company is advised by counsel that Stock cannot be issued pursuant to such
exercise until the requirements of Federal or state securities laws are met, the
Company shall so notify the participant and the Company shall have no liability
for any delay in issuing or failure to issue such Stock until such requirements
are met or as a result of the inability of the Company to comply with such
requirements. However, no option which is prevented from being exercised
pursuant to this paragraph shall expire until the later of (i) its expiration
date pursuant to its terms or (ii) 30 days after the Company has advised the
Optionee that the Company is no longer prevented by Federal or state securities
laws from issuing Stock to the Optionee.
Article VIII
Privilege of Stock Ownership
No participant entitled to be issued Stock under this Plan shall have
the rights or privileges of a stockholder of the Company for any shares of Stock
issuable until such person has become the holder of record of such shares. No
adjustment shall be made for dividends or other rights for which the record date
is prior to the date on which such person becomes the holder of record, except
as otherwise expressly provided in this Plan.
<PAGE>
Article IX
Adjustment
9.1 If the number of outstanding shares of Stock is increased or
decreased, or such shares are exchanged for a different number or kind of shares
or securities of the Company through reorganization, merger, recapitalization,
reclassification, stock dividend, stock split, combination of shares, or other
similar transaction, (a) the aggregate number of shares of Stock subject to the
Plan as provided in Article III above, (b) the number of shares of Stock and the
Purchase Price applicable thereto specified in outstanding Option Agreements
executed under the Plan, and (c) the number of Stock credits to each Stock
Account, shall be appropriately and proportionately adjusted by the Board.
9.2 In the event of the payment of an extraordinary dividend by the
Company on the Stock (an "extraordinary dividend" being a payment or series of
payments within any 12 consecutive months in the aggregate in excess of
twenty-five percent (25%) of the book value attributable to the Stock of the
Company at the time of the payment of the extraordinary dividend), (a)
adjustment shall be made in the purchase price of Stock under the Option for the
amount of the extraordinary dividend, and (b) each participating director's
Stock Account shall be credited with that number of shares (rounded to the
nearest whole share) determined by multiplying the dividend amount per share by
the total number of shares credited to such director's Stock Account as of the
record date for such dividend and dividing the product by the Fair Market Price
Per Share on the dividend payment date.
9.3 Adjustments under this Article IX shall be made by the Board, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. No fractional shares of Stock shall be
issued nor shall cash in lieu of fractional shares be paid under the Plan or in
connection with any such adjustment.
Article X
Definitions
10.1 "Fair Market Value Per Share" of the Stock shall mean: (i) if the
Stock is traded only otherwise than on a securities exchange and is quoted on
the NASDAQ Stock Market ("Nasdaq"), the closing quoted selling price of the
Stock on the date of grant of the Option, as reported by the Wall Street
Journal; (ii) if the Stock is admitted to trading on a securities exchange, the
closing quoted selling price of the Stock on the date of grant of the Option, as
reported in the Wall Street Journal; or (iii) if the Stock is traded only
otherwise than on a securities exchange and is not quoted on Nasdaq, the closing
quoted selling price of the Stock on the date of grant of the Option as quoted
on the Nasdaq OTC Bulletin Board. In any case, if there were no sales of the
Stock on the date of the grant of an Option, the Fair Market Value Per Share
shall be determined by the Board in accordance with Section 20.2031-2 of the
Federal Estate Tax Regulations.
<PAGE>
10.2 "Change in Control" shall mean the occurrence of any of the
following events: (i) any "person" (together with its "affiliates" and
"associates") becoming the "beneficial owner" (each term as defined in the
Securities Exchange Act of 1934, as amended, or the rules and regulations
promulgated thereunder) of 30% or more of the voting power of all outstanding
securities of the Company entitled to vote for the election of directors of the
Company, unless a majority of the Board as constituted prior to that time have
determined in their sole discretion that, for purposes of the Plan, a Change in
Control of the Company has not occurred; (ii) as a result of or in connection
with any cash tender offer, merger or other business combination, sale of assets
or contested election of directors, or any combination of the foregoing, the
persons who were members of the Board immediately prior to such event shall
cease to constitute a majority of the Company's Board; or (iii) the Board or
shareholders of the Company approve an agreement providing for a transaction in
which the Company will cease to be an independent publicly-owned corporation or
the occurrence of a sale or other disposition of all or substantially all of the
assets of the Company.
Article XI
Amendment and Termination of Plan
11.1 The Board may, from time to time, with respect to any shares at
the time not subject to Options or credited to any Stock Account, suspend or
terminate the Plan or amend or revise the terms of the Plan.
11.2 This Plan shall terminate ten years from the earlier of the
adoption of this Plan by the Board.
11.3 No amendment, suspension or termination of this Plan shall,
without the consent of the participant, alter or impair any rights or
obligations under any Option granted to an Optionee or Stock credited to any
Stock Account under this Plan prior to the date of such amendment, suspension or
termination.
Article XII
Effective Date of Plan
The Plan shall become effective upon adoption by the Board of Directors
of the Company.
Article XIII
Term of Options Granted Under the Plan
No Option shall be granted and the Board. shall credit no Stock to any
Stock Account under this Plan more than ten years from the date of adoption of
the Plan.
Adopted by the Board of Directors as of the 1st day of February, 1998.
THE SOURCE INFORMATION MANAGEMENT COMPANY
By:
S. Leslie Flegel, Chairman
of the Board and Chief Executive Officer
[BDO Letterhead]
Consent of Independent Certified Public Accountants
The Source Information Management Company
St. Louis, Missouri
We hereby consent to the incorporation in the Prospectus constituting a part of
this Registration Statement of our report dated March 27, 1998 relating to the
consolidated financial statements of The Source Information Management Company.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
St. Louis, Missouri
May 14, 1998
/S/ BDO Seidman, LLP
BDO Seidman, LLP
