<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended October 31, 1999
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
----- -----
Commission file number 1-13437
-------
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Exact Name of Small Business Issuer as Specified in Its Charter)
MISSOURI 43-1710906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11644 LILBURN PARK ROAD
ST. LOUIS, MISSOURI 63146
(Address of Principal Executive Offices)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding on December 10, 1999
Common Stock, $.01 Par Value 17,042,078
<PAGE> 2
THE SOURCE INFORMATION MANAGEMENT COMPANY
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
October 31, 1999 and January 31, 1999
Consolidated Statements of Income for the three months
and nine months ended October 31, 1999 and 1998
Consolidated Statements of Comprehensive Income for the
three months and nine months ended October 31, 1999 and 1998
Consolidated Statement of Stockholders'
Equity for the nine months ended October 31, 1999
Consolidated Statements of Cash Flows for
the nine months ended October 31, 1999 and 1998
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE> 3
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION> (unaudited)
January 31, 1999 October 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current
Cash $ 752,695 $ 2,242,571
Trade receivables (net of allowance for doubtful accounts of $469,658 and 29,464,187 55,706,998
$1,121,715)
Income taxes receivable 262,877 -
Inventories (Note 3) 1,395,699 7,724,472
Other current assets (Note 2) 263,692 1,396,656
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 32,139,150 67,070,697
- -----------------------------------------------------------------------------------------------------------------------------
Land 120,000 2,191,875
Manufacturing plants 680,000 11,518,627
Office equipment and furniture 5,713,459 12,631,530
- -----------------------------------------------------------------------------------------------------------------------------
Property, Plants and Equipment 6,513,459 26,342,032
Less accumulated depreciation and amortization 3,179,359 5,012,501
- -----------------------------------------------------------------------------------------------------------------------------
Net Property, Plants and Equipment 3,334,100 21,329,531
- -----------------------------------------------------------------------------------------------------------------------------
Other Assets
Goodwill, net of accumulated amortization of $648,600 and $2,478,903 (Note 4) 29,608,254 50,468,474
Deferred tax asset 7,000 -
Other (Note 2) 789,307 2,765,161
- -----------------------------------------------------------------------------------------------------------------------------
Total Other Assets 30,404,561 53,233,635
- -----------------------------------------------------------------------------------------------------------------------------
$ 65,877,811 $ 141,633,863
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(unaudited)
January 31, 1999 October 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current
Checks issued against future deposits $ 2,876,922 $ 7,612,398
Accounts payable and accrued expenses 3,727,529 8,954,239
Due to Huck Store Fixture Company (Note 3) - 10,174,848
Income taxes payable - 2,369,892
Due to retailers 2,737,077 6,857,281
Deferred income taxes 718,000 743,304
Current maturities of long-term debt (Note 5) 66,057 483,346
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 10,125,585 37,195,308
- -----------------------------------------------------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 5) 3,442,000 4,041,330
- -----------------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes - 399,745
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities 13,567,585 41,636,383
- -----------------------------------------------------------------------------------------------------------------------------
Commitments
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Contributed Capital:
Common Stock, $.01 par - shares authorized, 40,000,000; 11,751,425 issued,
of which 8,000 are being held as Treasury Stock at January 31,
1999 and 17,069,596 issued, of which 32,250 is being held as Treasury 117,513 170,694
Stock at October 31, 1999
Preferred Stock, $.01 par - shares authorized, 2,000,000; 1,473,281 and
-0- issued and outstanding, respectively at January 31, 1999 and October 14,733 -
31, 1999
Additional paid-in-capital 46,451,971 87,684,635
- -----------------------------------------------------------------------------------------------------------------------------
Total contributed capital 46,584,217 87,855,329
Other comprehensive income - 15,286
Retained earnings 5,767,140 12,458,168
- -----------------------------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 52,351,357 100,328,783
Less: Treasury Stock (8,000 and 32,250 shares at cost, respectively at (41,131) (331,303)
January 31, 1999 and October 31, 1999)
- -----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 52,310,226 99,997,480
- -----------------------------------------------------------------------------------------------------------------------------
$ 65,877,811 $ 141,633,863
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1998 1999 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service Revenues $ 3,960,409 $ 4,245,228 $ 11,136,199 $ 12,928,748
Manufacturing Revenues - 20,970,193 - 44,750,296
- -----------------------------------------------------------------------------------------------------------------------------
3,960,409 25,215,421 11,136,199 57,679,044
- -----------------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues 1,651,341 2,556,424 4,797,247 6,804,270
Cost of Goods Sold - 13,602,557 - 28,084,890
- -----------------------------------------------------------------------------------------------------------------------------
1,651,341 16,158,981 4,797,247 34,889,160
- -----------------------------------------------------------------------------------------------------------------------------
2,309,068 9,056,440 6,338,952 22,789,884
Selling, General and Administrative Expense 612,701 4,048,242 1,832,621 10,501,990
- -----------------------------------------------------------------------------------------------------------------------------
Operating Income 1,696,367 5,008,198 4,506,331 12,287,894
- -----------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 11,991 44,128 22,270 86,761
Interest expense (46,108) (95,486) (264,986) (791,621)
Other (3,244) 2,020 (9,194) 175,964
- -----------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (37,361) (49,338) (251,910) (528,896)
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 1,659,006 4,958,860 4,254,421 11,758,998
Income Tax Expense 700,000 2,091,036 1,778,000 5,067,970
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 959,006 $ 2,867,824 $ 2,476,421 $ 6,691,028
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per Share - Basic $ .10 $ .17 $ .28 $ .45
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Basic (Note 6) 9,586,239 16,913,672 8,783,125 14,731,539
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per Share - Diluted $ .10 $ .16 $ .27 $ .41
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Diluted (Note 10,030,461 18,171,277 9,247,799 16,151,395
6)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1998 1999 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 959,006 $ 2,867,824 $ 2,476,421 $ 6,691,028
Foreign Currency Translation Adjustment - 84,325 - 15,286
- -----------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 959,006 $ 2,952,149 $ 2,476,421 $ 6,706,314
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Other
Preferred Stock Common Stock Additional Compre- Treasury Stock Total
---------------------------------------- Paid - in Retained hensive ---------------- Stockholders'
Shares Amount Shares Amount Capital Earnings Income Shares Amount Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1999 1,473,281 $15 11,751,425 $ 117 $ 46,452 $ 5,767 $ - 8,000 $ (41) $ 52,310
Conversion of Class A (1,473,281) (15) 1,473,281 15 -
Preferred Stock to
Common Stock
Issuance of Common 3,000,000 30 35,703 35,733
Stock
Exercise of stock 80,428 1 411 412
options
Exercise of warrants 242,047 3 1,081 1,084
Directors fees 2,086 - 18 18
Warrants issued for 38 38
consulting services
Acquisition of MYCO, 134,615 1 874 875
Inc. (Note 4)
Acquisition of 285,714 3 1,819 1,822
Chestnut Display
Systems, Inc. (Note 4)
Acquisition of Huck 100,000 1 1,289 1,290
Store Fixture Company
(Note 4)
Purchase treasury stock 24,250 (290) (290)
Foreign currency 15 15
translation adjustment
Net income 6,691 6,691
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 1999 - $ - 17,069,596 $ 171 $ 87,685 $ 12,458 $ 15 32,250 $ (331) $ 99,998
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 7
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended October 31, 1998 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $ 2,476,421 $ 6,691,028
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 425,311 2,663,533
Deferred income taxes 28,000 300,252
Other 40,266 94,441
Changes in assets and liabilities:
Increase in accounts receivable (9,655,127) (15,290,887)
Decrease in inventories - 2,217,127
Decrease in other assets 551,253 339,616
Increase in checks issued against future deposits 3,647,058 4,735,476
Increase (decrease) in accounts payable and accrued 885,987 (3,681,688)
expenses
(Decrease) increase in amounts due customers (75,607) 4,120,204
- -----------------------------------------------------------------------------------------------------------------------
Cash (Used in) Provided by Operating Activities (1,676,438) 2,189,102
- -----------------------------------------------------------------------------------------------------------------------
Investment Activities
Acquisition of Periodical Concepts (2,500,000) -
Acquisition of Chestnut Display Systems, Inc., net of cash - (3,458,429)
acquired
Acquisition of MYCO, Inc., net of cash acquired - (13,623,019)
Acquisition of 132127 Canada Inc. (ProMark), net of cash - (862,130)
acquired
Acquisition of Aaron Wire and Metal Products, Ltd, net of cash - (1,612,509)
acquired
Acquisition of Huck Store Fixture Company, net of cash acquired - (9,897,163)
Acquisition of Arrowood, Inc. - (938,785)
Additional acquisition costs of U.S. Marketing Services, Inc. - (104,484)
Additional acquisition costs Yeager Industries, Inc. - (10,387)
Capital expenditures (484,899) (2,687,117)
Loans to officers - (975,000)
Collections on loan to officer 22,093 -
Increase in cash surrender value of life insurance (32,541) (32,218)
Other - 350
- -----------------------------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (2,995,347) (34,200,891)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 8
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended October 31, 1998 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financing Activities
Proceeds from issuance of Common Stock 8,276,187 37,232,175
Borrowings under credit facility 25,775,000 50,362,700
Principal payments on credit facility (29,332,000) (53,564,700)
Borrowings under long-term debt agreements - 15,000,000
Principal payments on long-term debt agreements (29,259) (15,016,027)
Purchase of treasury stock (41,131) (290,172)
Deferred loan costs - (222,311)
Other 200 -
- -----------------------------------------------------------------------------------------------------------------------
Cash Provided by Financing Activities 4,648,997 33,501,665
- -----------------------------------------------------------------------------------------------------------------------
(Decrease) Increase in Cash (22,788) 1,489,876
Cash, beginning of period 31,455 752,695
- -----------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 8,667 $ 2,242,571
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 9
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The consolidated financial statements as of October 31, 1999 and for the three
and nine month periods ended October 31, 1999 and 1998, include, in the opinion
of management, all adjustments (consisting of normal recurring adjustments and
reclassifications) necessary to present fairly the financial position, results
of operations and cash flows at October 31, 1999 and for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-KSB for the year
ended January 31, 1999. The results of operations for the three and nine month
periods ended October 31, 1999 are not necessarily indicative of the operating
results to be expected for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain 1999 amounts have been reclassified to conform to the 2000 presentation.
2. RELATED PARTY TRANSACTIONS
In connection with his employment with the Company, Richard Jacobsen received
two loans from the Company in the amounts of $600,000 ("Loan 1") and $375,000
("Loan 2"). Loan 1, including interest, will be forgiven over a 5-year term and
Loan 2, including interest, will be forgiven over a 7-year term, provided, in
each case, that Mr. Jacobsen remains an employee of the Company. The loans bear
interest at 5% per annum.
In May 1999, the Company purchased its facility in High Point, North Carolina
for $1.8 million. The facility was owned by a partnership in which stockholders
of the Company were partners. The Board of Directors appointed Timothy Braswell,
an independent director who has since resigned from the Board, to negotiate the
transaction on the Company's behalf and, based on Mr. Braswell's recommendation,
the Board believes the terms of the purchase were fair to the Company.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
January 31, 1999 October 31, 1999
------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 576,101 $ 2,666,963
Work-in-process 805,932 1,953,159
Finished goods 13,666 3,104,350
------------------------------------------------------------------------------------------------
$ 1,395,699 $ 7,724,472
------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. BUSINESS COMBINATIONS
Acquisition of Periodical Concepts
On July 27, 1998, the Company acquired all the assets of Periodical Concepts, a
Texas general partnership doing business as PC2, for $2,500,000 in cash. Prior
to the acquisition, PC2 provided information and marketing services to retail
stores selling magazines and other periodicals.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeds the fair value of the assets acquired by approximately
$2,400,000 and is being amortized straight line over 15 years.
Acquisition of Yeager Industries, Inc.
On January 7, 1999, the Company acquired the net assets of Yeager Industries,
Inc. for $2.3 million in cash and 164,289 shares of the Company's Common Stock,
valued at the time of the acquisition at $1.15 million. The purchase price could
be increased by up to $500,000 depending on Yeager's performance over the next
two years. Yeager manufactures front-end display racks from facilities in
Philadelphia, Pennsylvania.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeds the fair value of the assets acquired by approximately
$1,049,000 and is being amortized straight line over 20 years.
Acquisition of U.S. Marketing Services, Inc.
On January 7, 1999 the Company acquired all of the stock of U.S. Marketing
Services, Inc. in exchange for 1,926,719 shares of the Company's Common Stock
and 1,473,281 shares of the Company's Class A Convertible Preferred Stock,
valued at the time of the acquisition at $26.3 million in total. The Class A
Convertible Preferred Stock was converted into an equal number of Common Shares
on March 30, 1999. U.S. Marketing's subsidiary Brand Manufacturing Corporation
manufactures front-end display racks from manufacturing facilities in Brooklyn,
New York and a warehouse and distribution facility in New Jersey. Through its
affiliates, Brand provides trucking and freight services and removes and
disposes of display racks no longer required by its customers.
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 by approximately
$23,500,000 and is being amortized straight line over 20 years.
8
<PAGE> 11
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Unaudited pro forma results of operations for the year ended January 31, 1999
for the Company, PC2, Yeager and U.S. Marketing are listed below (in thousands):
<TABLE>
-----------------------------------------------------------------------------------------
<S> <C> <C>
Total Revenues As reported $ 21,100
Pro forma 38,959
Net Income As reported 3,867
Pro forma 1,747
Earnings Per Share
Basic As reported $ .42
Diluted As reported .40
Basic Pro forma .14
Diluted Pro forma .13
-----------------------------------------------------------------------------------------
</TABLE>
Acquisition of Chestnut Display Systems, Inc.
On February 1, 1999 the Company acquired the net assets of Chestnut Display
Systems, Inc. and its affiliate Chestnut Display Systems (North), Inc. for $3.6
million in cash and 285,714 shares of the Company's Common Stock, valued at the
time of acquisition at $1.8 million. The purchase price for Chestnut may be
increased to a value (including the amounts already paid) not to exceed $9.5
million if Chestnut meets certain performance goals during fiscal 2000 and 2001.
Any increase in the purchase price will be paid 50% in cash and 50% in shares of
Common Stock. The shares will be valued using a formula contained in the
acquisition agreement, subject to a minimum value of $5.00 per share and a
maximum value of $7.00 per share. Chestnut manufactures front-end display racks
from facilities in Greenville, South Carolina and Jacksonville, Florida.
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 by approximately
$4,059,000 and is being amortized straight line over 20 years.
Acquisition of MYCO, Inc.
On February 26, 1999 the Company acquired the net assets of MYCO, Inc. for $12
million in cash and 134,615 shares of the Company's Common Stock, valued at the
time of acquisition at $875,000. The Company also assumed MYCO's industrial
revenue bond indebtedness of $4 million and repaid MYCO's indebtedness of $1.5
million. The purchase price may be increased by up to an additional 250,000
shares of Common Stock depending on MYCO's performance in the twelve months
following the acquisition. MYCO is a Rockford, Illinois manufacturer of
front-end display racks.
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 by approximately
$11,074,000 and is being amortized straight line over 20 years.
Acquisition of 132127 Canada, Inc.
On March 23, 1999 the Company purchased the net assets of 132127 Canada, Inc.,
known as ProMark, for $1.5 million Canadian. ProMark is a Canadian corporation
headquartered in Toronto which provides rebate and information services to
retail customers throughout Canada.
9
<PAGE> 12
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 by approximately
$672,000 and is being amortized straight line over 20 years.
Acquisition of Aaron Wire and Metal Products, Ltd.
On July 1, 1999 the Company acquired all of the stock of Aaron Wire and Metal
Products, Ltd. for $2.4 million Canadian. Aaron Wire manufactures front-end
display racks from manufacturing facilities in Vancouver, British Columbia.
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 by approximately
$1,794,000 and is being amortized straight line over 20 years.
Acquisition of Huck Store Fixture Company
On September 21, 1999 the Company purchased the net assets of Huck Store Fixture
Company. The purchase price of Huck will be equal to four times the average of
Huck's earnings before interest, depreciation and amortization (EBITDA) for
fiscal years 1998 and 1999 (ending in November) less approximately $6.8 million
of debt assumed, and immediately paid off, by Source. The total purchase price
is estimated to be approximately $21.3 million. Source paid a portion of the
purchase price, consisting of $3 million cash and 100,000 shares of our common
stock, valued at $1.3 million at the time of acquisition, at closing. Huck will
be entitled to an earnout payment in the amount (if any) by which four times the
average of Huck's EBITDA for its years ending November, 1999 and 2000 exceed
four times its average EBITDA for its years ending November, 1998 and 1999. Both
the purchase price and the earnout will be paid 70% in cash and 30% in Source
common shares, with shares valued for such purposes at $11.375 per share. Huck
manufactures wood store fixtures from its facilities in Quincy, Illinois and
Carson City, Nevada.
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 fair market value of the assets acquired by
approximately $13,246,000 and is being amortized straight line over 20 years.
Acquisition of Arrowood, Inc.
On September 27, 1999 the Company acquired the net assets of Arrowood, Inc. for
$939,000 in cash and a note payable for $200,000. Arrowood manufactures wood
store fixtures from its facility in Norwood, North Carolina.
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 fair market value of the assets acquired by
approximately $34,000 and is being amortized straight line over 20 years.
10
<PAGE> 13
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
Long-term debt consists of:
<TABLE>
<CAPTION>
January 31, October 31,
1999 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Facility $ 3,202,000 $ -
Industrial Revenue Bonds - 4,000,000
Unsecured note payable to former owners of acquired company,
non-interest bearing, payable in five equal annual
installments beginning in November 1999 300,000 300,000
Unsecured note payable to former owner of acquired company,
7% annual interest, payable in two annual installments beginning
in September 2000 - 170,923
Term note payable in monthly installments of $629 through
November 1999, collateralized by an automobile
6,057 624
Capital leases - 53,130
---------------------------------------------------------------------------------------------------
Total Long-term Debt 3,508,057 4,524,676
Less current maturities 66,057 483,346
---------------------------------------------------------------------------------------------------
Long-term Debt $ 3,442,000 $ 4,041,330
---------------------------------------------------------------------------------------------------
</TABLE>
On March 31, 1999 the Company entered into a new credit agreement with Wachovia
Bank, N.A. The new credit agreement enables the Company to borrow up to $15
million under a revolving credit facility and $15 million under a term loan. The
term loan was repaid in July 1999 with the proceeds of the Company's common
stock offering. The revolving credit facility has no termination date, although,
Wachovia Bank has the right to terminate the revolving credit facility upon not
less than 13 months prior written notice.
Borrowings under the revolving credit facility bear interest at a rate equal to
the monthly LIBOR index rate plus a percentage ranging from 2.0% to 3.5%
depending upon the Company's ratio of funded debt to earnings before interest,
taxes, depreciation and amortization. The credit facility is secured by an
interest in substantially all of the Company's assets. Under the credit
agreement, the Company will be required to maintain certain financial ratios.
Wachovia has committed to increase the credit facility to $40 million.
In connection with the acquisition of MYCO, Inc., the Company assumed the
liabilities of MYCO's Industrial Revenue Bonds. On January 30, 1995, the City of
Rockford issued $4 million of its Industrial Project Revenue Bonds, Series 1995,
and the proceeds were deposited with the Amalgamated Bank of Chicago, as
trustee. Wachovia Bank, N.A. has issued a rolling 13-month letter of credit for
$4.1 million in connection with the bonds. The bonds are secured by the
11
<PAGE> 14
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
trustee's indenture and the $4.1 million letter of credit. The letter of credit
is secured by substantially all of the assets of the Company. The bonds bear
interest at a variable weekly rate (approximately 80% of the Treasury Rate) not
to exceed 15% per annum. The bonds mature on January 1, 2030. Fees related to
the letter of credit are 1% per annum of the outstanding bond principal plus
accrued interest.
6. EARNINGS PER SHARE
A reconciliation of the denominators of the basic and diluted earnings per share
computations are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
1998 1999 1998 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding 9,586,239 16,913,672 8,783,125 14,731,539
Effect of dilutive securities - stock options,
warrants and earnings contingency 444,222 1,257,605 464,673 1,419,856
----------------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding - as adjusted 10,030,461 18,171,277 9,247,799 16,151,395
----------------------------------------------------------------------------------------------------
</TABLE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental information on interest and income taxes paid is as follows:
<TABLE>
<CAPTION>
Nine Months Ended October 31, 1998 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest $ 284,000 $ 757,000
Income Taxes $ 953,000 $ 2,330,000
----------------------------------------------------------------------------------------------------
</TABLE>
In connection with the acquisitions in January 1999, the Company issued
2,091,008 shares of Common Stock and 1,473,281 shares of Class A Convertible
Preferred Stock which were converted to an equal number of common shares on
March 30, 1999.
In connection with the acquisitions in February 1999, the Company issued 420,329
shares of Common Stock.
In connection with the acquisition in September 1999, the Company issued 100,000
shares of Common Stock.
12
<PAGE> 15
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. SEGMENT FINANCIAL INFORMATION
The reportable segments of the Company are services and display rack and store
fixture manufacturing. Segment operating results are measured based on operating
income. Revenues totaling $1,350,055 through July 31, 1999 have been
reclassified from display rack and store fixture manufacturing to services.
<TABLE>
<CAPTION>
Display Rack &
Store Fixture Corporate
Services Manufacturing Overhead Total
- ---------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
OCTOBER 31, 1999
- ------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 4,245,228 $ 20,970,193 $ - $ 25,215,421
Depreciation and Amortization 220,326 805,200 - 1,025,526
Operating Income 1,605,808 4,944,303 (1,541,913) 5,008,198
Total Assets 57,092,069 84,541,794 - 141,633,863
Capital Expenditures 1,570 374,910 - 376,480
QUARTER ENDED
OCTOBER 31, 1998
- ------------------------------------
Revenues 3,960,409 - - 3,960,409
Depreciation and Amortization 172,367 - - 172,367
Operating Income 2,325,340 - (628,973) 1,696,367
Total Assets 35,458,560 - - 35,458,560
Capital Expenditures 159,157 - - 159,157
NINE MONTHS ENDED
OCTOBER 31, 1999
- ------------------------------------
Revenues 12,928,748 44,750,296 - 57,679,044
Depreciation and Amortization 623,211 2,040,322 - 2,663,533
Operating Income 5,915,807 10,051,932 (3,679,845) 12,287,894
Total Assets 57,092,069 84,541,794 - 141,633,863
Capital Expenditures 2,219,317 467,800 - 2,687,117
NINE MONTHS ENDED
OCTOBER 31, 1998
- ------------------------------------
Revenues 11,136,199 - - 11,136,199
Depreciation and Amortization 425,311 - - 425,311
Operating Income 6,256,010 - (1,749,679) 4,506,331
Total Assets 35,458,560 - - 35,458,560
Capital Expenditures 484,899 - - 484,899
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We derive our revenues from (1) providing information and management services
for retail magazine sales to U.S. and Canadian retailers, magazine publishers,
confectioners and vendors of general merchandise sold at checkout counters and
(2) manufacturing display racks and store fixtures used by retailers at checkout
counters and other areas of their stores.
During fiscal 1999 and the first nine months of fiscal 2000, approximately 80.9%
and 67.2%, respectively, of our service revenues were derived from fees earned
in connection with the collection of incentive payments under our Traditional
Claim Submission and Advance Pay Programs. Payments collected from publishers
under the Advance Pay Program as a percentage of total payments collected from
publishers under these programs grew from 21.9% during fiscal 1998 to 30.4%
during fiscal 1999. 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 our Traditional Claim Submission Program, we submit claims for
incentive payments on behalf of the retailer and receive a fee based on the
amounts collected. Under the Advance Pay Program, we pay participating retailers
a negotiated fixed percentage of total quarterly incentive payments and pocket
rental fees and then collect the payments from the publishers for our own
account.
Under both the Traditional Claim Submission Program and the Advance Pay Program,
service revenues are recognized at the time claims for incentive payments are
substantially completed for submission to the publishers. Our allowance for
doubtful accounts has to date been approximately 2% of accounts receivable. This
amount has been adequate to satisfy losses from uncollectible accounts
receivable. Under the Advance Pay Program, the revenues we recognize represent
the difference between the amount advanced to the retailer customer and the
amount claimed against the publisher.
ICN and PIN revenues consist of subscription fees. Subscribers pay for their
subscriptions on a quarterly basis. Subscriptions have an initial term of one
year and are automatically renewed for successive one-year terms unless earlier
terminated. Revenues are recognized ratably over the subscription term. We also
receive fees from publishers for advertising, promotions and special programs on
ICN.
Front-end management includes configuring and designing front-end display racks,
supervising fixture installation and billing incentive payments to and
collecting incentive payments from vendors for product placement.
Front-end management revenues are recognized as services are performed.
Since January 1999, we acquired seven manufacturers of front-end and
free-standing point-of-purchase display racks and store fixtures. Manufacturing
display racks and store fixtures in our own facilities allows us to be a
full-service provider of management services for the front-end of a customer's
store.
We intend to increase the operating margins in our manufacturing segment by
continuing to consolidate duplicative administrative functions, through
increased purchasing power, by using more efficient manufacturing methods in our
acquired facilities and by more efficiently utilizing plant capacities.
We generally recognize manufacturing revenues as products are shipped to
customers. If we receive payment prior to shipment, we record the amount as a
liability and recognize the amount as revenues when products are shipped. Upon
request from a customer, the product can be stored for future delivery for the
convenience of the customer. In this case revenue is recognized when the
manufacturing and earnings processes are complete, which is when the customer
accepts title in writing, the product is invoiced with payment due in the normal
course of business, the delivery schedule is fixed and the products are
segregated from other goods. In our manufacturing segment, we also receive
trucking revenues for transporting fixtures and warehousing revenues for storing
fixtures. We generally recognize trucking revenues as shipments are completed.
Warehousing revenues are recognized when services are rendered.
Cost of revenues generally includes personnel costs, including in some cases,
the cost of independent contractors. For manufacturing, cost of revenues also
includes the cost of materials and supplies directly used in the completion of
display racks and store fixtures. Cost of service revenues is an allocation of
operating costs and is not separately analyzed by management primarily because
operating costs do not vary significantly with revenues.
14
<PAGE> 17
Selling, general and administrative expense includes corporate overhead, project
management, management information systems, executive compensation, human
resource expenses and finance expenses.
Manufacturing has accounted for a substantial increase in our cost of revenues
due to both the cost of materials and supplies used in manufacturing and
substantially increased personnel costs relating to our manufacturing
facilities. Selling, general and administrative expenses also increased
substantially due to the increased scope of our operations.
See Note 8 in the "Notes to Consolidated Financial Statements" for certain
financial information on our two business segments, which are services and
display rack and store fixture manufacturing.
RECENT ACQUISITIONS
Since January 7, 1999, we acquired the following companies. Each of the
acquisitions was accounted for as a purchase.
- U.S. MARKETING SERVICES, INC. U.S. Marketing was the parent of Brand
Manufacturing Corporation, a manufacturer of front-end display racks
with manufacturing facilities in Brooklyn, New York and a warehouse and
distribution facility in New Jersey. Through its affiliates, Brand also
provides trucking and freight services and removes and disposes of
display racks no longer required by our customers. We acquired U.S.
Marketing in January 1999 for 1,926,719 shares of our common stock and
1,473,281 shares of our Class A Convertible Preferred Stock, valued at
the time of the acquisition at $26.3 million in total. The Class A
Convertible Preferred Stock was converted into an equal number of shares
of common stock on March 30, 1999.
- YEAGER INDUSTRIES, INC. Yeager manufactured front-end display racks from
facilities in Philadelphia, Pennsylvania. We purchased the assets of
Yeager and assumed its operating liabilities in January 1999 for $2.3
million in cash and 164,289 shares of our common stock, valued at the
time of the acquisition at $1.2 million. The purchase price may be
increased by up to $500,000, depending upon Yeager's performance during
fiscal 2000 and 2001.
- MYCO, INC. MYCO was a Rockford, Illinois manufacturer of front-end
display racks. We purchased the assets and assumed the operating
liabilities of MYCO in February 1999 for $12.0 million in cash and
134,615 shares of our common stock, valued at the time of the
acquisition at $875,000. We also assumed MYCO's industrial revenue bond
indebtedness of $4.0 million and repaid MYCO indebtedness of $1.5
million. The purchase price may be increased by up to an additional
250,000 shares of our common stock depending on MYCO's performance in
the twelve months following the acquisition.
- CHESTNUT DISPLAY SYSTEMS, INC. Chestnut manufactured front-end
display racks from facilities in Greenville, South Carolina and
Jacksonville, Florida. We purchased the assets and assumed the operating
liabilities of Chestnut Display Systems, Inc. and its affiliate,
Chestnut Display Systems (North), Inc. in February 1999 for $3.6 million
in cash and 285,714 shares of our common stock, valued at the time of
the acquisition at $1.8 million. The purchase price for Chestnut may be
increased to a value (including the amounts already paid) not to exceed
$9.5 million if Chestnut meets certain performance goals during fiscal
2000 and 2001. Any increase in the purchase price will be paid 50% in
cash and 50% in shares of our common stock. The number of shares will be
calculated using a formula contained in the acquisition agreement,
subject to a minimum value of $5.00 per share and a maximum value of
$7.00 per share.
- PROMARK. We purchased the assets and assumed the operating liabilities
of 132127 Canada Inc., known as ProMark, in March 1999. ProMark was a
Canadian corporation headquartered in Toronto which provides rebate and
information services to retail customers throughout Canada. ProMark
strengthens our ability to obtain information about retail sales from
checkout areas in Canada. We paid a cash purchase price of Cdn$1.5
million for ProMark.
- AARON WIRE AND METAL PRODUCTS, LTD. Aaron Wire manufactures front-end
display racks from its facilities in Vancouver, British Columbia. In
July 1999, we acquired the stock of Aaron Wire for approximately Cdn$2.4
million.
- HUCK STORE FIXTURE COMPANY. Huck manufactured wood store fixtures from
its facilities in Quincy, Illinois and Carson City, Nevada. In September
1999, we purchased the assets and assumed certain operating liabilities
of Huck. The purchase price of Huck will be equal to four times the
average of Huck's earnings before interest, depreciation and
amortization (EBITDA) for fiscal years 1998 and 1999 (ending in
November) less approximately $6.8 million of debt
15
<PAGE> 18
assumed, and immediately paid off, by Source. The total purchase price is
estimated to be approximately $21.3 million. Source paid a portion of the
purchase price, consisting of $3 million cash and 100,000 shares of our
common stock, valued at $1.3 million at the time of acquisition, at
closing. Huck will be entitled to an earnout payment in the amount (if
any) by which four times the average of Huck's EBITDA for its years
ending November , 1999 and 2000 exceed four times its average EBITDA for
its years ending November, 1998 and 1999. Both the purchase price and the
earnout will be paid 70% in cash and 30% in Source common shares, with
shares valued for such purposes at $11.375 per share.
- ARROWOOD INC. In September 1999, we acquired the net assets of
Arrowood for $939,000 in cash and a note payable for $200,000. Arrowood
manufactured wood store fixtures from its facility in Norwood, North
Carolina.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, information relating
to our operations expressed as a percentage of Total Revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
----------- -----------
1998 1999 1998 1999
------- ------- ------- ------
<S> <C> <C> <C> <C>
Service Revenues 100.0% 16.8% 100.0% 22.4%
Manufacturing Revenues -.- 83.2 -.- 77.6
----- ----- ----- -----
Total Revenues 100.0 100.0 100.0 100.0
Cost of Service Revenues 41.7 10.1 43.1 11.8
Cost of Goods Sold -.- 54.0 -.- 48.7
----- ----- ----- -----
Gross Profit 58.3 35.9 56.9 39.5
Selling, General and Administrative Expense 15.5 16.0 16.4 18.2
----- ----- ----- -----
Operating Income 42.8 19.9 40.5 21.3
Interest Expense, Net (0.8) (0.2) (2.2) (1.2)
Other Income (Expense), Net (0.1) -.- (0.1) 0.3
----- ----- ----- -----
Income Before Income Taxes 41.9 19.7 38.2 20.4
----- ----- ----- -----
Net Income 24.2% 11.4% 21.2% 11.6%
===== ===== ===== =====
</TABLE>
QUARTER ENDED OCTOBER 31, 1999 COMPARED TO QUARTER ENDED OCTOBER 31, 1998
SERVICE REVENUES. Services, which include the Traditional Claim Submission
Program, Advance Pay Program, PIN/ICN and front-end management, accounted for
approximately 16.8% and 32.1% of our revenues and operating income,
respectively, for the quarter ended October 31, 1999. Service revenues of $4.2
million increased $285,000, or 7.2% compared to the third quarter of the prior
year as a result of an increase in front-end management revenues and the
acquisition in March 1999 of ProMark.
MANUFACTURING REVENUES. In January, 1999, we acquired Yeager and U.S. Marketing.
In February, 1999, we acquired Chestnut and MYCO. In July, 1999, we acquired
Aaron Wire and in September, 1999, we acquired Huck and Arrowood. Results of
operations for all companies have been included in our consolidated financial
statements since their respective dates of acquisition. Manufacturing display
racks and store fixtures accounted for approximately 83.2% and 98.7% of our
revenues and operating income, respectively, for the quarter ended October 31,
1999. Manufacturing revenues were $21.0 million in the third quarter of this
year. There were no manufacturing revenues in the third quarter of fiscal 1999.
GROSS PROFIT. Gross profit increased to $9.0 million for the quarter ended
October 31, 1999 from $2.3 million for the quarter ended October 31, 1998, an
increase of approximately $6.7 million, or 292.2%. Approximately $7.4 million of
the gross profit was from recently acquired manufacturing subsidiaries. Gross
margin of the service segment decreased to 39.8% for the quarter ended October
31, 1999 from 58.3% for the quarter ended October 31, 1998. One reason for the
decrease was the formation of a unified marketing and sales team that services
both the service and manufacturing segments. All of the team's costs are
included as costs of service revenues. Cost of service revenues includes all
costs dedicated to generating service revenues as well as an allocation of the
non-dedicated costs. Non-dedicated costs include administrative and corporate
costs. The allocation of non-dedicated costs also contributed to the decrease in
the gross margin of the service segment.
16
<PAGE> 19
Selling, General and Administrative Expense. Selling, general and administrative
expense increased to $4.0 million for the quarter ended October 31, 1999 from
$613,000 for the quarter ended October 31, 1998, an increase of $3.4 million, or
560.7%. Of the total, approximately $2.4 million was attributable to our
recently acquired manufacturing subsidiaries. Of the remaining $1.0 million
increase, $100,000 was attributable to our services segment and $900,000 was
attributable to general corporate expenses. Selling, general and administrative
expense as a percentage of revenues increased from 15.5% for the quarter ended
October 31, 1998 to 16.0% for the quarter ended October 31, 1999.
Operating Income. Operating income increased to $5.0 million for the quarter
ended October 31, 1999 from $1.7 million for the quarter ended October 31, 1998,
an increase of $3.3 million, or 195.2%. Operating margins decreased from 42.8%
to 19.9% as a result of acquiring manufacturing subsidiaries which have lower
operating margins than our services. The service segment contributed
approximately $1.6 million to operating income and the manufacturing segment
contributed approximately $4.9 million. General corporate expenses included in
selling, general and administrative expense and allocated to cost of service
revenues reduced operating income by approximately $1.5 million.
Interest Expense. Interest expense increased $50,000 compared to the quarter
ended October 31, 1998, due to the assumption of the $4 million in industrial
revenue bonds in connection with the MYCO acquisition.
Income Tax Expense. The effective income tax rate for the quarters ended October
31, 1999 and 1998 was 42.2%. This rate varied from the federal statutory rate
due to state income taxes and expenses not deductible for income tax purposes.
These non-deductible expenses include goodwill amortization, meals and
entertainment and officers' life insurance premiums.
NINE MONTHS ENDED OCTOBER 31, 1999 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
1998
Service Revenues. Services accounted for approximately 22.4% and 48.1% of our
revenues and operating income, respectively, for the nine months ended October
31, 1999. Service revenues of $12.9 million increased $1.8 million, or 16.1%
compared to the first nine months of the prior year as a result of an increase
in front-end management revenues and the acquisition in March 1999 of ProMark.
Manufacturing Revenues. Manufacturing display racks and store fixtures accounted
for approximately 77.6% and 81.8% of our revenues and operating income,
respectively, for the nine months ended October 31, 1999. Manufacturing revenues
were $44.7 million in the first nine months of this year. There were no
manufacturing revenues in the first nine months of fiscal 1999.
Gross Profit. Gross profit increased to $22.8 million for the nine months ended
October 31, 1999 from $6.3 million for the nine months ended October 31, 1998,
an increase of approximately $16.5 million, or 259.5%. Approximately $16.7
million of the gross profit was from recently acquired manufacturing
subsidiaries. Gross margin of the service segment decreased to 47.3% for the
nine months ended October 31, 1999 from 56.9% for the nine months ended October
31, 1998. One reason for the decrease was the formation of a unified marketing
and sales team that services both the service and manufacturing segments. All of
the team's costs are included as costs of service revenues. Cost of service
revenues includes all costs dedicated to generating service revenues as well as
an allocation of the non-dedicated costs. Non-dedicated costs include
administrative and corporate costs. The allocation of non-dedicated costs also
contributed to the decrease in the gross margin of the services segment.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased to $10.5 million for the nine months ended October 31, 1999
from $1.8 million for the nine months ended October 31, 1998, an increase of
$8.7 million, or 473.1%. Of the total, approximately $6.6 million was
attributable to our recently acquired manufacturing subsidiaries. Of the
remaining $2.1 million increase, $130,000 was attributable to our services
segment and $2.0 million was attributable to general corporate expenses.
Selling, general and administrative expense as a percentage of revenues
increased from 16.4% for the nine months ended October 31, 1998 to 18.2% for the
nine months ended October 31, 1999.
Operating Income. Operating income increased to $12.3 million for the nine
months ended October 31, 1999 from $4.5 million for the nine months ended
October 31, 1998, an increase of $7.8 million, or 172.7%. Operating margins
decreased from 40.5% to 21.3% as a result of acquiring manufacturing
subsidiaries which have lower operating margins than our services. The service
segment contributed approximately $5.9 million to operating income and the
manufacturing segment contributed approximately $10.1 million. General corporate
expenses included in selling, general and administrative expense and allocated
to cost of service revenues reduced operating income by approximately $3.7
million.
17
<PAGE> 20
Interest Expense. Interest expense increased $527,000 compared to the nine
months ended October 31, 1998, principally due to the increased borrowings used
to fund our manufacturing acquisitions and the assumption of the $4 million in
industrial revenue bonds in connection with the MYCO acquisition.
Income Tax Expense. The effective income tax rates for the nine months ended
October 31, 1999 and 1998 were 43.1% and 41.8%, respectively. These rates varied
from the federal statutory rate due to state income taxes and expenses not
deductible for income tax purposes. These non-deductible expenses include
goodwill amortization, meals and entertainment and officers' life insurance
premiums.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements for the service segment are for funding the
Advance Pay Program and for meeting general working capital requirements. Our
primary cash requirements for the manufacturing segment are for purchasing
materials and the cost of labor incurred in the manufacturing process.
Historically, we have financed our business activities through cash flows from
operations, borrowings under our revolving credit facility and through the
issuance of equity securities.
During the nine months ended October 31, 1999, we advanced approximately $46.2
million under the Advance Pay Program. During fiscal 1999, 1998 and 1997, we
advanced approximately $59.8 million, $41.7 million and $16.7 million,
respectively, under the Advance Pay Program. These advances grew by 43.4% from
fiscal 1998 to fiscal 1999 and 149.7% from fiscal 1997 to fiscal 1998.
Generally, the primary source of funding the advances is our credit facility,
which is discussed below. During the quarter ended October 31, 1999, the Program
was funded by (i) proceeds from the recently completed common stock offering,
(ii) borrowings under the revolving credit facility, and (iii) cash flows from
operations. Collections under the Advance Pay Program are used to pay down any
outstanding balance under the credit facility. Thus, the credit facility is
primarily used to manage the timing of payments and collections under the
Advance Pay Program. Growth of the Advance Pay Program will be monitored and
controlled to ensure that funding will be available either through cash provided
by operations or borrowings under our credit facility.
Net cash provided by operating activities was $2.2 million for the nine months
ended October 31, 1999 compared to net cash used by operating activities of $1.7
million for the nine months ended October 31, 1998.
Net cash used in investing activities was $34.2 million for the nine months
ended October 31, 1999 and $3.0 million for the nine months ended October 31,
1998. The increase was due primarily to the acquisitions during the nine months.
Net cash provided by financing activities was $33.5 million in the nine months
ended October 31, 1999 and $4.6 million in the nine months ended July 31, 1998.
The increase was due primarily to proceeds from the common stock offering in
July 1999.
At October 31, 1999, we did not have any commitments for capital expenditures.
Currently, we do not anticipate any significant capital expenditures during
fiscal 2000.
At October 31, 1999, our total long-term debt obligations were approximately
$4.5 million. In March 1999, we amended and restated our Credit Agreement with
Wachovia Bank, N.A. to provide for a $15.0 million term loan and a $15.0 million
revolving credit facility. Proceeds of the term loan, which were received on
March 31, 1999, were used to fund our recent acquisitions and borrowings under
the revolving credit facility were used for general corporate purposes,
including funding our Advance Pay Program. The term loan was repaid in full in
July with proceeds from the public offering. The Credit Agreement is secured by
an interest in substantially all of our assets. Wachovia has committed to
increase our credit facility to $40 million.
At October 31, 1999, we had no outstanding balance under the revolving credit
facility. The revolving credit facility bears interest at a variable rate based
on the London Interbank Offered Rate and carries a facility fee of 0.375% per
annum on the average daily balance of the unused portion. The revolving credit
facility has no termination date, although Wachovia Bank has the right to
terminate the facility upon not less than thirteen (13) months prior written
notice. We believe that Wachovia will not terminate this arrangement in the
foreseeable future. However, should Wachovia terminate the credit facility, we
would be required to use funds from operations, obtain other financing or issue
equity securities to repay the debt. If we were unable to obtain alternative
financing, our ability to fund the Advance Pay Program would be substantially
impaired.
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<PAGE> 21
Under the Credit Agreement, we are subject to various financial and operating
covenants. These include (i) requirements that we satisfy various financial
ratios, (ii) restrictions on our ability to make capital expenditures exceeding
$3.5 million in any fiscal year, and (iii) limitations on the payment of cash
dividends or other distributions on capital stock or payments in connection with
the purchase, redemption, retirement or acquisition of capital stock.
In connection with the acquisition of MYCO, Inc., the Company assumed MYCO's
Industrial Revenue Bonds (IRB). On January 30, 1995, the City of Rockford issued
$4 million of its Industrial Project Revenue Bonds, Series 1995, and the
proceeds were deposited with the Amalgamated Bank of Chicago, as trustee.
Wachovia has issued a rolling 13-month letter of credit for $4.1 million in
connection with the IRB. The bonds are secured by the trustee's indenture and
the $4.1 million letter of credit. The letter of credit is secured by
substantially all of our assets. The bonds bear interest at a variable weekly
rate (approximately 80% of the Treasury Rate) not to exceed 15% per annum. The
bonds mature on January 1, 2030. Fees related to the letter of credit vary from
1% to 2.5% (depending upon the ratio of funded debt to EBITDA) per annum of the
outstanding bond principal plus accrued interest.
In June 1999, we purchased our facility in High Point, North Carolina for $1.8
million. We financed this purchase through available borrowings under our
revolving credit facility.
We believe that our cash flow from operations together with our revolving credit
facility and the proceeds from our common stock offering will be sufficient to
fund our working capital needs and capital expenditures for the foreseeable
future.
NEW ACCOUNTING STANDARDS
SOP 98-5, "Reporting on the Costs of Start-Up Activities," requires that the
costs of start-up activities, including organization costs, be expensed as
incurred. This Statement is effective for financial statements issued for fiscal
years beginning after December 15, 1998. The Company believes that the adoption
of SOP 98-5 will have no material effect on the financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company does
not expect the adoption of this statement to have a significant impact on the
results of operations, financial position or cash flows.
YEAR 2000 COMPLIANCE
Year 2000 Overview - Most of the services we provide are dependent upon computer
technology. Since early 1997, we have been analyzing and testing all of our
information technology (IT) and non-IT data systems for possible Year 2000, or
Y2K, problems and have been remediating any Y2K problems detected. As of
December 13, 1999, we have completed 100% of all analyses and testing which we
believe to be advisable for all six IT and non-IT systems and, as a result, at
this time we are not aware of any further remediation effort which may be
required.
Claim Submission Program. We developed our Claim Submission Program IT software
with a third party. We completed Y2K compliance analysis and testing on this
software in February 1999 and have corrected all Y2K problems detected during
that testing. In addition, we have upgraded the operating system on the hardware
platform for the Claim Submission Program software to be Y2K compliant. We
conducted follow up testing and remediation on all Claim Submission Program IT
software during October 1999 and, as a result, at this time we are not aware of
any further remediation effort which may be required. Our Claim Submission
Program also utilizes non-IT phone lines for electronic data transmission. We
have confirmed Y2K compliance with the third party provider of our phone
services. In the event our telecommunications services experience Y2K-related
failures, we would employ alternative, though less efficient, methods of data
transmission, such as electronic tape transfer and hard copy data printouts.
Advance Pay Program. The IT component of our Advance Pay Program involves
transporting data on rebate claims into a Microsoft Excel 97 software program
which reformats the data to determine the amount of advance payments due to our
retailer customers. Microsoft Excel 97 has been declared Y2K compliant by the
vendor, which is consistent with our internal
19
<PAGE> 22
testing results. There are no non-IT functions involved in our Advance Pay
Program. Because we do not anticipate any Y2K problems with our Advance Pay
Program, we have not developed a Y2K failure contingency plan for the program.
PIN PROGRAM. The IT component of our PIN Program was developed by our internal
programming staff with Microsoft Visual Foxpro version 6.0, which has been
declared Y2K compliant by the vendor. We completed testing and remediation of
this program during October 1999 and, as a result, at this time we are not aware
of any further remediation effort which may be required. There are no non-IT
functions upon which the PIN Program is dependent. We have not developed a Y2K
failure contingency plan for the PIN Program because we do not believe the
program will experience any Y2K-related failures.
ICN. The IT functions of our ICN website were developed by our internal
programming staff using Web Connects Software, which has been declared Y2K
compliant by the vendor. Background databases are programmed in Microsoft Visual
Foxpro version 6.0, which has also been declared Y2K compliant by the vendor.
Because the ICN system utilizes an 8-digit date field, we do not anticipate any
Y2K problems. We completed Y2K testing and remediation of this program during
October 1999 and, as a result, at this time we are not aware of any further
remediation effort which may be required. The only non-IT function of ICN
involves telecommunications. In the event of telecommunications problems our
contingency plan involves other methods of data transmission for this component
of ICN such as phoning, faxing or mailing information to our customers.
Front-end Management Services. Our Front-end Management Services IT software was
developed by a third party software developer with MacroMedia Director software,
which has been declared Y2K compliant by the vendor. The developer also has
confirmed that our customized Front-end Management Services software package is
Y2K compliant. We completed internal testing of this software during October
1999 and, as a result, at this time we are not aware of any further remediation
effort which may be required. There are no non-IT functions related to our
Front-end Management Services. Because we do not anticipate Y2K issues, we have
not developed a contingency plan for our Front-end Management Services.
Display Rack and Store Fixture Manufacturing. Our Display Rack and Store Fixture
Manufacturing subsidiaries were acquired within the past year. We collected data
to verify Y2K compliance issues which may affect these subsidiaries. We
completed our Y2K analyses and testing for both the IT and non-IT systems of our
manufacturing subsidiaries during November 1999 and then setup remediation work
which presently we expect to be completed by the end of December. All companies
which were using accounting software that was not Y2K compliant have converted
to a new accounting package (ACCPAC) that has been declared by the vendor Y2K
compliant.
IT Systems - We believe that we have corrected all Y2K deficiencies which we
detected in our manufacturing subsidiaries' IT systems:
- All manufacturing subsidiaries primary computer systems and all personal
computers have been tested and we believe are Y2K compliant.
- The rack billing and cost sharing software for all of our manufacturing
subsidiaries has been replaced and we believe is Y2K compliant.
- The payroll software used by all the manufacturing subsidiaries has been
orally declared compliant by the payroll service providers.
- Certain aspects of MYCO's inventory and raw materials control software
were not Y2K compliant. This software is being replaced with a new purchase
order system that will be in place before the end of the year.
- Brand utilizes a Novell network which is not currently Y2K compliant. We
intend to correct this problem by the end of 1999.
Non-IT Systems - Our non-IT manufacturing systems consist principally of
software used in our manufacturing equipment and phone systems. Because our
non-IT manufacturing systems are not significantly dependent upon date sensitive
functions, we do not expect any material problems with these operations in the
event they are not fully Y2K compliant. We have assessed and tested the Y2K
compliance status of our manufacturing and phone systems and have taken what we
believe to be
20
<PAGE> 23
the necessary steps to ensure that these systems will be substantially Y2K
compliant by the end of 1999. Our analysis and testing of our manufacturing
subsidiaries' non-IT systems have revealed the following:
- We believe the only non-IT systems used by MYCO are those pertaining to
its manufacturing operations and its phone system. Based on our analysis, there
do not appear to be any Y2K issues associated with MYCO's production process.
MYCO's phone system has been orally declared compliant by the vendor.
- The only non-IT system in Chestnut's manufacturing operations involves a
wire bender for which we have received written confirmation of Y2K compliance
from the vendor. Chestnut's phone system has been orally declared compliant by
the vendor.
- Letters have been received from each vendor of Yeager's production
equipment stating to the effect that this equipment is Y2K compliant. Yeager's
phone system has been orally declared compliant by the vendor.
- We are not aware of any Y2K problems relating to Brand's, Aaron's, Huck's
or Arrowood's non-IT manufacturing systems. Their phone systems have been orally
declared compliant by the vendors.
Third Party Assessments - We have communicated orally or in writing with
approximately 90% of our magazine wholesaler, national distributor and magazine
publisher trading partners in order to assess their Y2K readiness. Based on
those communications, we believe that almost all of those with whom we have
communicated expect to be Y2K compliant before the end of 1999, and we do not
presently have reason to believe that there will be significant Y2K problems
with these third parties that would impair our normal operations. In addition to
our oral communications with magazine wholesalers, national distributors and
magazine publishers, we sent a letter in May 1999 to 139 magazine wholesalers to
verify their Y2K compliance. We have received responses from 33, or 24%, of
those contacted. We attempted to contact all parties who failed to respond to
our Y2K inquiries. Although we have not received confirmation from 100% of these
wholesalers, we have received confirmation from the programming houses for the
majority of the wholesalers that they believe their systems to be Y2K compliant.
We have made verbal and written Y2K inquiries of our vendors, suppliers and
customers. We have also communicated with our suppliers of non-IT operations and
services (such as electricity and telecommunications providers). Based on these
communications, we do not presently have reason to believe that there will be
Y2K problems involving any of these third parties that would materially impair
our operations. In the event any of our vendors or suppliers are not Y2K
compliant by the end of 1999, we intend to establish relationships with other
vendors or suppliers to replace those who are non-compliant. To date we have
received approximately 35% of the responses back from the vendors, suppliers and
customers. This 35% represents the majority of all of our major vendors,
suppliers and customers. We do not anticipate any far reaching problems with
continuing business relationships with these vendors, suppliers and customers.
Potential Y2K Risk - We believe that the most reasonably likely worst-case
scenario due to our internal and third party external systems not being Y2K
compliant would be the inability to perform the above-described services in a
most time-efficient manner and thereby meet client deadlines. We depend on data,
materials and other services from third parties in order to provide information
and manufacturing services to our clients. If these third parties have problems
supplying data, materials and other services to us, then deadlines for our
clients may not be met. If our internal systems are not Y2K compliant, data,
materials and services received from third parties cannot be processed in a
timely manner. This could also lead to missed deadlines, which could have a
negative impact on our relationships with our customers and a material and
adverse effect on our financial condition and results of operations.
Contingency Plan - In the event our telecommunications services that impact our
Claims Submission Program experience Y2K-related failures, we would employ
alternative, though less efficient, methods of data transmission, such as
electronic tape transfer and hard copy data printouts. In the event of
telecommunications problems that impact ICN our contingency plan involves other
methods of data transmission such as phoning, faxing or mailing information to
our customers. Because we do not anticipate Y2K issues for the remaining IT and
non-IT systems we have not developed a contingency plan for those systems.
Y2K Expenses - As of December 1999, we had incurred expenses of less than
$50,000 for Y2K analysis, testing and remediation. We do not anticipate any
substantial additional expenses in connection with our remaining Y2K compliance
21
<PAGE> 24
efforts. We have not included any expenditures for Y2K compliance in our budget.
There can be no assurance that our additional expenses, in particular in
connection with our manufacturing subsidiaries, will not be significant.
22
<PAGE> 25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders in the
quarter ended October 31, 1999.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Exhibit Index.
(a) The following Current Report on Form 8-K was filed during the quarter
ended October 31, 1999.
(i) The Company's Current Report on Form 8-K dated October 6, 1999,
relating to the acquisition of Huck Store Fixture Company on
September 21, 1999.
23
<PAGE> 26
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE SOURCE INFORMATION MANAGEMENT COMPANY
Date: December 15, 1999 /S/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Chief Financial Officer
24
<PAGE> 27
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule (Filed in EDGAR version only)
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet at October 31, 1999 (Unaudited) and the Statement of Income for the Nine
Months Ended October 31, 1999 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 2,242,571
<SECURITIES> 0
<RECEIVABLES> 55,706,998
<ALLOWANCES> 1,027,715
<INVENTORY> 7,724,472
<CURRENT-ASSETS> 67,070,697
<PP&E> 26,342,032
<DEPRECIATION> 5,012,501
<TOTAL-ASSETS> 141,633,863
<CURRENT-LIABILITIES> 37,195,308
<BONDS> 0
0
0
<COMMON> 170,694
<OTHER-SE> 99,826,786
<TOTAL-LIABILITY-AND-EQUITY> 141,633,863
<SALES> 57,679,044
<TOTAL-REVENUES> 57,679,044
<CGS> 34,889,160
<TOTAL-COSTS> 10,501,990
<OTHER-EXPENSES> (175,964)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 791,621
<INCOME-PRETAX> 11,758,998
<INCOME-TAX> 5,067,970
<INCOME-CONTINUING> 6,691,028
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,691,028
<EPS-BASIC> .45
<EPS-DILUTED> .42
</TABLE>
