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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required). For the fiscal year ended January 31, 1999.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required). For the transition period from
_____________ to ______________.
Commission file number 1-13437
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Name of Small Business Issuer in its Charter)
MISSOURI 43-1710906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11644 LILBURN PARK ROAD
ST. LOUIS, MISSOURI 63146
(Address of Principal Executive Offices) (Zip Code)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
Securities registered under Section 12(g) of the Act: COMMON STOCK $0.01 PAR
VALUE
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $21,099,928.
At April 16, 1999 the aggregate market value of the voting stock held by
non-affiliates of The Source Information Management Company (the "Company") was
approximately $97,700,000 based on the last sale price of the Common Stock
reported by the Nasdaq National Market on April 16, 1999. At April 16, 1999, the
Company had outstanding 13,663,735 shares of Common Stock.
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TABLE OF CONTENTS
PART I
Page
ITEM 1. Description of Business 1
ITEM 2. Description of Property
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
ITEM 7. Financial Statements
ITEM 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation
ITEM 11. Security Ownership of Certain Beneficial Owners and
Management
ITEM 12. Certain Relationships and Related Transactions
ITEM 13. Exhibits and Reports on Form 8-K
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SOME OF THE INFORMATION CONTAINED IN THIS FORM 10-KSB CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. WHEN USED IN THIS
REPORT, THE WORDS "MAY," "WILL," "BELIEVES," "ANTICIPATES," "INTENDS,"
"EXPECTS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. BECAUSE SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES, OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO: (I) OUR DEPENDENCE ON THE
MARKETING AND DISTRIBUTION STRATEGIES OF PUBLISHERS AND OTHER VENDORS; (II) OUR
ABILITY TO ACCESS CHECKOUT AREA INFORMATION; (III) RISKS ASSOCIATED WITH OUR
ADVANCE PAY PROGRAM, INCLUDING PROBLEMS COLLECTING INCENTIVE PAYMENTS FROM
PUBLISHERS; (IV) DEMAND FOR OUR DISPLAY RACKS; (V) OUR ABILITY TO SUCCESSFULLY
IMPLEMENT OUR GROWTH STRATEGY; (VI) COMPETITION; (VII) OUR ABILITY TO
EFFECTIVELY MANAGE OUR EXPANSION; AND (VIII) GENERAL ECONOMIC AND BUSINESS
CONDITIONS NATIONALLY, IN OUR MARKETS AND IN OUR INDUSTRY. INVESTORS ARE ALSO
DIRECTED TO CONSIDER OTHER RISKS AND UNCERTAINTIES DISCUSSED IN OTHER REPORTS
PREVIOUSLY AND SUBSEQUENTLY FILED BY US WITH THE SECURITIES AND EXCHANGE
COMMISSION. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE 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.
Information stated on a pro forma basis included in this report includes the
results of operations of U. S. Marketing Services, Inc. as if the acquisition
had been consummated on February 1, 1997.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
We are a leading provider of information and management services for retail
magazine sales to U.S. and Canadian retailers and magazine publishers. We are
also a leading manufacturer of display racks used by retailers at checkout
counters. We were organized as a Missouri corporation in 1995 by the
consolidation of two companies, which had provided services to magazine
retailers for over twenty years. Since our organization, we have expanded our
services and our geographic reach through the acquisition of eleven companies,
seven of which provide services for retail magazine sales and four of which are
display rack manufacturers.
Through our information services, we provide sales figures and product placement
and other related information in various user-friendly formats, including print,
CD-ROM and over the Internet. This information helps users to formulate
marketing, distribution and advertising plans and to react more quickly to
changing market conditions. Our information services cover approximately 7,000
magazine titles and are provided to over 1,000 retail chains with approximately
100,000 stores and 500,000 checkout counters. We believe we maintain the most
comprehensive information database available for retail magazine sales and
magazine placement at checkout counters. Our extensive retailer and vendor
relationships allow us to keep this information up to date. We have expanded
upon our experience with retail magazine sales and also provide similar
information and services to confectioners and vendors of general merchandise
sold at checkout counters.
Through our management services, we help retailers to increase sales and
incentive payment revenues by reconfiguring and designing front-end display
racks, supervising fixture installation, selecting products and negotiating,
billing and collecting incentive payments from vendors. Historically, as part of
our services, we arranged for the manufacture of display racks for many of our
customers. Since January 1999, we acquired four display rack manufacturers.
Manufacturing display racks in our own facilities allows us to be a full-service
provider of management services for the checkout area, or "front-end," of a
customer's store. We also can integrate the design and manufacturing processes
with our clients' merchandising strategies and better manage the timing of
display rack delivery. We believe this enhances the value of our front-end
management services for our clients. We also manufacture free-standing
"point-of-purchase" display racks for other locations in retail stores that are
designed to increase product visibility and sales.
We believe that we are well positioned to use our existing relationships with
retailers and vendors to cross-sell our information and management services and
display rack manufacturing capability.
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INDUSTRY OVERVIEW
A substantial portion of the products sold in retail stores are bought on
impulse. It is therefore important to vendors that their products be on
prominent display in those areas of a store where they will be seen by the
largest number of shoppers. There are usually two such areas in a store. One is
a dedicated area called a mainline display; the other is the checkout area which
is sometimes referred to as the front-end. The front-end is visited by virtually
every shopper in a store. Shoppers typically must wait to complete the checkout
process and are more likely to see products on display in the front-end, which
increases the likelihood that these products will be bought on impulse. Products
suited to front-end display include magazines, confections and certain general
merchandise such as razor blades, film and batteries.
Vendors of front-end products compete for favorable spaces on display racks
known as "pockets." Some vendors make incentive payments to retailers for
favorable pocket locations. For example, magazine publishers and confectioners
often pay retailers an up-front fee to have front-end display racks configured
to provide for their desired pocket placements. Magazine publishers and general
merchandise vendors also pay periodic pocket rental fees based on the location
and size, measured in linear inches, of their products' pockets. Alternatively,
some magazine publishers offer retailers cash rebates based on the sales volumes
of their magazines to encourage retailers to carry and assign favorable pocket
space to their titles. Most retailers have historically outsourced the
information gathering and administration of claims collection to third parties
such as The Source. This relieves them of the substantial administrative burden
associated with that process, including monitoring thousands of titles, each
with a distinct incentive arrangement.
Retailers typically reconfigure their checkout areas every three years, at which
time they install new display racks and negotiate new agreements with magazine
publishers and confectioners. Agreements with vendors of other front-end
products are typically negotiated annually.
In the magazine industry, incentives also are provided for including magazines
on mainline displays. These incentives take the form of a rebate for each copy
sold by the retailer and are intended to encourage retailers to prominently
display titles on mainline displays. In addition to increasing revenues,
additional sales enable magazine publishers to charge higher advertising rates.
Timely delivery of information about retailer activity at the front-end,
including timing of reconfigurations, changes in display position or the
discontinuance of a vendor's products, is important to vendors of front-end
products. This allows them to take advantage of opportunities at the front-end
before final decisions are made by the retailer and to react expeditiously to
changed circumstances. Timely delivery of information about price changes,
special promotions, new product introductions and other vendor plans is
important to retailers because it allows them to react quickly to capitalize on
opportunities presented by a vendor's plans and to take advantage of changes in
the market rate for the fees and incentive payments available from magazine
publishers and other front-end product vendors.
Historically, information available to vendors about retail checkout area
activity and information available to retailers about price changes, special
promotions and other matters has been fragmented and stale. This is the result
of a number of factors, including the following:
- Many front-end products, including magazines, are sold through
distributors, resulting in very little direct contact between vendors
and retailers;
- Retailers generally have not had systems in place to efficiently collect
front-end sales and other information;
- The number of retailers who sell magazines and other front-end products
is large and they are widely dispersed geographically; and
- Until the availability of cost-effective and user-friendly data
processing applications, there was no convenient means to disseminate
this information.
We believe that there is an increasing demand on the part of front-end product
vendors for more frequent and detailed
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information on sales and other front-end activity. For example, timely
information about sales of each magazine title by store would be of particular
importance to magazine publishers, because it would assist them to increase
revenues from advertisers who want to target their advertising to a particular
market.
Our traditional source of retail magazine sales information has been magazine
distributors. They provide us with quarterly information about retail sales of
magazines on a chain-by-chain basis. Accordingly, information we provide to
magazine publishers about magazine sales by retailers is also on a quarterly,
chain-by-chain basis, rather than on a more frequent, store-by-store basis. We
intend to develop the capability to gather and provide magazine sales
information on a weekly, store-by-store basis.
Through our front-end management services we also have access to a significant
amount of information about retail checkout area activity. Our recent
acquisitions of four display rack manufacturers further increase our information
base.
The continual re-merchandising and re-modeling of retail stores drives the
demand for new display racks. Retailers request new displays to promote new
products, to upgrade the appearance of an existing store and to render the
appearance of newly opened stores consistent with the rest of the retail chain.
The continual introduction of new products and rapidly evolving packaging of
existing products also drives the need for new displays.
SERVICES
Our claims submission services for magazine retailers were established over 20
years ago. Our experience in providing these services is the foundation for our
other services. Set forth below are descriptions of our services and products in
each of our segments: claim submission and other information services, and
display rack manufacturing. See Note 16 in our "Notes to Consolidated Financial
Statements" for certain financial information of each of our segments.
Claims Submission and Other Information Services
Claim Submission Program. Through our information gathering capabilities, we
assist U.S. and Canadian retailers to accurately monitor, document, claim and
collect magazine publisher incentive and pocket rental payments. Incentive
payments consist of cash rebates offered to retailers by magazine publishers
equal to a percentage of magazine sales. Pocket rental payments are made by
magazine publishers for providing a specific pocket size and location on a
display rack. Our claim submission program relieves our retailer customers of
the substantial administrative burden of documenting their claims and we believe
increases the amount of claims they collect.
The claim submission process begins at the end of each calendar quarter. Local
distributors detail the titles and number of copies sold by our retailer clients
during that quarter. Display rack manufacturers and our retailer clients provide
us with information about magazine pocket placements. Based on this information,
we prepare claim forms and submit the documented claims to the appropriate
national distributor. After verification of the claim, the national distributor,
on behalf of the publisher, remits to us payment for the retailer. We then
record the payment and forward it to the retailer. We charge the retailer a
negotiated percentage of the amount collected.
Retailer customers who use our claim submission program include Fleming, Kroger,
Southland 7-Eleven, Target and Walgreens. Claim submission services accounted
for approximately 14.4% of our fiscal 1999 revenues on a pro forma basis.
Advance Pay Program. As an extension of our claim submission program, we have
established our Advance Pay Program for magazine sales. Under this program, we
pay to participating retailers a negotiated fixed percentage of the total
quarterly incentive payments and pocket rental fees otherwise due the retailer.
We generally make these payments within 90 days after the end of the quarter. We
then collect the payments for our own account. This service provides the
retailer with improved cash flow and relief from the burdensome administrative
task of processing a large number of small checks from publishers.
Our payments to the retailer precede our collections from the publisher. In
order to make these payments to retailers,
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we use funds generated from operations and funds borrowed under our revolving
credit facility. Service fees earned under the Advance Pay Program generally
exceed those charged under our claim submission program. However, we generally
assume the risk of uncollectibility of the incentive and pocket rental payments.
Customers of our Advance Pay Program include A&P, Ahold USA, Food Lion, Kmart
and W.H. Smith. The Advance Pay Program accounted for approximately 19.9% of our
fiscal 1999 revenues on a pro forma basis.
PIN. We market to magazine publishers our database of magazine-related industry
information that we gather through our claims submission program. This
information assists them in formulating their publishing and distribution
strategies. PIN subscribers have access to a historical database of sales
information for publications, as well as quarterly updates. PIN can generate
reports of total sales, sales by class of trade and sales by retailer. Each
report also provides other sales related information, including returns of
unsold magazines and total sales ranking. We believe that PIN is the most
extensive database available for single-copy retail magazine sales information.
Subscribers to PIN 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. At March 31, 1999, we had
17 PIN subscribers, including Globe Marketing Services, Hearst Distribution
Group Magazines, Primedia, Time Distribution Services and Warner Publisher
Services. PIN accounted for 1.6% of our fiscal 1999 revenues on a pro forma
basis.
ICN. In response to the business communications opportunities presented by the
Internet, we have developed our ICN website. The ICN website enables subscribing
magazine publishers to access information regarding pricing, new titles,
discontinued titles and display rack configuration changes on a chain-by-chain
basis. This information is important to publishers because discontinuation and
placement of their titles on the display rack can have a significant impact on
sales. We believe that, prior to ICN, publishers could not react as quickly to
these changes. Publishers also can use ICN to promote special incentives and
advertise and display special editions, new publications and upcoming covers,
all of which can increase their sales.
Retailers can use ICN to order new magazine titles and take advantage of
promotions by publishers. They also can download frequently changing price
information, including Uniform Product Codes, which change often because of
price changes and new title introductions.
As part of our increased emphasis on confections and general merchandise sold at
checkout counters, we intend to adapt ICN for confections and general
merchandise.
The ICN website is configured so that publishers cannot access the strategically
sensitive information of other publishers and retailers. Retailers and
publishers can also exchange information and conduct transactions on the
Internet site without compromising their sensitive, proprietary information. PIN
can also be accessed through ICN.
We receive annual fees from each publisher that subscribes to ICN. We also
receive fees from publishers for advertising, promotions and special programs on
ICN. Since its launch in January 1999, we have signed up over 90 retailer
subscribers, including Ames Department Stores, Eckerd, Kmart, Southland
7-Eleven, W.H. Smith and Wegman's Food Markets and 15 publishers, including
American Media, Hearst Distribution Group Magazines, Time Distribution Services,
Times Mirror and Time Warner. Because of its recent introduction, we received no
revenues from ICN in fiscal 1999.
Front-End Management. We help retailers to increase sales and incentive payment
revenues by reconfiguring and designing front-end display racks, supervising
fixture installation, selecting products and negotiating, billing and collecting
incentive payments from vendors. We also help our retailer clients to develop
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 these magazines.
To further enhance our front-end management service capabilities, we recently
developed our SourcePro software. SourcePro is a three dimensional fixture
design system that analyzes the retailer's store layout, customer traffic
patterns and available front-end merchandising alternatives to develop an
appropriate checkout display configuration.
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We introduced front-end management in July 1997 with a contract to manage the
front-end of approximately 2,200 Kmart stores. The number of stores for which we
provide front-end management services has grown substantially, and involves
arrangements with many prominent retailers, including Eckerd, Fleming, Kmart,
Southland 7-Eleven, SuperValu and Wegman's Food Markets.
Front-end management services accounted for approximately 6.5% of our fiscal
1999 revenues on a pro forma basis. We believe our recent acquisitions of four
manufacturers of front-end display racks will enable us to expand our front-end
management business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent and Pending Acquisitions."
Front-End and Point-of-Purchase Display Rack Manufacturing
We design, manufacture and deliver custom front-end and point-of-purchase
displays for both retail store chains and product manufacturers, including A&P,
American Stores, Food Lion, Kmart and Winn Dixie. For many of our retail store
accounts, we also invoice vendors for rack costs and coordinate the collection
of payments on these invoices. We believe that display rack manufacturing
strengthens our ability to provide front-end management services, and in many
cases it is provided as part of our front-end management services. We also
believe that manufacturing display racks increases our access to information
about sales of magazines and other products from retail checkout areas, which
enhances our ability to provide PIN and ICN.
Our manufacturing process typically begins when a retail store chain contacts us
to design a display for its stores. We create a computer model of the display
based on the retailer's specifications, from which a prototype is created and
presented to the retailer for its examination. We then work together with the
retailer to finalize the design of the display and negotiate a price per
display. All of our front-end display racks are manufactured to customer
specifications.
We design, manufacture and coat each pocket, shelf and other component of a
display unit separately and then assemble these components to create the
finished display. We believe that our component-oriented manufacturing process
enables us to produce our displays more quickly and efficiently and with a
higher standard of quality than if we used a unit-oriented process.
Materials used in manufacturing our racks include wire, metal tubing and
paneling. At our five manufacturing locations, we cut, shape, bend and weld
wire, tubing and metal paneling and paint and assemble the finished product. We
use a just-in-time inventory practice. This reduces our requirements to carry
inventories of raw materials, which in turn improves our cash flow.
Display rack manufacturing accounted for approximately 57.6% of our fiscal 1999
revenues on a pro forma basis.
MARKETING AND SALES
We market our services and display racks through our own direct sales force. Our
sales group consists of four divisional vice presidents and 13 regional
managers. We have integrated our marketing efforts for our traditional
information and management services with our display rack manufacturing. We
market our services primarily through direct contact with clients and
prospective clients. We also market our services at industry trade shows and
through trade publications.
Each of our managers 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 territory. Our regional managers maintain frequent contact
with our clients in order to provide them with a high level of service and react
quickly to their needs.
COMPETITION
Competition among providers of many of our services, particularly the processing
of incentive payment claims, is intense. We have a substantial number of direct
competitors for our claims submission program, all of which are
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closely-held private companies. We believe there is no significant competition
for PIN and ICN. Information contained in PIN and ICN could be obtained from
other sources, although we believe this would be at greater expense to the user
and that it would take substantially more time to collect.
We compete with five other manufacturers in the front-end display rack
manufacturing business. One of those competitors has substantially greater
financial resources than we do. There also are a substantial number of
competitors in the point-of-purchase display rack business, many of which are
national in scope and have a substantially larger market share, greater name
recognition in this industry segment and substantially greater financial
resources than we do. However, the total market for point-of-purchase display
racks is much larger than the market for front-end display racks and therefore
can support a larger number of manufacturers.
We believe that the principal competitive factors in the retail information
industry include access to information, technological support, accuracy, system
flexibility, financial stability, customer service and reputation. In addition
to financial stability, customer service and reputation, we believe that product
quality, timeliness of delivery and, to a lesser extent, price are competitive
factors in the display rack manufacturing business. We believe we compete
effectively with respect to each of the above factors.
INFORMATION SYSTEMS; INTELLECTUAL PROPERTY
Software used in connection with our claims submission program and in connection
with PIN and ICN, as well as our SourcePro software, was developed specifically
for our use by a combination of in-house software engineers and outside
consultants. We believe that certain elements of all three of these software
systems are proprietary to The Source. Other portions of these systems are
licensed from the third party, MJ Systems, that helped to design the system. We
also receive systems service and upgrades under the license.
We have filed provisional applications with the U.S. Patent Office for patent
protection for our ICN program and intend to seek patent protection for our
SourcePro and PIN innovations. Certain aspects of our ICN, SourcePro and PIN
innovations also have copyright protection.
EMPLOYEES
As of January 31, 1999, we employed 497 persons, of whom 489 were employed on a
full-time basis and eight were employed on a part-time basis. Of such persons,
62 were engaged in administrative activities and 82 were engaged in sales,
customer support and data processing. The remaining employees were engaged in
manufacturing activities.
Of the employees at our Brooklyn, New York facility, 175 are represented by
Local 810 of the Steel, Metal, Alloys and Hardware Fabricators of the
International Brotherhood of Teamsters under a collective bargaining agreement
expiring on September 30, 1999. Of the employees at our Philadelphia,
Pennsylvania facility, 90 are represented by Local 837 of the Teamsters Union
under a collective bargaining agreement expiring on December 31, 2000. We
consider our employee relations to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
We conduct our business from over twenty manufacturing, data processing, office
and warehouse facilities. All of our manufacturing and warehouse facilities are
used by our manufacturing segment. Our office facilities are shared by our
manufacturing and service segments. All of our owned facilities are subject to
mortgages in favor of our lender.
<TABLE>
<CAPTION>
LOCATION DESCRIPTION SIZE SQ. FT. OWNED/LEASED
---------------- ------------------- ------------ -------------
<S> <C> <C> <C>
Jacksonville, FL Manufacturing/Office 55,000 Leased
Rockford, IL Manufacturing/Office 310,536 Owned
St. Louis, MO Office 8,050 Leased
High Point, NC Data Processing/Office 22,000 Leased
Fair Lawn, NJ Office 2,771 Leased
Brooklyn, NY Manufacturing/Office 92,000 Leased
New York, NY Office 1,900 Leased
Philadelphia, PA Manufacturing/Office 110,000 Owned
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Greenville, SC Manufacturing/Office 30,000 Leased
</TABLE>
In addition, we have warehouse facilities in Florida, New Jersey and South
Carolina and small offices in Pennsylvania, Ohio, Oklahoma, Texas and Ontario.
We believe our facilities are adequate for our current level of operations and
that all of our facilities are adequately insured.
ITEM 3. LEGAL PROCEEDINGS.
We are from time to time parties to various legal proceedings arising out of our
businesses. We believe that there are no proceedings pending or threatened
against us which, if determined adversely, would have a material adverse effect
on our business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders during the fourth
quarter of fiscal 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
From February 12, 1996 until June 12, 1998, our Common Stock was quoted on the
Nasdaq SmallCap Market under the symbol "SORC." Beginning June 12, 1998, our
Common Stock has been quoted on the Nasdaq National Market under the symbol
"SORC." The following table sets forth, for the periods indicated, the high and
low closing bid prices for the Common Stock as reported on the Nasdaq SmallCap
Market and the Nasdaq National Market, as applicable.
<TABLE>
<CAPTION>
Fiscal 1998 High Low
- ----------- ---- ---
<S> <C> <C>
First Quarter $3.48 $2.58
Second Quarter $3.70 $1.20
Third Quarter $4.75 $3.17
Fourth Quarter $5.38 $3.56
Fiscal 1999 High Low
First Quarter $6.75 $5.13
Second Quarter $8.00 $5.75
Third Quarter $6.88 $5.00
Fourth Quarter $12.38 $5.75
</TABLE>
As of April 21, 1999, there were 95 holders of record of the Common Stock.
We have never paid dividends on our Common Stock. The Board of Directors
presently intends to retain all of its earnings, if any, for the development of
our business for the foreseeable future. The declaration and payment of cash
dividends in the future will be at the discretion of our Board of Directors and
will depend upon a number of factors, including among others, future earnings,
operations, capital requirements, the general financial condition of the Company
and such other factors that the Board of Directors may deem relevant.
SALES OF UNREGISTERED SHARES
In January 1999, we issued shares of our Common Stock and of our Series A
Convertible Preferred Stock to the former stockholders of two manufacturers of
display racks that we have recently acquired as part of the consideration for
such acquisitions. Based upon representations made by each of the stockholders,
we believe each of them is an "accredited investor" as that term is defined in
Regulation D promulgated under the Securities Act of 1933, as amended (the
"Act"). Each of the stockholders represented to us in writing that he was
acquiring the shares for investment and agreed that the shares could not be sold
or otherwise transferred unless they were first registered under the Act except
in a transaction which, in the opinion of counsel acceptable to us, is exempt
from the registration requirement. The certificates for the shares bear
appropriate restrictive legends. We believe that the issuance of these shares
was exempt from the registration requirements of the Act pursuant to Section
4(2) thereof. The shares were issued as follows:
a. 1,926,719 shares of Common Stock and 1,473,281 shares of Series A
Convertible Preferred Stock to the three stockholders of U.S. Marketing
Services, Inc. The shares of Preferred Stock have since been converted
into an equal number shares of Common Stock;
b. 164,289 shares of Common Stock to the former stockholder of Yeager
Industries, Inc.
In February 1999, we issued shares of our Common Stock to the former
stockholders of two manufacturers of display racks that we have recently
acquired as part of the consideration for such acquisitions. Based upon
representations made by each of the stockholders, we believe each of them is an
"accredited investor" as that term is defined in Regulation D promulgated under
the Act. Each of the stockholders represented to us in writing that he was
acquiring the shares for investment and agreed that the shares could not be sold
or otherwise transferred unless they were first registered under the Act except
in a transaction which, in the opinion of counsel acceptable to us, is exempt
from the registration requirement.
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The certificates for the shares bear appropriate restrictive legends. We believe
that the issuance of these shares was exempt from the registration requirements
of the Act pursuant to Section 4(2) thereof. The shares were issued as follows:
a. 134,615 shares of Common Stock to the former stockholder of MYCO, Inc.;
b. 285,714 shares of Common Stock to the five former stockholders of
Chestnut Display Systems, Inc.
In August 1998, we issued a warrant to purchase 150,000 shares of Common Stock
at $10 per share, beginning February 1, 1999, to Herbert A. Hardt. This warrant
was issued pursuant to a consulting agreement under which Mr. Hardt will provide
us with consulting services. The warrant, which was independently appraised, was
valued at $37,500. The warrant contains vesting provisions which provided that
the right to acquire shares subject to the warrant would vest 15,000 shares per
quarter during each quarter of fiscal 2000 and 22,500 shares per quarter during
each quarter of fiscal 2001. Expense will be recognized in relation to the
vesting schedule. Mr. Hardt provided us with appropriate written investment
representations and agreed that the shares could not be sold or otherwise
transferred unless they were first registered under the Act except in a
transaction which, in the opinion of counsel acceptable to us, is exempt from
the registration requirement. The warrant also provides that any shares of our
Common Stock issued upon exercise of the warrant will bear an appropriate legend
restricting transfer. We believe the issuance of the warrant was and the
issuance of Common Stock upon exercise of the warrant will be exempt from
registration requirements of the Act pursuant to Section 4(2) thereof.
In each of June 1998 and October 1997, we granted to Donald & Co. Securities,
Inc. ("Donald") a warrant to purchase 200,000 shares of our Common Stock
(400,000 shares in aggregate). The warrants were issued to Donald as
underwriting compensation in connection with our offerings of Common Stock in
June 1998 and October 1997, respectively. The exercise prices of the warrants
are $8.40 and $4.80 per share, respectively. The warrants contain appropriate
investment representations and restrictions on transfer, provide that the Common
Shares underlying the warrants will contain similar restrictions, and we believe
the issuances of the warrants were and the issuances of the Common Stock upon
exercise will be exempt from the registration requirements of the Act pursuant
to Section 4(2) thereof.
Between March 1996 and July 1997, we issued an aggregate of 15,600 shares of our
convertible Preferred Stock and warrants to purchase an aggregate of 14,917
shares of our Common Stock in "offshore transactions" as defined in Rule 902 of
Regulation S to two entities which are not "U.S. persons" as defined in Rule 902
of Regulation S promulgated under the Act. In July 1997, we issued warrants to
purchase an aggregate of 310,709 shares of our Common Stock to the same two
offshore entities. One of these entities, Cameron Capital Ltd., was the
beneficial owner of more than 5% of our outstanding Common Stock at the time of
certain of these transactions. Each of the purchasers gave appropriate
investment representations, and the certificates for the securities (including
the warrants) bear appropriate restrictive legends as required by Regulation S.
We believe the transactions were exempt from the registration requirements of
the Act pursuant to Regulation S promulgated thereunder.
ITEM 6. 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 and magazine publishers
and (2) manufacturing display racks used by retailers at checkout counters. We
recently have expanded upon our experience with retail magazine sales to provide
similar information and services to confectioners and general merchandise
vendors for products sold at checkout counters.
During fiscal 1999, approximately 80.9% of our service revenues were derived
from fees earned in connection with the collection of incentive payments under
either our Claims Submission Program or our Advance Pay Program. 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 Claims 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.
9
<PAGE> 12
Under both the Claims 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.
PIN revenues consist of subscription fees. Subscribers to PIN 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. PIN revenues are recognized ratably over the subscription term.
Commencing in fiscal 2000, we will begin to receive fees from each publisher
that subscribes to ICN. These fees will be recognized ratably over the annual
subscription term. We will also receive fees from publishers for advertising,
promotions and special programs on ICN.
Front-end management revenues are generally recognized as services are
performed, or in accordance with applicable contract terms. Front-end management
revenues fluctuate as a result of various factors, including the number and
scope of reconfiguration programs undertaken by our retailer clients and the
timing of shipments by display rack manufacturers.
Historically, as part of our front-end management services, we reconfigured,
designed and arranged for the manufacture of display racks for many of our
customers. Since January 1999, we acquired four manufacturers of front-end and
free-standing point-of-purchase display racks. Manufacturing display racks in
our own facilities allows us to be a full-service provider of management
services for the front-end of a customer's store. Beginning in fiscal 2000,
manufacturing will account for a substantial increase in revenues, although
services are expected to contribute a disproportionate portion of our gross
profits.
We intend to increase the operating margins in our manufacturing segment by
consolidating 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. When we receive payment prior to shipment, we record the amount as
deferred revenues 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, 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 racks, warehousing revenues for storing racks, and consulting
revenues for providing consulting service relating to such manufacturing. We
generally recognize trucking revenues as shipments are completed. Consulting and
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. 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.
Selling, general and administrative expense includes corporate overhead, project
management, management information systems, executive compensation, human
resource expenses and finance expenses.
Beginning in fiscal 2000, manufacturing will account 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 will
increase substantially due to the increased scope of our operations beginning in
fiscal 2000.
RECENT AND PENDING ACQUISITIONS
10
<PAGE> 13
Since January 7, 1999, we acquired the following companies. Each of the
acquisitions was accounted for as a purchase. A portion of the cash component of
the acquisition prices was funded by a temporary increase in our revolving
credit facility, which was converted into a $15.0 million term loan in March
1999.
- U.S. MARKETING SERVICES, INC. U.S. Marketing is 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 manufactures 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 is 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 manufactures 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 is 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
March 1999, we signed a letter of intent to purchase the stock of Aaron
Wire for approximately Cdn$2.4 million.
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>
Fiscal Year Ended January 31,
-----------------------------------------
1999 1998
---- ----
<S> <C> <C>
Service Revenues 67.4% 100.0%
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C> <C>
Manufacturing Revenues 32.6% -%
Total Revenues 100.0% 100.0%
Cost of Service Revenues 31.6% 49.7%
Cost of Goods Sold 21.8% -%
Gross Profit 46.6% 50.3%
Selling, General and Administrative Expense 14.0% 19.9%
----- -----
Operating Income 32.6% 30.4%
Interest, Net (1.4)% (5.9)%
Other Income (Expense), Net (0.2)% (0.7)%
------ ------
Income Before Income Taxes 31.0% 23.8%
----- -----
Net Income 18.3% 13.5%
===== =====
</TABLE>
SERVICE REVENUES
Services, which include the Claims Submission Program, Advance Pay Program, PIN
and Front-End Management, accounted for approximately 67.4% and 74.4% of our
revenues and operating income, respectively, for fiscal 1999. Because of its
recent introduction, we received no revenues from ICN in fiscal 1999.
Service revenues increased to $14.2 million in fiscal 1999 from $11.8 million in
fiscal 1998, an increase of 20.3%. Increased retailer participation in the
Advance Pay Program and the acquisition of Periodical Concepts ("PC2")
contributed to the increase. Claims Submission Program, Advance Pay Program and
PIN revenues increased approximately $1.7 million, or 16.8%, over the prior
year. Front-end management revenues increased from $1.5 million in the prior
year to $2.2 million in the current year, or 46.9%. This was due to an increase
in the number of reconfiguration programs that we undertook on behalf of our
retailer clients.
MANUFACTURING REVENUES
On January 7, 1999, we acquired Yeager and U.S. Marketing. Results of operations
for both companies have been included in our consolidated financial statements
since the date of acquisition. Manufacturing display racks accounted for
approximately 32.6% and 25.6% of our revenues and operating income,
respectively, for fiscal 1999. Manufacturing revenues were $6.9 million in
fiscal 1999. There were no manufacturing revenues in the prior fiscal year.
MYCO and Chestnut will be included in our results of operations beginning in
fiscal 2000.
GROSS PROFIT
Gross profit increased to $9.8 million in fiscal 1999 from $5.9 million in
fiscal 1998, an increase of approximately $3.9 million, or 65.4%. Approximately
$2.3 million of the increase in gross profit was due to our recently acquired
manufacturing subsidiaries. The remaining $1.6 million increase was attributable
to our service segment. Gross margin of the service segment increased slightly
to 53.2% in fiscal 1999 from 50.3% in fiscal 1998. The improved service segment
gross margin was due in large part to a 20.3% increase in service revenues
without a corresponding increase in employees.
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<PAGE> 15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased to $2.9 million in fiscal
1999 from $2.3 million in fiscal 1998, an increase of $600,000, or 25.5%. Of the
total, approximately $502,000 was attributable to the recently acquired
manufacturing subsidiaries. The remaining $97,000 increase was attributable to
the services segment. Overall, selling, general and administrative expense as a
percentage of revenues decreased from 19.9% in fiscal 1998 to 14.0% in fiscal
1999.
OPERATING INCOME
Operating income increased to $6.9 million in fiscal 1999 from $3.6 million in
fiscal 1998, an increase of $3.3 million, or 91.7%. As a percentage of revenues,
operating income increased to 31.0% in fiscal 1999 from 23.9% in fiscal 1998. Of
the $3.3 million increase, approximately $1.8 million was attributable to the
recently acquired manufacturing subsidiaries. Approximately $1.5 million was
attributable to the services segment. The significant increase in operating
income from the services segment was primarily a result of higher gross profits
and stable selling, general and administrative expenses during fiscal 1999.
INTEREST EXPENSE
Interest expense decreased $383,000, principally due to the repayment of
borrowings with cash generated by our Common Stock offerings in October 1997 and
June 1998.
INCOME TAX EXPENSE
The effective income tax rates for fiscal years 1999 and 1998 were 40.8% and
43.7%, 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 meals and entertainment, goodwill amortization,
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, short-term borrowings under available lines of credit and through
the issuance of equity securities.
Net cash provided by operating activities was $3.1 million for fiscal 1999
compared to net cash used by operating activities of $5.5 million for fiscal
1998. The manufacturing segment contributed $2.7 million to cash provided by
operations in fiscal 1999.
Net cash used in investing activities was $5.5 million in fiscal 1999 and
$700,000 in fiscal 1998. The increase is due primarily to the acquisitions
during fiscal 1999. Net cash provided by financing activities was $3.1 million
in fiscal 1999 and $6.0 million in fiscal 1998.
Our service business has not required significant capital expenditures. As a
result, at January 31, 1999, we did not have any commitments for capital
expenditures. Currently, we do not anticipate any significant capital
expenditures during fiscal 2000.
At January 31, 1999, we had total deferred tax assets of $255,000 and total
deferred tax liabilities of $966,000, resulting in a net deferred tax liability
of $711,000. This liability is due to 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. We
intend to obtain the funds necessary to satisfy this tax obligation from cash
flows from operations.
At January 31, 1999, our total long-term debt obligations were approximately
$3.5 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
13
<PAGE> 16
$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 credit agreement is
secured by an interest in substantially all of our assets. Principal on the term
loan is payable in twelve consecutive quarterly installments beginning on August
1, 1999, with the final payment due May 1, 2002. The first quarterly payment
amount is $900,000. Quarterly installments increase by $350,000 each August 1st.
For the term loan, the interest rate will be periodically adjusted based on
various interest rate calculation formulas that we can choose from. At April 29,
1999, the interest rate for the term loan was 7.4388%.
At April 29, 1999,we had approximately $3.9 million of availability 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 curtailed.
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
$1.5 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 April 1999, we entered into an agreement to purchase our leased facility in
High Point, North Carolina for $1.8 million. Wachovia Bank, N.A. has committed
to provide funds for the purchase either through an increase in the existing
credit facility or a separate real estate loan.
In April 1999, we filed a registration statement with the Securities and
Exchange Commission covering 4,600,000 shares of our common stock, of which
3,000,000 shares would be sold by us and 1,000,000 shares would be sold by some
of our stockholders in an offering underwritten on a firm commitment basis. The
selling stockholders have also granted the underwriters an option to purchase up
to 600,000 additional shares to cover over-allotments. If the offering is
consummated, we intend to use the estimated $33.8 million net proceeds (after
underwriting discounts and other expenses of the offering and based on a
proposed offering price of $12.25 per share) to repay outstanding balances under
our term loan and revolving credit facility with Wachovia Bank, N.A., to
purchase the North Carolina facility (or repay funds borrowed for the purchase)
and to fund general corporate purposes, including our Advance Pay Program. The
revolving credit facility would remain in place after the offering.
We believe that our cash flow from operations together with our revolving line
of credit and the proceeds from our proposed common stock offering will be
sufficient to fund our working capital needs and capital expenditures for the
foreseeable future. However, if the proposed common stock offering is not
consummated, we may need to seek additional debt or equity financing, which may
or may not be available, to fund anticipated growth, particularly of our Advance
Pay Program.
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. The Company adopted SFAS No. 130 in the first
quarter of fiscal 1999, but had no "other" comprehensive income items for the
years presented in the statements of income or accumulated as of the balances
sheet dates presented.
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. See Note 16.
14
<PAGE> 17
SOP 98-5, "Reporting on the Costs of Start-Up Activities," requires that the
costs of start-up activities, including organization costs, be expenses 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 FASB 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 years beginning after June 15,
1999 and requires comparative information for all fiscal quarters of fiscal
years beginning after June 15, 1999. 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
Most of our services rely on computer technology. Since early 1997, we have been
analyzing all of our information and data systems for possible Year 2000, or
Y2K, problems.
- - Our Claims Submission Program software was developed with a third party. The
software has been reviewed and modified for Y2K problems. Initial Y2K compliance
testing was completed in February 1999. All problems detected during these tests
have been corrected. Follow-up testing is expected to be completed by the end of
October 1999.
- - Our Advance Pay Program involves transporting data on rebate claims into an
"off-the-shelf" Microsoft Excel 97 software program. Microsoft Excel reformats
the data to determine the amount of the advance payments to our retailer
customers. Microsoft Excel 97 has been declared Y2K compliant by the vendor.
This is consistent with our internal testing results.
- - Our PIN Program was developed by our internal programming staff. This system
was developed with Microsoft Visual Foxpro version 6.0, which has been declared
Y2K compliant by the vendor. We have not detected and do not expect to encounter
any significant Y2K problems with this program. Testing of this program is
expected to be completed by the end of October 1999.
- - Our ICN website was also developed by an internal programming staff using Web
Connects Software from WestWind Corporation. This software 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.
This system utilizes a 4-digit date field. We therefore do not anticipate any
significant Y2K problems with ICN. Testing of this program is expected to be
completed by the end of October 1999.
- - Our Front-end Management Services software was developed by a third party
software developer. The program was developed with MacroMedia Director software,
which has been declared Y2K compliant by the vendor. We have been informed by
the developer that our customized Front-end Management Services software package
is Y2K compliant.
- - Our Display Rack Manufacturing subsidiaries were acquired within the past four
months. We are still in the process of collecting data to verify Y2K compliance
issues which may affect these subsidiaries. We intend to complete our Y2K
assessment of our manufacturing affiliates by the end of July 1999 and to then
commence any required remediation work. Our preliminary findings indicate that
at least some of our manufacturing operations are not currently Y2K compliant.
Yeager's accounting software is not in compliance with Y2K, but we intend to
remedy this problem prior to December 31, 1999. In addition, certain of our
manufacturing subsidiaries' payroll and billing software is not Y2K compliant.
We intend to either replace or upgrade this software before the end of 1999. We
will continue to assess the Y2K compliance status of our manufacturing
operations and believe these operations will be substantially Y2K compliant by
the end of 1999. We do not expect any material problems with our manufacturing
operations in the event they are not fully Y2K compliant.
15
<PAGE> 18
We completed our Y2K survey of our computer hardware equipment in early 1999 and
we have completed upgrading ,with software provided by vendors at no cost,
equipment that was identified as being noncompliant. We currently do not
anticipate any significant Y2K problem with our hardware.
We are communicating with our outside trading partners in order to assess their
Y2K readiness. While there can be no assurance that such outside parties will be
Y2K compliant, we believe that most of the third parties upon whom we are
dependent expect to be Y2K compliant before the end of 1999. Based on
information already gathered from these parties, 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. We have also communicated with our
suppliers of non-information technology 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 significant Y2K
problems involving these third parties that would materially impair our
operations.
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 the most time-efficient
manner and thereby meet client deadlines. We depend on data from third parties
(e.g. wholesalers, publishers and retailers) in order to process information
from and for our clients. If the third parties have problems supplying data to
us, then deadlines for our clients may not be met. If our internal systems are
not Y2K compliant, information 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.
Currently, we have no Y2K contingency plan. A contingency plan will be developed
upon completion of all system testing and is expected to be finalized by the end
of the third quarter of 1999.
We have incurred expenses of less than $10,000 to date for Y2K testing and
remediation. We do not anticipate incurring any significant additional expenses
in connection with our remaining Y2K compliance efforts, and we have not
included any expenditures for Y2K compliance in our budget. However, there can
be no assurance that our additional expenses, in particular in connection with
our manufacturing operations, will not be significant.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS.
The consolidated financial statements of the Company are included herein as a
separate section of this statement which begins on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
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<PAGE> 19
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth certain information concerning the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Position
S. Leslie Flegel 61 Director, Chairman and Chief Executive Officer
Richard A. Jacobsen 43 Director, Vice-Chairman and Chief Operating Officer
William H. Lee 48 Director, Chairman of the Executive Committee and
Chief Administrative Officer
James R. Gillis 46 President
Dwight L. DeGolia 54 Executive Vice President, Special Projects
W. Brian Rodgers 33 Secretary and Chief Financial Officer
Jason S. Flegel 33 Executive Vice President, Information Services
Stephen E. Borjes 48 President - Display Group
Robert O. Aders 71 Director
Timothy A. Braswell 70 Director
Harry L. "Terry" Franc, III 63 Director
Aron Katzman 61 Director
Randall S. Minix 49 Director
</TABLE>
The Board consists of eight members, each of whom serves in that 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. Our Articles of Incorporation and By-Laws
provide for three classes of directorships serving staggered three year terms
such that one class of the directors is elected at each annual meeting of
stockholders. The terms of Messrs. Katzman and Minix will continue until the
1999 annual meeting of stockholders, the terms of Messrs. Braswell, Franc and
Jacobsen will continue until the 2000 annual meeting of stockholders and the
terms of Messrs. Aders, Flegel and Lee will continue until the 2001 annual
meeting of stockholders.
Each of the executive officers is a full-time employee of The Source.
Non-employee directors of The Source devote such time to the affairs of The
Source as is necessary and appropriate. Set forth below are descriptions of the
backgrounds of the executive officers and Directors of The Source:
S. Leslie Flegel has been the Chairman of the Board of Directors and Chief
Executive Officer of The Source 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, a predecessor of The Source. S.
Leslie Flegel is the father of Jason S. Flegel, The Source's Executive Vice
President, Information Services.
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<PAGE> 20
Richard A. Jacobsen was elected a Director in March 1999 and became Vice
Chairman and Chief Operating Officer in April 1999. Prior thereto, he was
President of Time Distribution Services from 1995 until April 1999; he served
Time Distribution Services in various executive capacities since 1981. He is a
member of the Board of Directors of the International Periodical Distributors
Association, Chairman of the Magazine Publishers Association Retail Advisory
Council and a member of the American Magazine Conference Planning Committee.
William H. Lee has been a director of The Source since its inception in March
1995 and has been Chief Administrative Officer since March 1999. Prior thereto,
Mr. Lee was President and Chief Operating Officer since The Source's inception.
For approximately 14 years prior thereto, Mr. Lee was the principal owner and
Chief Executive Officer of Periodical Marketing and Management, Inc., a
predecessor of The Source.
James R. Gillis has served as President of The Source since December 1998. Prior
thereto, he served as the President of Brand Manufacturing Corporation from
September 1995. Prior to joining Brand, Mr. Gillis was a partner in the
Aders-Wilcox-Gillis Group, which advised supplier companies on industry
retailers worldwide. Mr. Gillis is a member of the Board of Directors of
Broadband Sports, Inc.
Dwight L. DeGolia has served as Executive Vice President of The Source since its
inception in May 1995. For more than ten years prior thereto, Mr. DeGolia served
as Executive Vice President of Sales and Marketing for Display Information
Systems Company. 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 Secretary and Chief Financial Officer since
October 1996. Prior to joining The Source, Mr. Rodgers practiced for seven years
as a Certified Public Accountant with BDO Seidman, LLP.
Jason S. Flegel has served as Executive Vice President, Information Services
since March 1999. Prior thereto, he served as Senior Vice President of RDA
Operations since June 1996, and since The Source inception in March 1995, he
served as Vice President -- Western Region. For more than two years prior
thereto, Mr. Flegel was an owner and the Chief Financial Officer of Display
Information Systems Company. Jason S. Flegel is the son of S. Leslie Flegel.
Stephen E. Borjes has served as President - Display Group since September 1997.
For more than 20 years, Mr. Borjes held several positions with Dixie News Co.
("Dixie News") and the News Group, which purchased Dixie News in 1994. His
latest position at the News Group was Vice President of Operations for the
distribution centers in Charlotte and Winston-Salem, North Carolina, and
Johnston City, Tennessee.
Robert O. Aders was elected a director in March 1999. He is Chairman and Chief
Executive Officer of the Advisory Board, Inc. (an international consulting
organization) and a member of the Board of Directors of Food Marketing
Institute, where he served from its founding in 1976 until his retirement in
1993. He is also counsel to Collier, Shannon, Rill & Scott (a Washington, D.C.
law firm). Mr. Aders was the Acting Secretary of Labor in the Ford
administration, is a former advisor to the White House Office of Emergency
Preparedness and has served on the U.S. Wage and Price Commission and as a Vice
Chairman of the National Business Council for Consumer Affairs. From 1970 to
1974, Mr. Aders was Chairman of the Board of the Kroger Company, where he served
in various executive positions beginning in 1957. He is currently a trustee of
the National Urban League. He also is a director of Association International
Distribution Alimentares (Belgium), the Association of Latin American
Supermarkets, a Fellow of the Institute of Grocery Distribution (U.K.) and a
member of the International Self Service Organization (Germany). In addition, he
is a director of Checkpoint Systems, Inc., a company listed on the New York
Stock Exchange, Coinstar, a company listed on Nasdaq and Telepanel, a company
listed on Nasdaq.
Timothy A. Braswell has been a director of The Source 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. Prior to
that time, 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 Source 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. Mr. Franc
has been Executive Vice President of BTC for more than 20 years and for more
than 20 years
18
<PAGE> 21
prior to 1995, served as a director and an Executive Vice President of BIS. Mr.
Franc is a member of the National Organization of Investment Professionals and a
director of P.J. Holdings, LLC.
Aron Katzman has served as a director of The Source since it commenced
operations in May 1995. Until its sale in May 1994, 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 and Southern Internet, Inc.
Randall S. Minix has served as a director of The Source since it commenced
operations in May 1995. For more than five years, Mr. Minix has been the
managing partner of Minix, Morgan & Company, L.L.P., an independent accounting
firm headquartered in Greensboro, North Carolina.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has established an Audit Committee, a Compensation Committee, a
Finance Committee and an Acquisition Committee. The duties and members of each
of these committees are indicated below.
- - 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 our independent auditors, reviewing the scope and
results of the audit and services provided by our independent accountants
and meeting with our financial staff 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 our financial records to determine overall
compensation and benefits for executive officers 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 our capital structure, reviewing available alternatives to
satisfy our liquidity and capital requirements and recommending the firm or
firms which will provide investment banking and financial advisory services
to us.
- - The Acquisition Committee is comprised of three directors, presently Messrs.
Franc, Braswell and Katzman, and has been given the responsibility of
monitoring our search for attractive acquisition opportunities, consulting
with members of management to review plans and strategies for the
achievement of our external growth objectives and recommending the firm or
firms that will serve as advisors to us in connection with the evaluation of
potential business combinations.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company during its most recent fiscal year and Form 5 and amendments
thereto, or written representations that no Form 5 is required, two persons,
Messrs. Gillis and Aders, failed to timely file a Form 3, Initial Statement of
Beneficial Ownership of Securities. Three persons, Messrs. Katzman, Watkins and
Franc, failed to timely file Form 4, Statement of Changes in Beneficial
Ownership. Six persons, Messrs. Leslie Flegel, Lee, Watkins, DeGolia, Rodgers
and Jason Flegel failed to timely file a Form 5, Annual Statement of Changes in
Beneficial Ownership. All such reports have since been filed.
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes information concerning cash and non-cash
compensation paid to or accrued for the benefit of the named executive officers
for all services rendered in all capacities to the Company and its predecessors.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
19
<PAGE> 22
<TABLE>
<CAPTION>
SECURITIES
NAME OF PRINCIPAL FISCAL UNDERLYING OTHER ANNUAL ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION($) COMPENSATION(1)($)
- -------------------- ----- ---------- ---------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
S. Leslie Flegel 1999 $260,857 $ 23,795 360,000 $ 16,188 $5,450
Chief Executive 1998 255,000 96,300 89,256 16,550 9,093
Officer 1997 227,500 176,398 -- 21,531 9,093
William H. Lee 1999 $246,430 $ 23,795 -- $ 12,109 $3,056
Chief Administrative 1998 245,494 70,382 49,091 9,573 3,056
Officer 1997 224,830 30,000 -- 10,888 3,056
Dwight L. DeGolia 1999 $175,000 $ -- 40,000 $ 11,699 $3,553
Executive Vice 1998 150,000 29,200 10,909 10,777 --
President, 1997 140,000 4,773 -- 11,223 --
Special Projects
Stephen E. Borjes(2) 1999 $140,000 $ -- 40,000 $ 6,790 --
President-- Display 1998 26,667 8,333 -- 2,000 --
Group 1997 -- -- -- -- --
Jason S. Flegel 1999 $112,500 $ -- 10,000 $ 7,005 $ 381
Executive Vice 1998 100,000 9,600 9,091 6,205 381
President, 1997 90,000 -- -- 5,266 381
Information
Services
</TABLE>
- ----------
(1) In fiscal 1999, the estimated incremental cost to The Source of life
insurance premiums paid on behalf of Messrs. S. Leslie Flegel, Lee DeGolia,
Borjes and Jason Flegel was $5,450, $3,056, $3,553, $0 and $381. In fiscal
1998, the estimated incremental cost to The Source of life insurance
premiums paid on behalf of Messrs. S. Leslie Flegel, Lee, DeGolia, Borjes
and Jason Flegel was $9,093, $3,056, $0, $0 and $381, respectively. In
fiscal 1997, such cost to The Source was $9,093, $3,056, $0, $0 and $381,
respectively.
(2) Since February 1999, Mr. Borjes has been Vice President, Database Operations
of The Source.
OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Securities % of Total Options Exercise or
Underlying Options Granted to Employees Base Price Expiration
Name Granted # in Fiscal Year ($/Sh) Date
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C>
S. Leslie Flegel 360,000(1) 35% $5.13 2-01-08
William H. Lee - - - -
Dwight L. DeGolia 10,000(2) 1 5.13 2-01-08
Dwight L. DeGolia 30,000(3) 3 5.00 10-07-08
Stephen E. Borjes 20,000(3) 2 5.00 10-07-08
Stephen E. Borjes 20,000(4) 2 6.63 4-30-08
Jason S. Flegel 10,000(5) 1 5.00 10-07-98
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
</TABLE>
(1) Options were granted February 2, 1998 and vest in four equal annual
installments.
(2) Options were granted February 2, 1998 and are exercisable immediately.
(3) Options were granted October 8, 1998 and vest in three equal annual
installments.
(4) Options were granted May 1, 1998 and vest in five equal annual installments
(5) Options were granted October 8, 1998 and vest in five equal annual
installments.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
- --------------------------------------------------------------------------------
20
<PAGE> 23
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at Fiscal Year In-the Money Options/
Shares End (#) Exercisable/ at Fiscal Year End ($)
Acquired on Value Unexercisable Exercisable/
Name Exercise (#) Realized ($) Unexercisable
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C>
S. Leslie Flegel 0 0 29,752 / 419,504 251,851 / 2,301,901
William H. Lee 0 0 16,364 / 32,727 122,157 / 244,307
Dwight L. DeGolia 0 0 24,364 / 26,545 134,825 / 152,929
Stephen E. Borjes 0 0 10,666 / 29,334 48,143 / 124,257
Jason S. Flegel 0 0 5,636 / 13,455 38,265 / 83,031
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
</TABLE>
DIRECTOR COMPENSATION.
Under the Company's present policy, each director of the Company who is
not also an employee receives $15,000 annually payable quarterly in either cash
or shares Common Stock valued at 90% of market on the date of grant as of the
payment date. Directors also annually receive options to purchase 3,000 shares
of Common Stock at an exercise price equal to market on the date of grant.
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.
In October 1997, we entered into separate employment agreements with S. Leslie
Flegel, William H. Lee and W. Brian Rodgers, each of which expires January 31,
2000 and are subject to annual renewal thereafter. Under the employment
agreements, Mr. Flegel will serve as the Chairman of the Board and Chief
Executive Officer of The Source in exchange for annual base compensation of
$255,000, Mr. Lee will serve as Chairman of the Executive Committee and Chief
Administrative Officer of The Source in exchange for annual base compensation of
$240,573, and W. Brian Rodgers will serve as Chief Financial Officer of The
Source and receive 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 Source 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 employment 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 Source or engaging, directly or
indirectly, in the rendering of services competitive with those offered by The
Source during the term of his employment and for two years thereafter, without
the prior written consent of The Source.
In December 1998, we entered into an employment agreement with James R. Gillis,
which expires January 31, 2001 (subject to renewal). The employment agreement
provides that Mr. Gillis will serve as President of The Source and receive
annual base compensation of $250,000, subject to annual adjustment by the Board.
In addition, Mr. Gillis is entitled to receive an annual bonus of $50,000 for
each of fiscal 2000, 2001 and 2002 if certain performance goals are met. The
annual bonus amounts may increase if the performance of our front-end display
rack manufacturers exceeds certain thresholds. However, under his employment
agreement, Mr. Gillis is not entitled to an annual bonus of more than $250,000.
In the event the employment of Mr. Gillis is terminated for reasons other than
cause, permanent disability or death, Mr. Gillis will be entitled to receive the
remainder of his base salary and benefits for the balance of the term of the
agreement and a pro rata portion of his annual bonus for the year of
termination. Mr. Gillis agreed to refrain from disclosing information
confidential to The Source during the term of the employment agreement and
agreed not to engage, directly or indirectly, in the rendering of services
competitive with those offered by The Source during the term of his employment
and for two years thereafter.
In March 1999, we entered into an employment agreement with Richard A. Jacobsen,
which expires January 31, 2004 (subject to renewal). Under his agreement, Mr.
Jacobsen will serve as Vice Chairman and Chief Operating Officer of The Source
and receive annual base compensation of $235,000 for fiscal 2000, $255,000 for
fiscal 2001 and $275,000 for fiscal 2002. For fiscal 2003 and 2004, Mr.
Jacobsen's salary will be determined by the Board, but it may not be less than
$275,000. Mr. Jacobsen will also be entitled to receive an annual bonus equal to
a percentage of our net income before taxes ranging from
21
<PAGE> 24
0.69% to 2.7% if certain performance goals are met. Mr. Jacobsen will not be
entitled to a bonus if our pre-tax net income is not at least 82% of our
budgeted pre-tax net income. In connection with his employment by The Source, we
made two loans to Mr. Jacobsen 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.
Under this employment agreement, Mr. Jacobsen also is entitled to receive
payments compensating him for his annual tax liabilities in connection with
forgiveness of the loans. In the event (1) the employment of Mr. Jacobsen is
terminated for reasons other than for cause, permanent disability or death, (2)
there occurs an assignment of duties or responsibilities inconsistent with Mr.
Jacobsen's appointed positions or (3) there is a "Change of Control" (as defined
in his employment agreement) (each of the foregoing being a "Termination"), Mr.
Jacobsen will be entitled to receive his accrued but unpaid base salary, his
base salary for the remainder of the term of the employment agreement,
forgiveness of Loan 1 and Loan 2, immediate vesting of options granted to Mr.
Jacobsen under the employment agreement and payment of a bonus in an amount
equal to the greater of the annual bonus due in the year of termination or the
annual bonus for the prior year. Under the agreement, Mr. Jacobsen agreed to
refrain from disclosing information confidential to The Source or engaging,
directly or indirectly, in the rendering of services competitive with those
offered by The Source during the term of his employment and for two years
thereafter, without the prior written consent of The Source.
Under the terms of a written agreement with us, Dwight L. DeGolia has agreed to
refrain from disclosing information confidential to us or engaging directly or
indirectly, in any activity which is competitive with our business during the
term of his employment and for two years thereafter.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of April 16, 1999
concerning the beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to be the beneficial owner of more than five percent
of the outstanding Common Stock, (ii) each executive officer named in the
Summary Compensation Table contained in this Form 10-KSB, and (iii) all
directors and executive officers of the Company as a group. Each person named
has sole voting and investment power with respect to the shares indicated,
except as otherwise stated in the notes to the table:
Beneficial Ownership (1)
<TABLE>
<CAPTION>
Name and Address
of Beneficial Owner Number of Shares Percent
- ------------------- ---------------- -------
<S> <C> <C>
Jonathon J. Ledecky 3,140,000(2) 23.0%
800 Connecticut Avenue NW, Suite 1111
Washington, D.C. 20006
S. Leslie Flegel 1,373,774(2)(3) 9.9
11644 Lilburn Park Road
St. Louis, Missouri 63146
William H. Lee 907,623(3) 6.6
711 Gallimore Dairy Road
High Point, North Carolina 27265
A.G. Edwards & Sons, Inc. 832,225(4) 6.1
One North Jefferson
St. Louis, Missouri 63103
Timothy A. Braswell 339,644(3)(5) 2.5
711 Gallimore Dairy Road
High Point, North Carolina 27265
Aron Katzman 212,961(3)(5) 1.6
10 Layton Terrace
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
<S> <C> <C>
St. Louis, Missouri 63124
Jason S. Flegel 139,405(3) 1.0
711 Gallimore Dairy Road
High Point, North Carolina 27265
James R. Gillis 130,000 *
711 Gallimore Dairy Road
High Point, North Carolina 27265
Dwight L. DeGolia 121,468(3) *
11644 Lilburn Park Road
St. Louis, Missouri 63146
Harry L. Franc, III 50,157(3)(5) *
19 Briarcliff
St. Louis, Missouri 63124
Stephen E. Borjes 14,667(3) *
711 Gallimore Dairy Road
High Point, North Carolina 27265
Randall S. Minix 13,866(3) *
5502 White Blossom Drive
Greensboro, North Carolina 27410
Robert O. Aders 8,000(3) *
132 S. Delancey Place
Atlantic City, NJ 08401
All directors and executive 3,322,595(2)(6) 23.7
officers as a group (13 persons)
</TABLE>
- ------------------------
*Less than 1%
(1) Under the rules of the Commission, some of the shares of the Company's
common stock which a person has the right to acquire within 60 days
after April 16, 1999 in connection with the exercise of stock options
and warrants are deemed to be outstanding for the purpose of computing
beneficial ownership and the percentage of ownership of that person.
(2) S. Leslie Flegel and Jonathan J. Ledecky entered into a Voting
Agreement on January 7, 1999, under which Mr. Ledecky granted a proxy
to Mr. Flegel to vote his shares of common stock with regard to certain
corporate matters. The number of shares shown for Mr. Flegel in the
table does not include Mr. Ledecky's shares.
(3) Includes exercisable options to acquire shares of common stock in the
following amounts per beneficial owner: S. Leslie Flegel - 180,754
shares; William H. Lee - 16,364 shares; Timothy A. Braswell - 3,000
shares; Aron Katzman - 3,000 shares; Jason S. Flegel - 5,636 shares;
and Dwight L. DeGolia - 14,364 shares; Harry L. Franc, III - 3,000
shares; Stephen E. Borjes - 14,667; Randall S. Minix - 3,000 shares;
and Robert O. Aders - 3,000 shares.
(4) This amount, as reflected on Schedule 13G filed on February 11, 1999,
consists of sole voting power with respect to 455,475 shares, sole
dispositive power with respect to 832,225 shares and no shared voting
or dispositive power.
(5) Includes exercisable warrants to acquire shares of common stock in the
following amounts per beneficial owner: Timothy A. Braswell - 40,180
shares; Aron Katzman - 40,180 shares; Harry L.
Franc, III - 8,929 shares.
(6) Includes options and warrants to acquire 11,030 shares of common stock,
excluded in the names indicated in the footnotes above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
23
<PAGE> 26
From time to time, we and our predecessors have engaged in various transactions
with our directors, executive officers and other affiliated parties. The
following paragraphs summarize certain information concerning these transactions
and relationships to the extent that they occurred during the past two fiscal
years or which are presently proposed.
PREDECESSOR TRANSACTIONS
S. Leslie Flegel and Dwight L. DeGolia have from time to time received cash
advances from The Source and one of its predecessors. The largest aggregate
amount of advances outstanding at any time since February 1, 1997 was $270,675
and $22,093, respectively. All outstanding advances have been repaid in full.
On June 28, 1991, a predecessor of ours entered into a lease with 711 Gallimore
Partnership in which William H. Lee, is a partner. Under the term of the lease,
711 Gallimore Partnership leases us office space in High Point, North Carolina.
The lease currently provides for annual rent of $290,449 and expires in 2012. In
fiscal 1998 and 1997, we paid 711 Gallimore Partnership $174,888 and $157,498,
respectively, in rent.
We have reached an agreement to purchase the property that we lease from 711
Gallimore Partnership for $1.8 million in cash. Our Board appointed Timothy
Braswell, an independent director, to negotiate this transaction on our behalf
and, based on Mr. Braswell's recommendation, the Board believes the terms of the
proposed purchase are fair to The Source.
COMPANY TRANSACTIONS
2532 Partnership, a North Carolina partnership in which Mr. Lee is a partner,
has occasionally provided us with the use of an airplane. In fiscal 1999 and
1998, we paid 2532 Partnership1,800 and $11,692, respectively, for use of the
airplane.
In July 1997, an affiliated party, along with the other holder of our 1996
Series 7% Convertible Preferred Stock, exchanged all 5,600 outstanding shares
for (1) 186,667 shares of common stock at an exchange price of $3.00 per share
and (2) nontransferable warrants, expiring on July 1, 2002, to purchase 310,709
shares of common stock at an exercise price of $3.00 per share.
In September 1997, we issued to Messrs. Katzman, Franc and Braswell
non-transferable warrants, expiring on September 2, 2000, to purchase an
aggregate of 89,289 shares of our common stock at an exercise price of $3.00 per
share.
The terms of the foregoing transactions were not negotiated on an arm's-length
basis, but were ratified by a majority of the independent and disinterested
outside directors who had access, at our expense, to our legal counsel. All
future transactions between The Source and its officers, directors, principal
stockholders and affiliates will be approved by a majority of the independent
and disinterested outside directors who will have access, at our expense, to our
legal counsel.
24
<PAGE> 27
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Exhibit Index.
(b) Reports on Form 8-K.
A report on Form 8-K dated November 19, 1998 reporting the letters of
intent to acquire MYCO, Inc and an affiliated real estate holding
company and Chestnut Display Systems, Inc. ("Chestnut") and an
affiliate of Chestnut was filed on December 11, 1998.
A report on Form 8-K dated January 7, 1999 reporting the acquisitions
of U.S. Marketing Services, Inc. and Yeager Industries, Inc. was filed
on January 21, 1999.
<PAGE> 28
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENT OF THE SOURCE INFORMATION MANAGEMENT COMPANY PAGE
The Report of the Independent Certified Public Accountants F-2
Consolidated Balance Sheet of January 31, 1999 F-3
Consolidated Statements of Operations for the fiscal years ended January 31, 1999 and 1998 F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
F-1
<PAGE> 29
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, 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended January 31, 1999. 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, 1999 and the results of its
operations and its cash flows for each of the two years in the period ended
January 31, 1999 in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
St. Louis, Missouri
April 16, 1999
F-2
<PAGE> 30
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEET
January 31, 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS (NOTE 7)
CURRENT
Cash $ 752,695
Trade receivables (net of allowance for doubtful accounts of $469,658) (Note 3) 32,593,428
Income taxes receivable 262,877
Inventories (Note 4) 1,395,699
Other current assets 263,692
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 35,268,391
- --------------------------------------------------------------------------------------------------------------------
Land 120,000
Manufacturing Plant 680,000
Office equipment and furniture 5,713,459
Less accumulated depreciation and amortization (3,179,359)
- --------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 3,334,100
- --------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net of accumulated amortization of $648,600 (Note 5) 29,608,254
Deferred tax asset (Note 8) 7,000
Other 789,307
- --------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 30,404,561
- --------------------------------------------------------------------------------------------------------------------
$ 69,007,052
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 31
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEET
January 31, 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Checks issued against future deposits $ 2,876,922
Accounts payable and accrued expenses 3,727,529
Due to retailers (Note 6) 2,737,077
Deferred revenues 3,129,241
Deferred income taxes (Note 8) 718,000
Current maturities of long-term debt (Note 7) 66,057
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 13,254,826
- --------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 7) 3,442,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 16,696,826
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS (NOTES 9 AND 13)
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Contributed Capital:
Common Stock, $.01 par - shares authorized, 16,528,925; 11,751,425 issued, of which 117,513
8,000 are being held as Treasury Stock (Note 10)
Preferred Stock, $.01 par - shares authorized, 2,000,000; outstanding 1,473,281 (Note 11) 14,733
Additional paid-in-capital 46,451,971
- --------------------------------------------------------------------------------------------------------------------
Total contributed capital 46,584,217
Retained earnings 5,767,140
- --------------------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 52,351,357
Less: Treasury Stock (8,000 shares at cost) (41,131)
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 52,310,226
- --------------------------------------------------------------------------------------------------------------------
$ 69,007,052
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 32
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service Revenues $ 14,229,072 $ 11,803,844
Manufacturing Revenues 6,870,856 -
- --------------------------------------------------------------------------------------------------------------------
21,099,928 11,803,844
- --------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues 6,658,814 5,860,653
Cost of Goods Sold 4,608,941 -
- --------------------------------------------------------------------------------------------------------------------
11,267,755 5,860,653
- --------------------------------------------------------------------------------------------------------------------
9,832,173 5,943,191
Selling, General and Administrative Expense 2,949,382 2,350,622
- --------------------------------------------------------------------------------------------------------------------
Operating Income 6,882,791 3,592,569
- --------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 28,407 21,164
Interest expense (331,058) (714,404)
Other (46,602) (79,321)
- --------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (349,253) (772,561)
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 6,533,538 2,820,008
Income Tax Expense (Note 8) (2,667,000) (1,231,000)
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 3,866,538 $ 1,589,008
- --------------------------------------------------------------------------------------------------------------------
Earnings per Share - Basic (Note 12) $ 0.42 $ 0.23
- --------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Basic (Note 12) 9,132,383 6,561,761
- --------------------------------------------------------------------------------------------------------------------
Earnings per Share - Diluted (Note 12) $ 0.40 $ 0.22
- --------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Diluted (Note 12) 9,775,673 6,693,666
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 33
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Additional Total
Preferred Stock Common Stock Paid - in Retained Treasury Stock Stockholders'
----------------------------------------- ----------------
Shares Amount Shares Amount Capital Earnings Shares Amount Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1997 - $ - 5,727,465 $ 57 $ 2,757 $ 331 - $ - $ 3,145
Issuance of Common Stock 2,000,000 20 6,701 - 6,721
(Note 10)
Directors fees 1,811 - 8 - 8
Exercise of stock options 2,182 - 5 - 5
Dividend on Preferred Stock 6,381 - 19 (19) -
Exchange of 7% Preferred 186,667 2 521 - 523
Stock to Common Stock
(Note 11)
Redeemable Common Stock 91,938 1 503 - 504
converted to Common Stock
Purchase fractional shares (77) - - - -
from reverse stock split
Net income for the year - - - 1,589 1,589
- -----------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1998 10,514 $ 1,901 $ 12,495
8,016,367 $ 80 $
Issuance of Common Stock 1,538,334 15 8,001 8,016
Directors fees 993 3 3
Exercise of stock options 103,542 1 505 506
Exercise of warrants 1,181 6 6
Warrants issued for 27 27
consulting services (Note
10)
Purchase of treasury stock 8,000 (41) (41)
Acquisition of US 1,473,281 15 1,926,719 19 26,248 26,282
Marketing (Note 5)
Acquisition of Yeager 164,289 2 1,148 1,150
Industries, Inc. (Note 5)
Net income for the year 3,866 3,866
- -----------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1999 1,473,281 $ 15 11,751,425 $ 117 $ 46,452 $ 5,767 8,000 $ (41) $ 52,310
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 34
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,866,538 $ 1,589,008
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 713,037 432,632
Loss on disposition of equipment - 1,338
Provision for losses on accounts receivable 8,760 97,311
Impairment of investment in limited partnership 20,000 20,000
Deferred income taxes (438,000) 470,000
Services received in exchange for Common Stock 3,000 8,000
Services received in exchange for Common Stock Warrants 27,012 -
Changes in assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable (2,143,300) (5,537,689)
Decrease in inventories 3,298,263 -
Decrease (increase) in other assets 914,666 (421,882)
Increase (decrease) in checks issued against future deposits 2,528,342 (3,093,479)
(Decrease) increase in accounts payable and accrued expenses (631,434) 120,614
Decrease in deferred revenues (5,650,890) -
Increase in amounts due customers 601,597 794,271
- --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,117,591 (5,519,876)
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of Periodical Concepts (2,500,000) -
Cash acquired in acquisition of U.S. Marketing Services, Inc. 295,945 -
Acquisition of Yeager Industries, Inc. (2,365,433) -
Acquisition of Mike Kessler & Associates, Inc., net of cash acquired - (608,650)
Capital expenditures (642,514) (344,847)
Loans to officers - (10,000)
Collection on officers notes receivable 22,093 221,485
Proceeds from sale of fixed assets - 2,000
Direct costs of companies acquired subsequent to year end (224,112) -
Increase in cash surrender value of life insurance (42,272) (55,333)
Proceeds from surrender of life insurance policies - 83,959
- --------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (5,456,293) (711,386)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 35
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 8,527,870 6,725,882
Borrowings under credit facility 36,483,000 37,777,000
Principal payments on credit facility (41,879,000) (36,303,000)
Repayments under short-term debt agreements (30,997) (2,221,961)
Common Stock reacquired (41,131) -
Other financing activities 200 (125)
- --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 3,059,942 5,977,796
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 721,240 (253,466)
CASH, beginning of period 31,455 284,921
- --------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 752,695 $ 31,455
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 36
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SUMMARY OF Business
ACCOUNTING
POLICIES 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
revenues from consulting and other services
rendered to clients on other than a
commission basis.
The Company also designs and manufactures
custom-designed product display units that
are categorized as front-end merchandisers
or point-of-purchase displays used by
retailers and consumer product manufacturers
nationwide.
Principles of Consolidation
The consolidated financial statements
include the accounts of The Source
Information Management Company and its
wholly-owned subsidiaries (collectively, the
Company). The results of operations of
Source-Yeager Industries, Inc. and
Source-U.S. Marketing Services, Inc. and its
subsidiary are included in the accompanying
financial statements as of the date of
acquisition. All material intercompany
accounts and transactions have been
eliminated in consolidation.
Concentrations of Credit Risk
During fiscal 1999 approximately 55% of the
Company's revenues were derived 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.
In the Advance Pay Program (Note 3), 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.
In the display rack manufacturing segment,
the Company does have significant client
concentration. Substantially all of the
Company's services are performed under
short-term contracts, thus permitting the
Company's clients to obtain services from
other providers without further obligation
to the Company. If the Company experiences a
significant reduction in business from its
clients, the Company's results of operations
and financial condition may be materially
and adversely affected.
F-9
<PAGE> 37
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Revenue Recognition
Under both the standard arrangement and the
Advance Pay Program, service revenues are
recognized at the time claims for incentive
payments are substantially completed for
submission to the publishers. The service
revenues recognized are 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.
Revenues from annual PIN contracts are
recognized ratably over a year.
Front-end management revenues are generally
recognized as services are performed, or in
accordance with applicable contract terms.
The Company generally recognizes
manufacturing revenues when products are
shipped. Upon request from a customer, the
product can be stored for future delivery
for the convenience of the customer. This
only occurs when the manufacturing and
earnings processes are complete, 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 product is
segregated from other goods.
Inventories
Inventories are valued at the lower of cost
or market. Cost is determined by the
first-in, first-out (FIFO) method.
Equipment and Furniture
Equipment and furniture are stated at cost.
Depreciation 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
The Company accounts for income taxes under
an asset and liability approach that
requires the recognition of deferred tax
assets and liabilities for the expected
future tax consequences of events that have
been recognized in the Company's financial
statements or tax returns. In estimating
future tax consequences, the Company
generally considers all expected future
events other than enactments of changes in
the tax laws or rates.
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 to 20 years.
Stock-Based Compensation
F-10
<PAGE> 38
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 and earnings per share,
determined as if the Company had applied the
new method, are disclosed within Note 13.
Accounting Estimates
The preparation of financial statements in
conformity with 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. Management periodically reviews
the carrying value of property and equipment
and intangibles in relation to the operating
performance and future undiscounted cash
flows of the underlying business to
determine whether impairment exists. No
impairment was identified for the years
ended January 31, 1999 and 1998.
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.
F-11
<PAGE> 39
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Software Capitalization Policy
The Company capitalizes software in
accordance with Statement of Position 98-1
("SOP 98-1"). The SOP allows capitalization
of costs of computer software developed or
obtained for internal use only for (i)
external direct costs of materials and
services incurred in developing or obtaining
internal-use computer software, (ii) payroll
and payroll-related costs for employees who
are directly associated with and devote time
to the internal-use computer software
project, to the extent of the time spent
directly on the project, or (iii) interest
costs incurred while developing internal-use
computer software.
Reclassifications
Certain 1998 amounts have been reclassified
to conform to the 1999 presentation.
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. The Company
adopted SFAS No. 130 in the first quarter of
fiscal 1999, but had no "other"
comprehensive income items for the years
presented in the statements of income or
accumulated as of the balances sheet date
presented.
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. See Note 16.
SOP 98-5, "Reporting on the Costs of
Start-Up Activities," requires that the
costs of start-up activities, including
organization costs, be expenses 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 FASB 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 years beginning after June
15, 1999 and requires comparative
information for all fiscal quarters of
fiscal years beginning after June 15, 1999.
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.
2. RELATED PARTY The Company currently leases certain office
TRANSACTIONS 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
$278,000 and $223,000 for 1999 and 1998,
respectively. Amounts paid for the airplane
were approximately $1,800 and
F-12
<PAGE> 40
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
$12,000 for 1999 and 1998, 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. All notes
were paid in full by January 31, 1999.
3. ADVANCE PAY
PROGRAM The Company has established an Advance Pay
Program. Under this program the Company
advances an agreed upon percentage of the
incentive payments otherwise due the
retailer from magazine publishers upon
quarterly submission of claims for such
payments. The claims otherwise due the
retailer become due the Company. Included in
trade receivables at January 31, 1999 is
$19,965,882 due the Company under the
Advance Pay Program (net of $6,210,636 due
the program participants). Service revenues
from the program were approximately
$6,668,000 and $4,576,000 during 1999 and
1998, respectively.
4. INVENTORIES Inventories consist of the following:
<TABLE>
<CAPTION>
January 31, 1999
-----------------------------------------------------------------------------------
<S> <C>
Raw materials $ 576,101
Work-in-process 805,932
Finished goods 13,666
-----------------------------------------------------------------------------------
$ 1,395,699
-----------------------------------------------------------------------------------
</TABLE>
5. BUSINESS Acquisition of Mike Kessler and Associates,
COMBINATIONS 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
straight line over 15 years.
Unaudited pro forma results of operations
for 1998 for the Company and MKA is listed
below (in thousands):
<TABLE>
<CAPTION>
Year Ended January 31, 1998
-------------------------------------------------------------------------------------
<S> <C> <C>
Total Revenues As reported $ 11,804
Pro forma 12,304
Net Income As reported 1,589
Pro forma 1,637
</TABLE>
F-13
<PAGE> 41
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Earnings Per Share
Basic As reported $ 0.23
Diluted As reported 0.22
Basic Pro forma 0.23
Diluted Pro forma 0.23
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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. The Company
intends to continue the operation of such
business and does not intend to
substantially change the nature of PC2's
operation.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeds
the fair value of the assets acquired by
approximately $2,400,000 and is being
amortized straight line over 15 years.
Acquisition of Yeager Industries, Inc.
On January 7, 1999, the Company acquired the
net 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 $1,038,000 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. ("U.S. Marketing") 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 ("Brand")
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.
F-14
<PAGE> 42
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 $23,064,000 and is being
amortized straight line over 20 years.
Unaudited pro forma results of operations
for 1999 and 1998 for the Company and U.S.
Marketing are listed below (in thousands):
<TABLE>
<CAPTION>
Year Ended January 31, 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenues As reported $ 14,229 $ 11,804
Pro forma 33,539 31,405
Net Income As reported 3,866 1,589
Pro forma 1,695 3,821
Earnings Per Share
Basic As reported $ .42 $ .23
Diluted As reported .40 .22
Basic Pro forma .14 .37
Diluted Pro forma .13 .37
------------------------------------------------------------------------------------
</TABLE>
6. DUE TO RETAILERS For the service segment, the Company has
arrangements with certain of its customers
whereby the Company is authorized to collect
and deposit in its own accounts, checks
payable to its customers for incentive
payments. The Company retains the commission
related to such payments and pays the
customer the difference. The Company owes
retailers $1,235,718 at January 31, 1999
under such arrangements.
For the display rack manufacturing segment,
Due to Retailers represents funds collected
on behalf of the retailers on front-end
racking programs not yet remitted to the
retailer.
7. LONG-TERM DEBT Long-term debt consists of:
AND REVOLVING
CREDIT FACILITY
F-15
<PAGE> 43
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, 1999
-----------------------------------------------------------------------------------
<S> <C>
Revolving Credit Facility $ 3,202,000
Unsecured note payable to former owners of
acquired Company, non-interest bearing, payable
in five equal annual installments beginning in November 1999 300,000
Term note payable in monthly installments of $629
through November 1999, collateralized by an automobile 6,057
-----------------------------------------------------------------------------------
Total Long-term Debt 3,508,057
Less current maturities 66,057
-----------------------------------------------------------------------------------
Long-term Debt $ 3,442,000
-----------------------------------------------------------------------------------
</TABLE>
Annual maturities of long-term debt are as
follows: 2000 - $66,057; 2001 - $3,262,000;
2002 - $60,000; 2003 - $60,000; 2004 -
$60,000.
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, 1999). 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, 1999.
On March 31, 1999 the Company entered into a
new credit agreement with Wachovia Bank,
N.A. See Note 17, Subsequent Events.
8. INCOME TAXES Provision for federal and state income taxes
in the consolidated statements of operations
consist of the following components:
F-16
<PAGE> 44
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C>
Current
Federal $ 2,473,000 $ 606,000
State 632,000 155,000
------------------------------------------------------------------------------------
Total Current 3,105,000 761,000
------------------------------------------------------------------------------------
Deferred
Federal (349,000) 376,000
State (89,000) 94,000
------------------------------------------------------------------------------------
Total Deferred (438,000) 470,000
------------------------------------------------------------------------------------
Total Income Tax Expense $ 2,667,000 $ 1,231,000
------------------------------------------------------------------------------------
Deferred income taxes reflect the net tax
effects of temporary differences between the
carrying amount of the assets and liabilities
for financial reporting purposes and the
amounts used for income tax purposes. The
sources of the temporary differences and their
effect on deferred taxes are as follows:
<CAPTION>
January 31, 1999
------------------------------------------------------------------------------------
<S> <C>
Deferred Tax Assets
Net operating loss carryforward $ 1,082,000
Allowance for doubtful accounts 185,000
Deferred compensation 52,000
Other 73,000
------------------------------------------------------------------------------------
1,392,000
Less: Valuation allowance (1,137,000)
------------------------------------------------------------------------------------
Deferred Tax Asset, Net 255,000
------------------------------------------------------------------------------------
Deferred Tax Liabilities
Book/tax difference in accounts receivable 849,000
Income not previously taxed under cash
basis of accounting for income tax purposes 72,000
Depreciation 43,000
Other 2,000
------------------------------------------------------------------------------------
Total Deferred Tax Liabilities 966,000
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Net Deferred Tax Liability $ 711,000
------------------------------------------------------------------------------------
Classified as
Non-current asset 7,000
Current liability 718,000
------------------------------------------------------------------------------------
Net Deferred Tax Liability $ 711,000
------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE> 45
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The deferred tax asset in the accounts of
Source-U.S. Marketing Services, Inc.
("Source-U.S. Marketing") totaling $1,137,000
is fully offset by a valuation allowance of the
same amount due to uncertainty regarding its
ultimate utilization. At January 31, 1999,
Source-U.S. Marketing had net operating loss
("NOL") carryforwards of approximately
$1,800,000 expiring through 2018. Brand, a
wholly owned subsidiary of Source-U.S.
Marketing, had NOL carryforwards at January 31,
1999 of approximately $880,000 expiring through
2018.
All of the valuation allowance for deferred tax
assets for subsequent recognized tax benefits
will be allocated to reduce goodwill.
The following summary reconciles income taxes
at the maximum federal statutory rate with the
effective rates for 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended January 31, 1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C>
Income tax expense (benefit) at statutory rate $ 2,221,000 $ 960,000
State income tax expense (benefit), net of
federal income tax benefit 379,000 200,000
Non-deductible meals and entertainment 37,000 30,000
Non-deductible officers' life insurance (6,000) 7,000
Non-deductible goodwill amortization 134,000 61,000
Utilization of NOL carryforwards - (19,000)
Other, net (98,000) (8,000)
-----------------------------------------------------------------------------------
Income Tax Expense $ 2,667,000 $ 1,231,000
-----------------------------------------------------------------------------------
</TABLE>
9. COMMITMENTS Leases
The Company leases office and manufacturing
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.
The Company has reached an agreement to
purchase this property for $1.8 million in
cash. The value of the property was appraised
at $1.6 million in August 1998. The Board
appointed Timothy Braswell, an independent
director, to negotiate this transaction on the
Company's behalf and, based on Mr. Braswell's
recommendation, the Board believes the terms of
the proposed purchase are fair to the Company.
In most other cases, management expects that in
the normal course of business, leases will be
renewed or replaced with other leases. Rent
expense was approximately $622,000 and $462,000
for the years ended January 31, 1999 and 1998,
respectively. Amounts paid to related parties
included in total rent expense were
approximately $278,000 and $223,000 for 1999
and 1998, respectively.
Future minimum payments, by year and in the
aggregate, under noncancelable operating leases
with initial or remaining terms of one year or
more consisted of the following at January 31,
1999:
F-18
<PAGE> 46
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Operating
Year Ending January 31, leases
------------------------------------------------------------------------------------
<S> <C>
2000 959,299
2001 589,357
2002 330,035
2003 299,711
2004 292,449
Thereafter 2,563,865
------------------------------------------------------------------------------------
Total minimum lease payments $ 5,034,716
------------------------------------------------------------------------------------
</TABLE>
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 condition, results of operations or
liquidity.
Employment agreements
The Company has entered into employment
agreements with certain officers and key
employees. These agreements expire at dates
ranging from January 2000 to January 2004, are
subject to annual renewal, and require annual
salary levels and termination benefits, should
a termination occur.
Consulting agreements
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.
The Company entered into a consulting agreement
with Herbert A. Hardt commencing on August 31,
1998 and ending November 25, 2000. The
agreement requires the Company to issue a
warrant, expiring January 31, 2001, to purchase
150,000 shares of Common Stock, which was
independently appraised at $37,500.
Union Contracts
At January 31, 1999 approximately 265 of the
Company's 497 employees were members of a
collective bargaining unit. The Company is
party to two collective bargaining agreements,
which expire on September 30, 1999 and December
31, 2000.
Company contributions to the Union funds
charged to operations were approximately
$64,000 for the period ended January 31, 1999.
F-19
<PAGE> 47
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. COMMON STOCK In September 1997, the Company issued to Aron
Katzman, Harry L. Franc, III and Timothy A.
Braswell, each a director of the Company,
non-transferable warrants, expiring in 2000, to
purchase an aggregate of 89,289 shares of
Common Stock at an exercise price of $3.00 per
share. These warrants will vest at a rate of
25% on August 1, 1998, 25% on November 1, 1998,
25% on February 1, 1999 and 25% on May 1, 1999.
The related cost as determined by independent
appraisal of approximately $54,000 will be
recognized ratably over those periods.
In October 1997, the Company sold in a public
offering (the "Offering"), 2,000,000 shares of
the Company's Common Stock. Concurrent with the
Offering, the Company effected the 1 for 1.21
reverse stock split previously approved by the
Company's shareholders. The weighted average
number of common shares presented in the
financial statements have been retroactively
restated to give effect to such reverse stock
split.
11. 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.
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
F-20
<PAGE> 48
July 31, 1997.
On January 6, 1999, 1,500,000 shares of
Preferred Stock were designated as Class A
Convertible Preferred Stock. The shares of
Class A Convertible Preferred Stock carry no
voting rights; however, the Company shall not,
without the approval of at least a majority of
the outstanding shares of Preferred Stock, (i)
amend the Articles of Incorporation or any
other document to alter or change any rights,
preferences or privileges of the Preferred
Stock or to materially and adversely affect the
Preferred Stock, (ii) increase or decrease the
authorized number of shares of Preferred stock
or effect a stock split or reverse stock split
of the Preferred Stock, or (iii) authorize
another class or series of shares senior to or
pari passu with the Preferred Stock with
respect to distribution of assets on
liquidation. The holders of Preferred Stock are
entitled to receive dividends at the same rate,
on the same conditions at the same time and to
the same extent dividend are paid or declared
by the Company on the Common Stock. In the
event of any voluntary or involuntary
liquidation, dissolution or winding-up of the
Company, the holders of the Preferred Stock
shall be entitled to receive in cash out of the
assets of the Company, before any amount shall
be paid to the holders of the Common Stock, a
liquidation preference amount of $7.73 per
share plus any dividends previously declared
but unpaid (the "Liquidation Preference
Amount"). Upon approval by the holders of a
majority of the shares of Common Stock voting
at a Special Meeting , each share of Preferred
Stock shall be converted automatically into one
share of Common Stock. If shareholder approval
is not obtained on or before June 30, 1999, the
Company shall, at the election of any holder of
the Preferred Stock, convert all of the shares
of the Preferred Stock held by such holder into
a demand note of the Company with a principal
amount per share equal to the Liquidation
Preference Amount. For the shares of Preferred
Stock which are to be converted, the Company is
obligated to deliver to the holder thereof a
note in a principal amount equal to the
Liquidation Preference Amount times the number
of shares of Preferred Stock to be converted.
Such note shall be payable on demand with 30
days notice and shall bear interest at the
Prime Rate (as announced from time to time by
J.P. Morgan) plus 1% from the date of
conversion.
On January 7, 1999, 1,473,281 shares of Class A
Convertible Preferred Stock were issued in
connection with the acquisition of U.S.
Marketing Services, Inc. On March 30, 1999 the
Preferred Stock was converted to 1,473,281
shares of Common Stock.
12. EARNINGS PER SHARE In calculating earnings per share, Net Income
for the year ended January 31, 1998 was reduced
by a constructive dividend of $109,937, which
resulted from the exchange of all 5,600
outstanding shares of Preferred Stock for
186,667 shares of Common Stock and
non-transferable warrants.
A reconciliation of the denominators of the
basic and diluted earnings per share
computations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average number of common shares outstanding 9,132,383 6,561,761
Effect of dilutive securities - stock options and warrants 643,289 131,905
------------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE> 49
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Weighted average number of common shares outstanding - as
adjusted 9,775,673 6,693,666
------------------------------------------------------------------------------------
</TABLE>
13. 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, 1999 and 1998.
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, 1999
and 1998 pursuant to this Plan were
approximately $63,000 and $63,000,
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 ("the Plan")
for key employees and reserved 520,661 shares
of Common Stock for the Plan. At a Special
Meeting of Shareholders on March 30, 1999, the
shares reserved for issuance under this Plan
were increased by 1 million shares to
1,520,661. 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.
<TABLE>
<CAPTION>
Weighted
Range of Average
Number of Exercise Exercise
Options Prices Price
--------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at
January 31, 1997 165,288 5.30 - 5.60 5.45
Options granted 327,275 1.66 - 5.60 2.97
Options expired 92,554 2.42 - 5.60 5.26
</TABLE>
F-22
<PAGE> 50
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Options exercised 2,182 2.42 2.42
--------------------------------------------------------
Options outstanding at
January 31, 1998 397,827 1.66 -5.60 3.47
Options granted 1,036,820 5.00 - 10.88 7.09
Options expired 56,047 2.42 - 5.60 4.36
Options exercised 103,542 2.42 - 5.60 4.88
--------------------------------------------------------
Options outstanding at
January 31, 1999 1,275,058 1.66 - 10.88 6.26
--------------------------------------------------------
</TABLE>
The following table summarizes information
about the stock options outstanding at
January 31, 1999:
<TABLE>
<CAPTION>
Remaining
Number Contractual Options
Exercise Price Outstanding Life (Months) Exercisable
-------------------------------------------------------------------------------------
<S> <C> <C>
1.66 89,256 40 29,752
2.42 45,455 101 18,182
2.42 16,445 101 10,963
2.66 49,091 41 16,363
5.00 70,000 116 23,333
5.00 58,347 116 19,449
5.00 50,000 116 10,000
5.13 10,000 108 0
5.13 360,000 108 0
5.30 42,644 100 42,644
6.13 910 113 303
6.63 20,000 111 4,000
6.63 910 111 303
7.38 5,000 118 1,000
7.81 202,000 118 0
10.88 155,000 119 31,000
10.88 100,000 119 33,333
------- ------
1,275,058 240,625
-------------------------------------------------------------------------------------
</TABLE>
Options exercisable at January 31, 1999 totaled
245,673 with a weighted average exercise price
of $5.80. Options exercisable at January 31,
1998 totaled 131,922 with a weighted average
exercise price of $4.82. The weighted average
fair value of each option granted during the
year was $1.34 and $.61 (at grant date) in 1999
and 1998, respectively.
The options above were issued at exercise
prices which approximate fair market value at
the date of grant. At January 31, 1999, 26,879
shares were available for grant under the Plan.
As of January 31, 1999, 527,000 options had
been granted
F-23
<PAGE> 51
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
by the Stock Option Committee that were subject
to approval of the proposal to increase the
authorized shares of the Plan by 1 million. The
proposal was approved at a Special Meeting of
the Shareholders on March 30, 1999. Had
shareholder approval not been obtained, the
options issued would have been treated as
non-qualified options.
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 and
consolidated income per share would have been
reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Year Ended January 31, 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $ 3,866,538 $1,589,008
Pro forma 3,766,441 1,575,534
Basic earnings per share As reported .42 .23
Pro forma .41 .22
Diluted earnings per share As reported .40 .22
Pro forma .39 .22
------------------------------------------------------------------------------------
</TABLE>
The pro forma amounts reflected above are not
representative of the effects on reported net
income in future years because in general, the
options granted typically do not vest for
several years and additional awards are made
each year. The fair value of each option grant
is estimated on the grant date using the
Black-Scholes option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
Year Ended January 31, 1999 1998
-------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Dividend yield 0% 0%
Range of expected lives (years) 1.0 - 2.05 3.6 -10
Range of expected volatility 0.30 - 0.40 0.40 - 0.60
Risk-free interest rate 4.11% - 5.66% 5.90%
-------------------------------------------------- ----------------- ----------------
</TABLE>
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.
14. SUPPLEMENTAL CASH
FLOW INFORMATION Supplemental information on interest and income
taxes paid is as follows:
F-24
<PAGE> 52
<TABLE>
<CAPTION>
Year Ended January 31, 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C>
Interest $ 357,000 $ 700,000
Income Taxes $ 2,222,000 $ 1,081,000
------------------------------------------------------------------------------------
</TABLE>
On February 28, 1997, 6,381 shares of Common
Stock were issued as a dividend to the
preferred shareholders as of that date.
As part of the acquisition of Mike Kessler &
Associates, Inc. the Company entered into a
short-term debt agreement for $2,150,000. The
obligation was paid in full at its due date in
January 1998.
As part of 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.
15. FAIR VALUES OF The following methods and assumptions were
FINANCIAL INSTRUMENTS used to estimate 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.
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
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 carrying amount of long-term debt has been
discounted to its present value.
The estimated fair values of the Company's
financial instruments are as follows:
F-25
<PAGE> 53
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Carrying Fair
January 31, 1999 value value
------------------------------------------------------------------------------------
<S> <C> <C>
Financial Assets
Trade receivables $ 32,593,428 $ 32,593,428
Financial Liabilities
Accounts payable and accrued
expenses $ 3,727,529 3,727,529
$
Due to retailers $ 2,737,077 2,737,077
$
Long-term debt $ 3,508,057 3,442,958
$
------------------------------------------------------------------------------------
</TABLE>
16. SEGMENT FINANCIAL The reportable segments of the Company are
INFORMATION claims submission and other information
services and display rack manufacturing. The
accounting policies of the segments are the
same as those described in the Summary of
Accounting Policies. Segment operating results
are measured based on income before taxes.
There were no intersegment sales during 1999 or
1998.
<TABLE>
<CAPTION>
Claims
Submission
and Other
Information Display Rack
Services Manufacturing Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
-----------------------------------
Revenues from external customers $ 14,229,072 $ 6,870,856 $ 21,099,928
Depreciation and amortization 622,110 90,927 713,037
Income before taxes 4,776,949 1,756,589 6,533,538
Total Assets 33,026,229 35,980,823 69,007,052
Capital Expenditures 640,573 1,941 642,514
1998
-----------------------------------
Revenues from external customers 11,803,844 - 11,803,844
Depreciation and amortization 432,632 - 432,632
Income before taxes 2,820,008 - 2,820,008
Total Assets 23,807,857 - 23,807,857
Capital Expenditures 344,847 - 344,847
-------------------------------------------------------------------------------------
</TABLE>
17. SUBSEQUENT EVENTS Acquisitions
On February 26, 1999 the Company acquired the
net assets of MYCO, Inc. ("MYCO") 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.
<PAGE> 54
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On February 26, 1999 the Company also 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.
On March 23, 1999 the Company also 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.
In March 1999 the Company signed a letter of
intent to purchase the stock of Aaron Wire for
approximately $2.4 million Canadian. Aaron Wire
manufactures front-end display racks from its
facilities in Vancouver, British Columbia.
Credit Facility
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 matures in May 2002. 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
ration of funded debt to earnings before
interest, taxes, depreciation and amortization.
The term loan bears interest, at the Company's
election, at either (i) the London Interbank
Offered Rates for periods of 30, 60, 90 or 180
days, at our option, 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 or (ii) the higher of the prime
rate or the federal funds rate plus .5%. 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.
Registration Statement (unaudited)
Subsequent to year end, the Board of Directors
approved a plan in which the Company would sell
additional shares of its Common Stock. The
Company will be required to file a registration
statement for the sale of these securities. It
is anticipated that the aggregate selling price
of all of the securities will approximate
$56,350,000. The proposed issue date of these
securities is expected to be June 1999.
F-27
<PAGE> 55
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
F-28
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<S> <C>
Date: ________, 1999 /s/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Secretary and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
________, 1999 /s/ S. LESLIE FLEGEL
--------------------
S. Leslie Flegel
Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
________, 1999 /s/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
________, 1999 /s/ RICHARD A. JACOBSEN
-----------------------
Richard A. Jacobsen
Vice Chairman, Chief Operating Officer and
Director
________, 1999 /s/ WILLIAM H. LEE
------------------
William H. Lee
Chief Administrative Officer and
Director
________, 1999 /s/ ROBERT O. ADERS
-------------------
Robert O. Aders
Director
________, 1999 /s/ TIMOTHY A. BRASWELL
-----------------------
Timothy A. Braswell
Director
________, 1999 /s/ HARRY L. "TERRY" FRANC, III
-------------------------------
Harry L. "Terry" Franc, III
Director
________, 1999 /s/ ARON KATZMAN
----------------
Aron Katzman
Director
________, 1999 /s/ RANDALL S. MINIX
--------------------
Randall S. Minix
Director
</TABLE>
<PAGE> 57
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
3.3 Amendment to Articles of Incorporation(2)
3.4 Amendments to Bylaws(2)
3.5 Amendment to Articles of Incorporation(3)
3.6 Amendment to Articles of Incorporation*
4.1 Form of Common Stock Certificate(2)
4.2 Form of Representative's Warrants(2)
4.3 Form of Privately Issued Warrant(2)
9.1 Voting Agreement dated January 7, 1999 between S.
Leslie Flegel and Jonathan J. Ledecky.(4)
10.1 Form of Indemnity Agreement with Officers and
Directors(1)
10.2 Lease Agreement dated June 22, 1991 with 711
Gallimore Partnership(1)
10.3 Addendum to the Lease Agreement, dated as of
January 1, 1994, with 711 Gallimore Partnership(3)
10.4 Addendum to the Lease Agreement, dated as of
January 1, 1996, with 711 Gallimore Partnership(3)
10.5 Addendum to the Lease Agreement, dated as of
April 1, 1996, with 711 Gallimore Partnership(3)
10.6 Addendum to the Lease Agreement, dated as of
April 25, 1996, with 711 Gallimore Partnership(3)
10.7 Amended and Restated Credit Agreement dated as of
March 31, 1999 among The Source Information
Management Company, its subsidiaries and Wachovia
Bank National Association(4)
10.8 The Source Information Management Company Amended
and Restated 1995 Incentive Stock Option Plan (5)
10.9 The Source Information Management Company Stock
Award Plan(6)
10.10 Form of Employment Agreement with S. Leslie
Flegel, William H. Lee and W. Brian
Rodgers(2)
10.11 Employment and Non-Competition Agreement with
James R. Gillis dated as of December 14, 1998*
10.12 Employment Agreement with Richard A. Jacobsen
dated as of March 24, 1999.*
10.13 Agreement with Dwight L. DeGolia(2)
10.14 Form of Financial Consulting Agreement with Donald
& Co. Securities Inc.(2)
10.15 Asset Purchase Agreement dated as of July 10, 1998
by and among The Source Information Management
Company, PC-SUB, Inc. and Periodical Concepts.(7)
10.16 Agreement and Plan of Merger dated as of
January 7, 1999 by and among The Source
Information Management Company, Source-U.S.
Marketing Services, Inc., U.S. Marketing
Services, Inc. and U.S. Marketing Shareholders.(8)
10.17 Asset Purchase Agreement dated as January 7, 1999
by and among The Source Information Management
Company and Yeager Industries, Inc.(8)
10.18 Asset Purchase Agreement dated as of February 1,
1999 by and among The Source Information
Management Company, Chestnut Display Systems, Inc.
and Chestnut Display Systems (North), Inc.(9)
10.19 Asset Purchase Agreement dated as of February 26,
1999 by and among The Source Information
Management Company, MYCO, Inc. and RY, Inc.(9)
10.20 Amendment to Asset Purchase Agreement dated as of
February 26, 1999 by and among The Source
Information Management Company, MYCO, Inc. and
RY, Inc.(9)
10.21 Asset Purchase Agreement dated March 19, 1999
between The Source Information Management Company,
The Source-Canada Corp. and 132127 Canada Inc.*
10.22 Real Estate Sale Contract dated as of April 20,
1999 by and between 711 Gallimore Partnership and
The Source Information Management Company*
10.23 Consulting agreement dated August 31, 1998
between Herbert A. Hardt and The Source
Information Management Company*
21.1 Subsidiaries of the Company*
23.1 Consent of BDO Seidman, LLP*
- ----------
* Filed herewith.
(1) Incorporated by reference to Registration Statement on Form 10-SB
(File no. 0-26238)
<PAGE> 58
(2) Incorporated by reference to Registration Statement on Form SB-2
(File no. 333-32733)
(3) Incorporated by reference to Form 10-KSB for the fiscal year ended
January 31, 1996
(4) Incorporated by reference to Registration Statement on Form S-2 (File No.
333-76979)
(5) Incorporated by reference to Schedule 14A filed on March 9, 1999
(6) Incorporated by reference to Form S-8 (File no. 333-16059) filed on
November 13, 1996.
(7) Incorporated by reference to Current Report on Form 8-K filed on August 10,
1998.
(8) Incorporated by reference to Current Report on Form 8-K filed on January 22,
1999
(9) Incorporated by reference to Current Report on Form 8-K filed on March 12,
1999
<PAGE> 1
EXHIBIT 3.6
AMENDMENT OF ARTICLES OF INCORPORATION
OF
THE SOURCE INFORMATION MANAGEMENT COMPANY
HONORABLE REBECCA MCDOWELL COOK
SECRETARY OF STATE
STATE OF MISSOURI
JEFFERSON CITY, MISSOURI 65101
Pursuant to the provisions of The General and Business Corporation Law of
Missouri, the undersigned Corporation certifies the following:
SECTION 1
The present name of the Corporation is The Source Information Management
Company. The name under which it was originally organized was Periodico, Inc.
SECTION 2
An amendment to the Corporation's Articles of Incorporation was adopted by
the shareholders on March 30, 1999.
SECTION 3
Section (a) of Article Four of the Articles of Incorporation is amended to
read as follows:
(a) The aggregate number of shares of capital stock which the corporation
shall have authority to issue is forty-two million (42,000,000), each having a
par value of One Cent ($0.01) per share. Of such authorized shares, forty
million (40,000,000) shares are hereby classified and designated as common stock
and two million (2,000,000) are hereby classified and designed as preferred
stock.
SECTION 4
All of the 12,168,299 common outstanding shares were entitled to vote on
the foregoing amendment; 6,947,521 shares voted for said amendment, 179,964
shares voted against said amendment and 19,845 abstained from voting. The
remaining 5,020,969 common shares were not represented at the meeting. Preferred
shares have no voting rights.
<PAGE> 2
SECTION 5
The Amendment changed the number of authorized shares having a par value to
from 18,528,925 to 42,000,000.
SECTION 6
The Amendment did not provide for any exchange, reclassification, or
cancellation of issued shares, or a reduction of the number of authorized shares
of any class below the value of issued shares of that class.
IN WITNESS WHEREOF, the undersigned, President, has executed this
instrument and its Secretary has affixed its corporate seal hereto and attested
said seal on the ______ day of April, 1999.
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Corporate Seal) By ______________________________________
S. Leslie Flegel,
Chief Executive Officer
Attest:
_______________________________
W. Brian Rodgers
Secretary
-2-
<PAGE> 3
STATE OF MISSOURI )
)SS
CITY OF ST. LOUIS )
I, _________________________, a Notary Public, do hereby certify that on
the ____ day of April, 1999 personally appeared before me S. Leslie Flegel who,
being by me first duly sworn, declared that he is the Chief Executive Officer of
The Source Information Management Company, that he signed the foregoing document
as Chief Executive Officer of the Corporation, and that the statements therein
contained are true.
___________________________
Notary Public
My commission expires:
3
<PAGE> 1
EXHIBIT 10.11
EMPLOYMENT AND NON-COMPETITION AGREEMENT
THIS EMPLOYMENT AND NON-COMPETITION AGREEMENT ("Agreement") is made as of
the 14th day of December, 1998, by and between THE SOURCE INFORMATION MANAGEMENT
COMPANY, a Missouri corporation (the "Corporation") and JAMES R. GILLIS
("Employee"), an individual currently residing at 73-15 Weaver Street,
Greenwich, Connecticut 06831.
WITNESSETH:
WHEREAS, the Corporation desires to employ Employee and Employee desires to
accept such employment on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and promises herein contained, the adequacy of which is hereby acknowledged, the
Corporation and Employee hereby agree as follows.
I. EMPLOYMENT
The Corporation employs Employee, and Employee accepts employment by the
Corporation upon all of the terms and conditions set out in this Agreement. This
Agreement supersedes Employee's Employment Agreement (the "Brand Agreement")
dated May 20, 1998 with Brand Manufacturing Corporation ("Brand"), which is
hereby terminated. Employee acknowledges and agrees that Brand has no further
obligations under the Brand Agreement.
II. POSITIONS AND DUTIES
2.1 POSITIONS. Employee shall serve as President of the Corporation during
the term of this Agreement.
2.2 DUTIES, RESPONSIBILITIES AND INVOLVEMENT. Employee will report to the
Vice Chairman and Chief Operating Officer (the "COO") of the Corporation.
Subject to direction by the COO, Employee will be an executive officer of the
Corporation with primary responsibility for the operations of the Corporation's
subsidiaries engaged in front-end fixture manufacture and design,
Source-Chestnut Display Systems, Inc., Source-MYCO, Inc., Source-U.S. Marketing
Services, Inc. and Source-Yeager, Inc. (collectively, the "Front-End
Subsidiaries"). Employee shall also have such other responsibilities as may be
assigned to him from time to time by the
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<PAGE> 2
COO or by the Chief Executive Officer of the Corporation that are customarily
performed by a person serving as president of a business such as the
Corporation's business.
The Board of Directors of the Corporation may change this job description
as dictated by business need, provided such change is consistent with
Employee's position as President of the Corporation.
2.3 COMMITMENT TO CORPORATION. Employee shall devote so much of Employee's
time, attention and energies to the business of the Corporation as shall be
necessary for the performance of his responsibilities hereunder, and shall not
during the term of this Agreement be engaged in any other business activity
which requires his personal time and attention whether or not such business
activity is pursued for gain, profit or other pecuniary advantage. This shall
not be construed as preventing Employee from investing Employee's assets in such
form or manner consistent with the restrictions in Section 12.1, below, as will
not require any services on the part of Employee in the operation or affairs of
the entities in which such investments are made.
2.4 COMPLIANCE. Employee agrees to abide by the Articles of Incorporation
and By-Laws of the Corporation and such reasonable rules and regulations as are
adopted from time to time by the Board of Directors of the Corporation in each
case which are not inconsistent with this Agreement and which are communicated
to Employee.
2.5 PLACE OF PERFORMANCE. Employee shall carry out his duties and
responsibilities hereunder principally in and from the High Point, North
Carolina metropolitan area. The Corporation agrees that it may not require,
for any reason whatsoever, Employee to relocate from his residence in High
Point, North Carolina to another geographic location.
III. TERM OF EMPLOYMENT
3.1 INITIAL TERM. The term of Employee's employment under this Agreement
shall commence on December 14, 1998 and continue until midnight on January 31,
2001 unless terminated as provided in this Agreement.
3.2 RENEWAL OR ADJUSTMENT. At the end of the initial term, this Agreement
may be extended, renewed or adjusted upon the mutual agreement of Corporation
and Employee.
IV. COMPENSATION
4.1 REGULAR COMPENSATION. For all services rendered by Employee in any
capacity, Employee shall be entitled to receive regular compensation at the
rate of $250,000 per annum ("Base Salary"). Such compensation shall be payable
in accordance with the Corporation's normal payroll procedures as determined
from time to time by the Board of Directors of Corporation but not less than
monthly.
2
<PAGE> 3
4.2 WITHHOLDING. All payments of regular compensation shall be less such
amounts as are required to be withheld by federal, state or local law.
V. BONUS
5.1 ANNUAL BONUS. Employee shall be entitled to receive an annual bonus of
$50,000 for each of the Corporation's fiscal year ending January 31, 2000, 2001
and 2002 if the aggregate earnings before interest, taxes, depreciation and
amortization ("EBITDA") of the Front-End Subsidiaries (as determined by the
Corporation's auditors) exceed $9,000,000 for such year, and an additional bonus
equal to 5% of the amount (if any) by which aggregate EBITDA of the Front-End
Subsidiaries exceeds $9,000,000 for such year, provided that such bonus shall
not exceed $250,000 in the aggregate with respect to any year. Employee may also
be entitled to participate in the Corporation's executive bonus pool based upon
his overall performance at the discretion of the CEO and the Chief Operating
Officer of the Corporation.
VI. FRINGE BENEFITS; OPTIONS
Employee shall be entitled to participate with other executive officers of
the Corporation, so long as Employee meets the applicable eligibility
requirements, in such employee fringe benefit plans as may be authorized and
adopted from time to time by the Board of Directors of the Corporation. The
Corporation may furnish, withdraw or modify such benefits for Employee as the
Board of Directors of the Corporation shall determine from time to time within
its discretion. Notwithstanding the immediately preceding sentence, Employee
will be entitled to (i) four weeks' paid vacation per year, (ii) reimbursement
for initiation fees, dues and all other membership expenses for one country club
in North Carolina which is approved by the COO and (iii) immediate participation
in the Corporation's health plan. In addition, the Corporation shall assume the
lease of the automobile currently used by Employee (or, if it is unable to
assume the lease, the Corporation will make all lease payments thereon), make
such automobile available to Employee and pay all expenses of operation and
maintenance of and insurance on such automobile.
Employee will, upon the effective date of this Agreement, receive options
to purchase an aggregate of 202,000 shares of the Corporation's common stock at
an exercise price equal to $7,813 per share (the closing sale price on the date
of this Agreement). The options shall vest as to 66,666 shares on each of
January 1, 2000, 2001 and as to 66,667 shares on January 1, 2002. In the event
of the termination of Employee's employment by Employee (other than for "Actual
Default" (as defined below) by the Corporation) or by the Corporation for
"Cause" (as defined below), all unvested options will terminate. No options
(whether vested or unvested) shall terminate or be forfeited by Employee prior
to December 13, 2008 for any other reason whatsoever. Additional options may be
granted at the discretion of the Board of Directors.
3
<PAGE> 4
VII. EXPENSES
Reasonable expenses for promoting the business of the Corporation including
expenses for transportation, promotion, entertainment, travel, telephone, and
similar items shall be subject to reimbursement to the extent authorized for
reimbursement by the Corporation in accordance with reasonable rules and
regulations adopted by the Board of Directors. Such expenses as are so
authorized for reimbursement shall be paid for by the Corporation or reimbursed
to Employee upon Employee's presenting to the Corporation an itemized expense
statement with respect thereto. If Employee and the Corporation agree that
Employee will move from his present location, he will be entitled to
reimbursement of all reasonable moving expenses.
VIII. DEATH OR DISABILITY OF EMPLOYEE
In the event of Employee's death during the term of this Agreement (whether
Employee is then actively engaged in the performance of services for the
Corporation or is being compensated for disability), this Agreement shall
terminate immediately and Employee's estate shall be entitled to receive from
the Corporation an amount equal to the compensation due up until the date of
Employee's death.
If at any time during the term an independent licensed physician selected
by the Board of Directors of the Corporation determines that Employee has been
or will be unable, as a result of physical or mental illness or incapacity, to
perform his duties hereunder for a period of four consecutive months or for an
aggregate of more than six months in any twelve-month period (a "Permanent
Disability"), Employee's employment hereunder may be terminated by the Board
upon 30 days' written notice to Employee. If Employee's employment is terminated
by reason of Permanent Disability, Employee shall be entitled to receive from
the Corporation only the sum of (x) the unpaid portion of the Base Salary then
in effect which has accrued to the date of termination PLUS (y) an amount equal
to six months of Employee's Base Salary.
IX. TERMINATION OF EMPLOYMENT
9.1 TERMINATION BY THE CORPORATION. The Corporation may terminate
Employee's employment pursuant to this Agreement for "Cause". For purposes
hereof, "Cause" shall mean conviction by Employee of a felony or acts of gross
negligence, fraud, embezzlement or willful misconduct by Employee in carrying
out his obligations or responsibilities to the Corporation, as determined in the
reasonable discretion of the Board of Directors of the Corporation; provided
that, in the case of termination as a result of Employee's gross negligence, the
Corporation shall give Employee thirty (30) days' written notice of such gross
negligence, and termination for Cause shall occur only if the Employee shall
have failed or refused to remedy such action within such thirty (30) day period.
4
<PAGE> 5
In the event of such termination by the Corporation for Cause, the
Corporation shall be obligated to continue to pay Employee the Base Salary due
Employee under this Agreement up to the termination date and Employee will be
entitled to no further compensation from the Corporation.
In the event the Corporation terminates Employee's employment pursuant to
this Agreement for any reason other than Cause, the Corporation shall be
obligated to continue to pay Employee the Base Salary and provide the benefits
due Employee under this Agreement for the balance of the scheduled term of this
Agreement and Employees shall remain eligible to receive a pro rata portion of
the annual bonus with respect to the year of termination to the extent the
EBITDA targets set forth in Section 5.1 hereof are achieved.
9.2 TERMINATION BY EMPLOYEE. Employee may terminate Employee's employment
pursuant to this Agreement in the event that the Corporation, during the term of
this Agreement, shall be in Actual Default (as defined herein) under any
provision of this Agreement, by giving written notice to the Corporation of
Employee's intention to terminate this Agreement.
In the event of any such termination by Employee, the Corporation shall
continue to pay Employee the Base Salary and provide the benefits due Employee
under this Agreement for the balance of the scheduled term of the Agreement so
long as Employee continues to perform all of Employee's duties in accordance
with the terms of this Agreement up to the termination date stated in Employee's
written notice and Employee shall remain eligible to receive a pro rata portion
of the annual bonus with respect to the year of termination to the extent EBITDA
targets set forth in Section 5.1 hereof are achieved.
9.3 COOPERATION BY EMPLOYEE. Following any such notice of termination,
Employee shall fully cooperate with the Corporation in all matters relating to
the winding up of Employee's pending work on behalf of the Corporation and the
orderly transfer of any such pending work to such other employees of the
Corporation as may be designated by the Corporation; and to that end the
Corporation shall be entitled to such full-time or part-time services of
Employee as Corporation may reasonably require during all or any part of the
period from the time of giving any such notice until the effective date of such
termination provided that Employee is compensated at the rate set forth in
Section IV hereof for such services performed.
9.4 SETTLEMENT OF ACCOUNTS. After any termination of this Agreement, all
compensation and amounts due to Employee with respect to work performed or
expenses incurred prior to the date of termination shall be reconciled with
amounts due to the Corporation from Employee (if any). Each party shall be
entitled to offset against any amounts that may be due to the other party such
amounts as are due from such other party to it or him excluding any amounts
under the contemplated Agreement and Plan of Merger to which the Corporation
will acquire by subsidiary merger U.S. Marketing Services, Inc. The parties
shall proceed expeditiously to
5
<PAGE> 6
accomplish the foregoing, and the resulting amount due from one party to
the other shall be paid promptly after it is determined; PROVIDED, that during
the pendency of any dispute over such resulting amount, each party shall pay to
the other all undisputed amounts.
X. FILES AND RECORDS
All files, records, documents, reports and other written instruments
concerning customers of the Corporation, including, without limitation, clients
and customers consulted, interviewed or served by Employee during the term of
this Agreement shall belong to and remain the property of the Corporation.
XI. CONFIDENTIAL INFORMATION
11.1 NONDISCLOSURE BY EMPLOYEE. Employee will not, except as authorized by
the Corporation, during or at any time after the termination of Employee's
employment with the Corporation, directly or indirectly, use for himself or
others, or disclose, communicate, divulge, furnish to, or convey to any other
person, firm, or corporation, any secret or confidential information, knowledge
or data of the Corporation or that of third parties obtained by Employee during
the period of his employment with the Corporation and such information,
knowledge or data includes, without limitation, the following:
a. Secret or confidential matters of a technical nature such as, but
not limited to, methods, know-how, formulae, compositions, processes,
discoveries, manufacturing techniques, inventions, computer programs, and
similar items or research projects involving such items;
b. Secret or confidential matters of a business nature such as, but
not limited to, information about costs, purchasing, profits, market, sales
of lists of customers; or
c. Secret or confidential matters pertaining to future developments
such as, but not limited to, research and development or future marketing
or merchandising.
11.2 SURRENDER OF INFORMATION. Employee, upon termination of his
employment with the Corporation, or at any other time upon the Corporation's
written request, shall deliver promptly to the Corporation all drawings,
blueprints, manuals, letters, notes, notebooks, reports, sketches, formulae,
computer programs and similar items, memoranda, lists of customers, and all
other materials and copies thereof relating in any way to the Corporation's
business which contain confidential information and which were in any way
obtained by Employee during the term of his employment with the Corporation
which are in his possession or under his control; and Employee will not make or
retain any copies of any of the foregoing and will so represent to the
Corporation upon termination of his employment.
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<PAGE> 7
11.3 NOTIFICATION OF SUBSEQUENT EMPLOYERS. The Corporation may notify any
person, firm, or corporation employing Employee or evidencing at intention to
employ Employee as to the existence and provisions of this Agreement.
11.4 REMEDIES. Employee understands and acknowledge that such confidential
information or other commercial ideas mentioned herein are unique and that the
disclosure or use of such matters or any other secret or confidential
information other than in furtherance of the business of the Corporation would
reasonably be expected to result in irreparable harm to the Corporation. In
addition to whatever other remedies the non-breaching party and/or its
successors or assigns may have at law or in equity, each party specifically
covenants and agrees that, in the event of default under or breach of this
Agreement, the non-breaching party and/or its successors and assigns shall be
entitled to apply to any court of competent jurisdiction to enjoin any breach,
threatened or actual, by the breaching party, and/or to sue to obtain damages
for default under or any breach of this Agreement. In the event of default
under or breach of this Agreement, each of the Corporation and Employee hereby
agrees to pay all costs of enforcement and collection of any and all remedies
and damages under this Agreement incurred by the non-breaching party, including
reasonable attorneys' fees as determined by a court of competent jurisdiction.
XII. LIMITATION ON COMPETITION
12.1 NON-COMPETITION AGREEMENT. During the period of employment and for a
period of two (2) years after expiration or termination of this Agreement, for
Cause or by Employee (other than termination by Employee pursuant to Section
9.2, above, as a result of Actual Default by Corporation), Employee shall not,
within the United States of America, directly or indirectly as an owner,
employee, consultant or otherwise, individually or collectively, acquire an
interest in (other than Employee's ownership of not more than 2% of the
outstanding equity securities of a publicly-traded company), become an employee
of or consultant to a person or entity engaged in the business of (i) designing,
manufacturing, marketing or distributing front-end fixtures for use by retail
stores or (ii) the third party billing and collecting of rebates for magazines
or other products sold at the checkout of mass market retailers. Employee agrees
that the area, in light of the character of the industry, and the duration of
this limitation are reasonable under the circumstances, considering Employee's
position with the Corporation and other relevant factors, and that in all
likelihood this will not constitute a serious handicap to Employee in securing
future employment. Notwithstanding the foregoing, in the event this Agreement
terminates upon expiration of its term (including any extension or renewal
thereof), the provisions of this Section 12.1 will terminate unless, on or prior
to such date of expiration, the Corporation shall have notified Employee in
writing of its election to extend the provisions of this paragraph for a period
of one year or two years. During the First year of any such extension, the
Corporation shall pay Employee an aggregate of $125,000, payable in equal
monthly installments as the fee for such extension. If the extension is for two
years, the Corporation shall pay Employee in the second year of such extension
an aggregate amount equal to $150,000 in equal monthly installments during the
second year of such extension.\
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<PAGE> 8
12.2 NONSOLICITATION AGREEMENT. Employee will not, either during employment
or during the period of two (2) years after expiration or termination of this
Agreement, for Cause or by Employee, directly or indirectly, either for himself
or for any other person or entity, take any action or perform any services which
are designed to or in fact call upon, compete for, solicit, divert, or take
away, or attempt to divert or take away, any of the customers of Corporation or
of any subsidiary of the Corporation; this prohibition includes customers
existing at the present time or prospective or past customers solicited, sold to
or served by Corporation or any subsidiary of the Corporation during the five
(5) years prior to termination or expiration of this Agreement.
12.3 NON-HIRE AGREEMENT. Employee will not, either during employment or
during the period of two (2) years after expiration or termination of this
Agreement, for Cause or by. Employee, directly or indirectly, either for himself
or for any other person or entity, induce, employ or attempt to employ any
person who is at that time, or has been within six (6) months immediately prior
thereto, employed by the Corporation or any subsidiary of the Corporation.
12.4 REMEDIES. It is further agreed that, if Employee shall violate the
foregoing prohibitions, the Corporation shall be entitled to seek specific
performance of these covenants, and Employee shall pay all costs and attorneys'
fees, as determined by a court of competent jurisdiction, incurred by the
Corporation in enforcing the aforesaid covenants if the Corporation is
successful in so doing after a final adjudication of the matter. If any of the
foregoing covenants is not enforceable to the full extent provided, it shall be
and remain enforceable to the extent permitted by law, and a court is authorized
by the parties to modify such covenant to make it reasonable and, as so
modified, enforce it.
12.5 TERMINATION OF PROVISIONS. Notwithstanding the provisions hereof
regarding termination of this Agreement, the provisions of this Section shall
remain in full force and effect provided for hereunder.
XIII. ACTUAL DEFAULT
In the event Employee believes that the Corporation has failed to fulfill
any of its obligations under this Agreement, Employee shall give the Corporation
written notice of such default specifying the nature thereof, If within thirty
(30) days after the giving of such notice, the Corporation has failed or refused
to remedy such default, Employee may by notice in writing declare the
Corporation to be in actual default ("Actual Default") of this Agreement and
proceed in the manner otherwise provided for herein. The provisions of this
Section are intended to provide a means whereby the Corporation will have an
opportunity to cure any such alleged default before Employee shall be entitled
to attempt to terminate this Agreement. The giving of such notice and the
expiration of the thirty (30) day period provided for herein shall not, however,
prevent the Corporation from establishing that no default did in fact exist.
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<PAGE> 9
XIV. GENERAL PROVISIONS
14.1 WAIVER. The waiver by either party of a breach or violation of any
provision of this Agreement shall not operate as or be construed to be a waiver
of any subsequent breach hereof.
14.2 SEVERABILITY. Should any one or more sections of this Agreement be
found to be invalid, illegal, or unenforceable in any-respect, the validity,
legality and enforceability of the remaining sections contained herein shall
not in any way be affected or impaired thereby. In addition, if any section
hereof is found to be partially enforceable, then it shall be enforced to that
extent.
14.3 NOTICES. Any and all notices required or permitted to be given under
this Agreement shall be sufficient if furnished in writing and personally
delivered or sent by registered or certified mail to the last known residence
address of Employee or to Corporation, c/o The Source Information Management
Company, 11644 Lilburn Park Road, St. Louis, Missouri 63146 or such other place
as it may subsequently designate in writing.
14.4 GOVERNING LAW. This Agreement shall be interpreted, construed and
governed according to the laws of the State of Missouri.
14.5 SECTION HEADINGS. The section headings contained in this Agreement
are for convenience only and shall in no manner be construed to limit or define
the terms of this Agreement.
14.6 COUNTERPARTS. This Agreement shall be executed in two or more
counterparts, each of which shall be deemed an original and together they shall
constitute one and the same Agreement, with at least one counterpart being
delivered to each party hereto.
14.7 ASSIGNABILITY. The Corporation shall have the right to assign this
Agreement to a third party which purchases substantially all of the then assets
of the business formerly operated by it.
14.8 SUCCESSORS AND ASSIGNS BOUND. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns.
14.9 ENTIRE AGREEMENT. This is the entire and only Agreement between the
parties respecting the subject matter hereof. This Agreement may be modified
only by a written instrument executed by all parties hereto.
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<PAGE> 10
14.10 INDEMNIFICATION. In the event Employee is made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was performing services under this Agreement, then the Corporation shall
indemnify Employee against all expenses (including attorneys' fees and
disbursements), judgments, fines and amounts paid in settlement, as actually and
reasonably incurred by Employee in connection therewith to the fullest extent
provided by Missouri law.
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<PAGE> 11
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officers, and Employee has executed this
Agreement as of the date first written above.
THE SOURCE INFORMATION MANAGEMENT
COMPANY
By: _______________________________
Name: S. Leslie Flegal
Its: Chairman & CEO
EMPLOYEE
___________________________________
JAMES R. GILLIS
10
<PAGE> 1
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
AGREEMENT by and between THE SOURCE INFORMATION MANAGEMENT COMPANY, a
Missouri corporation (the "Company"), and RICHARD A. JACOBSEN (the "Executive"),
dated as of the 24th day of March, 1999.
WHEREAS, the Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its shareholders to employ
the Executive in the positions set forth below, and the Executive desires to
serve in those capacities;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. EMPLOYMENT PERIOD. The Company shall employ the Executive, and the
Executive shall serve the Company, on the terms and conditions set forth in this
Agreement, for the period commencing on April 12, 1999 and ending on January 31,
2004 (the "Employment Period"); provided that the Employment Period will
automatically be extended on January 31, 2004 and each January 31 thereafter for
additional one-year periods unless either party shall, at least 90 days before
such date, provide notice to the other party that the Employment Period will not
be extended.
2. POSITION AND DUTIES.
(a) The Executive shall serve as Vice Chairman and Chief Operating
Officer of the Company, reporting to the Chairman of the Board and Chief
Executive Officer of the Company, with such duties and responsibilities as are
customarily assigned to such positions, and such other duties and
responsibilities not inconsistent therewith as may be assigned to him from time
to time by the Chief Executive Officer. In addition, throughout the Employment
Period, the Executive shall be nominated to serve as a member of the Board.
<PAGE> 2
(b) During the Employment Period, and excluding any periods of
vacation and sick leave to which the Executive is entitled, the Executive shall
devote his full-time efforts to the business and affairs of the Company and use
his best efforts to carry out such responsibilities faithfully and efficiently.
It shall not be considered a violation of the foregoing for the Executive to (i)
serve on corporate, civic or charitable boards or committees, (ii) deliver
lectures or fulfill speaking engagements and (iii) manage personal investments,
so long as such activities do not interfere with the performance of his
responsibilities as an employee of the Company in accordance with this Agreement
or violate the provisions of Section 7 of this Agreement.
3. COMPENSATION.
(a) BASE SALARY. During the Employment Period, the Executive shall
receive an annual base salary (the "Annual Base Salary") at the annual rate of
$235,000 for the Company's fiscal year ending January 31, 2000, $255,000 for the
fiscal year ending January 31, 2001 and $275,000 for the fiscal year ending
January 31, 2002. For the Company's fiscal years ending January 31, 2003 and
2004, the Annual Base Salary shall be fixed by the Board at a level not less
than $275,000. The Annual Base Salary shall be payable in accordance with the
Company's payroll practices for key executives as in effect from time to time.
The Board may increase the Annual Base Salary above the foregoing amounts at its
discretion. The Company shall give the Executive written notice of the Annual
Base Salary for each fiscal year no later than the first regularly scheduled
Board meeting in such fixed year. The Annual Base Salary shall not be reduced
after any such increase, and the term "Annual Base Salary" shall thereafter
refer to the Annual Base Salary as so increased.
(b) ANNUAL BONUS. In addition to the Annual Base Salary, the
Executive shall be awarded annual bonuses (the "Annual Bonus") in accordance
with this Section 3(b). For each
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<PAGE> 3
fiscal year or portion of a fiscal year during the Employment Period, the
Executive shall receive an Annual Bonus in cash equal to a percentage of the
Company's net income before income taxes calculated as provided in Schedule I
hereto.
(c) LOANS. On the first day of Executive's employment hereunder, the
Company will advance to Executive cash in the amount of $600,000 ("Loan I") and
$375,000 ("Loan II"). Executive shall execute and deliver to the Company
promissory notes in the forms of EXHIBITS A AND B hereto, respectively
representing Loans I and II (the "Notes"). The Notes will bear interest at the
applicable Federal rate on the date the advances are made.
(i) On each of the first five anniversaries of this Agreement,
(a) an amount equal to the sum of (A) $120,000 and (B) accrued interest on
Loan I (the "Loan I Base Sum") shall be forgiven and (b) an amount equal to the
difference between the quotient of the Loan I Base Sum divided by the reciprocal
of the maximum Combined New Jersey and Federal tax rate applicable to
individuals and the Loan I Base Sum (the "Loan I Gross-Up"), shall be paid to
Executive in cash.
(ii) On each of the first seven anniversaries of this Agreement,
(a) an amount equal to the sum of (A) $53,571.43 and (B) accrued interest on
Loan II (the "Loan II Base Sum") shall be forgiven and (b) an amount equal to
the difference between the quotient of the Loan II Base Sum divided by the
reciprocal of the maximum combined New Jersey and Federal tax rate to
applicable to individuals and the Loan II Base Sum (the "Loan II Gross-Up"),
shall be paid to Executive in cash.
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<PAGE> 4
(d) STOCK OPTIONS. On the date of execution of this Agreement, the
Executive shall be granted options under the Company's Stock Option Plan to
purchase 375,000 shares of the Company's common stock at an exercise price equal
tothe last sale price at which such shares are sold as reported by Nasdaq as of
the market close on the date of execution of this Agreement. Such options shall
vest as follows: (i) 50,000 shares on the first anniversary of this Agreement;
(ii) 112,500 shares on the second anniversary of this Agreement; (iii) 162,500
shares on the third anniversary of this Agreement and (iv) 50,000 shares on the
fourth anniversary of this Agreement.
(e) INSURANCE. The Company will provide Executive with term life
insurance in the amount of One Million Dollars ($1,000,000). The Company will
also maintain a term life insurance policy on Executive in the amount of Two
Million Dollars ($2,000,000) for the benefit of the Company. Executive will
cooperate with the Company in obtaining such policies.
(f) OTHER BENEFITS. During the Employment Period: (i) the Executive
shall be entitled to participate in all benefit programs of the Company to the
same extent as other key executives; and (ii) the Executive and/or the
Executive's family, as the case may be, shall be eligible for participation in,
and shall receive all benefits under, all welfare benefit plans, practices,
policies and programs provided by the Company to the same extent as other key
executives, including, but not limited to any comprehensive medical and dental
plan, retirement plans and profit sharing programs the Company may provide to
its key executives from time to time.
(g) EXPENSES. During the Employment Period, the Executive shall be
entitled to receive prompt reimbursement for all reasonable expenses incurred by
the Executive in carrying out the Executive's duties under this Agreement,
provided that the Executive complies with the
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<PAGE> 5
policies, practices and procedures of the Company for submission of expense
reports, receipt and similar documentation of such expenses.
(h) FRINGE BENEFITS. During the Employment Period, the Executive shall be
entitled to paid vacation, car allowance, and payment of annual dues and
assessments at one country club selected by the Executive, in each case on the
terms and conditions as are in effect for other key executives of the Company
from time to time or, if not made available to other key executives, on terms
and conditions that are determined by the Compensation Committee of the Board to
be fair and reasonable.
4. TERMINATION OF EMPLOYMENT.
(a) DEATH OR DISABILITY. The Executive's employment shall terminate
automatically upon the Executive's death during the Employment Period. The
Company shall be entitled to terminate the Executive's employment because of the
Executive's Disability during the Employment Period. "Disability" means that
(i) the Executive has been unable, for a period of six months, or for a total of
180 days in any given period of twelve months, to perform the Executive's duties
under this Agreement, as a result of physical or mental illness or injury, and
(ii) a physician selected by the Company or its insurers, and acceptable to the
Executive or the Executive's guardian or legal representative, has determined
that the Executive's incapacity is total and permanent. A termination of the
Executive's employment by the Company for Disability shall be communicated to
the Executive by written notice, and shall be effective on the 30th day after
receipt of such notice by the Executive (the "Disability Effective Date"),
unless the Executive is able to, and does, return to full-time performance of
the Executive's duties before the Disability Effective Date.
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<PAGE> 6
(b) BY THE COMPANY.
(i) The Company may terminate the Executive's employment during
the Employment Period for Cause or without Cause. "Cause" means:
A. any fraud, embezzlement or other dishonesty of the
Executive that adversely affects the Company's business or
reputation; or
B. the Executive's conviction of a felony or entering
into a plea of NOLO CONTENDERE with respect to a felony.
(ii) A termination of employment by the Company for Cause shall
be effectuated by giving the Executive written notice ("Notice of Termination
for Cause") of the termination, setting forth the conduct of the Executive that
constitutes Cause. Termination of employment by the Company for Cause shall be
effective on the date when the Notice of Termination for Cause is given, unless
the notice sets forth a later date (which date shall in no event be later than
30 days after the notice is given).
(iii) A termination of the Executive's employment by the Company
without Cause shall be effected by giving the Executive written notice of the
termination.
(c) BY THE EXECUTIVE.
(i) The Executive may terminate employment for Good Reason.
"Good Reason" means:
A. the assignment to the Executive of any duties
inconsistent in any respect with paragraph (a) of Section 2 of
this Agreement, other than actions that are not taken in bad
faith and are remedied by the Company within 15 days after
receipt of notice thereof from the Executive;
B. any failure by the Company to comply with any
provision of Section 3 of this Agreement, other than failures
that are not taken in bad faith and are remedied by the Company
within 15 days after receipt of notice thereof from the
Executive;
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<PAGE> 7
C. the occurrence of a Non-Negotiated Change in Control of
the Company (as defined below).
For purposes of this Agreement, "Non-Negotiated Change in Control" means any one
or more of the following occurrences unless such occurrence or occurrences are
approved in advance by a majority of the Continuing Directors (as defined
below):
(w) Any individual, corporation (other than the Company,
any trustees or other beneficiary holding securities under any
employee benefit plan of the Company, or any Company owned,
directly or indirectly, by the Stockholders of the Company in
substantially the same proportions as their ownership of stock of
the Company), partnership, trust, association, pool, syndicate,
or any other entity or any group of persons acting in concert
becomes the beneficial owner (within the meaning of Rule 13d-3
under the Securities Exchange Act of 1934) of securities of the
Company possessing more than one-half of the voting power for the
election of directors of the Company;
(x) There shall be consummated any consolidation, merger,
or other business combination involving the Company or the
securities of the Company in which holders of voting securities
of the Company immediately prior to such consummation own, as a
group, immediately after such consummation, voting securities of
the Company (or, if the Company does not survive such
transaction, voting securities of the entity surviving such
transaction) having less than one-half of the total voting power
in an election of directors of the Company (or such other
surviving corporation);
(y) During any period of two (2) consecutive years,
individuals who at the beginning of such period constitute the
directors of the Company cease for any reason to constitute at
least a majority thereof unless the election, or the nomination
for election by the Company's shareholders, of each new director
of the Company was approved by a vote of at least two-thirds
(2/3) of the directors of the Company then still in office who
were directors of the Company at the beginning of any such period
("Continuing Directors"; each director nominated by the
Continuing Directors shall also be a Continuing Director); or
(z) There shall be consummated any sale, lease, exchange,
or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the
Company (on a consolidated basis) to a party which is not
controlled by or under common control with the Company.
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<PAGE> 8
(ii) A termination of employment by the Executive for Good Reason
shall be effectuated by giving the Company written notice ("Notice of
Termination for Good Reason") of the termination, setting forth the conduct of
the Company that constitutes Good Reason. A termination of employment by the
Executive for Good Reason shall be effective on the fifth business day following
the date when the Notice of Termination for Good Reason is given, unless the
notice sets forth a later date (which date shall in no event be later than
30 days after the notice is given).
(d) NO WAIVER. Except with respect to the notice required by Section
4(b)(i)A hereof, the failure to set forth any fact or circumstance in a Notice
of Termination for Cause or a Notice of Termination for Good Reason shall not
constitute a waiver of the right to assert, and shall not preclude the party
giving notice from asserting, such fact or circumstance in an attempt to enforce
any right under or provision of this Agreement.
(e) DATE OF TERMINATION. The "Date of Termination" means the date of
the Executive's death, the Disability Effective Date, the date on which the
termination of the Executive's employment by the Company for Cause or by the
Executive for Good Reason is effective, or the date on which the Executive
gives the Company notice of a termination of employment without Good Reason, as
the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION.
(a) OTHER THAN FOR CAUSE, DEATH OR DISABILITY; GOOD REASON. If,
during the Employment Period, the Company terminates the Executive's
employment, other than for Cause, Death or Disability, or the Executive
terminates his employment for Good Reason, the Company shall (i) pay the
Executive's accrued but unpaid portion of the Annual Base Salary (the "Accrued
Obligations") to the Executive in a lump sum in cash within 30 days after the
Date of
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<PAGE> 9
Termination, (ii) continue to pay the Base Salary for the remainder of the term
hereof, (iii) forgive the balance of principal and accrued interest on Loans I
and II and (iv) pay Executive cash equal to the Loan I and II Gross-Up based
upon the amount forgiven. In addition, (A) the Option shall immediately vest
with respect to all shares as to which the Option has not theretofore been
exercised and shall terminate 90 days after the date of such Termination and
(B) the Executive shall be entitled to an Annual Bonus in an amount equal to
the greater of the Annual Bonus the Executive would have received for the year
in which such termination occurs had this Agreement not been terminated and the
Annual Bonus received by Executive for the year prior to the date of such
termination. The payments provided pursuant to this paragraph (a) of Section 5
are intended as liquidated damages for a termination of the Executive's
employment by the Company other than for Cause or Disability or for the actions
of the Company leading to a termination of the Executive's employment by the
Executive for Good Reason, and shall be the sole and exclusive remedy therefor.
(b) DEATH OR DISABILITY. If the Executive's employment is terminated
by reason of the Executive's death or Disability during the Employment Period,
(i) the Company shall pay the Accrued Obligations to the Executive or the
Executive's estate or legal representative, as applicable, in a lump sum in cash
within 30 days after the Date of Termination, (ii) the Company shall forgive the
outstanding principal balances and accrued interest on Loans I and II, (iii) pay
Executive cash equal to the Loan I and Loan II Gross-Up based upon the amount
forgiven and (iv) the Option shall vest with respect to all shares as to which
it has not been exercised and shall terminate 90 days after the Date of
Termination. In addition, if the Executive's employment is terminated by reason
of Disability, the Company will continue to pay to Executive until the earlier
of January 31, 2004 or the date of Executive's death, cash in an amount equal to
the Annual Base
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<PAGE> 10
Salary, less any amounts received by Executive under any disability insurance
coverage maintained for Executive by the Company. The Company shall have no
further obligations under this Agreement.
(c) CAUSE; OTHER THAN FOR GOOD REASON. If the Executive's employment
is terminated by the Company for Cause during the Employment Period, or if the
Executive terminates his employment during the Employment Period other than for
Good Reason, the outstanding principal balances and accrued interest of Loans I
and II (the "Note Obligations") shall immediately become due and payable by
Executive, the Option shall terminate, the Company shall pay Executive the
Accrued Obligations less the note Obligations and the Company shall have no
further obligations under this Agreement.
6. NON-EXCLUSIVITY OF RIGHTS.
Nothing in this Agreement shall prevent or limit the Executive's
continuing or future participation in any plan, program, policy or practice
provided by the Company or any of its affiliated companies for which the
Executive may qualify, nor, subject to paragraph (f) of Section 11, shall
anything in this Agreement limit or otherwise affect such rights as the
Executive may have under any contract or agreement with the Company or any of
its affiliated companies. Vested benefits and other amounts that the Executive
is otherwise entitled to receive under any plan, policy, practice or program of,
or any contract or agreement with, the Company or any of its affiliated
companies on or after the Date of Termination shall be payable in accordance
with such plan, policy, practice, program, contract or agreement, as the case
may be, except as explicitly modified by this Agreement.
7. CONFIDENTIAL INFORMATION NON-COMPETITION.
(a) The Executive shall hold in a fiduciary capacity for the benefit
of the Company all secret or confidential information, knowledge or data
relating to the Company or any
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<PAGE> 11
of its affiliated companies and their respective businesses that the Executive
obtains during the Executive's employment by the Company or any of its
affiliated companies and that is not public knowledge (other than as a result of
the Executive's violation of this paragraph (a) of Section 7) ("Confidential
Information"). The Executive shall not communicate, divulge or disseminate
Confidential Information at any time during or after the Executive's employment
with the Company, except with the prior written consent of the Company or as
otherwise required by law or legal process.
(b) During the period of employment and for a period of two (2) years
after expiration or termination of this Agreement, for Cause or by Executive
other than for Good Reason, Executive shall not, within the United States of
America or Canada, directly or indirectly as an owner, employee, consultant or
otherwise, individually or collectively, acquire an interest in (other than
Executive's ownership of not more than two percent (2%) of the outstanding
equity securities of a publicly-traded company) become an employee of or
consultant to a person or entity engaged in the business of (i) designing,
manufacturing, marketing or distributing front-end fixtures for use by retail
stores, (ii) the third party billing and collecting of rebates for magazines or
other products sold at the checkout of mass market retailers or (iii) the
providing of information to subscribers similar to information provided by the
Company on its Interactive Communications Network. Executive agrees that the
area, in light of the character of the industry, and the duration of this
limitation are reasonable under the circumstances, considering Executive's
position with the Company and other relevant factors, and that in all likelihood
this will not constitute a serious handicap to Executive in securing future
employment.
(c) Executive will not, either during employment or during the period
of two (2) years after expiration or termination of this Agreement, for Cause or
by Executive, directly
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<PAGE> 12
or indirectly, either for himself or for any other person or entity, take any
action or perform any services which are designed to or in fact call upon,
compete for, solicit, divert, or take away, or attempt to divert or take away,
any of the customers of Company or of any subsidiary of the Company; this
prohibition includes customers existing at the present time or prospective or
past customers solicited, sold to or served by Company or any subsidiary of the
Company during the five (5) years prior to termination or expiration of this
Agreement.
(d) Executive will not, either during employment or during the period of
two (2) years after expiration or termination of this Agreement, for Cause or
by Executive other than for Good Reason, directly or indirectly, either for
himself or for any other person or entity, induce, employ or attempt to employ
any person who is at that time, or has been within six (6) months immediately
prior thereto, employed by the Company or any subsidiary of the Company.
(e) It is further agreed that, if Executive shall violate the foregoing
prohibitions, the Company shall be entitled to seek specific performance of
these covenants, and Executive shall pay all costs and attorneys' fees, as
determined by a court of competent jurisdiction, incurred by the Company in
enforcing the aforesaid covenants if the Company is successful in so doing
after a final adjudication of the matter. If any of the foregoing covenants is
not enforceable to the full extent provided, it shall be and remain enforceable
to the extent permitted by law, and a court is authorized by the parties to
modify such covenant to make it reasonable and, as so modified, enforce it.
(f) Notwithstanding the provisions hereof regarding termination of this
Agreement, the provisions of this Section shall remain in full force and effect
provided for hereunder.
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<PAGE> 13
8. NO MITIGATION. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement and such
amounts shall not be reduced, regardless of whether the Executive obtains other
employment.
9. SUCCESSORS.
(a) This Agreement is personal to the Executive and, without the
prior written consent of the Company, shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no such
succession had taken place. As used in this Agreement, "Company" shall mean both
the Company as defined above and any such successor that assumes and agrees to
perform this Agreement, by operation of law or otherwise.
10. MISCELLANEOUS.
(a) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of New Jersey, without reference to principles of
conflict of laws. The captions of this Agreement are not part of the provisions
hereof and shall have no force or effect.
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<PAGE> 14
This Agreement may not be amended or modified except by a written agreement
executed by the parties hereto or their respective successors and legal
representatives.
(b) All notices and other communications under this Agreement shall be in
writing and shall be given by hand delivery to the other party or by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
IF TO THE EXECUTIVE:
Richard A. Jacobsen
15 Ashland Drive
Montville, NJ 07045
IF TO THE COMPANY:
The Source Information Management Company
11644 Lilburn Park Road
St. Louis, MO 63146
Attention: Chief Executive Officer
or to such other address as either party furnishes to the other in writing in
accordance with this paragraph (b) of Section 10. Notices and communications
shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable and
continue in full force and effect to the fullest extent consistent with law.
(d) Notwithstanding any other provision of this Agreement, the Company may
withhold from amounts payable under this Agreement all federal, state, local and
foreign taxes that are required to be withheld by applicable laws or
regulations.
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<PAGE> 15
(e) The failure of the Executive or the Company to insist upon strict
compliance with any provision of, or to assert any right under, this Agreement
shall not be deemed to be a waiver of such provision or right or of any other
provision of or right under this Agreement.
(f) The Executive and the Company acknowledge that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof.
(g) This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, and which together shall constitute one
instrument.
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of its Board of Directors, the Company has
caused this Agreement to be executed in its name on its behalf, all as of the
day and year first above written.
_______________________________________
Richard A. Jacobsen
THE SOURCE INFORMATION MANAGEMENT COMPANY
By: ____________________________________
<PAGE> 16
EXHIBIT A
PROMISSORY NOTE
St. Louis, Missouri
$600,000.00 March___, 1999
On or before the Maturity Date (hereinafter defined), the undersigned,
RICHARD A. JACOBSEN, an individual (the "BORROWER"), for value received,
promises to pay to the order of THE SOURCE INFORMATION MANAGEMENT COMPANY, a
Missouri corporation with an address at 11644 Lilburn Park Road, St. Louis,
Missouri 63146 (the "HOLDER"), at the address set forth herein, or at such
other place as may be designated in writing by the Holder, in lawful money of
the United States of America in immediately available funds, the principal sum
of Six Hundred Thousand Dollars ($600,000.00) together with interest on the
aforesaid principal sum at the rate hereinafter specified.
During the term hereof, Borrower agrees to pay interest on the unpaid
principal balance hereunder at a rate per annum equal to ____________ percent
(______%) based on a year consisting of 365 days (the "LOAN INTEREST RATE").
On the Maturity Date, Borrower agrees to pay the entire unpaid principal
balance hereunder plus all accrued interest thereon. The term "Maturity Date"
shall mean ________________, 2004, or any earlier date on which payment
hereunder is due whether by acceleration or otherwise After the Maturity Date,
whether by acceleration or otherwise, the rate of interest hereunder shall
equal the Loan Interest Rate plus three percent (3.000%) per annum based on a
year consisting of 365 days (the "DEFAULT RATE").
Borrower reserves the right to prepay in whole or in part the principal sum
hereof at any time or from time to time, without premium or penalty, so long as
a default has not occurred under this Note. The Holder, however, shall have no
obligation to re-advance any sums prepaid and any partial prepayment shall not
relieve the undersigned of paying the remaining balance hereunder when due. All
payments by Borrower shall be applied to accrued interest hereon and then to
the outstanding principal balance hereunder.
This Note is one of the "Notes" referred to in and issued pursuant to that
certain Employment Agreement (the "AGREEMENT") between Borrower and Holder,
dated as of March___, 1999, and is intended to evidence the indebtedness of
Borrower pursuant to Loan I as provided in the Agreement. The Agreement is by
this reference incorporated herein and made a part hereof as if fully set forth
herein, and this Note is entitled to all benefits of, and is subject to the
terms and conditions of, the Agreement. The indebtedness evidenced by this Note
shall be forgiven and any Gross-Up payments (as defined in the Agreement) shall
be made as set forth in the Agreement.
In the event that Borrower's employment with Holder pursuant to the
Agreement shall be (i) terminated by Holder for Cause (as defined in the
Agreement) or (ii) terminated by Borrower for other than Good Reason (as
defined in the Agreement) (each, an "Acceleration Event"), then the Holder, at
its option and without further notice or demand, may declare immediately due
and payable
A-1
<PAGE> 17
the entire unpaid balance of principal due under this Note, together with all
accrued interest thereon, and after the date of such Acceleration Event the
outstanding principal balance hereunder shall bear interest at the Default Rate.
In such case the Holder may also recover all costs and expenses of suit and any
and all other expenses in connection with efforts to collect any of the
aforesaid amounts, together with reasonable attorney's fees (including
attorneys' fees for representation in proceedings under the Bankruptcy Code),
regardless of whether litigation is commenced, together with interest on any
judgment obtained by the Holder at the Default Rate, including interest at the
Default Rate from and after the date of any such Acceleration Event until actual
payment is made to the Holder of the full amount due the Holder.
Presentment and demand for payment, notice of non-payment, protest, protest
of non-payment, notice of protest, notice of dishonor, and any and all lack of
diligence and suit are hereby waived by all parties liable hereon.
Any failure by any holder hereof to exercise any right hereunder shall not
be construed as a waiver of the right to exercise the same or any other right at
any other time and from time to time thereafter.
The loan evidenced hereby has been made and this Note has been delivered,
at the Holder's office set forth above, and such loan, this Note, and the
rights, obligations and remedies of the Holder and the undersigned shall be
governed by and construed in accordance with the laws of the State of Missouri.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed and
delivered as of the date first above written.
____________________________________________
Richard A. Jacobsen
A-2
<PAGE> 18
EXHIBIT B
---------
PROMISSORY NOTE
St. Louis, Missouri
$375,000.00 March , 1999
---
On or before the Maturity Date (hereinafter defined), the undersigned,
RICHARD A. JACOBSEN, an individual (the "Borrower"), for value received,
promises to pay to the order of THE SOURCE INFORMATION MANAGEMENT COMPANY, a
Missouri corporation with an address at 11644 Lilburn Park Road, St. Louis,
Missouri 63146 (the "Holder"), at the address set forth herein, or at such
other place as may be designated in writing by the Holder, in lawful money of
the United States of America in immediately available funds, the principal sum
of Three Hundred Seventy-Five Thousand Dollars ($375,000.00) together with
interest on the aforesaid principal sum at the rate hereinafter specified.
During the term hereof, Borrower agrees to pay interest on the unpaid
principal balance hereunder at a rate per annum equal to percent ( %)
based on a year consisting of 365 days (the "Loan Interest Rate").
On the Maturity Date, Borrower agrees to pay the entire unpaid
principal balance hereunder plus all accrued interest thereon. The term
"Maturity Date" shall mean that date which is , 2006, or any earlier date on
which payment hereunder is due whether by acceleration or otherwise. After the
Maturity Date, whether by acceleration or otherwise, the rate of interest
hereunder shall equal the Loan Interest Rate plus three percent (3.000%) per
annum based on a year consisting of 365 days (the "Default Rate").
Borrower reserves the right to prepay in whole or in part the principal
sum hereof at any time or from time to time, without premium or penalty, so long
as a default has not occurred under this Note. The Holder, however, shall have
no obligation to re-advance any sums prepaid and any partial prepayment shall
not relieve the undersigned of paying the remaining balance hereunder when due.
All payments by Borrower shall be applied to accrued interest hereon and then to
the outstanding principal balance hereunder.
This Note is one of the "Notes" referred to in and issued pursuant to
that certain Employment Agreement (the "Agreement") between Borrower and Holder,
dated as of March , 1999, and is intended to evidence the indebtedness of
Borrower pursuant to Loan II as provided in the Agreement. The Agreement is by
this reference incorporated herein and made a part hereof as if fully set forth
herein, and this Note is entitled to all benefits of, and is subject to the
terms and conditions of, the Agreement. The indebtedness evidenced by this Note
shall be forgiven and any Gross-Up payments (as defined in the Agreement) shall
be made as set forth in the Agreement.
In the event that Borrower's employment with Holder Pursuant to the
Agreement shall be (i) terminated by Holder for Cause (as defined in the
Agreement) or (ii) terminated by Borrower
B-1
<PAGE> 19
for other than Good Reason (as defined in the Agreement) (each, an
"Acceleration Event"), then the Holder, at its option and without further
notice or demand, may declare immediately due and payable the entire unpaid
balance of principal due under this Note, together with all accrued interest
thereon, and after the date of such Acceleration Event the outstanding
principal balance hereunder shall bear interest at the Default Rate. In such
case the Holder may also recover all costs and expenses of suit and any and all
other expenses in connection with efforts to collect any of the aforesaid
amounts, together with reasonable attorneys' fees (including attorneys' fees
for representation in proceedings under the Bankruptcy Code), regardless of
whether litigation is commenced, together with interest on any judgment
obtained by the Holder at the Default Rate, including interest at the Default
Rate from and after the date of any such Acceleration Event until actual
payment is made to the Holder of the full amount due the Holder.
Presentment and demand for payment, notice of non-payment, protest,
protest of non-payment, notice of protest, notice of dishonor, and any and all
lack of diligence and suit are hereby waived by all parties liable hereon.
Any failure by any holder hereof to exercise any right hereunder shall not
be construed as a waiver of the right to exercise the same or any other right
at any other time and from time to time thereafter.
The loan evidenced hereby has been made and this Note has been delivered,
at the Holder's office set forth above, and such loan, this Note, and the
rights, obligations and remedies of the Holder and the undersigned shall be
governed by and construed in accordance with the laws of the State of Missouri.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed
and delivered as of the date first above written.
_________________________________
Richard A. Jacobsen
B-2
<PAGE> 20
SCHEDULE I
The Annual Bonus will be based upon the percentage that the Company's net
income before taxes ("EBT") reflected in the Company's audited financial
statements for the applicable fiscal year ("Actual EBT") represents of the
budgeted EBT for such fiscal year based upon the budget approved by the
Company's Board of Directors ("Target EBT"). Such calculations shall be made as
follows:
<TABLE>
<CAPTION>
Actual EBT
as % of Bonus as %
Target EBT of Actual EBT
---------- -------------
<S> <C> <C>
1. <82% -0-
2. 82% 50% of 1.37% (.69%)
3. 94% 75% of 1.37% (1.03%)
4. 99-101% 1.37% ("Target Bonus")
5. 106% 125% of 1.37% (1.71%)
6. 118% 150% of 1.37% (2.1%)
7. 124% or more 200% of 1.37% (2.7%
</TABLE>
If Actual EBT as a percentage of Target EBT falls between any of the above
percentages, the Annual Bonus as a percentage of Actual EBT shall be
proportionately adjusted. For instance, if Actual EBT were 84% of Target EBT,
the Annual Bonus would be 54.16% of Target Bonus, or 0.74% of Actual EBT,
calculated as follows:
A. 84% is between 82% (category 2 above) and 94% (category 3 above).
B. There is a 12% spread (94% - 82% = 12%) between categories 2 and 3.
C. There is a 25% difference (75% - 50% = 25%) between the percentage of
the Target Bonus to be paid if Actual EBT is at the category 2 or
category 3 level.
D. For each 1% variance from category 2 or category 3 EBT, there is a
2.08% variance (25% divided by 12% = 2.08%) in the percentage of
Target Bonus earned.
E. Annual Bonus earned is 54.16% of Target Bonus (84% - 82% x 20.8 =
4.16% + 50% = 54.16%).
<PAGE> 1
EXHIBIT 10.21
================================================================================
ASSET PURCHASE AGREEMENT
BETWEEN
THE SOURCE INFORMATION MANAGEMENT COMPANY,
THE SOURCE-CANADA CORP.
AND
132127 CANADA INC.
March 19, 1999
================================================================================
<PAGE> 2
EXHIBITS AND SCHEDULES
Exhibit A -- Agreement with Seller Stockholders
Exhibit B -- Allocation Schedule
Exhibit C -- Historical Financial Statements
Exhibit D -- General Conveyance and Assumption of Liabilities
Exhibit E -- January 31, 1999 Balance Sheet & February 28, 1999 Balance Sheet
Exhibit F -- Escrow Agreement
Disclosure Schedule -- Exceptions to Representations and Warranties
i
<PAGE> 3
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered
into on March 19, 1999, by and between THE SOURCE INFORMATION MANAGEMENT
COMPANY, a Missouri corporation, THE SOURCE-CANADA CORP., an Ontario corporation
(collectively "Buyer"), and 132127 CANADA INC., a Canadian corporation
("Seller"). Buyer and Seller are hereinafter collectively referred to as the
"Parties."
This Agreement contemplates a transaction in which Buyer will purchase
substantially all of the operating assets of Seller and assume certain
designated liabilities reflected on the books of Seller in return for cash.
Now, therefore, in consideration of the premises and the mutual
promises herein made, and in consideration of the representations, warranties,
and covenants herein contained, the Parties agree as follows.
1 Definitions.
"Acquired Assets" means all right, title, and interest in and to all of
the assets of Seller, including all of its, (a) tangible assets, including any
equipment, furniture and fixtures, (b) Intellectual Property and goodwill
associated therewith, (c) leases and rights thereunder, (d) agreements,
contracts, other similar arrangements, and rights thereunder, (e) accounts,
notes, and other receivables, (f) claims, deposits, prepayments, refunds, causes
of action, choses in action, rights of recovery, rights of set off, and rights
of recoupment (including any such item relating to the payment of Taxes), in
respect of the accounts receivables, (g) customer lists, and (h) Cash; provided,
however, that the Acquired Assets shall not include (i) the corporate charters,
qualifications to conduct business as a foreign corporation, arrangements with
registered agents relating to foreign qualifications, taxpayer and other
identification numbers, seals, minute books, stock transfer books, blank stock
certificates, and other documents relating to the organization, maintenance, and
existence of Seller as a corporation or (ii) any of the rights of Seller under
this Agreement (or under any side
<PAGE> 4
agreement between Seller on the one hand and Buyer on the other hand entered
into on or after the date of this Agreement).
"Affiliate" shall mean any person or entity controlled by, in common
control with or controlling Seller.
"Agreement with Seller Stockholders" means the Agreement with Seller
Stockholders entered into concurrently herewith and attached hereto as Exhibit
A.
"Applicable Employee Benefits Laws" means all laws, regulations, orders
or other legislative, administrative or judicial promulgations applicable to the
Employee Benefit Plans.
"Assumed Liabilities" means (a) all Liabilities of Seller relating to
trade payables and other normal operating liabilities and accruals, as set forth
on the face of the Most Recent Balance Sheet, (b) all Liabilities of Seller
which have arisen after the Most Recent Fiscal Year End in the Ordinary Course
of Business (other than any Liability resulting from, arising out of, relating
to, in the nature of, or caused by any breach of contract, breach of warranty,
tort, infringement, or violation of law), (c) all obligations of Seller under
the agreements, contracts, leases, licenses, and other arrangements referred to
in the definition of Acquired Assets either (i) to furnish goods, services, and
other non-Cash benefits to another party after the Closing or (ii) to pay for
goods, services, and other non-Cash benefits that another party will furnish to
it after the Closing, (d) Liabilities of Seller in respect of the employees of
Seller who are offered and accept employment with the Buyer (the "Engaged
Employees"), as well as in respect of employees who are offered, but do not
accept employment with the Buyer, for accrued, but unpaid vacation pay, accrued
wages, salaries and commissions, including any accrued liabilities of Seller for
unemployment insurance, OHIP and Canada Pension Plan premium to the close of
business on the day immediately preceding the Closing Date for the most recent
periods for which such payments are due, (e) any statutory or common law
severance obligation of Seller in respect of any Engaged Employees, resulting
from the termination of any Engaged Employee without cause, at that term is
defined by statute or common law, (f) all other Liabilities and obligations of
Seller set forth in an appendix to the Disclosure Schedule under an
2
<PAGE> 5
express statement (that Buyer has initialed) to the effect that the definition
of Assumed Liabilities will include the Liabilities and obligations so
disclosed; provided, however, that the Assumed Liabilities shall not include (i)
any Liability of Seller for income, transfer, sales, use, and other Taxes
arising in connection with the consummation of the transactions contemplated
hereby (including any income Taxes arising because Seller is transferring the
Acquired Assets, or because Seller has any other deferred gain), (ii) any
obligation of Seller to indemnify any Person (including any of Seller
Stockholders) by reason of the fact that such Person was a director, officer,
employee, or agent of Seller or was serving at the request of any such entity as
a partner, trustee, director, officer, employee, or agent of another entity
(whether such indemnification is for judgments, damages, penalties, fines,
costs, amounts paid in settlement, losses, expenses, or otherwise and whether
such indemnification is pursuant to any statute, charter document, bylaw,
agreement, or otherwise) (iii) any Liability of Seller for costs and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby, (iv) any Liability or obligation of Seller under this Agreement or the
Agreement with Seller Stockholders.
"Basis" means any past or present fact, situation, circumstance,
status, condition, activity, practice, plan, occurrence, event, incident,
action, failure to act, or transaction that forms or could form the basis for
any specified consequence.
"Buyer" has the meaning set forth in the preface above.
"Cash" means cash and cash equivalents (including marketable securities
and short term investments) calculated in accordance with GAAP applied on a
basis consistent with the preparation of the Financial Statements.
"Closing" has the meaning set forth in ss.2(d) below.
"Closing Date" has the meaning set forth in ss.2(d) below.
"Disclosure Schedule" has the meaning set forth in ss.3 below.
3
<PAGE> 6
"Employee Benefit Plan" means the employee benefit, health, welfare,
supplemental unemployment benefit, bonus, severance, pension, profit sharing,
deferred compensation, stock, stock appreciation, retirement, hospitalization
insurance, medical, dental, legal, disability and similar plans or arrangements
or practices relating to the employees or former employees of Seller.
"Financial Statement" has the meaning set forth in ss.3(g) below.
"GAAP" means Canadian generally accepted accounting principles as in
effect from time to time.
"GST" means goods and services tax imposed under Part IX of the Excise
Tax Act (Canada).
"Intellectual Property" means (a) all logos, trade names, and corporate
names, together with all translations, adaptations, derivations, and
combinations thereof and including all goodwill associated therewith, and all
applications, registrations, and renewals in connection therewith, (b) all
computer software (including data and related documentation) belonging to the
Seller and all software under license to Seller to the extent that the same is
transferable, including all copies and tangible embodiments thereof (in whatever
form or medium).
"Knowledge" means actual knowledge after reasonable investigation.
"Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Most Recent Balance Sheet" means the balance sheet contained within
the Most Recent Financial Statements.
"Most Recent Financial Statements" has the meaning set forth in ss.3(g)
below.
4
<PAGE> 7
"Most Recent Fiscal Year End" means August 31st 1998.
"Ordinary Course of Business means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Purchase Price" has the meaning set forth in ss.2(c) below.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, (b) liens for Taxes not yet due and payable, (c) purchase
money liens and liens securing rental payments under capital lease arrangements,
and (d) other liens arising in the Ordinary Course of Business and not incurred
in connection with the borrowing of money.
"Seller" has the meaning set forth in the preface above.
"Seller Share" means any share of the Capital Stock of Seller.
"Seller Stockholder" means any person who or which holds any Seller
Shares.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
5
<PAGE> 8
"Tax" means any Canadian provincial, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental, customs duties, capital stock,
franchise, profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or other
tax of any kind whatsoever, including any interest, penalty, or addition
thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund,
or information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
2 Basic Transaction.
(a) Purchase and Sale of Assets. On and subject to the terms and
conditions of this Agreement, Buyer agrees to purchase from Seller, and Seller
agrees to sell, transfer, convey, and deliver to Buyer, all of the Acquired
Assets at the Closing for the consideration specified below in this ss.2.
(b) Assumption of Liabilities. On and subject to the terms and
conditions of this Agreement, Buyer agrees to assume and become responsible for
all of the Assumed Liabilities from and after the Closing. Buyer will not assume
or have any responsibility, however, with respect to any other obligation or
Liability of Seller not included within the definition of Assumed Liabilities.
(c) Purchase Price. As of Closing Date, Buyer shall disburse One
Million Five Hundred Two Canadian Dollars (C$1,502,500) (the "Purchase Price")
in the following manner:
(i) One Million Canadian Dollars (C$1,000,000) to Seller;
(ii) Two Hundred Fifty Two Thousand Five Hundred Canadian
Dollars (C$252,500) representing payment in full of certain payables to
certain Seller
6
<PAGE> 9
Stockholders. The payment required by ss. 2(c)(ii) shall be reduced, on
a dollar-for- dollar basis, by any payments made by Seller to a Seller
Stockholder since August 31, 1998 in respect of any Seller Stockholder
loan to Seller; and
(iii) Two Hundred Fifty Thousand Canadian Dollars (C$250,000)
shall be deposited in escrow pursuant to the Escrow Agreement, attached
as Exhibit F.
(d) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall commence at 9:00 a.m. St. Louis, Missouri time
on the date of execution of this Agreement (the "Closing Date").
(e) Deliveries at the Closing. At the Closing, (i) Seller will deliver
to Buyer the various certificates, instruments, and documents referred to in
ss.6(a) below; (ii) Buyer will deliver to Seller the various certificates,
instruments, and documents referred to in ss.6(b) below; (iii) Seller will
execute, acknowledge (if appropriate), and deliver to Buyer such instruments of
sale, transfer, conveyance, and assignment as Buyer and its counsel reasonably
may request to fully and effectually transfer the Acquired Assets to the Buyer;
(iv) Buyer will execute, acknowledge (if appropriate), and deliver to Seller an
assumption in the form attached hereto as Exhibit D and such other instruments
of assumption as Seller and its counsel reasonably may request; and (v) Buyer
will deliver to Seller the consideration specified in ss.2(c) above.
(f) Allocation. The Parties agree to allocate the Purchase Price among
the Acquired Assets for all purposes (including financial accounting and tax
purposes) in accordance with the allocation schedule attached hereto as Exhibit
B.
(g) Section 22. The Seller and the Buyer shall execute jointly an
election in prescribed form under Section 22 of the Income Tax Act (Canada) in
respect of the accounts receivables and shall each file such election with their
respective tax returns for their respective taxation years that include the
Closing Date.
7
<PAGE> 10
(h) GST Election. At the Closing, the Seller and the Buyer shall
execute jointly an election under Section 167 of the Excise Tax Act (Canada) to
have the sale of the Acquired Assets take place on a GST-free basis under Part
IX of the Excise Tax Act (Canada) and the Buyer shall file such election with
its GST return for the reporting period in which the sale of the Acquired Assets
takes place.
(i) Employees.
(i) The Buyer shall offer employment, as of the Closing Date,
to each of the employees of the Seller employed as of the Closing Date
on substantially similar terms and conditions as presently exist for
such employment (it being understood that Seller will not make any
changes in such terms and conditions without prior written consent of
the Buyer), including all rights of seniority. The Buyer shall not be
obligated to any such employee who refuses the Buyer's offer of
employment. The Seller shall render all reasonable assistance to
encourage each such employee to accept the Buyer's offer of employment.
Seller shall employ all of its employees until the day before the
Closing Date except for any employees prior to the Closing Date who (1)
are terminated for cause, (2) are terminated with Buyer's consent,
which consent shall not be unreasonably withheld, (3) voluntarily
resign, (4) retire, or (5) die.
(ii) Promptly after the Closing, the Buyer shall establish or
cause to be established, at its own expense, with effect as of the
Closing Date, a benefit plan ("Buyer's Benefit Plan") to provide
benefits substantially identical to the benefits provided by Seller
under the Employee Benefit Plan listed on Schedule 3(t) of the
Disclosure Schedules (the "Seller's Benefit Plans") in connection with
any and all claims of such employees incurred after the Closing Date.
Such employees who participate in the Seller's Benefit Plans according
to the terms of the Seller's Benefit Plan shall, with effect as of the
Closing Date, cease to participate in and accrue
8
<PAGE> 11
benefits under the Seller's Benefit Plan and shall commence
participation in and accrue benefits under the Buyer's Benefit Plan in
accordance with, and subject to, the membership, eligibility and
coverage requirements of the Buyer's Benefit Plan. Such employees who
are not participants in the Seller's Benefit Plan as at the Closing
Date shall become participants in and accrue benefits under the Buyer's
Benefit Plan as and from the Closing Date in accordance with, and
subject to, the membership, eligibility and coverage requirements
thereof. Buyer's Benefit Plan shall provide that employment with Seller
shall be deemed employment with Buyer for the purpose of eligibility
and vesting. The Seller shall retain responsibility under the Seller's
Benefit Plan for all amounts payable by reason of or in connection with
any and all claims incurred by such employees before the Closing Date.
For the purposes of this Section 2(i)(ii), a claim shall be deemed to
have been incurred on the date of occurrence of an injury, the
diagnosis of an illness, or any other event giving rise to such claim
or series of related claims.
3 Representations and Warranties of Seller. Seller represents and
warrants to Buyer that the statements contained in this ss.3 are correct and
complete as of the date of this Agreement, except as set forth in the disclosure
schedule accompanying this Agreement and initialed by the Parties (the
"Disclosure Schedule"). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this ss.3.
(a) Organization of Seller. Seller is a corporation duly organized,
validly existing, and in good standing under the laws of the jurisdiction of its
incorporation.
(b) Authorization of Transaction. Seller has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder. Without limiting the
generality of the foregoing, the board of directors of Seller and Seller
Stockholders of Seller have duly authorized the execution, delivery, and
performance of this Agreement by Seller. This Agreement constitutes the valid
and legally binding obligation of Seller, enforceable in accordance with its
terms and conditions.
9
<PAGE> 12
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby
(including the assignments and assumptions referred to in ss.2 above), will (i)
violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Seller is subject or any provision of the
charter or bylaws of Seller or (ii) except as set forth hereinbelow, conflict
with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which Seller is a party or by which it is
bound or to which any of its assets is subject (or result in the imposition of
any Security Interest upon any of its assets). Seller does not need to obtain
any authorization, consent, or approval of any government or governmental agency
in order for the Parties to consummate the transactions contemplated by this
Agreement.
Buyer hereby specifically acknowledges that the agreements summarized
in ss.3(c) of the Disclosure Schedule require the consent of the co-contracting
party to the assignment of such contracts and Buyer specifically exempts Seller
from obtaining such consents.
(d) Brokers' Fees. Seller has no Liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which Buyer could become liable
or obligated.
(e) Title to Assets. Seller has good and marketable title to, or a
valid leasehold interest in, the properties and assets used by it or shown on
its Most Recent Balance Sheet or acquired after the date thereof, free and clear
of all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of such Most Recent Balance Sheet.
Without limiting the generality of the foregoing, Seller has good and marketable
title to all of the Acquired Assets, free and clear of any Security Interest or
restriction on transfer.
(f) Subsidiaries. Seller does not have any Subsidiaries.
10
<PAGE> 13
(g) Financial Statements. Attached hereto as Exhibit C are the reviewed
balance sheets and statements of income, changes in stockholders' equity, and
cash flow as of and for the fiscal years ended August 31, 1997 and August 31,
1998 (the "Most Recent Fiscal Year End") for Seller (collectively the "Financial
Statements"). Also attached as Exhibit E are accurate and complete internal
Statement of Income and Balance Sheets as of January 31, 1999 and as of February
28, 1999 (the "February Balance Sheet"), which are materially complete and
accurate. The revenues for Seller (i) exceed Seven Hundred Eighty Thousand
Canadian Dollars ($780,000) for the twelve month period immediately preceding
January 31, 1999, (ii) have been prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby and (iii) present fairly
the revenues of Seller as of such dates.
(h) Events Subsequent to Most Recent Fiscal Year End. Since the Most
Recent Fiscal Year End:
(i) Seller has not sold, leased, transferred, or assigned any
of its assets, tangible or intangible, other than for a fair
consideration in the Ordinary Course of Business;
(ii) Seller has not entered into any agreement, contract,
lease, or license (or series of related agreements, contracts, leases,
and licenses) either involving payments by Seller of more than C$15,000
or outside the Ordinary Course of Business;
(iii) no party (including Seller) has accelerated, terminated,
modified, or canceled any agreement, contract, lease, or license (or
series of related agreements, contracts, leases, and licenses)
involving more than C$15,000 to which Seller is a party or by which
Seller is bound;
11
<PAGE> 14
(iv) Seller has not imposed any Security Interest upon any of
its assets, tangible or intangible;
(v) Seller has not made any capital expenditure (or series of
related capital expenditures) either involving more than C$15,000 or
outside the Ordinary Course of Business;
(vi) Seller has not made any capital investment in, any loan
to, or any acquisition of the securities or assets of, any other Person
(or series of related capital investments, loans, and acquisitions)
either involving more than C$15,000 or outside the Ordinary Course of
Business;
(vii) Seller has not issued any note, bond, or other debt
security or created, incurred, assumed, or guaranteed any indebtedness
for borrowed money or capitalized lease obligation either involving
more than C$15,000;
(viii) Seller has not delayed or postponed the payment of
accounts payable and other Liabilities outside the Ordinary Course of
Business;
(ix) Seller has not canceled, compromised, waived, or released
any right or claim (or series of related rights and claims) either
involving more than C$15,000 or outside the Ordinary Course of
Business;
(x) Seller has not granted any license or sublicense of any
rights under or with respect to any Intellectual Property;
(xi) there has been no change made or authorized in the
charter or bylaws of Seller;
12
<PAGE> 15
(xii) Seller has not declared, set aside, or paid any dividend
or made any distribution with respect to its capital stock (whether in
cash or in kind) or redeemed, purchased, or otherwise acquired any of
its capital stock;
(xiii) Seller has not experienced any material damage,
destruction, or loss (whether or not covered by insurance) to its
property;
(xiv) Seller has not made any loan to, or entered into any
other transaction with, any of its directors, officers, and employees
outside the Ordinary Course of Business;
(xv) Seller has not entered into any employment contract or
collective bargaining agreement, written or oral, or modified the terms
of any existing such contract or agreement;
(xvi) Seller has not granted any increase in the base
compensation of any of its directors, officers, and employees outside
the Ordinary Course of Business;
(xvii) Seller has not adopted, amended, modified or terminated
any bonus, profit-sharing, incentive, severance, or other plan,
contract, or commitment for the benefit of any of its directors,
officers, and employees (or taken any such action with respect to any
other Employee Benefit Plan);
(xviii) Seller has not made or pledged to make any charitable
or other capital contribution outside the Ordinary Course of Business;
(xix) Seller has not paid any amount to any third party with
respect to any Liability or obligation (including any costs and
expenses Seller has incurred or may incur in connection with this
Agreement and the transactions contemplated
13
<PAGE> 16
hereby) which would not constitute an Assumed Liability if in existence
as of the Closing;
(xx) Seller has not committed to any of the foregoing; and
(xxi) Seller has paid or properly accrued in the Ordinary
Course of Business (i) all wages and compensation due to employees,
including all vacations or vacation pay, holidays or holiday pay, sick
days or sick pay an bonuses, (ii) all sums in respect of the Canada
Pension Plan, OHIP and unemployment insurance premiums, and (iii) all
other sums due to its employees. All payments described in this section
have been properly earned by the appropriate employees.
(i) Undisclosed Liabilities. Seller has no Liability (and there is no
Basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand against it giving rise to any
Liability), for which Buyer may be liable, except for (i) Liabilities set forth
on the face of the Most Recent Balance Sheet (rather than in any notes thereto)
and (ii) Liabilities which have arisen after the Most Recent Fiscal Year End in
the Ordinary Course of Business (none of which results from, arises out of,
relates to, is in the nature of, or was caused by any breach of contract, breach
of warranty, tort, infringement, or violation of law).
(j) Legal Compliance. To Seller's Knowledge, Seller has complied with
all applicable laws (including rules, regulations, codes, plans, injunctions,
judgments, orders, decrees, rulings, and charges thereunder) of provincial,
local and foreign governments (and all agencies thereof), and, to Seller's
Knowledge, no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand, or notice has been filed or commenced against it
alleging any failure so to comply.
14
<PAGE> 17
(k) Real Property.
(i) Seller does not own any real property.
(ii) ss.3(k)(ii) of the Disclosure Schedule lists and
describes briefly all real property leased to Seller. Seller has
delivered to Buyer correct and complete copies of the lease listed in
ss.3(k)(ii) of the Disclosure Schedule (as amended to date). With
respect to the lease listed in ss.3(k)(ii) of the Disclosure Schedule:
(A) the lease is legal, valid, binding, enforceable,
and in full force and effect;
(B) neither Seller nor, to the Knowledge of Seller,
any other party to the lease is in breach or default, and no
event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination,
modification, or acceleration thereunder;
(C) Seller has not assigned, transferred, conveyed,
mortgaged, deeded in trust, or encumbered any interest in the
leasehold;
(D) the facility leased has received all approvals of
governmental authorities (including licenses and permits)
required in connection with the operation thereof and have
been operated and maintained in accordance with applicable
laws, rules, and regulations; and
(E) the facility leased is supplied with utilities
and other services necessary for the operation of said
facilities.
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(l) Intellectual Property.
(i) Seller does not own or use any intellectual property other
than the Intellectual Property nor is any other intellectual property
necessary for the operation of the business as presently conducted.
(ii) To the Knowledge of Seller, Buyer will not interfere
with, infringe upon, misappropriate, or otherwise come into conflict
with, any Intellectual Property rights of third parties as a result of
the continued operation of its businesses as presently conducted.
(m) Contracts. ss.3(m) of the Disclosure Schedule lists the following
contracts and other agreements to which Seller is a party and which is to be
assumed by Buyer:
(i) any agreement (or group of related agreements) for the
lease of personal property to or from any Person providing for lease
payments in excess of C$15,000 per annum;
(ii) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products, or
other personal property, or for the furnishing or receipt of services,
the performance of which will extend over a period of more than one
year, result in a loss to Seller, or involve consideration in excess of
C$15,000;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under
which Seller has created, incurred, assumed, or guaranteed any
indebtedness for borrowed money, or any capitalized lease obligation,
in excess of C$15,000 or under which Seller has imposed a Security
Interest on any of its assets, tangible or intangible;
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(v) any agreement concerning confidentiality or
noncompetition;
(vi) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other plan or
arrangement for the benefit of Seller's current or former directors,
officers, and employees;
(vii) any collective bargaining agreement;
(viii) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis providing annual
compensation in excess of C$15,000 or providing severance benefits;
(ix) any agreement under which Seller has advanced or loaned
any amount to any of its directors, officers, and employees outside the
Ordinary Course of Business;
(x) any other agreement (or group of related agreements) the
performance of which involves consideration in excess of C$15,000.
Seller has delivered to Buyer a correct and complete copy of each
written agreement listed in ss.3(m) of the Disclosure Schedule (as amended to
date) and a written summary setting forth the terms and conditions of each oral
agreement referred to in ss.3(m) of the Disclosure Schedule. With respect to
each such agreement: (A) the agreement is legal, valid, binding, enforceable,
and in full force and effect; (B) the agreement will continue to be legal,
valid, binding, enforceable, and in full force and effect on identical terms
following the consummation of the transactions contemplated hereby (including
the assignments and assumptions referred to in ss.2 above); (C) neither Seller
nor, to the Knowledge of Seller, any other party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
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(n) Notes and Accounts Receivable. All notes and accounts receivable of
Seller are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, are current and collectible, as adjusted
for the passage of time through the Closing Date in accordance with the past
custom and practice of Seller.
(o) Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of Seller.
(p) Insurance. ss.3(p) of the Disclosure Schedule briefly describes
each insurance policy (including policies providing property, casualty,
liability, and workers' compensation coverage and bond and surety arrangements)
currently in force to which Seller is a party, a named insured, or otherwise the
beneficiary of coverage.
(q) Litigation. There is no litigation pending against the Seller.
(r) Employees. ss.3(r) of the Disclosure Schedule lists all the
employees of the Seller as of the date of this Agreement and the age, position,
status, length of service, compensation, bonuses and benefits of each of them,
respectively. Except as set out in ss.3(r) of the Disclosure Schedule, the
Seller is not a party to or bound by any contracts in respect of any employee of
the Seller including:
(i) Any contracts or arrangements for the employment of an
employee of the Seller; or
(ii) Any bonus, Employee Benefit Plan or other plans or
arrangements providing employee benefits, except for the plans
providing employee benefits described in ss.3(t) of the Disclosure
Schedule.
No executive, key employee or group of employees of the Seller has advised the
Seller of any intent or plan to terminate employment with the Seller. No
employees of Seller are residents of the United
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States of America. The Seller is in compliance with all applicable employment
laws with respect to its Employees.
(s) Collective Bargaining Agreements.
(i) The Seller is not a party to any collective bargaining
agreement, contract or legally binding commitment to any trade union or
employee organization or group in respect of or affecting employees of
the Seller.
(ii) The Seller is not currently engaged in any labor
negotiation.
(iii) The Seller is not a party to any application, complaint
or other proceeding under any statute or law.
(iv) The Seller is not engaged in any unfair labor practice
and the Seller is not aware of any pending or threatened complaint
regarding any alleged unfair labor practices.
(v) There is no strike, labor dispute, work slow down or
stoppage pending or threatened against the Seller.
(vi) There is no grievance or arbitration proceeding arising
out of or under any collective bargaining agreement which is pending or
threatened against the Seller.
(vii) The Seller is not the subject of any union organization
effort.
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(t) Employee Plans.
(i) ss.3(t) of the Disclosure Schedule lists the only Employee
Benefit Plan (the "Employee Benefit Plan") which is currently
maintained by the Seller.
(ii) All contributions or premiums required to be made by the
Seller under the terms of the of the Employee Benefit Plan or by
Applicable Employee Benefits Laws have been made in a timely fashion in
accordance with Applicable Employee Benefits Laws and the terms of the
Employee Benefit Plan, and the Seller does not have, and as of the
Closing Date will not have, any liability with respect to the Employee
Benefit Plan (other than liabilities accruing after the Closing Date)
other than premiums which are to be paid, and which if not paid have
been accured, in the Ordinary Course of Business.
(iii) No amendments have been made to the Employee Benefit
Plan and no improvements to any Employee Benefit Plan have been
promised and no amendments or improvements to an Employee Benefit Plan
will be made or promised before the Closing Date.
(iv) All employee data necessary to administer each Employee
Benefit Plan has been provided by the Seller to the Buyer and is true
and correct.
(v) No insurance policy or any other contract or agreement
affecting any Employee Benefit Plan requires or permits a retroactive
increase in premiums or payments due thereunder.
(vi) The Employee Benefit Plan is, and has been, operated and
administered in all respects in accordance with Applicable Benefit
Laws.
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(vii) The Seller has furnished the Buyer true and complete
copies of the Employee Benefit Plan, as amended to the date hereof,
together with all related documentation.
(u) Bonuses. The Seller has not paid any bonus, fee, distribution,
remuneration or other compensation to any employee of the Seller (other than
salaries, wages or bonuses paid or payable to employees in the ordinary course
of business in accordance with current compensation levels and practices as set
out in ss.3(r) of the Disclosure Schedule).
(v) Guaranties. Seller is not a guarantor nor is Seller otherwise
liable for any Liability or obligation (including indebtedness) of any other
Person.
(w) Certain Business Relationships With Seller. None of Seller
Stockholders and their Affiliates has been involved in any business arrangement
or relationship with Seller within the past twelve (12) months, and none of
Seller Stockholders and their Affiliates owns any asset, tangible or intangible,
which is used in the business of Seller.
(x) Disclosure. The representations and warranties contained in this
ss.3 do not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements and information
contained in this ss.3 not misleading.
4 Representations and Warranties of Buyer. Buyer represents and warrants to
Seller that the statements contained in this ss.4 are correct and complete as of
the date of this Agreement and will be correct and complete as of the Closing
Date (as though made then and as though the Closing Date were substituted for
the date of this Agreement throughout this ss.4), except as set forth in the
Disclosure Schedule. The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this ss.4.
(a) Organization of Buyer. Buyer is a corporation duly organized,
validly existing, and in good standing under the laws of the jurisdiction of its
incorporation.
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(b) Authorization of Transaction. Buyer has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder. This Agreement constitutes
the valid and legally binding obligation of Buyer, enforceable in accordance
with its terms and conditions.
(c) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby
(including the assignments and assumptions referred to in ss.2 above), will (i)
violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which Buyer is subject or any provision of its
charter or bylaws or (ii) conflict with, result in a breach of, constitute a
default under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
Buyer is a party or by which it is bound or to which any of its assets is
subject. Buyer does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or governmental
agency in order for the Parties to consummate the transactions contemplated by
this Agreement (including the assignments and assumptions referred to in ss.2
above).
(d) Brokers' Fees. Buyer has no Liability or obligation to pay any fees
or commissions to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement for which Seller could become liable or
obligated.
5 Closing. The Closing hereunder shall not be effective unless and until
the following documents, in a form reasonably acceptable to Seller and Buyer,
have been executed by the proper officers or agents of Seller or Buyer and have
been delivered to Seller or Buyer, as appropriate:
(a) An Escrow Agreement;
(b) A General Conveyance and Assumption of Liabilities Agreement;
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(c) An Opinion of Counsel to Seller;
(d) An Opinion of Counsel to Buyer;
(e) Corporate Certificate of Seller; and
(f) Corporate Certificate of each of Buyer.
6 Post-Closing Covenants
(a) Commissions. Buyer shall increase all commissions charged to
wholesalers for RDA consulting fees, which are, as of Closing, less than three
percent (3%) to three percent (3%) (the "Seller Stockholder Commissions"). The
Seller Stockholder Commissions shall (i) not be altered for a period of two (2)
years and (ii) for the third year shall increase by a percentage equivalent to
the percentage increase of the All Items Canadian Consumer Price Index,
published by Statistics Canada, during the period March 1, 1999 to March 1,
2001. Commissions which are currently in excess of three percent (3%) shall not
be altered for a period of one (1) year from the Closing Date. Notwithstanding
anything contained in this Section 6(a), Buyer shall have the unrestricted right
to implement its advance pay procedure with respect to any retailer or
wholesaler.
(b) Accounts Receivables Adjustment. Any receivable referenced in
ss.3(g) hereof which is not collected, in excess of the reserve as identified in
the February Balance Sheet, in the Ordinary Course of Business, within one
hundred twenty (120) days after the Closing shall, upon delivery of written
notice by Buyer, be repurchased by Seller at fifty percent (50%) of the cost
reflected on the books and records of Seller; provided, however, that after
Buyer recovers receivables aggregating One Hundred Thousand Dollars ($100,000),
Seller shall, upon delivery of written notice by Buyer, repurchase all remaining
receivables at one hundred percent (100%) of the cost reflected on the books and
records of Seller. Seller shall pay the amount due for such repurchase within
five
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(5) business days of the receipt of such notice. Seller shall not have the right
or obligation to repurchase any receivable unless written notice is delivered by
Buyer pursuant to this section.
7 Miscellaneous.
(a) Survival of Representations and Warranties. All of the
representations and warranties of the Parties contained in this Agreement shall
survive the Closing hereunder as and to the extent provided in the Agreement
With Seller Stockholders.
(b) Press Releases and Public Announcements. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement prior to the Closing without the prior written approval of the
other Party; provided, however, that Buyer may make any public disclosure it
believes in good faith is required by applicable law or any listing or trading
agreement concerning its publicly-traded securities (in which case Buyer will
use its reasonable best efforts to advise Seller prior to making the
disclosure).
(c) No Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
(d) Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement between the Parties and supersedes
any prior understandings, agreements, or representations by or between the
Parties, written or oral, to the extent they related in any way to the subject
matter hereof.
(e) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Party; provided, however, that Buyer may (i) assign any or all of
its rights and interests hereunder to one or more of its Affiliates and (ii)
designate one
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or more of its Affiliates to perform its obligations hereunder (in any or all of
which cases Buyer nonetheless shall remain responsible for the performance of
all of its obligations hereunder).
(f) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(g) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(h) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to Seller:
Benjamin News Inc.
9600 Jean Milot Street
LaSalle, Quebec H8R 1X7
Attn: Paul H. Benjamin
Copy to:
Kaufman Laramee
800 Rene Levesque West, Suite 2220
Montreal, Quebec H3B1X9
Attn: Barry Mintz
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If to Buyer:
The Source Information Management Company
11644 Lilburn Park Road
St. Louis, Missouri 63146
Attn: S. Leslie Flegel, Chairman & CEO
Copy to:
Armstrong Teasdale LLP
One Metropolitan Square, Suite 2600
St. Louis, Missouri 63102
Attn: John L. Gillis, Jr., Esq.
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail, or electronic mail), but no such
notice, request, demand, claim, or other communication shall be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other Parties notice in the manner herein set forth.
(i) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the Province of Ontario without giving
effect to any choice or conflict of law provision or rule (whether of the
Province of Ontario or any other jurisdiction) that would cause the application
of the laws of any jurisdiction other than the Province of Ontario.
(j) Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by Buyer
and Seller. Seller may consent to any such amendment at any time prior to the
Closing with the prior authorization of its boards of directors. No waiver by
any Party of any default, misrepresentation, or breach of warranty or covenant
hereunder, whether intentional or not, shall be deemed to extend to any prior
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or subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
(k) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(l) Expenses. Each of Buyer, Seller, and Seller Stockholders will bear
his or its own costs and expenses (including legal fees and expenses) incurred
in connection with this Agreement and the transactions contemplated hereby.
Seller also agrees that it has not paid any amount to any third party, and will
not pay any amount to any third party until after the Closing, with respect to
any of the costs and expenses of Seller and Seller Stockholders (including any
of their legal fees and expenses) in connection with this Agreement or any of
the transactions contemplated hereby.
(m) Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
(n) Specific Performance. Each of the Parties acknowledges and agrees
that the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their specific
terms or otherwise are breached. Accordingly, each of the Parties agrees that
the other Party shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof in any action instituted in any
court of the United States or any state thereof having jurisdiction over the
Parties and the matter in dispute, in addition to any other remedy to which it
may be entitled, at law or in equity.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
the date first above written.
THE SOURCE INFORMATION MANAGEMENT COMPANY
By: /s/ S. Leslie Flegel
--------------------------------------
S. Leslie Flegel
Chairman and Chief Executive Officer
THE SOURCE-CANADA CORP.
By: /s/ S. Leslie Flegel
--------------------------------------
S. Leslie Flegel
Chief Executive Officer
132127 CANADA, INC.
By: /s/ Paul H. Benjamin
--------------------------------------
Paul H. Benjamin
Vice-President
28
<PAGE> 1
EXHIBIT 10.22
REAL ESTATE SALE CONTRACT
THIS REAL ESTATE SALE CONTRACT (the "Contract"), dated as of April 20,
1999 (the "Effective Date"), is made and entered into by and between 711
GALLIMORE PARTNERSHIP, a North Carolina general partnership ("Seller") and THE
SOURCE INFORMATION MANAGEMENT COMPANY, a Missouri corporation ("Purchaser").
1. SALE OF REAL ESTATE: Seller agrees to sell and Purchaser agrees to
purchase the real estate known as 711 Gallimore Dairy Road, City of High Point,
County of Guilford County, State of North Carolina, consisting of a building
(hereinafter the "Building") situated on an improved lot, as the same is more
fully described in Exhibit A attached hereto, together with all rights,
easements, appurtenances and buildings and other improvements thereon
(collectively, the "Property"). The legal description of the Property as set
forth in the survey obtained by Purchaser shall govern any closing hereunder.
2. CLOSING DATE AND LOCATION: The Closing shall occur at 10:00 a.m.
within twenty days of the expiration of all Contingencies contained herein (the
"Closing Date"). The Closing shall be held at the office of Roberson, Haworth &
Reese, 300 North Main Street, Suite 300, High Point, North Carolina 27260
("Local Counsel").
3. PURCHASE PRICE: The total purchase price to be paid by Purchaser to
Seller at Closing is One Million Eight Hundred Thousand and No/100 Dollars
($1,800,000.00) ("Total Purchase Price"), subject to prorations and adjustments
as provided hereinafter, payable by cashier's check or wire transfer via Local
Counsel escrow.
4. CONTINGENCIES: This Contract and the obligations of Purchaser
hereunder are subject to the contingencies set forth in the following
subparagraphs of this paragraph 3, each of which shall be fulfilled within the
period of time specified in such subparagraph. All of the contingency periods
shall begin to run as of the Effective Date unless otherwise expressly provided.
If at any time within a contingency period the applicable contingency is not
satisfied, or will not be satisfied, Purchaser may notify Seller in writing no
later than two (2) business days after the expiration of such contingency period
that it desires to terminate this Contract and upon such termination, this
Contract shall be null and void. In the event of any delay by the Seller in
providing any documents required under any contingency herein beyond the period
set forth in such contingency, such contingency period may be extended by the
amount of such delay at the election of Purchaser by written notice to Seller
prior to extension:
a. Survey and Title Examination. Seller shall deliver to Purchaser
within forty-eight (48) hours of the Effective Date, any surveys, subdivision
plats or unrecorded private indentures, restrictions, regulations or instruments
or other plats related to the Property and any articles of incorporation,
by-laws, partnership or trust agreements or other organizational documents of
Seller, if applicable, in its possession or available to it as of the Effective
Date. On or before April 23, 1999, Purchaser shall order and receive from Title
Company a current ALTA form title
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insurance commitment with respect to the Property hereunder, together with
copies of all exceptions to such title commitment and a copy of a current ALTA
Form survey of the Property prepared by a licensed surveyor, with costs for
title and survey to be borne equally by Seller and Purchaser, certified to
Purchaser and Title Company, showing all title exceptions, acreage calculations,
boundaries, improvements, encroachments and building setback lines, wetlands and
floodway and flood plain boundaries as to the Property and in sufficient form to
delete the survey exception on the title insurance policy, and neither the
documents provided by Seller, the title commitment nor the survey shall include
any exceptions to title or other matters which are unacceptable to Purchaser;
b. Zoning And Other Governmental Approvals. On or before April 23,
1999, Purchaser shall receive confirmation that the zoning and permitted uses of
the Property are acceptable for such uses of the Property as are contemplated by
Purchaser and that all zoning, subdivision and other governmental approvals, are
received from all applicable governmental and regulatory bodies;
c. Environmental Condition. Within forty-eight (48) hours of the
Effective Date, or if not in the possession of Seller, within forty-eight (48)
hours of receipt, Seller shall deliver to Purchaser a Phase I environmental
audit report and all other reports, plans, drawings or other documents in
Seller's possession relative to the presence at any time on the Property of
Hazardous Substances, as defined below, and if Purchaser determines, Purchaser
shall cause a current Phase I environmental audit report to be prepared, costs
of which shall be borne equally by Seller and Purchaser, which documents shall
disclose no environmental condition of the Property unacceptable to Purchaser.
d. Plans And Specifications and Premises Inspection. Seller shall
furnish to Purchaser copies of all, utility, sewer, soil tests or other plans or
specifications related to the Property within its possession (the "Plans and
Specifications"). On or before April 23, 1999, inspections and/or tests of the
Property, including, without limitation, soils, percolation and flood plain
tests, examinations of streets and building structures and tests of capacity of
electric, water, sewer and other utility lines and facilities, may be conducted
by engineers and/or contractors of Purchaser's choosing at Purchaser's sole cost
and expense, which tests and inspections shall confirm that the Property is
acceptable to Purchaser.
e. Financing. On or before April 23, 1999, Purchaser shall receive
written confirmation of the availability to Purchaser of purchase money and
construction financing in form and substance acceptable to Purchaser.
f. Insurability. On or before April 23, 1999, Purchaser shall receive
written confirmation of the availability to Purchaser of liability and hazard
insurance as to the Property in form and substance acceptable to Purchaser.
5. PURCHASER'S ACCESS TO PROPERTY: Purchaser and its agents and
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<PAGE> 3
employees shall have the right of access to the Property at reasonable times for
inspections and/or tests prior to any closing date.
6. SELLER'S REPRESENTATIONS, WARRANTIES AND COVENANTS:
Seller hereby represents, warrants and covenants to Purchaser as follows,
provided that in the event any warranty or representation is false or inaccurate
or any covenant is breached in any material fashion as of the Closing Date or
any time prior thereto, Purchaser may terminate this Contract:
a. Seller is and will be at the time of closing hereunder, the present
owner of marketable title to the Property in fee simple absolute.
b. The Property is not subject to any sale contract or other agreement
concerning the transfer or lease of the Property, and Seller shall not enter
into any such sale contract or agreement with respect to the Property at any
time prior to Closing and so long as this Contract is in effect.
c. Seller is a North Carolina general partnership, duly formed, validly
existing and in good standing under the laws of the state of its formation.
Seller has all necessary power to execute and deliver this Contract and perform
all its obligations hereunder. The execution, delivery and performance of this
Contract by Seller (i) has been duly and validly authorized by all necessary
action on the part of Seller, (ii) does not conflict with or result in a
violation of its organizational documents, or any judgment, order or decree of
any court or arbiter in any proceeding to which Seller is a party, and (iii)
does not conflict with or constitute a breach of, or constitute a default under,
any contract, agreement or other instrument by which Seller or the Property is
bound or to which Seller is a party.
d. Seller does not have knowledge of any structural or other material
defect in the improvements on the Property.
e. The execution and delivery of this Contract by Seller and the
performance by Seller of its obligations hereunder will not conflict with or
result in a breach of any order, judgment, writ, injunction or decree of any
court or governmental instrumentality.
f. Seller and its general partners, agents, employees and attorneys
have not received notice of any violation of any fire, zoning, building or
health laws or regulations or of any other governmental violation which affects
the Property and Seller has not received notice from any governmental authority
requiring any alterations or modifications to the Property. In the event Seller
obtains knowledge or receive notice of any such violation, Seller shall
immediately notify Purchaser in writing and Purchaser shall have the right,
within twenty (20) days after the receipt of such notice from Seller, to
terminate this Contract or to accept the Property "as is" and close on the
purchase of the Property, with Purchaser being given credit to the Total
Purchase Price equal to the reasonably anticipated expense of curing such
violations; provided, that Purchaser
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shall have no such right to terminate if Seller shall remedy to Purchaser's
satisfaction any such problem in sufficient time for the closing hereunder to
occur;
g. (1) As used in this Contract, the term "Hazardous Substances" shall
mean any asbestos, flammable substances, explosives, radioactive materials,
PCB-laden oil, hazardous materials, hazardous waste, pollutants, contaminants,
toxic substances, pollution or related materials specified as such and/or
regulated under any federal, state or local laws, ordinances, rules, regulations
or policies governing use, storage, treatment, transportation, manufacture,
refinement, handling, production or disposal of such materials, including,
without limitation, Section 9601 of Title 42 of the United States Code.
(2) Seller has complied and shall comply with any and all
laws, regulations or orders with respect to the discharge and removal of
Hazardous Substances on the Property, shall pay immediately when due the cost of
removal of any such waste or materials and shall keep the Property free of any
lien imposed pursuant to such laws, regulations or orders. In the event Seller
fails to do so, after notice to Seller and the expiration of one-half of any
cure period permitted under applicable law, regulation or order, Purchaser may
declare this Contract null and void at the option and upon such declaration of
Purchaser.
(3) To the best of Seller's knowledge, the Property has not
been listed, proposed for listing or threatened to be listed on the National
Priorities List by the Environmental Protection Agency or on any similar list
maintained by the State or local authorities of the jurisdiction in which the
Property is located, and Seller warrants and represents that there have been no
discussions between Seller or its general partners, agents, employees or
attorneys and state, federal or local officials concerning the possibility of
such listings.
(4) There has been no storage, disposal, discharge, deposit,
injection, dumping, leaking, spilling, placing or escape of any Hazardous
Substances on, in, under or from the Property; and
(5) There are no underground storage tanks on the Property.
h. Seller has no knowledge of any condemnation action being threatened
or instituted against the Property. If any part of the Property be hereafter and
prior to Closing subject to any condemnation proceedings or threat thereof, or
any casualty or other damage, Seller shall immediately notify Purchaser and
Purchaser shall have the right to terminate this Contract within ten (10) days
after the receipt of any such notice from Seller or close the purchase of the
Property subject to all such proceedings, in which event Purchaser shall be
entitled to all condemnation awards.
i. The representations and warranties of Seller in this Contract do not
omit to state a material fact necessary in order to make the representations,
warranties or statements herein not misleading.
4
<PAGE> 5
7. SURVIVAL OF WARRANTIES: Those provisions of this Contract which
relate to warranties (including, but not limited to those in Paragraph 6), and
post-closing calculations or post-closing performances require of Seller shall
survive the Closing. Seller shall indemnify and hold Purchaser and any assignee
of Purchaser harmless from any loss, cost, expense (including reasonable
attorneys' fees in enforcing Purchaser's rights hereunder or defending any claim
by a third party), or damages sustained by reason of a breach of any
representation, warranty or covenant by Seller.
8. NOTICES: Notices hereunder shall be deemed properly delivered when
and if delivered or telefaxed, or mailed by Registered or Certified Mail, Return
Receipt Requested, postage prepaid, to the parties as set forth below (notices
given by mail being deemed given on the second business day after deposited in
the United States Mail): if to Purchaser, to Purchaser, 11644 Lilburn Park Road,
St. Louis, Missouri 63146, Attention: W. Brian Rodgers, telefax no.
314-995-9022, with a copy to Amit B. Shah, Esq., c/o Armstrong Teasdale LLP, One
Metropolitan Square, Suite 2600, St. Louis, Missouri 63102-2740, telefax no.
314-621-5065 and if to Seller, to Seller, at1518 Forest Hill Road Drive,
Greensboro, North Carolina 2740, Attention: Jack Johnson, telefax no.
336-294-4430. Each party may designate a substitute address to which notices to
such designating party shall be delivered, by requesting such address by like
notice given to the other party.
9. CLOSING DOCUMENTS: At Closing, the following documents shall be
executed and/or delivered by the appropriate parties, in form acceptable to
counsel to Purchaser and to Seller:
a. General Warranty Deed for the Property from Seller to Purchaser or
Purchaser's assigns, subject only to real estate taxes for the year of the
Closing and thereafter;
b. All affidavits of Seller required by Title Company to delete
standard exceptions from Purchaser's and Purchaser's lender's title insurance
policies, including the mechanic's lien exception;
c. All originals of any Plans and Specifications with respect to the
Property, copies of which have been delivered to Purchaser, shall be delivered
by Seller to Purchaser;
d. A non-foreign transferor affidavit from Seller;
e. Resolutions of Seller's partners and Purchaser's Boards of Directors
authorizing the transaction hereunder;
f. A Termination of Lease Agreement, terminating the Lease between
Seller and Purchaser relating to the Property.
g. Such other documents or instruments as may be reasonably required in
order to
5
<PAGE> 6
convey the Property to the Purchaser or to satisfy the obligations of the
parties hereunder.
10. PURCHASE PRICE AND CLOSING ADJUSTMENTS: At Closing, Purchaser
shall pay or cause to be released to Seller the Total Purchase Price as set
forth in Paragraph 3 hereof, and subject to such other adjustments as herein
provided. At Closing, all real estate taxes and special assessments related to
the Property, based on the most recent and available bills, and all sewer
service charges and/or other utilities provided to the Property shall be
prorated as of the Closing Date, with the Seller to have the last day. All
prorations and adjustments shall be applied to the cash portion of the Purchase
Price. After Closing, such prorations shall be readjusted based on final bills
when received. Purchaser shall pay recording fees pertaining to the General
Warranty Deed and any of Purchaser's financing documents. Seller shall pay for
all revenue stamps. All other closing fees not identified herein shall be
assessed as between Seller and Purchaser pursuant to local custom.
11. RISK OF LOSS: Seller shall at all times until Closing maintain in
force fire and extended hazard insurance coverage in the amount of no less than
the Purchase Price. Seller shall also maintain the Property in good order and
repair until Closing. If before Closing any part of the Property is destroyed or
materially damaged Seller shall promptly provide written notice of same to
Purchaser. Within 10 business days of receipt of such notice, Purchaser shall
have the right to inspect the Property and elect to terminate this Contract by
written notice of Seller within such 10-day period. In the event of any
non-material damage or any election of Purchaser to close notwithstanding any
material damage, Seller shall restore the Property within the later of 30 days
or the Closing Date, and the Closing Date shall be extended in the event
necessary to accommodate such 30-day period.
12. SALES COMMISSIONS WARRANTY: Seller warrants and represents that
there are no sales commissions due hereunder as a result of any brokers or
agents employed by Seller and Seller shall indemnify Purchaser and hold it
harmless from any claim, action, demand, damages or liability, including
reasonable attorney's fees, arising out of any claim that any commission is due,
except as arising out of any claim that a commission is due arising solely as a
result of employment by Purchaser. Purchaser shall indemnify Seller and hold it
harmless from any claim, action, demand, damages or liability, including
reasonable attorney's fees, arising out of any claim that a commission is due
arising solely as a result of employment by Purchaser.
13. WAIVER OF CONTINGENCIES: Purchaser reserves the right to waive any
and all conditions or contingencies contained in this Contract. Any such waiver
to be effective must be in writing signed by the Purchaser.
14. CONTRACT ASSIGNABLE BY PURCHASER: This Contract and Purchaser's
rights and obligations hereunder are assignable by Purchaser with the consent of
Seller, which shall not be unreasonably withheld or delayed; provided, however,
that Purchaser shall have the right to assign this Contract and Purchaser's
rights and obligations hereunder to an affiliate of Purchaser without prior
written consent of Seller. In the event of an assignment to
6
<PAGE> 7
which Seller has consented, Purchaser shall be relieved of any liability under
any and all of covenants, agreements, and obligations contained in or derived
from this Contract or arising out of any act, occurrence or omission occurring
after such assignment, and the assignee shall be deemed to have assumed and
agreed to carry out any and all such covenants, agreements, and obligations.
15. BINDING ON SUCCESSORS AND ASSIGNS: This Sale Contract is binding
upon and shall inure to the benefit of the heirs, successors and assigns of the
parties hereto.
16. REMEDIES IN CASE OF DEFAULT: In the event of default hereunder by
either party, the non-defaulting party shall be entitled to all remedies
available at law or equity, including the rights to seek specific performance
and/or money damages. In the case of any legal or equitable action taken by
either party in connection with the default of the other party, the prevailing
party shall be entitled to recover from the other party all costs and reasonable
attorneys fees incurred in connection therewith.
17. ENTIRE CONTRACT: This Contract constitutes the entire understanding
of the parties and neither party shall be bound by any matter unless expressly
set forth in this Contract.
18. JOINT AND SEVERAL LIABILITY OF SELLER: The promises, covenants,
representations, warranties and other obligations and liabilities of each of the
general partners of Seller under this Contract are joint and several and each
general partner shall be liable for the obligations and liabilities of the other
hereunder.
19. AUTHORITY OF SELLER: The undersigned individual purporting to sign
this Contract on behalf of Seller personally warrants and represents to
Purchaser that he is authorized by all necessary partnership action on behalf of
Seller to enter into this Contract on behalf Seller and bind Seller thereto. The
undersigned individual shall indemnify and hold the Purchaser and any assignee
of the Purchaser harmless from any loss, cost, expense (including reasonable
attorneys' fees in enforcing the Purchaser's rights hereunder), or damages
sustained by reason of a breach of this representation.
20. EXECUTION IN COUNTERPARTS, BY TELEFAX: This Contract may be
executed in one or more counterparts, which, taken together, shall constitute an
original and may be executed by telefax, either of which shall constitute an
original.
[Signature Page Follows]
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have hereunto executed this Contract as
of the Effective Date.
PURCHASER:
THE SOURCE INFORMATION MANAGEMENT
COMPANY, a Missouri corporation
By: /s/ W. Brian Rodgers
-------------------------------
W. Brian Rodgers, CFO
SELLER:
711 GALLIMORE PARTNERSHIP, a North
Carolina General Partnership
/s/ William H. Lee, Jr.
-------------------------------------
William H. Lee, Jr., General Partner
/s/ Jack L. Johnson
-------------------------------------
Jack L. Johnson, General Partner
/s/ George H. Turnbull
-------------------------------------
George H. Turnbull, General Partner
/s/ Robert G. Shupe
-------------------------------------
Robert G. Shupe, General Partner
Being all the Partners of the Seller
8
<PAGE> 9
EXHIBIT A
Legal Description of the Property
All that certain lot or parcel of land situated in the City of High
Point, Township of Deep River, County of Guilford, State of North Carolina and
more particularly described as follows:
Property shown on Annexation Map of G.T. Fales and S. Neerman and C.J.
Fales as per plat thereof recorded in Plat Book 91 at Page 52, in the Office of
the Register of Deeds of Guilford County (known formerly as Lot No. 1 of the
Property of William W. Pegg, Jr. and wife, Janet R. Pegg, as per plat thereof
recorded in Plat Book 69, at Page 40 in the Office of the Register of Deeds of
Guilford, North Carolina.)
9
<PAGE> 1
EXHIBIT 10.23
THE SOURCE INFORMATION MANAGEMENT COMPANY
11644 Lilburn Park Road
St. Louis, Missouri 63146
Telephone: (314) 995-9040
Fax: (314) 995-9022
August 31, 1998
Mr. Herbert A. Hardt
Monness, Crespi, Hardt & Co., Inc.
767 Third Avenue
New York, New York 10017
Dear Herb:
Re: Financial Consulting Agreement
The purpose of this letter is to set forth the agreement between
Herbert A. Hardt ("Consultant") and The Source Information Management Company,
Inc. (the "Company"). The Company recently completed a registered underwritten
public offering of its common stock (the "Offering"). Consultant participated in
the Offering, particularly in introducing the Company to, and causing the
purchase of the Company's common stock by, certain institutional investors.
Consultant has advised the Company that Consultant's business relates
principally to providing investment services, information and advice to
institutional investors. The Company wishes to continue to encourage
institutional investors to take an interest in the Company's common stock, and
Consultant has offered the Company his services in assisting the Company in
continuing to maintain such institutional interest.
Therefore, the Company and Consultant agree as follows.
1. Engagement of Consultant. The Company hereby engages and retains
Consultant to render to the Company the financial services described in Section
2 (the "Financial Services") for the period commencing on the date hereof and
ending November 25, 2000 (the "Consulting Period").
2. Description of Financial Services. The Financial Services rendered
by Consultant hereunder shall consist of: (a) consultations with management of
the Company regarding the interest of institutional investors in acquiring and
holding the Company's common stock, as
<PAGE> 2
Mr. Herbert A. Hardt
August 31, 1998
Page 2
determined by Consultant to be appropriate or requested by the Company from time
to time during the term of this Agreement.
Consultant's duties may include, but will not be limited to, providing
recommendations concerning the following financial and related matters:
A. Rendering advice and assistance in
connection with the preparation of annual and interim
reports and press releases; and
B. Assisting in the Company's financial
public relations with institutional investors.
3. Payment for Services Rendered. The Company agrees to pay Consultant
for the Financial Services to be rendered hereunder, and Consultant wishes to
accept as his compensation therefor, a warrant for the purchase of 150,000
shares of common stock of the Company, in substantially the form and substance
of the warrant set attached to this agreement.
4. Disclaimer of Responsibility for Acts of the Company. In rendering
Consultant's services under this Agreement, Consultant shall act as an
independent contractor, and in no event shall Consultant act as the agent of the
Company. All final decisions with respect to acts of the Company, its
subsidiaries or its affiliates, whether or not made pursuant to or in reliance
on information or advice furnished by Consultant hereunder, shall be those of
the Company or such subsidiaries or affiliates, and Consultant shall under no
circumstances be liable for any expense incurred or loss suffered by the Company
as a consequence of such decisions.
5. Termination. Either Consultant or the Company may terminate this
Agreement at any time after November 25, 1998 by giving notice of termination to
the other. This Agreement shall terminate automatically upon the death of
Consultant. In the event of termination pursuant to this Section 5, neither
party shall have any rights or obligations hereunder after the date of such
termination, except for the confidentiality obligations of Consultant under
Section 6.
6. Confidentiality. Consultant will not disclose to any other person,
firm, or corporation, nor use for Consultant's own benefit, during or after the
term of this Agreement, any trade secrets or other information designated as
confidential by the Company which is acquired by Consultant in the course of
performing services hereunder. (A trade secret is information not generally
known to the trade which gives the Company an advantage over its competitors.
Trade secrets can include, by way of example, products or services under
development, production methods and processes, sources of supply, customer lists
and marketing plans.) Any information which is, at the time of disclosure by the
Company to Consultant hereunder or thereafter becomes, through no fault or
negligence of Consultant or Consultant's employees or agents,
<PAGE> 3
Mr. Herbert A. Hardt
August 31, 1998
Page 3
generally available to the public will not be considered confidential
information for purposes of this Section.
7. Amendment. No amendment to this Agreement shall be valid unless such
amendment is in writing and is signed by the Company and Consultant.
8. Waiver. Any of the terms and conditions of this Agreement may be
waived at any time and from time to time in writing by the party entitled to the
benefit thereof, but a waiver in one instance shall not be deemed to constitute
a waiver in any other instance. A failure to enforce any provision of this
Agreement shall not operate as a waiver of the provision or of any other
provision hereof.
9. Severability. In the event that any provision of this Agreement
shall be held to be invalid, illegal or unenforceable in any circumstances, the
remaining provisions shall nevertheless remain in full force and effect and
shall be construed as if the unenforceable portion or portions were deleted.
10. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Missouri.
11. Notices. All notices, requests, payments, instructions, claims or
other communications hereunder shall be in writing and shall be deemed to be
given or made when delivered by Express, registered or certified mail or by next
business day courier to the following address or addresses or such other address
or addresses as the parties may designate in writing in accordance with this
Section:
<PAGE> 4
Mr. Herbert A. Hardt
August 31, 1998
Page 4
If to the Company: 11644 Lilburn Park Road
St. Louis, Missouri 63146
Attention: S. Leslie Flegel,
Chief Executive Officer
If to Consultant: c/o Monness, Crespi, Hardt & Co., Inc.
767 Third Avenue
New York, New York 10017
12. No Assignment. This Agreement shall not be assigned, nor shall the
obligations of Consultant hereunder be subcontracted, by Consultant, by
operation of law or otherwise.
If you are in agreement with the foregoing, please confirm your
agreement by signing both copies of this Agreement and returning one of the
fully executed copies to the undersigned.
Sincerely,
THE SOURCE INFORMATION
MANAGEMENT COMPANY
By:
S. Leslie Flegel
Chief Executive Officer
Confirmed and Agreed to:
- -----------------------------
Herbert A. Hardt
Dated: As of August 31, 1998
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE SOURCE INFORMATION MANAGEMENT COMPANY
Subsidiary Incorporated in:
- ----------- ----------------
Source-Yeager Industries, Incorporated Delaware
Source-U.S. Marketing Services, Incorporated Delaware
Source-MYCO, Incorporated Delaware
Source-Chestnut Display Systems, Incorporated Delaware
PC-Sub, Incorporated Missouri
K-Sub, Incorporated Missouri
L-Sub, Incorporated Missouri
Magazine Marketing, Incorporated Ohio
Readers Choice, Incorporated Ohio
Mike Kessler & Associates, Incorporated New Jersey
The Source-Canada Corporation Ontario, Canada
<PAGE> 1
Exhibit 23.1
Consent of Independent Certified Public Accountants
The Source Information Management Company
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Registration
Statement Form S-8 (No. 333-16039) of The Source Information Management
Company (the Company) of our report dated April 16, 1999, relating to the
consolidated financial statements of the Company appearing in the Company's
Annual Report on Form 10-KSB as of and for the year ended January 31, 1999.
BDO Siedman, LLP
St. Louis, Missouri
April 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 752,695
<SECURITIES> 0
<RECEIVABLES> 32,593,428
<ALLOWANCES> 469,658
<INVENTORY> 1,395,699
<CURRENT-ASSETS> 35,268,391
<PP&E> 6,513,459
<DEPRECIATION> 3,179,359
<TOTAL-ASSETS> 69,007,052
<CURRENT-LIABILITIES> 13,254,826
<BONDS> 0
0
14,733
<COMMON> 117,513
<OTHER-SE> 52,177,980
<TOTAL-LIABILITY-AND-EQUITY> 69,007,052
<SALES> 21,099,928
<TOTAL-REVENUES> 21,099,928
<CGS> 11,267,755
<TOTAL-COSTS> 14,217,137
<OTHER-EXPENSES> 18,195
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 331,058
<INCOME-PRETAX> 6,533,538
<INCOME-TAX> 2,667,000
<INCOME-CONTINUING> 3,866,538
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,866,538
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.40
</TABLE>
