<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended April 30, 1999
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
Commission file number 1-13437
-----------
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Exact Name of Small Business Issuer as Specified in Its Charter)
MISSOURI 43-1710906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11644 LILBURN PARK ROAD
ST. LOUIS, MISSOURI 63146
(Address of Principal Executive Offices)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding on June 8, 1999
<PAGE> 2
Common Stock, $.01 Par Value 13,665,273
-------------------
<PAGE> 3
THE SOURCE INFORMATION MANAGEMENT COMPANY
INDEX
PART I - FINANCIAL INFORMATION
Page
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
April 30, 1999 and January 31, 1999
Consolidated Statements of Income for
the three months ended April 30, 1999 and 1998
Consolidated Statements of Comprehensive Income
for the three months ended April 30, 1999 and 1998
Consolidated Statement of Stockholders'
Equity for the three months ended April 30, 1999
Consolidated Statements of Cash Flows for
the three months ended October 31, 1999 and 1998
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
<PAGE> 4
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(unaudited)
January 31, 1999 April 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 752,695 $ 1,267,171
Trade receivables (net of allowance for doubtful accounts of $469,658 and
$1,327,229) 32,593,428 40,220,093
Income taxes receivable 262,877 -
Notes receivable - officers (Note 2) - 173,571
Inventories (Note 3) 1,395,699 2,478,077
Other current assets 263,692 936,778
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 35,268,391 45,075,690
- -----------------------------------------------------------------------------------------------------------------------------
Land 120,000 820,000
Manufacturing plant 680,000 4,581,650
Office equipment and furniture 5,713,459 7,732,066
- -----------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment 6,513,459 13,133,716
Less accumulated depreciation and amortization 3,179,359 3,393,890
- -----------------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 3,334,100 9,739,826
- -----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Notes receivable - officers (Note 2) - 801,429
Goodwill, net of accumulated amortization of $648,600 and $1,178,881 (Note 4) 29,608,254 43,383,945
Other 789,307 2,035,244
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 30,404,561 46,220,618
- -----------------------------------------------------------------------------------------------------------------------------
$ 69,007,052 $ 101,036,134
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(unaudited)
January 31, 1999 April 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Checks issued against future deposits $ 2,876,922 $ 1,551,286
Accounts payable and accrued expenses 3,727,529 8,653,912
Income taxes payable - 249,798
Due to retailers 2,737,077 1,721,835
Deferred revenues 3,129,241 882,211
Deferred income taxes 718,000 703,000
Current maturities of long-term debt (Note 5) 66,057 977,283
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 13,254,826 14,739,325
- -----------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 5) 3,442,000 29,197,723
- -----------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES - 18,600
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 16,696,826 43,955,648
- -----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS
- -----------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Contributed Capital:
Common Stock, $.01 par - shares authorized, 40,000,000; 11,751,425 issued,
of which 8,000 are being held as Treasury Stock at January 31,
1999 and 13,671,735 issued, of which 8,000 is being held as Treasury
Stock at April 30, 1999 117,513 136,716
Preferred Stock, $.01 par - shares authorized, 2,000,000; 1,473,281 and
-0- issued and outstanding, respectively at January 31, 1999 and April 14,733 -
30, 1999 14,733 -
Additional paid-in-capital 46,451,971 49,298,707
- -----------------------------------------------------------------------------------------------------------------------------
Total contributed capital 46,584,217 49,435,423
Other comprehensive income - 25,008
Retained earnings 5,767,140 7,661,186
- -----------------------------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 52,351,357 57,121,617
Less: Treasury Stock (8,000 shares at cost) (41,131) (41,131)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 52,310,226 57,080,486
- -----------------------------------------------------------------------------------------------------------------------------
$ 69,007,052 $ 101,036,134
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended April 30, 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service Revenues $ 3,595,202 $ 3,553,126
Manufacturing Revenues - 12,926,561
- -----------------------------------------------------------------------------------------------------------------------------
3,595,202 16,479,687
- -----------------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues 1,566,407 1,980,381
Cost of Goods Sold - 7,631,658
- -----------------------------------------------------------------------------------------------------------------------------
1,566,407 9,612,039
- -----------------------------------------------------------------------------------------------------------------------------
2,028,795 6,867,648
Selling, General and Administrative Expense 666,674 3,333,624
- -----------------------------------------------------------------------------------------------------------------------------
Operating Income 1,362,121 3,534,024
- -----------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 588 7,306
Interest expense (120,243) (295,069)
Other (2,819) 138,849
- -----------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (122,474) (148,914)
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 1,239,647 3,385,110
Income Tax Expense 513,000 1,491,064
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 726,647 $ 1,894,046
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per Share - Basic $ .09 $ .15
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Basic (Note 6) 8,017,828 12,573,994
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per Share - Diluted $ .09 $ .13
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Diluted (Note 6) 8,499,070 14,556,976
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended April 30, 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income $ 726,647 $ 1,894,040
Foreign Currency Translation Adjustment - 25,008
- -----------------------------------------------------------------------------------------------------------------------------
Comprehensive Income 726,647 1,919,054
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
Other
Preferred Stock Common Stock Additional Compre- Treasury Stock Total
------------------------------------ Paid - in Retained hensive ---------------- Stockholders'
Shares Amount Shares Amount Capital Earnings Income Shares Amount Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1,473,281 $15 11,751,425 $117 $ 46,452 $ 5,767 $ - 8,000 $ (41) $ 52,310
1999
Conversion of Class A (1,473,281) (15) 1,473,281 15 -
Preferred Stock to
Common Stock
Exercise of stock 26,700 - 137 137
options
Warrants issued for 17 17
consulting services
Acquisition of MYCO, 134,615 1 874 875
Inc. (Note 4)
Acquisition of 285,714 3 1,819 1,822
Chestnut Display
Systems, Inc. (Note 4)
Foreign currency 25 25
translation adjustment
Net income for the 1,894 1,894
quarter
- ---------------------------------------------------------------------------------------------------------------------------
Balance, April, 1999 - $ - 13,671,735 $ 136 $ 49,299 $ 7,661 $ 25 8,000 $ (41) $ 57,080
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended April 30, 1998 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 726,647 $ 1,894,046
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 124,411 773,779
Provision for losses on accounts receivable - 35,878
Impairment of investment in limited partnership 5,000 5,000
Deferred income taxes 48,000 3,600
Services received in exchange for Common Stock Warrants - 17,256
Other - 13,260
Changes in assets and liabilities:
Increase in accounts receivable (2,172,458) (415,439)
Decrease in inventories - 809,761
Decrease (increase) in other assets 341,185 (749,830)
Increase (decrease) in checks issued against future 447,337 (1,325,636)
deposits
Increase (decrease) in accounts payable and accrued 437,665 (1,003,959)
expenses
Decrease in deferred revenues - (2,247,030)
Decrease in amounts due customers (434,625) (1,015,242)
- -----------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (476,838) (3,204,556)
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Acquisition of Chestnut Display Systems, Inc., net of cash
acquired - (3,456,556)
Acquisition of MYCO, Inc., net of cash acquired - (13,368,359)
Acquisition of 132127 Canada Inc. (Promark), net of cash
acquired - (848,075)
Capital expenditures (127,506) (182,271)
Loans to officers - (975,000)
Increase in cash surrender value of life insurance (14,668) (16,282)
Other - (3,286)
- -----------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (142,174) (18,849,829)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended April 30, 1998 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 11,659 137,525
Borrowings under credit facility 10,750,000 45,794,000
Principal payments on credit facility (10,042,000) (23,189,000)
Repayments under short-term debt agreements (17,853) (1,774)
Deferred loan costs - (143,882)
Registration costs - (28,008)
- -----------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 701,806 22,568,861
- -----------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH 82,794 514,476
CASH, beginning of period 31,455 752,695
- -----------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 114,249 $ 1,267,171
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 10
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION The consolidated financial statements as of
April 30, 1999 and for the three month
periods ended April 30, 1999 and 1998,
include, in the opinion of management, all
adjustments (consisting of normal recurring
adjustments and reclassifications) necessary
to present fairly the financial position,
results of operations and cash flows at
April 30, 1999 and for all periods
presented.
Certain information and footnote disclosures
normally included in financial statements
prepared in accordance with generally
accepted accounting principles have been
condensed or omitted. It is suggested that
these consolidated financial statements be
read in conjunction with the consolidated
financial statements and notes thereto
incorporated by reference in the Company's
Form 10-KSB for the year ended January 31,
1999. The results of operations for the
three month period ended April 30, 1999 are
not necessarily indicative of the operating
results to be expected for the full year.
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make certain estimates and assumptions that
affect the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of
financial statements and the reported
amounts of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
2. RELATED PARTY In connection with his employment with the
TRANSACTIONS Company, Richard Jacobsen received
two loans from the Company in
the amounts of $600,000 ("Loan 1") and
$375,000 ("Loan 2"). Loan 1, including
interest, will be forgiven over a 5-year
term and Loan 2, including interest, will be
forgiven over a 7-year term, provided, in
each case, that Mr. Jacobsen remains an
employee of the Company. The loans bear
interest at 5% per annum.
In May 1999, we purchased our leased
facility in High Point, North Carolina for
$1.8 million. The facility was owned by a
partnership in which stockholders of the
Company were partners. The Board of
Directors appointed Timothy Braswell, an
independent director, to negotiate the
transaction on the Company's behalf and,
based on Mr. Braswell's recommendation, the
Board believes the terms of the purchase
were fair to the Company.
3. INVENTORIES Inventories consist of the following:
<TABLE>
<CAPTION>
January 31, April 30,
1999 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials 576,101 $ 1,026,135
$ 5
Work-in-process 805,932 901,594
Finished goods 13,666 550,348
------------------------------------------------------------------------------------
1,395,699 $ 2,478,077
$ 7
------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. BUSINESS COMBINATIONS Acquisition of Periodical Concepts
On July 27, 1998, the Company acquired all
the assets of Periodical Concepts, a Texas
general partnership doing business as PC2,
for $2,500,000 in cash. Prior to the
acquisition, PC2 provided information and
marketing services to retail stores selling
magazines and other periodicals. The Company
intends to continue the operation of this
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 assets of Yeager Industries, Inc. for
$2.3 million in cash and 164,289 shares of
the Company's Common Stock, valued at the
time of the acquisition at $1.15 million.
The purchase price could be increased by up
to $500,000 depending on Yeager's
performance over the next two years. Yeager
manufactures front-end display racks from
facilities in Philadelphia, Pennsylvania.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeds
the fair value of the assets acquired by
approximately $1,038,000 and is being
amortized straight line over 20 years.
11
<PAGE> 12
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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.
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 1998 and 1999 for the Company and U.S.
Marketing are listed below (in thousands):
<TABLE>
<CAPTION>
Year Ended January 31, 1998 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenues As reported $ 11,804 $ 21.100
Pro forma 31,405 33,539
Net Income As reported 1,589 3,867
Pro forma 3,821 1,695
Earnings Per Share
Basic As reported $ .23 $ .42
Diluted As reported .22 .40
Basic Pro forma .37 .14
Diluted Pro forma .37 .13
-------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Acquisition of Chestnut Display Systems, Inc.
On February 1, 1999 the Company acquired the
net assets of Chestnut Display Systems, Inc.
and its affiliate Chestnut Display Systems
(North), Inc. for $3.6 million in cash and
285,714 shares of the Company's Common
Stock, valued at the time of acquisition at
$1.8 million. The purchase price for
Chestnut may be increased to a value
(including the amounts already paid) not to
exceed $9.5 million if Chestnut meets
certain performance goals during fiscal 2000
and 2001. Any increase in the purchase price
will be paid 50% in cash and 50% in shares
of Common Stock. The shares will be valued
using a formula contained in the acquisition
agreement, subject to a minimum value of
$5.00 per share and a maximum value of $7.00
per share. Chestnut manufactures front-end
display racks from facilities in Greenville,
South Carolina and Jacksonville, Florida.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeded
the fair value of the assets acquired by
approximately $3,496,000 and is being
amortized straight line over 20 years.
Acquisition of MYCO, Inc.
On February 26, 1999 the Company acquired
the net assets of MYCO, Inc. ("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.
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 $9,923,000 and is being
amortized straight line over 20 years.
13
<PAGE> 14
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Acquisition of 132127 Canada, Inc.
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.
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 $639,000 and is being
amortized straight line over 20 years.
5. LONG-TERM DEBT Long-term debt consists of:
AND REVOLVING
CREDIT FACILITY
<TABLE>
<CAPTION>
January 31, April 30,
1999 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Facility $ 3,202,000 $ 10,807,000
Term note payable to bank - 15,000,000
Industrial Revenue Bonds - 4,000,000
Unsecured note payable to former owners of
acquired Company, non-interest bearing, payable
in five equal annual installments beginning in
November 1999 300,000 300,000
Term note payable in monthly installments of
$629 through November 1999, collateralized by
an automobile
6,057 4,283
Capital leases - 63,723
------------------------------------------------------------------------------------
Total Long-term Debt 3,508,057 30,175,006
Less current maturities 66,057 977,283
------------------------------------------------------------------------------------
Long-term Debt $ 3,442,000 $ 29,197,723
------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 ratio 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.
In connection with the acquisition of MYCO,
Inc., the Company assumed the liabilities of
MYCO's Industrial Revenue Bonds. On January
30, 1995, the City of Rockford issued $4
million of its Industrial Project Revenue
Bonds, Series 1995, and the proceeds were
deposited with the Amalgamated Bank of
Chicago, as trustee. Wachovia Bank, N.A. has
issued a rolling 13-month letter of credit
for $4.1 million to the Company. The bonds
are secured by the trustee's indenture and
the $4.1 million letter of credit. The
letter of credit is secured by substantially
all of the assets of the Company. The bonds
bear interest at a variable weekly rate
(approximately 80% of the Treasury Rate) not
to exceed 15% per annum. The bonds mature on
January 1, 2030. Fees related to the letter
of credit are 1% per annum of the
outstanding bond principal plus accrued
interest.
6. EARNINGS PER SHARE A reconciliation of the denominators of the
basic and diluted earnings per share
computations are as follows:
<TABLE>
<CAPTION>
Three Months Ended April 30, 1998 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average number of common shares
outstanding 8,017,828 12,573,994
Effect of dilutive securities - stock options
and warrants 481,243 1,982,982
-------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding - as adjusted 8,499,070 14,556,976
-------------------------------------------------------------------------------------
</TABLE>
The following options and warrants were not
included in the computation of diluted EPS
because the exercise prices were greater
than the average market price of the common
shares. All were still outstanding at April
30, 1999.
15
<PAGE> 16
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Shares
Exercisable Under
Options/Warrants Exercise Price Grant Date Expiration Date
----------------------------- -------------------- ----------------- -----------------
<S> <C> <C> <C>
125,000 11.41 3/16/99 3/16/09
----------------------------- -------------------- ----------------- -----------------
</TABLE>
7. SUPPLEMENTAL CASH FLOW Supplemental information on interest and
INFORMATION income taxes paid is as follows:
<TABLE>
<CAPTION>
Three Months Ended April 30, 1998 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Interest $ 121,000 $ 169,000
Income Taxes $ 189,000 $ 1,040,900
------------------------------------------------------------------------------------
</TABLE>
In connection with the acquisitions in
January 1999, the Company issued 2,091,008
shares of Common Stock and 1,473,281 shares
of Class A Convertible Preferred Stock which
were converted to an equal number of common
shares on March 30, 1999.
In connection with the acquisitions in
February 1999, the Company issued 420,329
shares of Common Stock.
8. SEGMENT FINANCIAL The reportable segments of the Company are
INFORMATION claims submission and other information
services and display rack manufacturing.
Segment operating results are measured based
on income before taxes.
<TABLE>
<CAPTION>
Claims
Submission
and Other
Information Display Rack
Services Manufacturing Eliminations Total
- ----------------------------------------------------------------------------------------------------------------------
APRIL 30, 1998
- ------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 3,595,202 $ - $ - $ 3,595,202
Depreciation and amortization 124,411 - - 124,411
Income before income taxes 1,239,647 - - 1,239,647
Total Assets 25,734,687 - - 25,734,687
Capital Expenditures 127,506 - - 127,506
APRIL 30, 1999
- ------------------------------------
Revenues 4,225,610 12,926,561 (672,484) 16,479,687
Depreciation and amortization 192,394 581,385 - 773,779
Income before income taxes 1,102,232 2,282,878 - 3,385,110
Total Assets 33,983,121 67,483,037 - 101,466,158
Capital Expenditures 140,059 42,212 - 182,271
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We derive our revenues from (1) providing information and management services
for retail magazine sales to U.S. and Canadian retailers, magazine publishers,
confectioners and vendors of general merchandise sold at checkout counters
and (2) manufacturing display racks used by retailers 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
our Claim Submission and Advance Pay Programs. Payments collected from
publishers under the Advance Pay Program grew from 21.9% during fiscal 1998 to
30.4% during fiscal 1999. Most incentive payment programs offer the retailer a
cash rebate, equal to a percentage of the retailer's net sales of the
publisher's titles, which is payable quarterly upon submission of a properly
documented claim. Under our Claim Submission Program, we submit claims for
incentive payments on behalf of the retailer and receive a fee based on the
amounts collected. Under the Advance Pay Program, we pay participating retailers
a negotiated fixed percentage of total quarterly incentive payments and pocket
rental fees and then collect the payments from the publishers for our own
account.
Under both the Claim Submission Program and the Advance Pay Program, service
revenues are recognized at the time claims for incentive payments are
substantially completed for submission to the publishers. Our allowance for
doubtful accounts has to date been approximately 2% of accounts receivable. This
amount has been adequate to satisfy losses from uncollectible accounts
receivable. Under the Advance Pay Program, the revenues we recognize represent
the difference between the amount advanced to the retailer customer and the
amount claimed against the publisher.
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 includes configuring and designing front-end display racks,
supervising fixture installation and collecting incentive payments from vendors
for product placement. Front-end management revenues are recognized as services
are performed. Historically, we received front-end management fees from either
retailers or manufacturers of display racks. As a result of our recent
acquisitions, we intend to provide front-end management services as a bundled
product offering with the manufacture of display racks. Consequently, a portion
of future revenue derived from front-end management services will be reflected
in manufacturing revenue.
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.
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, which is
when the customer accepts title in writing, the product is invoiced with
payment due in the normal course of business, the delivery schedule is
fixed and the products are segregated from other goods. In our manufacturing
segment, we also receive trucking revenues for transporting racks, warehousing
revenues for storing racks and consulting revenues for providing consulting
service relating to our 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
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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.
See Note 8 in the "Notes to Consolidated Financial Statements" for certain
financial information on our two business segments, which are claims submission
and other information services, and display rack manufacturing.
RECENT AND PENDING ACQUISITIONS
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.
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- - 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
QUARTER ENDED APRIL 30, 1999 COMPARED TO QUARTER ENDED APRIL 30, 1998
The following table sets forth, for the periods presented, information relating
to our operations expressed as a percentage of Total Revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
---------
1998 1999
---- ----
<S> <C> <C>
Service Revenues 100.0% 21.6%
Manufacturing Revenues -.- 78.4
---- ----
Total Revenues 100.0 100.0
Cost of Service Revenues 43.6 12.0
Cost of Goods Sold -.- 46.3
----- -----
Gross Profit 56.4 41.7
Selling, General and Administrative Expense 18.5 20.2
----- -----
Operating Income 37.9 21.5
Interest Expense, Net (3.3) (1.7)
Other Income (Expense), Net (0.1) 0.8
----- -----
Income Before Income Taxes 34.5 20.6
----- -----
Net Income 20.2% 11.5%
===== =====
</TABLE>
Service Revenues. Services, which include the Claim Submission Program, Advance
Pay Program, PIN and front-end management, accounted for approximately 21.6% and
38.3% of our revenues and operating income, respectively, for the quarter ended
April 30, 1999. Service revenues of $3.6 million were flat compared to the first
quarter of the prior year as a result of a decrease in front-end management
revenues offset by an increase in revenues from the Claim Submission and Advance
Pay Programs. The decrease in revenues from front-end management resulted from
our acquisitions of display rack manufacturers.
Manufacturing Revenues. On January 7, 1999, we acquired Yeager and U.S.
Marketing. On February 1, 1999, and February 28, 1999, we acquired Chestnut and
MYCO, respectively. Results of operations for all companies have been included
in our consolidated financial statements since their respective dates of
acquisition. Manufacturing display racks accounted for approximately 78.4% and
61.7% of our revenues and operating income, respectively, for the quarter ended
April 30, 1999. Manufacturing revenues were $12.9 million in the first quarter
of this year. There were no manufacturing revenues in the first quarter of
fiscal 1999.
Gross Profit. Gross profit increased to $6.8 million for the quarter ended April
30, 1999 from $2.0 million for the quarter ended April 30, 1998, an
approximately $4.8 million, or 238.5%. Approximately $5.3 million of the
increase in gross profit was due to our recently acquired manufacturing
subsidiaries. Gross margin of the service segment decreased to 44.3% for the
quarter ended April 30, 1999 from 56.4% for the quarter ended April 30, 1998.
The reason for the decrease was the formation of a unified marketing and sales
team that services both the service and manufacturing segments. All of the
team's costs are included as costs of service revenues.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased to $3.3 million for the quarter ended April
30, 1999 from $667,000 for the quarter ended April 30, 1998, an increase of
$2.7 million, or 400.0%. Of the total, approximately $2.4 million was
attributable to our recently acquired manufacturing subsidiaries. The remaining
$300,000 increase was attributable to our services segment. Selling, general
and administrative expense as a percentage of revenues increased from 18.5% for
the quarter ended April 30, 1998 to 20.2% for the quarter ended April 30, 1999.
Operating Income. Operating income increased to $3.5 million for the quarter
ended April 30, 1999 from $1.4 million for the quarter ended April 30, 1998, an
increase of $2.1 million, or 159.5%. As a percentage of revenues, operating
income decreased to 21.5% for the quarter ended April 30, 1999 from 37.9% for
the quarter ended April 30, 1998. Approximately
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$2.9 million of operating income was attributable to the recently acquired
manufacturing subsidiaries. Approximately $600,000 was attributable to
the services segment.
Interest Expense. Interest expense increased $175,000 compared to the quarter
ended April 30, 1998, principally due to the increased borrowings used to fund
our manufacturing acquisitions and the assumption of the $4 million in
industrial revenue bonds in connection with the MYCO acquisition.
Income Tax Expense. The effective income tax rates for the quarters ended April
30, 1999 and 1998 were 44.0% and 41.4%, respectively. These rates varied from
the federal statutory rate due to state income taxes and expenses not deductible
for income tax purposes. These non-deductible expenses include goodwill
amortization, meals and entertainment and officers' life insurance premiums.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements for the service segment are for funding the
Advance Pay Program and for meeting general working capital requirements. Our
primary cash requirements for the manufacturing segment are for purchasing
materials and the cost of labor incurred in the manufacturing process.
Historically, we have financed our business activities through cash flows from
operations, short-term borrowings under available lines of credit and through
the issuance of equity securities.
During fiscal 1999, 1998 and 1997, we advanced approximately $59.8 million,
$41.7 million and $16.7 million, respectively, under the Advance Pay Program.
These advances grew by 43.4% from fiscal 1998 to fiscal 1999 and from 149.7%
from fiscal 1997 to fiscal 1998. The primary source of funding the advances is
our credit facility, which is discussed below. Collections under the Advance Pay
Program are used to pay down any outstanding balance under the credit facility.
Thus, the credit facility is primarily used to manage the timing of payments and
collections under the Advance Pay Program. Growth of the Advance Pay Program
will be monitored and controlled to ensure that funding will be available either
through cash provided by operations or borrowings under our credit facility.
Net cash used by operating activities was $3.2 million for the quarter ended
April 30, 1999 compared to $477,000 for the quarter ended April 30, 1998.
Net cash used in investing activities was $18.8 million for the quarter ended
April 30, 1999 and $142,000 for the quarter ended April 30, 1998. The increase
was due primarily to the acquisitions during the quarter. Net cash provided by
financing activities was $22.6 million in the quarter ended April 30, 1999 and
$702,000 in the quarter ended April 30, 1998. The increase was due primarily to
the advances on the revolving credit facility that were used for the
acquisitions.
Our service business has not required significant capital expenditures. As a
result, at April 30, 1999, we did not have any commitments for capital
expenditures. Currently, we do not anticipate any significant capital
expenditures during fiscal 2000.
At April 30, 1999, our total long-term debt obligations were approximately $30.2
million. In March 1999, we amended and restated our Credit Agreement with
Wachovia Bank, N.A. to provide for a $15.0 million term loan and a $15.0 million
revolving credit facility. Proceeds of the term loan, which were received on
March 31, 1999, were used to fund our recent acquisitions and borrowings under
the revolving credit facility were used for general corporate purposes,
including funding our Advance Pay Program. The 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 30, 1999, the interest rate for the term loan was 7.4388%.
At June 8, 1999, we had outstanding approximately $7.6 million and approximately
$7.4 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
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foreseeable future. However, should Wachovia terminate the credit facility, we
would be required to use funds from operations, obtain other financing or issue
equity securities to repay the debt. If we were unable to obtain alternative
financing, our ability to fund the Advance Pay Program would be substantially
impaired.
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 connection with the acquisition of MYCO, Inc., the Company assumed the
liabilities of MYCO's Industrial Revenue Bonds. On January 30, 1995, the City
of Rockford issued $4 million of its Industrial Project Revenue Bonds, Series
1995, and the proceeds were deposited with the Amalgamated Bank of Chicago, as
trustee. Wachovia has issued a rolling 13-month letter of credit for $4.1
million to us. The bonds are secured by the trustee's indenture and the $4.1
million letter of credit. The letter of credit is secured by substantially
all of our assets. The bonds bear interest at a variable weekly rate
(approximately 80% of the Treasury Rate) not to exceed 15% per annum. The bonds
mature on January 1, 2030. Fees related to the letter of credit are 1% per
annum of the outstanding bond principal plus accrued interest.
In June 1999, we purchased our leased facility in High Point, North Carolina for
$1.8 million. We financed this purchase through available borrowings under our
revolving credit facility. Wachovia has committed to a $1.6 million increase in
available borrowings under the revolving credit facility and will hold a deed of
trust on the High Point property.
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.
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. We adopted SFAS No. 130 in the first quarter
of fiscal 1999.
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 8 in the "Notes
to Consolidated Financial Statements."
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 Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company does
not expect the adoption of this statement to have a significant impact on the
results of operations, financial position or cash flows.
YEAR 2000 COMPLIANCE
Year 2000 Overview - Most of the services we provide are dependent upon computer
technology. Since early 1997, we have been analyzing and testing all of our
information technology (IT) and non-IT data systems for possible Year 2000, or
Y2K, problems and have been remediating any Y2K problems detected. As of May 31,
1999, we had analyzed five, or approximately 83%, of our six IT systems and had
tested two, or approximately 33%, of our six IT systems for Y2K
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<PAGE> 22
compliance. We are in the process of evaluating the analysis and testing of our
non-IT systems to determine the completion status of our non-IT Y2K compliance
efforts. We intend to complete all analysis by August 1999 and all testing and
remediation by the end of December 1999 for both our IT and non-IT systems.
Claim Submission Program. We developed our Claim Submission Program IT software
with a third party. We completed Y2K compliance analysis and testing on this
software in February 1999 and have corrected all Y2K problems detected during
that testing. In addition, we have upgraded the operating system on the hardware
platform for the Claim Submission Program software to be Y2K compliant. We
expect to conduct follow up testing and remediation, if necessary, on all Claim
Submission Program IT software by the end of October 1999. Our Claim Submission
Program also utilizes non-IT phone lines for electronic data transmission. We
have been unable to confirm Y2K compliance with the third party provider of our
phone services. In the event our telecommunications services experience
Y2K-related failures, we would employ alternative, though less efficient,
methods of data transmission, such as electronic tape transfer and hard copy
data printouts.
Advance Pay Program. The IT component of our Advance Pay Program involves
transporting data on rebate claims into a Microsoft Excel 97 software program
which reformats the data to determine the amount of advance payments due to our
retailer customers. Microsoft Excel 97 has been declared Y2K compliant by the
vendor, which is consistent with our internal testing results. There are no
non-IT functions involved in our Advance Pay Program. Because we do not
anticipate any Y2K problems with our Advance Pay Program, we have not developed
a Y2K failure contingency plan for the program.
PIN Program. The IT component of our PIN Program was developed by our internal
programming staff with Microsoft Visual Foxpro version 6.0, which has been
declared Y2K compliant by the vendor. We expect to complete testing and
remediation, if necessary, of this program by the end of October 1999. As of May
1999, we had not detected any Y2K problems that would adversely affect this
program. There are no non-IT functions upon which the PIN Program is dependent.
We have not developed a Y2K failure contingency plan for the PIN Program because
we do not believe the program will experience any Y2K-related failures.
ICN. The IT functions of our ICN website were developed by our internal
programming staff using Web Connects Software, which has been declared Y2K
compliant by the vendor. Background databases are programmed in Microsoft Visual
Foxpro version 6.0, which has also been declared Y2K compliant by the vendor.
Because the ICN system utilizes a 4-digit date field, we do not anticipate any
Y2K problems. We expect to complete Y2K testing and remediation, if necessary,
of this program by the end of October 1999. The only non-IT function of ICN
involves telecommunications. We intend to establish a contingency plan involving
other methods of data transmission for this component of ICN by December 1999.
Front-end Management Services. Our Front-end Management Services IT software was
developed by a third party software developer with MacroMedia Director software,
which has been declared Y2K compliant by the vendor. The developer also has
confirmed that our customized Front-end Management Services software package is
Y2K compliant. We expect to complete internal testing of this software by
October 1999 and believe that any problems detected will be corrected by the
developer before the end of 1999. There are no non-IT functions related to our
Front-end Management Services. Because we do not anticipate Y2K issues, we have
not developed a contingency plan for our Front-end Management Services.
Display Rack Manufacturing. Our Display Rack Manufacturing subsidiaries were
acquired within the past five months. We are in the process of collecting data
to verify Y2K compliance issues which may affect these subsidiaries. We intend
to complete our Y2K analysis and testing for both the IT and non-IT systems of
our manufacturing subsidiaries by the end of July 1999 and to then commence any
required remediation work if any problems are detected.
IT Systems - We intend to correct any Y2K deficiencies in our manufacturing
subsidiaries' IT systems prior to the end of 1999. Our preliminary analysis and
testing of our manufacturing subsidiaries' IT systems have revealed the
following:
- MYCO's primary computer system and all personal computers have been
tested and verified in writing by the software vendor to be Y2K compliant. All
of Chestnut's personal computers have passed Y2K compliance tests. We are
continuing to analyze and test computers at our other manufacturing
subsidiaries.
- Our preliminary findings indicate that, with the exception of MYCO, the
accounting software of all of our manufacturing subsidiaries is not Y2K
compliant. We intend to select and implement a uniform Y2k compliant
accounting
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package for all of our manufacturing subsidiaries by the end of 1999.
- The billing software for all of our manufacturing subsidiaries is not Y2K
compliant. We intend to upgrade or replace this software before the end of 1999.
- Currently, the payroll software used by Brand and MYCO is Y2K compliant.
The payroll software used by Yeager and Chestnut, however, is not Y2K compliant.
We intend to replace all non-compliant payroll software with Y2K compliant
programs by the end of 1999.
- Certain aspects of MYCO's inventory and raw materials control software
are not Y2K compliant. We intend to upgrade or replace this software by the end
of 1999.
- Brand utilizes a Novell network which is not currently Y2K compliant. We
intend to correct this problem by the end of 1999.
- Brand's cost sharing software is not Y2K compliant. Internal systems are
currently being designed to replace this system and are expected to be
implemented before the end of 1999.
Non-IT Systems - Our non-IT manufacturing systems consist principally of
software used in our manufacturing equipment and phone systems. Because our
non-IT manufacturing systems are not significantly dependent upon date sensitive
functions, we do not expect any material problems with these operations the
event they are not fully Y2K compliant. We continue to assess and test the Y2K
compliance status of our manufacturing and phone systems and intend to take
necessary steps to ensure that these systems will be substantially Y2K compliant
by the end of 1999. Our preliminary analysis and testing of our manufacturing
subsidiaries' non-IT systems have revealed the following:
- We believe the only non-IT systems used by MYCO are those pertaining to
its manufacturing operations and its phone system. Based on our analysis, there
do not appear to be any Y2K issues associated with MYCO's production process.
MYCO's phone system has been orally declared compliant by the vendor.
- The only non-IT systems in Chestnut's manufacturing operations involve a
wire bender for which we have received written confirmation of Y2K compliance
from the vendor. We are assessing the Y2K status of Chestnut's phone system.
- Letters have been received from each vendor of Yeager's production
equipment stating that this equipment is Y2K compliant. We are assessing the Y2K
status of Yeager's phone system.
- We are not aware of any Y2K problems relating to Brand's non-IT
manufacturing systems. We are assessing the Y2K status of Brand's phone system.
Third Party Assessments - We have communicated orally or in writing with
approximately 90% of our magazine wholesaler, national distributor and magazine
publisher trading partners in order to assess their Y2K readiness. Based on
those communications, we believe that almost all of those with whom we have
communicated expect to be Y2K compliant before the end of 1999, and we do not
presently have reason to believe that there will be significant Y2K problems
with any of these third parties that would impair our normal operations. In
addition to our oral communications with magazine wholesalers, national
distributors and magazine publishers, we sent a letter in May 1999 to 139
magazine wholesalers to verify their Y2K compliance. We have received responses
from 13, or 9%, of those contacted. Only one respondent indicated that it is not
Y2K compliant, though it indicated that it intends to upgrade the noncompliant
software by the end of June 1999. We intend to contact all parties who have
failed to respond to our Y2K inquiries by August 1999.
We are in the process of making verbal and written Y2K inquiries of our vendors,
suppliers and customers. We expect to complete these inquiries by August 1999.
We have also communicated with our suppliers of non-IT operations and services
(such as electricity and telecommunications providers). Based on these
communications, we do not presently have reason to believe that there will be
Y2K problems involving any of these third parties that would materially impair
our operations. In the event any of our vendors or suppliers are not Y2K
compliant by the end of 1999, we intend to establish relationships with other
vendors or suppliers to replace those who are non-compliant.
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Potential Y2K Risk - We believe that the most reasonably likely worst-case
scenario due to our internal and third party external systems not being Y2K
compliant would be the inability to perform the above-described services in a
most time-efficient manner and thereby meet client deadlines. We depend on data,
materials and other services from third parties in order to provide information
and manufacturing services to our clients. If these third parties have problems
supplying data, materials and other services to us, then deadlines for our
clients may not be met. If our internal systems are not Y2K compliant, data,
materials and services received from third parties cannot be processed in a
timely manner. This could also lead to missed deadlines, which could have a
negative impact on our relationships with our customers and a material and
adverse effect on our financial condition and results of operations.
Contingency Plan - Currently, we have not completed a Y2K contingency plan. A
final contingency plan will be developed upon completion of all system testing
and is expected to be completed by the end of 1999.
Y2K Expenses - As of May 1999, we had incurred expenses of less than $10,000 for
Y2K analysis, testing and remediation. We anticipate that our additional
expenses in connection with our remaining Y2K compliance efforts will not exceed
$40,000. We have not included any expenditures for Y2K compliance in our budget.
There can be no assurance that our additional expenses, in particular in
connection with our manufacturing subsidiaries, will not be significant.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) A Special Meeting of the Shareholders of the Company was held on March
30, 1999. Of the 12,168,299 shares entitled to vote at such meeting,
7,127,741 shares were present at the meeting in person or by proxy.
(c) The proposal to issue 1,473,281 shares of the Common Stock of the
Company upon the conversion of the Class A Convertible Preferred Stock
was approved. The number of shares voted for, against and withheld were
as follows:
For Against Withheld
4,748,460 524,904 21,915
The proposal to amend the Company's Articles of Incorporation to
increase authorized shares of Common Stock to 40,000,000 shares was
approved. The number of shares voted for, against and withheld were as
follows:
For Against Withheld
6,947,521 179,964 19,845
The proposal to amend the Company's 1995 Incentive Stock Option Plan to
increase the number of shares of the Company's Common Stock available
under the Stock Plan by 1,000,000 shares was approved. The number of
shares voted for, against and withheld were as follows:
For Against Withheld
7,043,718 84,023 19,589
ITEM 5. OTHER INFORMATION
Not Applicable
25
<PAGE> 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Exhibit Index.
(b) The following Current Reports on Form 8-K were filed during the quarter
ended April 30, 1999.
(i) The Company's Current Report on Form 8-K dated March 11, 1999,
relating to the acquisitions of Chestnut Display Systems, Inc.
and MYCO, Inc. on February 26, 1999.
(ii) The Company's Current Report on Form 8-K/A dated March 23,
1999 (for the acquisition of U.S. Marketing Services, Inc. on
January 7, 1999), relating to the consolidated financial
statements of U.S. Marketing Services, Inc., together with the
related Report of Independent Public Accountants, for the
period from March 25, 1998 (inception) through December 31,
1998; combined financial statements of Brand Manufacturing
Corp. ("Brand") and TCE Corporation ("TCE"), together with the
related Report of Independent Public Accountants, for the
period from January 1, 1998 through May 20, 1998; financial
statements of Brand, together with the related Report of
Independent Auditors, for they ear ended December 31, 1997;
financial statements of TCE together with the related Report
of Independent Auditors, for the year ended December 31, 1997;
pro forma financial information; unaudited pro forma combined
condensed balance sheet as of October 31, 1998, including
notes thereto; unaudited pro forma combined condensed
statement of operations for the nine months ended October 31,
1998 and for the year ended January 31, 1998, including notes
thereto.
26
<PAGE> 27
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE SOURCE INFORMATION MANAGEMENT COMPANY
Date: June 14, 1999 /S/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Chief Financial Officer
27
<PAGE> 28
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedule (Filed in EDGAR version only)
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT APRIL 30, 1999 (UNAUDITED) AND THE STATEMENT OF INCOME FOR THE THREE
MONTHS ENDED APRIL 30, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> APR-30-1999
<CASH> 1,267,171
<SECURITIES> 0
<RECEIVABLES> 40,220,093
<ALLOWANCES> 1,327,229
<INVENTORY> 2,478,077
<CURRENT-ASSETS> 1,110,349
<PP&E> 13,133,716
<DEPRECIATION> 3,393,890
<TOTAL-ASSETS> 101,036,134
<CURRENT-LIABILITIES> 14,739,325
<BONDS> 0
0
0
<COMMON> 136,716
<OTHER-SE> 56,943,770
<TOTAL-LIABILITY-AND-EQUITY> 101,036,134
<SALES> 16,926,561
<TOTAL-REVENUES> 16,926,561
<CGS> 9,612,039
<TOTAL-COSTS> 3,333,624
<OTHER-EXPENSES> (146,155)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 295,069
<INCOME-PRETAX> 3,385,110
<INCOME-TAX> 1,491,064
<INCOME-CONTINUING> 1,491,064
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,894,046
<EPS-BASIC> .15
<EPS-DILUTED> .13
</TABLE>
