<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest JUNE 10, 1999 (JANUARY 7, 1999)
event reported)
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Exact name of Registrant as specified in its charter)
MISSOURI
(State or Other Jurisdiction of Incorporation)
0-26238 43-1710906
(Commission File Number) (IRS Employer Identification No.)
11644 LILBURN PARK ROAD, ST. LOUIS, MISSOURI 63146
(Address of principal executive offices) (Zip Code)
(314) 995-9040
(Registrant's telephone number, including area code)
N/A
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
The Source Information Management Company ("Registrant") hereby files
Amendment No. 2 to its Form 8-K filed on January 21, 1999.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
(i) 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.
(ii) 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.
(iii) Financial Statements of Brand, together with the related Report of
Independent Auditors, for the year ended December 31, 1997.
(iv) Financial Statements of TCE together with the related Report of
Independent Auditors, for the year ended December 31, 1997.
(b) Pro Forma Financial Information
(i) Unaudited Pro Forma Combined Condensed Balance Sheet as of October 31,
1998, including notes thereto.
(ii) 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.
(c) Exhibits
See the Exhibit Index attached hereto and incorporated herein by
reference.
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
U.S. Marketing Services, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of U.S. Marketing
Services, Inc. and Subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, capital deficit, and cash flows for the
period from March 25, 1998 (inception) through December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides 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 U.S. Marketing
Services, Inc. and Subsidiaries as of December 31, 1998, and the results of
their operations and their cash flows for the period from March 25, 1998
(inception) through December 31, 1998 in conformity with generally accepted
accounting principles.
March 9, 1999
/s/ BDO Seidman, LLP
1
<PAGE> 4
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1998
- -------------------------------------------------------------------------------------
<S> <C>
ASSETS (NOTE 7)
CURRENT:
Cash and cash equivalents $ 467,706
Accounts receivable (Note 12) 2,588,956
Inventories (Notes 3 and 4) 3,008,670
Deferred finance costs (Note 3) 389,907
Prepaid expenses 37,685
Prepaid income taxes 595,184
-----------
TOTAL CURRENT ASSETS 7,088,108
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION
(NOTES 3 AND 5) 182,375
INTANGIBLE ASSETS, NET (NOTES 3, 6 AND 13) 14,121,672
DEPOSITS AND OTHER 82,974
-----------
$21,475,129
-----------
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Notes payable - bank (Note 7) $17,500,000
Accounts payable 2,475,751
Accrued expenses and other liabilities 1,507,300
Current maturities of long-term debt (Note 13) 60,000
Due to retailers 1,141,634
Due to stockholders (Note 9) 575,383
-----------
TOTAL CURRENT LIABILITIES 23,260,068
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 13) 240,000
-----------
TOTAL LIABILITIES 23,500,068
-----------
MINORITY INTEREST 288,831
COMMITMENTS AND CONTINGENCIES (NOTE 10)
CAPITAL DEFICIT (NOTE 14):
Common stock, $0.001 par value - 100,000,000 authorized; 4,907,500
shares issued and outstanding 4,908
Preferred stock, $0.001 par value - 10,000,000 authorized; no shares
issued or outstanding -
Additional paid-in capital 127,989
Deficit (2,446,667)
-----------
TOTAL CAPITAL DEFICIT (2,313,770)
-----------
$21,475,129
-----------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Period from March 25, 1998 (inception) through December 31, 1998
- --------------------------------------------------------------------------------
<S> <C>
NET REVENUES (NOTE 12) $ 7,694,811
COST OF REVENUES 4,643,781
-----------
GROSS PROFIT 3,051,030
-----------
OPERATING EXPENSES:
Selling 355,086
General and administrative 3,886,988
Amortization expense 481,996
-----------
TOTAL OPERATING EXPENSES 4,724,070
-----------
LOSS FROM OPERATIONS (1,673,040)
-----------
OTHER INCOME (EXPENSES):
Interest expense (913,271)
Interest income 49,947
-----------
TOTAL OTHER EXPENSES (863,324)
-----------
LOSS BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST IN
NET LOSS OF CONSOLIDATED SUBSIDIARIES (2,536,364)
PROVISION FOR INCOME TAXES (NOTE 8) 160,603
-----------
LOSS BEFORE MINORITY INTEREST IN NET LOSS OF CONSOLIDATED
SUBSIDIARIES (2,696,967)
MINORITY INTEREST IN NET LOSS OF CONSOLIDATED SUBSIDIARIES 250,300
NET LOSS $(2,446,667)
- -------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL DEFICIT
<TABLE>
<CAPTION>
Period from March 25, 1998 (inception) through December 31, 1998
- --------------------------------------------------------------------------------
Additional
Common paid-in
stock capital Deficit Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, MARCH 25, 1998 $ - $ - $ - $ -
Issuance of common stock 4,908 127,989 - 132,897
Net loss - - (2,446,667) (2,446,667)
- --------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $4,908 $127,989 $(2,446,667) $(2,313,770)
- -------------------------- ------- -------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 7
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(NOTE 11)
<TABLE>
<CAPTION>
Period from March 25, 1998 (inception) through December 31, 1998
- --------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,446,667)
------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 51,110
Amortization 481,996
Minority interest in net loss of consolidated
subsidiaries (250,300)
Decrease (increase) in:
Accounts receivable 266,064
Inventories (2,164,913)
Prepaid expenses and other current assets (282,893)
Deposits and other 8,001
Increase (decrease) in:
Accounts payable and accrued expenses 2,540,645
Due to retailers (606,247)
------------
TOTAL ADJUSTMENTS 43,463
------------
NET CASH USED IN OPERATING ACTIVITIES (2,403,204)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (31,836)
Business acquisitions, net of cash acquired (14,875,234)
- ------------------------------------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (14,907,070)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan from majority stockholder 15,131,911
Repayment of loan from majority stockholder (15,131,911)
Issuance of common stock 132,897
Proceeds from notes payable - bank 18,500,000
Payments on notes payable - bank (1,000,000)
Due to stockholders 575,383
Finance costs (430,300)
------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 17,777,980
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 467,706
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 467,706
- ---------------------------------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 8
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
1. COMPANY STRUCTURE U.S. Marketing Services, Inc. (the "Parent") was founded in
March 1998 to create a nationwide consolidator of marketing
service companies. On May 20, 1998, the Parent, through a
loan from its majority shareholder, acquired 70% of the
voting shares of Brand Manufacturing Corp. ("Brand") and TCE
Corporation ("TCE") (collectively, the "Company") in a
business combination accounted for as a purchase. The total
cost of $15,521,000 to acquire the companies exceeded the
fair value of the net assets acquired by approximately
$14,300,000, which was recorded as goodwill. USM had no
significant activity until May 20, 1998 when it acquired
Brand and TCE.
2. BUSINESS Brand designs and manufactures custom-designed product
display units that are categorized as front-end
merchandisers or point-of-purchase displays, that are used
by retailers and consumer product manufacturers nationwide.
TCE provides trucking, consulting, and warehousing services
exclusively for Brand and its customers.
3. SUMMARY OF Principles of Consolidation
SIGNIFICANT
ACCOUNTING POLICIES
The consolidated financial statements include the accounts
of the Parent and its subsidiaries, Brand and TCE. The
results of operations of Brand and TCE are included in the
accompanying financial statements as of the date of
acquisition. All material intercompany balances and
transactions have been eliminated.
Revenue Recognition
Revenues are recognized as products are shipped to customers.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments
purchased with a maturity of three months or less to be cash
equivalents.
Inventories
Inventories, consisting of steel and product display units,
are stated at the lower of cost or market. Cost is
determined by the FIFO (first-in, first-out) method.
</TABLE>
6
<PAGE> 9
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Property and Equipment
Property and equipment, including leasehold improvements, are
stated at cost. Depreciation and amortization are computed by the
straight-line method over the estimated useful lives of the
related assets, which range from five to seven years. Leasehold
improvements are amortized over their estimated useful lives or
lease terms, whichever is shorter.
Goodwill, Tradename and Deferred Finance Costs
Goodwill represents the excess of cost over the fair value of the
net assets of companies acquired at the date of acquisition. The
balance is being amortized on a straight-line basis over 20 years.
Tradename is being amortized on a straight-line basis over 20
years. Deferred finance costs are amortized over the term of the
related debt.
Income Taxes
The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes". SFAS No. 109 requires the use of the asset and
liability method of accounting for income taxes. Under this
method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. Under SFAS No. 109, the effect
on deferred taxes of a change in tax rates is recognized in income
in the period that includes the enactment date.
Fair Value of Financial Instruments
The carrying value of financial instruments including cash and
cash equivalents, accounts receivable and accounts payable
approximate fair value due to the immediate or short-term maturity
of these financial instruments. The carrying amount reported for
notes payable and long-term debt approximates fair value as the
effective rates on the underlying instruments reflect market rates
for similar debt.
</TABLE>
7
<PAGE> 10
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents and accounts receivable.
The Company places its cash and short-term cash investments with
high credit quality financial institutions which limit the amount
of credit exposure. Concentrations of credit risk with respect to
trade accounts receivable are limited due to the Company's diverse
client base. Losses relating to accounts receivable have
historically been minimal; as a result, the Company does not
maintain an allowance for potential losses. The Company does not
require collateral from its customers. The majority of the
inventory at December 31, 1998 is for shipment to one customer in
1999.
Use of 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
Long-lived assets, such as intangible assets and property and
equipment, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amounts of the assets may
not be recoverable through the estimated undiscounted future cash
flows from the use of these assets. When any such impairment
exists, the related assets will be written down to their fair
value. This policy is in accordance with SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed Of". No
write-downs have been necessary through December 31, 1998.
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
1998, but had no "other" comprehensive income items for the years
presented in the statements of income or accumulated as of the
balance sheet date presented.
</TABLE>
8
<PAGE> 11
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
4. INVENTORIES Inventories at December 31, 1998 consist of the following:
-----------------------------------------------------
Raw materials $ 358,520
Work-in-process 540,648
Finished goods 2,109,502
-----------------------------------------------------
$3,008,670
-----------------------------------------------------
</TABLE>
9
<PAGE> 12
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
5. PROPERTY AND Major classes of property and equipment at
EQUIPMENT December 31, 1998 consist of the following:
-----------------------------------------------------
Machinery and equipment $ 59,533
Furniture, fixtures and equipment 7,119
Computer equipment 31,500
Leasehold improvements 135,333
-----------------------------------------------------
233,485
Less: Accumulated depreciation
and amortization 51,110
-----------------------------------------------------
Property and equipment, net $ 182,375
-----------------------------------------------------
6. INTANGIBLE ASSETS Intangible assets at December 31, 1998 consist of
the following:
Goodwill $14,263,275
Tradename 300,000
-----------------------------------------------------
14,563,275
Less: Accumulated amortization 441,603
-----------------------------------------------------
Intangible assets, net $14,121,672
-----------------------------------------------------
</TABLE>
7. NOTES PAYABLE - BANK The Company has an $18,500,000 credit facility with a
bank which expires on July 13, 2003. The facility
provides for a term loan in the amount of
$15,000,000, which is payable in 20 quarterly
installments ranging from $500,000 to $1,000,000,
plus interest, through June 30, 2003. The facility
also provides for short-term borrowings up to
$3,500,000 under a revolving line of credit.
Borrowings on the credit facility bear interest at
LIBOR plus 2.5% or the prime rate plus 1.5%, at the
borrower's option.
The borrowing agreement which contains certain
restrictions and covenants, as defined, is
collateralized by all the assets of the Company and
is personally guaranteed by the stockholders.
10
<PAGE> 13
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with the sale of the Company on January 7,
1999 (see Note 14), all borrowings under the credit
facility were repaid through a capital contribution to
the Company by the majority stockholders. At such time,
the Company wrote off the balance of deferred finance
costs in the amount of $389,907 to expense.
8. INCOME TAXES Effective May 20, 1998, in connection with the
acquisition of Brand and TCE by the Parent, Brand and TCE
became C corporations for Federal, state and local income
tax purposes.
The provisions for income taxes for the period ended
December 31, 1998 consist of the following:
<TABLE>
-----------------------------------------------------
<S> <C> <C>
Current:
Federal $ 98,652
State 61,951
-----------------------------------------------------
$ 160,603
-----------------------------------------------------
</TABLE>
The difference between the Company's effective tax rate
for financial statement purposes and the statutory
Federal income tax rate for 1998 is primarily due to net
operating losses incurred during the period.
Deferred tax assets (liabilities) are comprised of the
following:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Depreciation $ 97,000
Inventory capitalization 120,000
Net operating loss carryforward 1,082,000
Other 24,000
1,323,000
Deferred tax liabilities:
Goodwill amortization (48,000)
-----------------------------------------------------
1,275,000
Less: Valuation allowance (1,275,000)
-----------------------------------------------------
Deferred tax asset (liability), net $ -
-----------------------------------------------------
</TABLE>
11
<PAGE> 14
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The deferred tax asset is fully offset by a valuation
allowance of the same amount due to uncertainty
regarding its ultimate utilization.
At December 31, 1998, the Parent had net operating loss
("NOL") carryforwards of approximately $1,800,000
expiring through 2018. Brand had NOL carryforwards at
December 31, 1998 of approximately $880,000 expiring
through 2018.
9. RELATED PARTY
TRANSACTIONS At December 31, 1998, the Company had balances due to
minority stockholders of the Company in the amount of
$575,383 arising from the May 20, 1998 acquisition
agreement (see Note 1). These balances are non-interest
bearing and are payable on demand. The balances were
paid in full in January 1999.
10. COMMITMENTS AND
CONTINGENCIES Lease Commitments
The Company leases equipment and certain office, plant
and warehouse space in New York and New Jersey under
non-cancelable operating leases. Certain leases provide
for escalations based on increases in the landlord's
operating expenses and real estate taxes.
Minimum annual lease commitments under noncancelable
operating leases at December 31, 1998 are as follows:
<TABLE>
-----------------------------------------------------
<S> <C> <C>
1999 $435,000
2000 192,000
2001 7,000
2002 5,000
-----------------------------------------------------
$639,000
-----------------------------------------------------
Rent expense for the period ended December 31, 1998
was approximately $404,000.
</TABLE>
12
<PAGE> 15
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employment Contracts
The Company is obligated under various employment contracts
with certain officers and other employees of the Company for
salary and other compensation, as well as for providing
various benefits. Future minimum annual payments for
salaries and other compensation under these contracts are as
follows:
<TABLE>
-----------------------------------------------------
<S> <C>
1999 $ 655,000
2000 497,000
2001 220,000
2002 150,000
2003 150,000
-----------------------------------------------------
$1,672,000
-----------------------------------------------------
</TABLE>
Union Contracts
At December 31, 1998, approximately 75% of the Company's
employees were members of Local 810, affiliated with the
International Brotherhood of Teamsters (the "Union"). All
non-supervisory plant employees who have met certain
criteria are considered members of the Union. The Company is
party to a collective bargaining agreement with the Union,
which expires on September 30, 1999.
Company contributions to the Union funds charged to
operations were approximately $254,000 for the period ended
December 31, 1998.
Under the Multiemployer Pension Plan Amendment Act of 1980,
an employer is liable, upon withdrawal from or termination
of a multiemployer plan, for its proportionate share of the
plan's unfunded vested benefits liability, if any. As of
December 31, 1998, no such liability existed. Currently,
the Company has no intent of terminating or withdrawing from
the plan.
Litigation
The Company is a party to various litigation matters arising
in the ordinary course of business. In the opinion of
management, the outcome of these litigation matters will not
have a material adverse effect on the Company's financial
position, results of operations or liquidity.
13
<PAGE> 16
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
11. SUPPLEMENTAL The Company paid income taxes of approximately
DISCLOSURES OF CASH $642,000 for the period ended December 31, 1998.
FLOW INFORMATION Interest paid amounted to $913,271 for the period
ended December 31, 1998.
The Company incurred loans in the amount of $300,000
for the acquisition of the tradename of the acquired
company (see Note 13).
The Parent acquired 70% of the voting shares of Brand
and TCE for $15,521,000. In conjunction with the
acquisition, liabilities were assumed as follows:
-----------------------------------------------------
Fair value of assets purchased $ 18,711,000
Cash paid for the capital stock (15,521,000)
-----------------------------------------------------
Liabilities assumed $ 3,190,000
-----------------------------------------------------
12. MAJOR CUSTOMERS AND For the period ended December 31, 1998, three
CONCENTRATION OF customers accounted for approximately 34% of net
CREDIT RISK revenues. In addition, three customers accounted for
approximately 44% of accounts receivable at December
31, 1998.
13. ACQUISITION On November 19, 1998, the Company acquired the
tradename of a company that performs services for
Brand. The purchase price of $300,000 will be paid in
equal annual installments over 5 years starting
November 1999. The balance is included in intangible
assets and is being amortized over five years. In
connection with the acquisition, the Company entered
into employment contracts with the former owners of
the acquired company (see Notes 6 and 10).
</TABLE>
14
<PAGE> 17
U.S. MARKETING SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
14. SUBSEQUENT EVENT On January 7, 1999, the Parent entered into an
agreement and plan of merger (the "Merger") with Source
Information Management Company ("Source"), pursuant to
which the Parent and its subsidiaries were merged with
and into Source, and became a wholly-owned subsidiary
of Source. In connection with the Merger, all of the
capital stock of the Parent was exchanged for 3,400,000
shares of the capital stock of Source. On January 7,
1999, prior to entering into the Merger, the majority
stockholder of the Parent purchased the remaining
outstanding minority interest in Brand and TCE, so that
the Parent owned 100% of the stock of Brand and TCE at
the closing.
</TABLE>
15
<PAGE> 18
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Brand Manufacturing Corp. and TCE Corporation
We have audited the accompanying combined balance sheet of Brand Manufacturing
Corp. and TCE Corporation as of May 20, 1998, and the related combined
statements of income, stockholders' equity, and cash flows for the period from
January 1, 1998 through May 20, 1998. These combined financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Brand Manufacturing
Corp. and TCE Corporation as of May 20, 1998, and the results of their
operations and their cash flows for the period from January 1, 1998 through May
20, 1998 in conformity with generally accepted accounting principles.
March 9, 1999
/s/ BDO Seidman, LLP
1
<PAGE> 19
BRAND MANUFACTURING CORP.
AND TCE CORPORATION
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
May 20, 1998
- --------------------------------------------------------------------------------
<S> <C>
ASSETS (NOTE 2)
CURRENT:
Cash and cash equivalents $ 646,013
Accounts receivable (Note 8) 2,855,020
Inventories (Note 3) 843,757
Refundable income taxes 103,349
Prepaid expenses and other current assets 246,627
----------
TOTAL CURRENT ASSETS 4,694,766
PROPERTY AND EQUIPMENT, LESS ACCUMULATED DEPRECIATION AND
AMORTIZATION (NOTE 4) 194,897
OTHER ASSETS 90,975
----------
$4,980,638
----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 971,144
Accrued expenses and other liabilities 455,208
Due to retailers 1,747,881
Income taxes payable 16,054
----------
TOTAL CURRENT LIABILITIES 3,190,287
----------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 10)
STOCKHOLDERS' EQUITY (NOTE 9):
Common stock (Note 5) 7,375
Retained earnings 1,782,976
----------
TOTAL STOCKHOLDERS' EQUITY 1,790,351
----------
$4,980,638
----------
</TABLE>
See accompanying notes to combined financial statements.
2
<PAGE> 20
BRAND MANUFACTURING CORP.
AND TCE CORPORATION
COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
Period from January 1, 1998 through May 20, 1998
- --------------------------------------------------------------------------------
<S> <C>
NET REVENUES (NOTE 8) $6,078,934
COST OF REVENUES 3,589,239
----------
GROSS PROFIT 2,489,695
----------
OPERATING EXPENSES:
Selling 205,223
General and administrative 1,413,556
----------
TOTAL OPERATING EXPENSES 1,618,779
----------
INCOME FROM OPERATIONS 870,916
----------
OTHER INCOME (EXPENSES):
Interest expense (3,994)
Interest income 13,686
Other 14,332
----------
TOTAL OTHER INCOME 24,024
----------
INCOME BEFORE PROVISION FOR INCOME TAXES 894,940
PROVISION FOR INCOME TAXES 36,500
----------
NET INCOME $ 858,440
- ---------- ----------
</TABLE>
See accompanying notes to combined financial statements.
3
<PAGE> 21
BRAND MANUFACTURING CORP.
AND TCE CORPORATION
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Period from January 1, 1998 through May 20, 1998
- --------------------------------------------------------------------------------
Additional
Common paid-in Retained Treasury
stock capital earnings stock Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1,
1998 $11,767 $100,000 $3,359,113 $(690,024) $2,780,856
Retirement of
common stock (4,392) (100,000) (585,632) 690,024 -
S corporation
distributions - - (1,848,945) - (1,848,945)
Net income - - 858,440 - 858,440
- ---------- ------- --------- ----------- --------- -----------
BALANCE, MAY 20,
1998 $ 7,375 $ - $ 1,782,976 $ - $1,790,351
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to combined financial statements.
4
<PAGE> 22
BRAND MANUFACTURING CORP.
AND TCE CORPORATION
COMBINED STATEMENT OF CASH FLOWS
(NOTE 7)
<TABLE>
<CAPTION>
Period from January 1, 1998 through May 20, 1998
- --------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 858,440
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 13,579
Decrease (increase) in:
Accounts receivable (63,120)
Inventories (178,679)
Prepaid expenses and other current assets 131,146
Prepaid income taxes (103,349)
Other assets (17,000)
Increase (decrease) in:
Accounts payable (537,907)
Accrued expenses and other liabilities (218,263)
Due to retailers 1,623,578
Income taxes payable (9,946)
----------
TOTAL ADJUSTMENTS 640,039
----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,498,479
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (14,371)
CASH FLOWS FROM FINANCING ACTIVITIES:
S corporation distributions (1,848,945)
----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (364,837)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,010,850
----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 646,013
- ---------------------------------------- ----------
</TABLE>
See accompanying notes to combined financial statements.
5
<PAGE> 23
BRAND MANUFACTURING CORP.
AND TCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
1. BUSINESS AND Brand Manufacturing Corp. ("Brand") designs and
ORGANIZATION manufactures custom-designed product display units that
are categorized as front-end merchandisers or
point-of-purchase displays, that are used by retailers
and consumer product manufacturers nationwide.
TCE Corporation ("TCE") provides trucking, consulting,
and warehousing services exclusively for Brand and its
customers.
2. SUMMARY OF Principles of Combination
SIGNIFICANT The combined financial statements include the accounts
ACCOUNTING POLICIES of Brand and TCE (collectively, the "Company"). The
combined companies are related through common ownership
and control. The results of operations of Brand and TCE
are included in the accompanying financial statements
as of the date of acquisition. All material
intercompany balances and transactions are eliminated
in combination.
Revenue Recognition
Revenues are recognized as products are shipped to
customers. Cash and Cash Equivalents The Company
considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash
equivalents.
Inventories
Inventories, consisting of steel and product display
units, are stated at the lower of cost or market. Cost
is determined by the FIFO (first-in, first-out) method.
Property and Equipment
Property and equipment, including leasehold
improvements, are stated at cost. Depreciation and
amortization are computed by the straight-line method
over the estimated useful lives of the related assets,
which range from five to seven years. Leasehold
improvements are amortized over their estimated useful
lives or lease terms, whichever is shorter.
</TABLE>
6
<PAGE> 24
BRAND MANUFACTURING CORP.
AND TCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Income Taxes
The Company, with the consent of its stockholders, has
elected to be taxed as an S corporation under the provisions
of the Internal Revenue Code and the States of New York and
New Jersey tax laws. Under these provisions, the
stockholders are taxed on their proportionate shares of the
Company's taxable income on their individual tax returns.
Certain states impose a corporate level tax based upon the
differential between the corporate and individual tax rates.
The financial statements include a provision for these
taxes, as well as New York City income taxes.
As a result of the acquisition of the companies on May 20,
1998 (see Note 9), the companies' S corporation status was
terminated and both Brand and TCE became C corporations for
Federal, state and local income tax purposes.
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes". SFAS No. 109 requires
the use of the asset and liability method of accounting for
income taxes. Under this method, deferred income taxes are
recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates
applicable to future years to differences between the
financial statement carrying amounts and the tax bases of
existing assets and liabilities. Under SFAS No. 109, the
effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the
enactment date. Any deferred income tax liability (asset)
resulting from temporary differences is considered
immaterial and, as a result, no deferred tax provision has
been provided for at May 20, 1998.
Fair Value of Financial Instruments
The carrying value of financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable,
accrued expenses and other liabilities, due to retailers and
loans payable to stockholders approximate fair value due to
the immediate or short-term maturity of these financial
instruments.
</TABLE>
7
<PAGE> 25
BRAND MANUFACTURING CORP.
AND TCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Credit Risk
Financial instruments which potentially subject the Company
to concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable.
The Company places its cash and short-term cash investments
with high credit quality financial institutions which limit
the amount of credit exposure.
Concentrations of credit risk with respect to trade accounts
receivable are limited due to the Company's diverse client
base. Losses relating to the accounts receivable have
historically been minimal. As a result, the Company does not
maintain an allowance for potential losses. The Company does
not require collateral from its customers.
Use of 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
Long-lived assets, such as intangible assets and property
and equipment, are evaluated for impairment when events or
changes in circumstances indicate that the carrying amounts
of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets.
When any such impairment exists, the related assets will be
written down to their fair value. This policy is in
accordance with SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets to be Disposed Of ". No write-downs
have been necessary through May 20, 1998.
</TABLE>
New Accounting Standard
SFAS No. 130, "Report Comprehensive Income," was issued in
June 1997. Comprehensive income is defined as net income
plus certain items that are recorded directly to
shareholders equity, such as unrealized gains and losses on
available-for-sale securities. Components of the Company's
comprehensive income will be included in a financial
statement that has the same prominence as other financial
statements starting in the first quarter of fiscal 1999.
SFAS No. 130's disclosure requirements will have no impact
on the Company's financial condition or results of
operations.
8
<PAGE> 26
BRAND MANUFACTURING CORP.
AND TCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Effect of New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and display of
comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments
required to be recognized under current accounting standards
as components of comprehensive income and be reported in a
financial statement that is displayed with the same
prominence as other financial statements.
SFAS No. 130 is effective for financial statements for
periods beginning after December 15, 1997 and requires
comparative information for earlier years to be restated.
Management does not expect implementation of this standard
will have a material impact on its financial statement
disclosures.
3. INVENTORIES Inventories at May 20, 1998 consist of the following:
-----------------------------------------------------
Raw materials $ 162,890
Work-in-process 357,467
Finished goods 323,400
-----------------------------------------------------
$ 843,757
-----------------------------------------------------
4. PROPERTY AND Major classes of property and equipment at May 20, 1998
EQUIPMENT consist of the following:
-----------------------------------------------------
Machinery and equipment $ 980,800
Furniture, fixtures and equipment 129,826
Computer equipment 155,856
Leasehold improvements 117,640
-----------------------------------------------------
1,384,122
Less: Accumulated depreciation
and amortization 1,189,225
-----------------------------------------------------
Property and equipment, net $ 194,897
-----------------------------------------------------
</TABLE>
9
<PAGE> 27
BRAND MANUFACTURING CORP.
AND TCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
5. COMMON STOCK Common stock (no par value) at May 20, 1998 consists
of the following:
Brand TCE Total
-----------------------------------------------------
Shares authorized 320 200 520
Shares issued and
outstanding 100 125 225
Common stock value $7,292 $83 $7,375
-----------------------------------------------------
6. COMMITMENTS AND Lease Commitments
CONTINGENCIES The Company leases equipment and certain office,
plant and warehouse space in New York and New Jersey
under non-cancelable operating leases. Certain leases
provide for escalations based on increases in the
landlord's operating expenses and real estate taxes.
Minimum annual lease commitments under noncancelable
operating leases at May 20, 1998 are as follows:
-----------------------------------------------------
1999 $447,000
2000 426,000
2001 17,000
2002 7,000
2003 2,000
-----------------------------------------------------
$899,000
-----------------------------------------------------
Rent expense for the period ended May 20, 1998 was
approximately $283,000.
Employment Contracts
The Company is obligated under various employment
contracts with certain officers and other employees
of the Company for salary and other compensation, as
well as for providing various benefits. Future
minimum annual payments for salaries and other
compensation under these contracts are as follows:
</TABLE>
10
<PAGE> 28
BRAND MANUFACTURING CORP.
AND TCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
-----------------------------------------------------
1999 $ 465,000
2000 647,000
2001 365,000
2002 160,000
2003 150,000
Thereafter 87,000
-----------------------------------------------------
$1,874,000
-----------------------------------------------------
Union Contracts
At May 20, 1998, approximately 75% of the Company's employees
were members of Local 810, affiliated with the International
Brotherhood of Teamsters (the "Union"). All non-supervisory
plant employees who have met certain criteria are considered
members of the Union. The Company is party to a collective
bargaining agreement with the Union, which is for three years
and expires on September 30, 1999.
Company contributions to the Union funds charged to operations
were approximately $155,000 for the period ended May 20, 1998.
Under the Multiemployer Pension Plan Amendment Act of 1980, an
employer is liable, upon withdrawal from or termination of a
multiemployer plan, for its proportionate share of the plan's
unfunded vested benefits liability, if any. As of May 20, 1998,
no such liability existed. Currently, the Company has no intent
of terminating or withdrawing from the Plan.
Litigation
The Company is a party to various litigation matters arising in
the ordinary course of business. In the opinion of management,
the outcome of these litigation matters will not have a material
adverse effect on the Company's financial position, results of
operations or liquidity.
7. SUPPLEMENTAL The Company paid income taxes of approximately $600 for the
DISCLOSURES OF CASH period ended May 20, 1998. Interest paid amounted to $3,994 for
FLOW INFORMATION the period ended May 20, 1998.
The Company retired common stock in the amount of $690,024.
</TABLE>
11
<PAGE> 29
BRAND MANUFACTURING CORP.
AND TCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
8. MAJOR CUSTOMERS
AND CONCENTRATION For the period ended May 20, 1998, three customers
OF CREDIT RISK accounted for approximately 53% of net revenues. In
addition, three customers accounted for approximately
50% of accounts receivable at May 20, 1998.
9. SUBSEQUENT EVENTS (a) On May 20, 1998, U.S. Marketing Services, Inc. (the
"Parent") acquired 70% of the voting shares of the
Company in a business combination accounted for as a
purchase. The total cost to acquire the Company
exceeded the fair value of the net assets acquired by
approximately $14,300,000, which was recorded as
goodwill. It will be amortized over a 20 year period.
(b) On November 19, 1998, the Company acquired the
assets and trade name of a company that performs
services for Brand. The purchase price of $300,000 will
be paid in equal annual installments over five years.
The balance is included in intangible assets and is
being amortized over five years. In connection with the
acquisition and as part of the purchase price, the
Company entered into employment contracts with the
former owners of the acquired company (see Note 6).
(c) On January 7, 1999, the Parent entered into an
agreement and plan of merger (the "Merger") with Source
Information Management Company ("Source"), pursuant to
which the Parent and its subsidiaries were merged with
and into Source, and became a wholly-owned subsidiary
of Source. In connection with the Merger, all of the
capital stock of the Parent was exchanged for 3,400,000
shares of the capital stock of Source. On January 7,
1999, prior to entering into the Merger, the majority
stockholder of the Parent purchased the remaining
outstanding minority interest in Brand and TCE, so that
the Parent owned 100% of the stock of Brand and TCE at
the closing.
</TABLE>
12
<PAGE> 30
BRAND MANUFACTURING CORP.
AND TCE CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
13
<PAGE> 31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of Brand Manufacturing Corp.
We have audited the accompanying balance sheet of Brand Manufacturing Corp.
as of December 31, 1997 and the related statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brand Manufacturing Corp.
at December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Vienna, Virginia
April 17, 1998
F-1
<PAGE> 32
BRAND MANUFACTURING CORP.
BALANCE SHEET
<TABLE>
DECEMBER 31,
<CAPTION> 1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 864,910
Accounts receivable........................................... 2,876,911
Inventory..................................................... 665,078
Prepaid expenses and other current assets..................... 54,619
Refundable income taxes....................................... 134,069
----------
Total current assets........................................ 4,595,587
Property and equipment, net..................................... 178,434
Cash surrender value of officers' life insurance................ 155,945
Other assets.................................................... 68,434
----------
Total assets................................................ $4,998,400
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $1,502,125
Accrued expenses.............................................. 584,571
Due to affiliate.............................................. 591,135
Deferred revenue.............................................. 124,303
Income tax payable............................................ --
Distributions payable to stockholders......................... --
Payable to related party...................................... 88,900
----------
Total current liabilities................................... 2,891,034
Payable to related party, less current portion.................. --
Stockholders' equity:
Common stock, no par value; 320 shares authorized, 160 shares
issued and outstanding........................................ 111,667
Retained earnings............................................. 2,665,723
Less: treasury stock, at cost; 60 shares...................... (670,024)
----------
Total stockholders' equity.................................. 2,107,366
----------
Total liabilities and stockholders' equity.................. $4,998,400
==========
</TABLE>
See accompanying notes.
F-2
<PAGE> 33
BRAND MANUFACTURING CORP.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net revenues.................................................... $17,457,498
Cost of revenues................................................ 10,812,877
-----------
Gross profit.................................................. 6,644,621
Operating expenses:
Selling, general and administrative expenses.................. 4,979,592
-----------
Operating income................................................ 1,665,029
Other income (expense):
Other income.................................................. 69,133
Interest income............................................... 27,780
Interest (expense)............................................ (23,227)
-----------
73,686
Income before income tax provision.............................. 1,738,715
Income tax provision.......................................... 72,993
-----------
Net income...................................................... $ 1,665,722
===========
Unaudited pro forma information:
Net income before income tax provision........................ $ 1,738,715
Pro forma income tax provision................................ 683,495
-----------
Pro forma net income (see Note 2)............................. $ 1,055,220
===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 34
BRAND MANUFACTURING CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
--------------- ---------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
------ -------- ------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 160 111,667 (60) (670,024) 2,693,052 2,134,695
Net income............ -- -- -- -- 1,665,722 1,665,722
Distributions......... -- -- -- -- (1,693,051) (1,693,051)
--- -------- --- --------- ----------- -----------
Balance at December 31,
1997................... 160 111,667 (60) (670,024) 2,665,723 2,107,366
=== ======== === ========= =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 35
BRAND MANUFACTURING CORP.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
OPERATING ACTIVITIES
Net income........................................................ $ 1,665,722
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Loss on disposal of property and equipment...................... 10,340
Depreciation and amortization................................... 60,047
Cash surrender value of officers' life insurance................ (32,076)
Changes in operating assets and liabilities:
Accounts receivable........................................... (959,215)
Inventory..................................................... (231,870)
Prepaid expenses and other current assets..................... (16,547)
Refundable income taxes....................................... (134,069)
Other assets.................................................. --
Accounts payable.............................................. 720,604
Accrued expenses.............................................. (29,357)
Due to affiliate.............................................. 302,881
Deferred revenue.............................................. (888,108)
Income tax payable............................................ (46,347)
-----------
Net cash provided by (used in) operating activities............... 422,005
INVESTING ACTIVITIES
Purchases of property and equipment............................... (33,574)
Proceeds from the sale of property and equipment.................. 14,000
-----------
Net cash used in investing activities............................ (19,574)
FINANCING ACTIVITIES
Payment of bank loan.............................................. --
Payment of note payable to stockholders........................... --
Proceeds from note payable to stockholders........................ --
Loan from officers' life insurance................................ 3,895
Payment of payable to related party............................... (134,400)
Distributions to stockholders..................................... (1,693,051)
-----------
Net cash used in financing activities............................. (1,823,556)
-----------
Net increase (decrease) in cash and cash equivalents.............. (1,421,125)
Cash and cash equivalents at beginning of year................... 2,286,035
-----------
Cash and cash equivalents at end of year.......................... $ 864,910
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Non-cash transaction:
Distributions payable to stockholders............................. $ --
===========
Interest paid..................................................... $ 23,227
===========
Income taxes paid................................................. $ 220,683
===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 36
BRAND MANUFACTURING CORP.
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS AND ORGANIZATION
Brand Manufacturing Corp. ("Brand" or the "Company"), incorporated in New
York in 1956, designs and manufactures custom in-store merchandising units and
point-of-purchase displays for a wide range of retail store chains and product
manufacturers. For many of its retail store clients, Brand also involves the
retailers' suppliers and coordinates the collection of payments on these
invoices.
The Company is operated under common ownership with T.C.E. Corporation
("TCE"), an affiliated company incorporated in Delaware in 1978. TCE provides
trucking services to the Company's customers and consulting services and
warehousing space to the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company generally recognizes revenues as products are shipped to
customers, assuming that collection of the receivable is probable and the
Company has no significant remaining obligations. When the Company receives
payment in advance of shipment, the Company records the amount as deferred
revenue and recognizes the amount as revenues when the above revenue
recognition criteria have been met.
Advertising Costs
Advertising costs are expensed when incurred. Advertising costs for the
year ended December 31, 1997 were approximately $6,000.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a
maturity of three months or less to be cash equivalents.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or
market.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation and amortization is calculated on a straight-line basis
over estimated useful lives of the related assets, which range from five to
seven years. Leasehold improvements are amortized over the shorter of their
estimated useful lives or lease term, using the straight-line method.
Impairment of Long-Lived Assets
The Company reviews the recoverability of long-lived assets, whenever events
or changes in circumstances indicate that the carrying amounts may not be
recoverable, in accordance with criteria established by Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets". A loss is recognized for the difference between the carrying amount
and the estimated fair value of the asset. The Company made no adjustment to
the carrying values of the assets during the year ended December 31, 1997.
F-6
<PAGE> 37
BRAND MANUFACTURING CORP.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
At December 31, 1997, the fair value of the Company's cash and cash
equivalents, accounts receivable, and accounts payable approximates carrying
amounts due to the short-term maturities of such instruments. The carrying
amount of the payable to the related party approximates fair value since the
current effective rate reflects the market rate for debt with similar terms
and remaining maturities.
Concentration of Credit Risk and Other Risks
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company places its cash and cash equivalents with
high credit quality financial institutions and investment grade short-term
investments, which limit the amount of credit exposure.
For accounts receivable, the Company does not require collateral, however
consistent with management's expectations, losses have historically been
minimal due to the Company's diverse customer base. Therefore, the Company
does not maintain an allowance for losses.
Two customers approximated 22% of net revenues for the years ended
December 31, 1997. Additionally, three customers approximated 62% of
accounts receivable at December 31, 1997.
At December 31, 1997, the Company maintained approximately $1,008,000, in an
account with a bank that was not insured by the Federal Deposit Insurance
Corporation.
At December 31, 1997, 85% of the Company's labor force was subject to
collective bargaining agreements ("CBA"). The CBA expires in September 1999.
Income Taxes
Historically, the Company has elected, by the consent of its stockholders,
to be taxed under the provisions of Subchapter S of the Internal Revenue Code
(the "Code"). Under the provisions of the Code, the stockholders include the
Company's corporate income in their personal income tax returns. Accordingly,
the Company was not subject to federal corporate income tax during the period
for which it was an S Corporation. Certain states, in which the Company does
business, do not accept certain provisions under Subchapter S of the Code, and
as a result, income taxes in these states are a direct responsibility of the
Company.
The unaudited pro forma income tax information included in the statements of
operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and certain state income taxes for the year ended December
31, 1997.
Use of Estimates
The preparation of the 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.
F-7
<PAGE> 38
BRAND MANUFACTURING CORP.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
3. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Raw materials................................................ $364,467
Work-in-process.............................................. 252,592
Finished goods............................................... 48,019
--------
$665,078
========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Machinery and equipment...................................... $ 960,461
Furniture and equipment...................................... 283,179
Leasehold improvements....................................... 110,440
---------
1,354,080
Less accumulated depreciation and amortization............... 1,175,646
---------
$ 178,434
=========
</TABLE>
5. RELATED PARTY TRANSACTIONS
Due to Affiliate
The Company collects trucking service fees from its customers for trucking
services provided by its affiliated company, TCE. The Company remits the amounts
collected to TCE. TCE also provides consulting and warehousing services to the
Company. Expenses for these services were approximately $571,500 for the year
ended December 31, 1997. At December 31, 1997, the Company owed the affiliate
approximately $591,100. The due to affiliate account is settled periodically and
is classified as a current liability. There are no terms of settlement or
interest expense associated with the account.
Payable to Related Party
At December 31, 1997, the Company had an amount payable due to a former
stockholder of approximately $88,900. Although no formal note exists, the
Company effectively pays interest at 9% per annum and pays principal and
interest payable monthly. The balance is payable on demand.
F-8
<PAGE> 39
BRAND MANUFACTURING CORP.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases equipment and certain office, plant and warehouse space in
New York under non-cancelable operating lease agreements. Certain leases contain
escalation clauses and require the Company to pay its share of any increases in
operating expenses and real estate taxes. Rent expense was approximately
$414,000 for the year ended December 31, 1997. At December 31, 1997, future
minimum commitments under non-cancelable operating lease arrangements are as
follows:
<TABLE>
<S> <C>
1998.............................................................. $ 452,033
1999.............................................................. 434,982
2000.............................................................. 192,430
2001.............................................................. 7,261
2002.............................................................. 4,697
----------
$1,091,403
==========
</TABLE>
Employee Contracts
The Company entered into employment contracts with key employees. At
December 31, 1997, future minimum annual payments for salaries are
approximated as follows:
<TABLE>
<S> <C>
1998................................................................ $303,333
1999................................................................ 146,000
2000................................................................ 43,595
--------
$492,928
========
</TABLE>
Collective Bargaining Agreement
In October 1996, the Company entered into a three year collective bargaining
agreement with Local 810, affiliated with the International Brotherhood of
Teamsters (the "Union"). All of the Company's non-supervisory plant employees
who have met the Union's criteria are considered members of Local 810. The
collective bargaining agreement calls for the Company to provide stipulated
amounts per employee to the Union's defined benefit pension fund and health
and welfare fund (the "Plan"). Expenses related to a previously terminated
agreement and the current agreement described above were approximately
$429,000 for the year ended December 31, 1997.
Under the Multiemployer Pension Plan Amendment Act of 1980, an employer is
liable, upon withdrawal from or termination of a multiemployer plan, for its
proportionate share of the plan's unfunded vested benefits liability, if any.
As of December 31, 1997, no such liability existed. Currently, the Company has
no intent of terminating or withdrawing from the Plan.
Legal Matters
The Company is a party to various legal actions and administrative
proceedings arising in the normal course of business. In the opinion of the
Company's management, dispositions of these matters are not anticipated to
have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
F-9
<PAGE> 40
BRAND MANUFACTURING CORP.
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
7. EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT
On May 20, 1998, U.S. Marketing Services, Inc. ("U.S. Marketing") acquired
70% of the outstanding stock of the Company and its affiliate, TCE, for $15.1
million in cash in the first step of a two-step stock purchase.
On January 7, 1999, U.S. Marketing entered into an agreement and plan of
merger (the "Merger") with Source Information Management Company ("Source"),
pursuant to which U.S. Marketing and its subsidiaries were merged with and into
Source, and became a wholly-owned subsidiary of Source. In connection with the
Merger, all of the capital stock of U.S. Marketing was exchanged for 3,400,000
shares of capital stock of Source. On January 7, 1999, prior to entering into
the Merger, the majority stockholder of U.S. Marketing purchased the remaining
outstanding minority interest in Brand and TCE, so that U.S. Marketing owned
100% of the stock of Brand and TCE at the closing.
The affiliate arrangements as described in Note 5 will be amended upon
consummation of the merger discussed above so that all continuing obligations
will be similar to terms and conditions of agreements/arrangements with
unaffiliated third parties.
F-10
<PAGE> 41
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
of T.C.E. Corporation
We have audited the accompanying balance sheet of T.C.E. Corporation as of
December 31, 1997 and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of T.C.E. Corporation at
December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Vienna, Virginia
April 17, 1998
F-11
<PAGE> 42
T.C.E. CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $145,940
Due from affiliate............................................. 591,135
Prepaid expenses and other current assets...................... 33,140
--------
Total current assets......................................... 770,215
Property and equipment, net...................................... 15,671
Other assets..................................................... 5,541
--------
Total assets................................................. $791,427
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.......................... $ 91,937
Income tax payable............................................. 26,000
--------
Total current liabilities..................................... 117,937
Stockholders' equity:
Common stock, no par value; 200 shares authorized, 150 shares..
issued and outstanding......................................... 100
Retained earnings.............................................. 693,390
Less: treasury stock, at cost; 25 shares....................... (20,000)
--------
Total stockholders' equity................................... 673,490
--------
Total liabilities and stockholders' equity................... $791,427
========
</TABLE>
See accompanying notes.
F-12
<PAGE> 43
T.C.E. CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Net revenues...................................................... $2,144,067
Cost of revenues.................................................. 508,661
----------
Gross profit..................................................... 1,635,406
Operating expenses:
Selling, general and administrative expenses.................... 699,485
----------
Operating income................................................. 935,921
Interest (expense)...... --
----------
Income before income tax provision................................ 935,921
Income tax provision.............................................. 42,514
----------
Net income........................................................ $ 893,407
==========
Unaudited pro forma information:
Net income before income tax provision.......................... 935,921
Pro forma income tax provision.................................. 361,032
----------
Pro forma net income (see Note 2)............................... $ 574,889
==========
</TABLE>
See accompanying notes.
F-13
<PAGE> 44
T.C.E. CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
------------- --------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
------ ------ ------ -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 150 100 (25) (20,000) 560,384 540,484
Net income............ -- -- -- -- 893,407 893,407
Distributions......... -- -- -- -- (760,401) (760,401)
--- ---- --- -------- --------- ---------
Balance at December 31,
1997................... 150 100 (25) (20,000) 693,390 673,490
=== ==== === ======== ========= =========
</TABLE>
See accompanying notes.
F-14
<PAGE> 45
T.C.E. CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
-----------
<S> <C>
OPERATING ACTIVITIES
Net income........................................................ $ 893,407
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation..................................................... 18,672
Changes in operating assets and liabilities:
Due from affiliate............................................. (302,881)
Prepaid expenses and other current assets...................... (33,140)
Accounts payable and accrued expenses.......................... 87,572
Income tax payable.. 26,000
---------
Net cash provided by operating activities.......................... 689,630
INVESTING ACTIVITIES
Purchases of property and equipment................................ --
---------
Net cash used in
investing activities.............................................. --
FINANCING ACTIVITIES
Loan from stockholders............................................. --
Repayment of loan from stockholders................................ --
Distributions to stockholders...................................... (760,401)
---------
Net cash used in financing activities.............................. (760,401)
---------
Net increase (decrease) in cash and cash equivalents............... (70,771)
Cash and cash equivalents at beginning of period.................. 216,711
---------
Cash and cash equivalents at end of period......................... 145,940
=========
Supplemental disclosures of cash flow information:
Interest paid...................................................... $ --
=========
Income taxes paid................................................... $ 16,140
=========
</TABLE>
See accompanying notes.
F-15
<PAGE> 46
T.C.E. CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS AND ORGANIZATION
T.C.E. Corporation ("TCE" or the "Company") is a Delaware corporation
organized in 1978, under Subchapter S of the Internal Revenue Code (the
"Code"), to provide trucking and consulting services, and warehousing space to
primarily one customer, Brand Manufacturing Corp. ("Brand"), a company
affiliated by common ownership and control.
Brand designs and manufactures custom in-store merchandising units and
point-of-purchase displays for a wide range of retail store chains and product
manufacturers. For many of its retail store clients, Brand also invoices the
retailers' suppliers and coordinates the collection of payments on these
invoices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
The Company generally recognizes trucking revenues as shipments are
completed assuming that collection of the receivable is probable and the
Company has no significant remaining obligations. Consulting and warehousing
revenues are earned and recognized as services are rendered.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization is
calculated on a straight-line basis over estimated useful lives of the related
assets, which range from three to seven years.
Impairment of Long-Lived Assets
The Company reviews the recoverability of long-lived assets, whenever events
or changes in circumstances indicate that the carrying amounts may not be
recoverable, in accordance with criteria established by Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets". A loss is recognized for the difference between the carrying amount
and the estimated fair value of the asset. The Company made no adjustment to
the carrying values of the assets during the year ended December 31, 1997.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, including cash
and cash equivalents, receivables from the affiliate, and accounts payable,
approximate fair value.
Concentration of Credit Risk and Other Risks
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents
and receivables from the affiliate. The Company places its cash and cash
equivalents with high credit quality financial institutions and investment
grade short-term investments, which limit the amount of credit exposure.
For receivables from the affiliate, the Company does not require collateral,
as transactions giving rise to this account only occur with the affiliated
company, Brand. TCE has not recorded any reserves with respect to receivables
from affiliate as it has historically not experienced any credit losses.
F-16
<PAGE> 47
T.C.E. CORPORATION
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
Historically, the Company has elected, by the consent of its stockholders,
to be taxed under the provisions of Subchapter S of the Internal Revenue Code
(the "Code"). Under the provisions of the Code, the stockholders include the
Company's corporate income in their personal income tax returns. Accordingly,
the Company was not subject to corporate income tax during the period for
which it was an S Corporation. Certain states, in which the Company does
business, do not accept certain provisions under Subchapter S of the Code, and
as a result, income taxes in these states are a direct responsibility of the
Company.
The unaudited pro forma income tax information included in the statements of
operations is presented in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," as if the Company had been
subject to federal and certain state income taxes for the year ended December
31, 1997.
Use of Estimates
The preparation of the 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.
3. DUE FROM AFFILIATE
The Company provides trucking services to customers of Brand, an affiliated
company. Brand collects the trucking service fees from its customers and remits
the amounts to the Company. Additionally, the Company provides consulting and
warehousing services to Brand, for which the Company recorded revenues of
approximately $571,500 during the year ended December 31, 1997.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Trucks..................................................... $ 207,824
Furniture and equipment.................................... 4,527
---------
212,351
Less accumulated depreciation.............................. (196,680)
---------
$ 15,671
=========
</TABLE>
F-17
<PAGE> 48
T.C.E. CORPORATION
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS
The Company rents certain warehouse space in New Jersey under a month-to-
month arrangement. Rent expense was approximately $245,000 for the year ended
December 31, 1997.
6. EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT
On May 20, 1998, U.S. Marketing Services, Inc. ("U.S. Marketing") acquired
70% of the outstanding stock of the Company and its affiliate, Brand, for
$15.1 million in cash in the first step of a two-step stock purchase.
On January 7, 1999, U.S. Marketing entered into an agreement and plan of
merger (the "Merger") with Source Information Management Company ("Source"),
pursuant to which U.S. Marketing and its subsidiaries were merged with and into
Source, and became a wholly-owned subsidiary of Source. In connection with the
Merger, all of the capital stock of U.S. Marketing was exchanged for 3,400,000
shares of capital stock of Source. On January 7, 1999, prior to entering into
the Merger, the majority stockholder of U.S. Marketing purchased the remaining
outstanding minority interest in Brand and TCE, so that U.S. Marketing owned
100% of the stock of Brand and TCE at the closing.
The affiliate arrangements as described in Note 3 will be amended upon
consummation of the merger discussed above so that all continuing obligations
will be similar to terms and conditions of agreements/arrangements with
unaffiliated third parties.
F-18
<PAGE> 49
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On January 7, 1999, the Source Information Management Company, Inc. (Source)
acquired U.S. Marketing Services, Inc. (US Marketing), the holding company of
Brand Manufacturing Corporation (Brand) and T.C.E. Corporation (TCE) for
1,926,719 shares of common stock and 1,473,281 shares of preferred stock (one
for one conversion to common stock) with a market value of $26,282,000. The
market value was calculated using a price per share of $7.73 which was
approximately the average value based on the quoted market price of the security
before and after the acquisition agreement was reached and publicly announced.
The acquisition has been accounted for under the purchase method of accounting.
The Pro Forma information has been presented as if the shares of preferred stock
were converted to common stock in a one for one exchange.
On May 20, 1998, US Marketing acquired 70% of the voting shares of Brand and
TCE in a business combination accounted for as a purchase.
The Pro Forma Condensed Combined Balance Sheet was prepared as if the above
transaction occurred on October 31, 1998, combining the balance sheets of Source
at October 31, 1998 with that of US Marketing at December 31, 1998.
The Pro Forma Condensed Combined Statement of Operations give effect to the
above transaction as if it had occurred at the beginning of the earliest period
presented.
The following periods are presented:
Nine months ended October 31, 1998
- --------------------------------------------------------------------------------
Source February 1, 1998 through October 31, 1998
Combined Brand and TCE January 1, 1998 through May 20, 1998
(date of acquisition)
US Marketing March 25, 1998 (date of inception) through
September 30, 1998
- ------------------------------------------ -------------------------------------
Year Ended January 31, 1998
- --------------------------------------------------------------------------------
Source February 1, 1997 through January 31, 1998
Brand January 1, 1997 through December 31, 1997
TCE January 1, 1997 through December 31, 1997
- ------------------------------------------ -------------------------------------
The Pro Forma Condensed Combined Financial Information is unaudited and not
necessarily indicative of the consolidated results which actually would have
occurred if the above transaction would have been consummated at the beginning
of the periods presented, nor does it purport to present the future financial
position and results of operations for future periods. The Pro Forma Condensed
Consolidated Financial Information gives effect to the acquisition and is based
upon estimated allocations of the purchase price and includes all adjustments
described in the notes there to.
<PAGE> 50
UNAUDITED PRO FORMA BALANCE SHEET
AS OF OCTOBER 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Historical US Pro Forma
Source Marketing Adjustments Pro Forma
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT
Cash $ 8 $ 468 $ -- $ 476
Trade receivables, net of allowance 28,639 2,589 -- 31,228
Inventory -- 3,009 500(3) 3,509
Other current assets 146 1,022 -- 1,168
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 28,793 7,088 500 36,381
- -------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, net 1,087 182 -- 1,269
- -------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net of accumulated amortization 5,410 13,732 9,397(1)(3) 28,539
Other 168 473 (390)(2) 251
- -------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 5,578 14,205 9,007 28,790
- -------------------------------------------------------------------------------------------------------------------
$ 35,458 $ 21,475 $ 9,507 $ 66,440
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Checks issued against future deposits $ 3,779 $ -- $ -- $ 3,779
Notes payable -- 17,500 (17,500)(1) --
Accounts payable and accrued expenses 1,290 3,983 (1,500)(1) 3,773
Income taxes payable 299 -- -- 299
Due to retailers 918 1,142 -- 2,060
Deferred income taxes 867 -- -- 867
Due to stockholders/officers -- 575 -- 575
Current maturities of long-term debt 7 60 -- 67
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,160 23,260 (19,000) 11,420
LONG-TERM DEBT, less current maturities 5,042 240 -- 5,282
DEFERRED INCOME TAXES 33 -- 200(3) 233
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 12,235 23,500 (18,800) 16,935
- -------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST -- 289 (289)(1) --
- -------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Contributed capital:
Common Stock 96 5 29(4) 130
Additional paid-in capital 18,791 128 26,120(5) 45,039
- -------------------------------------------------------------------------------------------------------------------
Total contributed capital 18,887 133 26,149 45,169
Retained earnings 4,377 (2,447) 2,447(6) 4,377
- -------------------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 23,264 (2,314) 28,596 49,546
Less Treasury Stock (41) -- -- (41)
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 23,223 (2,314) 28,596 49,505
- -------------------------------------------------------------------------------------------------------------------
$ 35,458 $ 21,475 $ 9,507 $ 66,440
===================================================================================================================
</TABLE>
<PAGE> 51
NOTES TO UNAUDITED PRO FORMA BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
(1) To record additional cash contribution to additional paid in capital by
principal shareholder to reflect the following: $ 22,380
(i) repayment of the bank loan (17,500)
(ii) repayment of accrued expenses (1,500)
(iii)elimination of minority interest in Brand and TCE (289)
(iv) goodwill on the additional investment in Brand and TCE (3,091)
- -------------------------------------------------------------------------------------------------------------------
Net additional cash $ -
========
The principal shareholder is still obligated to pay any remaining
principal and interest on the bank loan at the closing date. Prior to the
merger, the principal shareholder contributed funds to repay the bank
loan and accrued expenses and to purchase the 30% minority interest.
- -------------------------------------------------------------------------------------------------------------------
(2) To record the write-off of deferred loan costs $ (390)
- -------------------------------------------------------------------------------------------------------------------
(3) To reflect the acquisition of US Marketing and the allocation of purchase
price on the basis of the fair values of the assets acquired and
liabilities assumed. The components of the purchase price and its
allocation are as follows:
Market value of Source common stock issued $ 26,282
Allocation of purchase price:
Stockholders' equity of US Marketing [(2,314) + 22,380 - 390] (19,676)
Increase in inventory to fair value (500)
Increase in deferred taxes 200
- -------------------------------------------------------------------------------------------------------------------
Cost in excess of net assets acquired $ 6,306
=========
(4) To reflect:
(i) the par value of Source common stock issued $ 34
(ii) the elimination of historical equity balance of US Marketing (5)
- -------------------------------------------------------------------------------------------------------------------
$ 29
(5) To reflect:
(i) the excess of the market value over the par value of the Source
common stock issued $ 26,248
(ii) the additional cash contribution by principal shareholder 22,380
(iii)the elimination of the additional contributions (22,380)
(iv) the elimination of the historical equity balance of US Marketing
(128)
- -------------------------------------------------------------------------------------------------------------------
$ 26,120
=========
(6) To reflect the elimination of historical equity balances of US Marketing $ 2,447
=========
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 52
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED OCTOBER 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Historical Combined US Pro Forma
Source Brand and TCE Marketing Adjustments Pro Forma
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $11,136 $6,078 $ 6,391 $ - $23,605
COST OF REVENUES 4,797 3,589 3,467 - 11,853
- --------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 6,339 2,489 2,924 - 11,752
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE 1,833 1,618 3,150 $ 120(1) 6,721
- --------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 4,506 871 (226) (120) 5,031
- --------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 22 10 25 - 57
Interest expense (265) - (566) 561(2) (270)
Other (9) 14 (33) 19(3) (9)
- --------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (252) 24 (574) 580 (222)
- --------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN INCOME - - 160 (160)(4) -
- --------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 1,778 30 511 (299)(5) 2,020
- --------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 2,476 $ 865 $(1,471) $ 919 $ 2,789
- --------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Basic $ .28 $ .23
Diluted $ .27 $ .22
- --------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Basic 8,783 12,183
Diluted 9,248 12,648
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 53
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
Historical Pro Forma
Source Brand TCE Adjustments Pro Forma
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $11,804 $17,457 $2,144 $ - $31,405
COST OF REVENUES 5,861 10,813 509 - 17,183
- ---------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 5,943 6,644 1,635 - 14,222
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE 2,351 4,979 699 (1,747)(1) 6,282
- ---------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 3,592 1,665 936 1,747 7,940
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 21 28 - - 49
Interest expense (714) (23) - - (737)
Other (79) 69 - - (10)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (772) 74 - - (698)
- ---------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE 1,231 73 43 1,695(5) 3,042
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,589 $ 1,666 $ 893 $ 52 $ 4,200
- ---------------------------------------------------------------------------------------------------------------------
DIVIDEND ON PREFERRED STOCK $ (110) $ (110)
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 1,479 $ 4,090
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Basic $ .23 $ .41
Diluted $ .22 $ .41
- ---------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Basic 6,562 9,962
Diluted 6,694 10,094
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 54
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
(Dollars in Thousands)
The Pro Forma Combined Statements of Operations reflect the adjustments for the
Acquisitions as of February 1, 1997.
<TABLE>
<CAPTION>
Nine months
ended Year ended
October 31, 1998 January 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(1) To reflect:
(i) portion of compensation expense for executive officers on the basis
of current arrangements as if they were effective February 1, 1997
$(622) $(2,911)
(ii) amortization of goodwill arising from the acquisition of US
Marketing, for the period prior to the acquisition
(estimated life 20 years) 742 1,164
- --------------------------------------------------------------------------------------------------------------------
$ 120 $ 1,747
===== =======
(2) To reflect the elimination interest expense related to US
Marketing for the period prior to the acquisition $ 561 $ -
(3) To reflect the elimination of the amortization of the deferred
loan costs $ 19 $ -
(4) To reflect the elimination of minority interests $ 160 $ -
(5) To adjust tax expense $(299) $ 1,695
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE SOURCE INFORMATION MANAGEMENT
COMPANY
Date: June 9, 1999 By: /s/ W. Brian Rodgers
--------------------------
W. Brian Rodgers
Chief Financial Officer
<PAGE> 56
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
1. Omitted - inapplicable.
2.1* Agreement and Plan of Merger, dated as of January 7, 1999, by and among
Registrant, Source-U.S. Marketing Services, Inc., U.S. Marketing and the
U.S. Marketing Shareholders, plus identification of omitted schedules and
exhibits and agreement to furnish supplementally a copy of any omitted
schedule or exhibit to the Securities and Exchange Commission upon
request.
2.2* Asset Purchase Agreement, dated as of January 7, 1999, between Registrant
and Yeager, plus identification of omitted schedules and exhibits and
agreement to furnish supplementally a copy of any omitted schedule or
exhibit to the Securities and Exchange Commission upon request.
4.* Certificate of Designation of Class A Preferred Stock of Registrant.
16. Omitted - inapplicable.
17. Omitted - inapplicable.
20. Omitted - inapplicable.
23.1** Consents of BDO Seidman, LLP.
23.2** Consent of Ernst & Young LLP.
23.3** Consent of Ernst & Young LLP.
24. Omitted - inapplicable.
27. Omitted - inapplicable.
99* Registrant's Press Release issued January 11, 1999.
* Previously filed.
** Filed herewith.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Source Information Management Company
St. Louis, Missouri
We hereby consent to inclusion in this Current Report on Form 8-K/A and to
incorporation by reference in the Registration Statement on Form S-8 (No.
333-16039) of The Source Information Management Company of our report dated
March 9, 1999, relating to the financial statements of U.S. Marketing Services,
Inc. and Subsidiaries.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
June 8, 1999
<PAGE> 2
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Source Information Management Company
St. Louis, Missouri
We hereby consent to inclusion in this Current Report on Form 8-K/A and to
incorporation by reference in the Registration Statement on Form S-8 (No.
333-16039) of The Source Information Management Company of our report dated
March 9, 1999, relating to the financial statements of Brand Manufacturing
Corp. and TCE Corporation.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
June 8, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-16039) pertaining to The Source Company Stock Award Plan and
The Source Company 1995 Incentive Stock Option Plan of our report dated April
17, 1998, with respect to the financial statements of Brand Manufacturing Corp.
included in the Form 8-K-A filed by The Source Company on June 9, 1999.
/s/ Ernst & Young LLP
Vienna, Virginia
June 8, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-16039) pertaining to The Source Company Stock Award Plan and
The Source Company 1995 Incentive Stock Option Plan of our report dated April
17, 1998, with respect to the financial statements of T.C.E. Corporation
included in the Form 8-K-A filed by The Source Company on June 9, 1999.
/s/ Ernst & Young LLP
Vienna, Virginia
June 8, 1999
