<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended July 31, 1999
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to _________
Commission file number 1-13437
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Exact Name of Small Business Issuer as Specified in Its Charter)
MISSOURI 43-1710906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11644 LILBURN PARK ROAD
ST. LOUIS, MISSOURI 63146
(Address of Principal Executive Offices)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding on September 1, 1999
Common Stock, $.01 Par Value 16,673,891
<PAGE> 2
THE SOURCE INFORMATION MANAGEMENT COMPANY
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
July 31, 1999 and January 31, 1999
Consolidated Statements of Income for the three months
and six months ended July 31, 1999 and 1998
Consolidated Statements of Comprehensive Income for the three
months and six months ended July 31, 1999 and 1998
Consolidated Statement of Stockholders'
Equity for the six months ended July 31, 1999
Consolidated Statements of Cash Flows for
the six months ended July 31, 1999 and 1998
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE> 3
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
January 31, 1999 July 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 752,695 $ 2,897,322
Trade receivables (net of allowance for doubtful accounts of $469,658 and 32,593,428 44,760,857
$987,858)
Income taxes receivable 262,877 -
Notes receivable - officers (Note 2) - 173,571
Inventories (Note 3) 1,395,699 3,425,176
Other current assets 263,692 1,017,818
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 35,268,391 52,274,744
- -----------------------------------------------------------------------------------------------------------------------------
Land 120,000 1,331,875
Manufacturing plant 680,000 5,885,508
Office equipment and furniture 5,713,459 9,449,127
- -----------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment 6,513,459 16,666,510
Less accumulated depreciation and amortization 3,179,359 4,890,280
- -----------------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 3,334,100 11,776,230
- -----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Notes receivable - officers (Note 2) - 801,429
Goodwill, net of accumulated amortization of $648,600 and $1,764,560 (Note 4) 29,608,254 44,536,888
Deferred tax asset 7,000 -
Other 789,307 2,075,533
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 30,404,561 47,413,850
- -----------------------------------------------------------------------------------------------------------------------------
$ 69,007,052 $ 111,464,824
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
January 31, 1999 July 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT
Checks issued against future deposits $ 2,876,922 $ 446,851
Accounts payable and accrued expenses 3,727,529 4,783,688
Income taxes payable - 815,740
Due to retailers 2,737,077 4,766,001
Deferred revenues 3,129,241 277,223
Deferred income taxes 718,000 683,000
Current maturities of long-term debt (Note 5) 66,057 375,472
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 13,254,826 12,147,975
- -----------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 5) 3,442,000 3,983,407
- -----------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES - 397,462
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 16,696,826 16,528,844
- -----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS
- -----------------------------------------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY
Contributed Capital:
Common Stock, $.01 par - shares authorized, 40,000,000; 11,751,425 issued,
of which 8,000 are being held as Treasury Stock at January 31,
1999 and 16,681,891 issued, of which 8,000 is being held as Treasury 117,513 166,817
Stock at July 31, 1999
Preferred Stock, $.01 par - shares authorized, 2,000,000; 1,473,281 and
-0- issued and outstanding, respectively at January 31, 1999 and July 31, 14,733 -
1999
Additional paid-in-capital 46,451,971 85,288,989
- -----------------------------------------------------------------------------------------------------------------------------
Total contributed capital 46,584,217 85,455,806
Other comprehensive income - (69,039)
Retained earnings 5,767,140 9,590,344
- -----------------------------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 52,351,357 94,977,111
Less: Treasury Stock (8,000 shares at cost) (41,131) (41,131)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 52,310,226 94,935,980
- -----------------------------------------------------------------------------------------------------------------------------
$ 69,007,052 $ 111,464,824
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 5
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
1998 1999 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service Revenues $ 3,580,588 $ 3,780,339 $ 7,175,790 $ 7,333,465
Manufacturing Revenues - 12,203,597 - 25,130,158
- -----------------------------------------------------------------------------------------------------------------------------
3,580,588 15,983,936 7,175,790 32,463,623
- -----------------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues 1,579,499 2,267,465 3,145,906 4,247,846
Cost of Goods Sold - 6,850,675 - 14,482,333
- -----------------------------------------------------------------------------------------------------------------------------
1,579,499 9,118,140 3,145,906 18,730,179
- -----------------------------------------------------------------------------------------------------------------------------
2,001,089 6,865,796 4,029,884 13,733,444
Selling, General and Administrative Expense 553,247 3,120,124 1,219,921 6,453,748
- -----------------------------------------------------------------------------------------------------------------------------
Operating Income 1,447,842 3,745,672 2,809,963 7,279,696
- -----------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 9,692 35,327 10,280 42,633
Interest expense (98,635) (401,066) (218,878) (696,135)
Other (3,131) 35,095 (5,950) 173,944
- -----------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (92,074) (330,644) (214,548) (479,558)
- -----------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 1,355,768 3,415,028 2,595,415 6,800,138
Income Tax Expense 565,000 1,485,870 1,078,000 2,976,934
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 790,768 $ 1,929,158 $ 1,517,415 $ 3,823,204
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per Share - Basic $ .09 $ .13 $ .18 $ .28
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Basic (Note 6) 8,720,594 14,644,334 8,375,035 13,622,388
- -----------------------------------------------------------------------------------------------------------------------------
Earnings per Share - Diluted $ .09 $ .12 $ .17 $ .25
- -----------------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Diluted (Note 9,238,183 16,053,969 8,865,692 15,314,751
6)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
1998 1999 1998 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 790,768 $ 1,929,158 $ 1,517,415 $ 3,823,204
Foreign Currency Translation Adjustment - (94,047) - (69,039)
- -----------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 790,768 $ 1,835,111 $ 1,517,415 $ 3,754,165
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
Other
Additional Compre- Total
Preferred Stock Common Stock Paid - in Retained hensive Treasury Stock Stockholders'
-------------------------------------- ----------------
Shares Amount Shares Amount Capital Earnings Income Shares Amount Equity
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1999 1,473,281 $ 15 11,751,425 $ 117 $ 46,452 $ 5,767 $ - 8.000 $ (41) $ 52,310
Conversion of Class A (1,473,281) (15) 1,473,281 15 -
Preferred Stock to
Common Stock
Issuance of Common 3,000,000 30 35,937 35,967
Stock
Exercise of stock 34,419 - 163 163
options
Exercise of warrants 1,867 - 7 7
Directors fees 570 - 3 3
Warrants issued for 34 34
consulting services
Acquisition of MYCO, 134,615 1 874 875
Inc. (Note 4)
Acquisition of 285,714 3 1,819 1,822
Chestnut Display
Systems, Inc. (Note 4)
Foreign currency (69) (69)
translation adjustment
Net income 3,823 3,823
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 1999 - $ - 16,681,891 $ 166 $ 85,289 $ 9,590 $ (69) 8,000 $ (41) $ 94,935
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 7
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended July 31, 1998 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,517,415 $ 3,823,204
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 252,944 1,638,007
Provision for losses on accounts receivable - (303,493)
Deferred income taxes 98,000 362,462
Other 13,000 52,206
Changes in assets and liabilities:
Increase in accounts receivable (4,432,162) (4,319,119)
Decrease in inventories - 110,910
Decrease (increase) in other assets 543,440 (678,674)
Increase (decrease) in checks issued against future
deposits 2,209,110 (2,430,071)
Increase (decrease) in accounts payable and accrued
expenses 793,832 (5,134,093)
Decrease in deferred revenues - (2,852,018)
Increase in amounts due customers 85,893 2,028,924
- -----------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES 1,081,472 (7,701,755)
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Acquisition of Periodical Concepts (2,500,000) -
Acquisition of Chestnut Display Systems, Inc., net of cash
acquired - (3,458,429)
Acquisition of MYCO, Inc., net of cash acquired - (13,536,049)
Acquisition of 132127 Canada Inc. (Promark), net of cash
acquired - (862,130)
Acquisition of Aaron Wire and Metal Products, Ltd, net of cash
acquired - (1,600,619)
Additional acquisition costs - (134,677)
Capital expenditures (325,742) (2,310,637)
Loans to officers - (975,000)
Collections on loan to officer 22,093 -
Increase in cash surrender value of life insurance (21,260) (23,083)
Other - 879
- -----------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (2,824,909) (22,899,745)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 8
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended July 31, 1998 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 8,061,800 36,137,652
Borrowings under credit facility 16,134,000 36,944,000
Principal payments on credit facility (22,399,000) (40,146,000)
Borrowings under long-term debt agreements - 15,000,000
Principal payments on long-term debt agreements (24,178) (15,010,901)
Deferred loan costs - (178,624)
Other 200 -
- -----------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 1,772,822 32,746,127
- -----------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH 29,385 2,144,627
CASH, beginning of period 31,455 752,695
- -----------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 60,840 $ 2,897,322
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 9
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
1. Basis of Presentation The consolidated
financial statements as of July 31, 1999 and
for the three and six month periods ended
July 31, 1999 and 1998, include, in the
opinion of management, all adjustments
(consisting of normal recurring adjustments
and reclassifications) necessary to present
fairly the financial position, results of
operations and cash flows at July 31, 1999
and for all periods presented.
Certain information and footnote disclosures
normally included in financial statements
prepared in accordance with generally
accepted accounting principles have been
condensed or omitted. It is suggested that
these consolidated financial statements be
read in conjunction with the consolidated
financial statements and notes thereto
incorporated by reference in the Company's
Form 10-KSB for the year ended January 31,
1999. The results of operations for the
three and six month periods ended July 31,
1999 are not necessarily indicative of the
operating results to be expected for the
full year.
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make certain estimates and assumptions that
affect the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of
financial statements and the reported
amounts of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
2. Related Party In connection with his employment with the
Company, Richard Jacobsen received
Transactions two loans from the Company in
the amounts of $600,000 ("Loan 1") and
$375,000 ("Loan 2"). Loan 1, including
interest, will be forgiven over a 5-year
term and Loan 2, including interest, will be
forgiven over a 7-year term, provided, in
each case, that Mr. Jacobsen remains an
employee of the Company. The loans bear
interest at 5% per annum.
In May 1999, we purchased our leased
facility in High Point, North Carolina for
$1.8 million. The facility was owned by a
partnership in which stockholders of the
Company were partners. The Board of
Directors appointed Timothy Braswell, an
independent director, to negotiate the
transaction on the Company's behalf and,
based on Mr. Braswell's recommendation, the
Board believes the terms of the purchase
were fair to the Company.
3 Inventories Inventories consist of the following:
</TABLE>
<TABLE>
<CAPTION>
January 31, July 31
1999 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Raw materials $ 576,101 $ 1,079,116
Work-in-process 805,932 1,580,139
Finished goods 13,666 765,921
------------------------------------------------------------------------------------
$ 1,395,699 $ 3,425,176
------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 10
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
4. Business Acquisition of Periodical Concepts
Combinations
On July 27, 1998, the Company acquired all
the assets of Periodical Concepts, a Texas
general partnership doing business as PC2,
for $2,500,000 in cash. Prior to the
acquisition, PC2 provided information and
marketing services to retail stores selling
magazines and other periodicals. The Company
intends to continue the operation of this
business and does not intend to
substantially change the nature of PC2's
operation.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeds
the fair value of the assets acquired by
approximately $2,400,000 and is being
amortized straight line over 15 years.
Acquisition of Yeager Industries, Inc.
On January 7, 1999, the Company acquired the
net assets of Yeager Industries, Inc. for
$2.3 million in cash and 164,289 shares of
the Company's Common Stock, valued at the
time of the acquisition at $1.15 million.
The purchase price could be increased by up
to $500,000 depending on Yeager's
performance over the next two years. Yeager
manufactures front-end display racks from
facilities in Philadelphia, Pennsylvania.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeds
the fair value of the assets acquired by
approximately $1,038,000 and is being
amortized straight line over 20 years.
Acquisition of U.S. Marketing Services, Inc.
On January 7, 1999 the Company acquired all
of the stock of U.S. Marketing Services,
Inc. ("U.S. Marketing") in exchange for
1,926,719 shares of the Company's Common
Stock and 1,473,281 shares of the Company's
Class A Convertible Preferred Stock, valued
at the time of the acquisition at $26.3
million in total. The Class A Convertible
Preferred Stock was converted into an equal
number of Common Shares on March 30, 1999.
U.S. Marketing's subsidiary Brand
Manufacturing Corporation ("Brand")
manufactures front-end display racks from
manufacturing facilities in Brooklyn, New
York and a warehouse and distribution
facility in New Jersey. Through its
affiliates, Brand provides trucking and
freight services and removes and disposes of
display racks no longer required by its
customers.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeded
the fair value of the assets acquired by
approximately $23,064,000 and is being
amortized straight line over 20 years.
Unaudited pro forma results of operations
for 1998 and 1999 for the Company and U.S.
Marketing are listed below (in thousands):
</TABLE>
8
<PAGE> 11
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1998 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Revenues As reported $ 11,804 $ 21,100
Pro forma 31,405 33,539
Net Income As reported 1,589 3,867
Pro forma 3,821 1,695
Earnings Per Share
Basic As reported $ .23 $ .42
Diluted As reported .22 .40
Basic Pro forma .37 .14
Diluted Pro forma .37 .13
-------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Acquisition of Chestnut Display Systems, Inc.
On February 1, 1999 the Company acquired the
net assets of Chestnut Display Systems, Inc.
and its affiliate Chestnut Display Systems
(North), Inc. for $3.6 million in cash and
285,714 shares of the Company's Common
Stock, valued at the time of acquisition at
$1.8 million. The purchase price for
Chestnut may be increased to a value
(including the amounts already paid) not to
exceed $9.5 million if Chestnut meets
certain performance goals during fiscal 2000
and 2001. Any increase in the purchase price
will be paid 50% in cash and 50% in shares
of Common Stock. The shares will be valued
using a formula contained in the acquisition
agreement, subject to a minimum value of
$5.00 per share and a maximum value of $7.00
per share. Chestnut manufactures front-end
display racks from facilities in Greenville,
South Carolina and Jacksonville, Florida.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeded
the fair value of the assets acquired by
approximately $3,496,000 and is being
amortized straight line over 20 years.
Acquisition of MYCO, Inc.
On February 26, 1999 the Company acquired
the net assets of MYCO, Inc. ("MYCO") for
$12 million in cash and 134,615 shares of
the Company's Common Stock, valued at the
time of acquisition at $875,000. The Company
also assumed MYCO's industrial revenue bond
indebtedness of $4 million and repaid MYCO's
indebtedness of $1.5 million. The purchase
price may be increased by up to an
additional 250,000 shares of Common Stock
depending on MYCO's performance in the
twelve months following the acquisition.
MYCO is a Rockford, Illinois manufacturer of
front-end display racks.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeded
the fair value of the assets acquired by
approximately $9,923,000 and is being
amortized straight line over 20 years.
Acquisition of 132127 Canada, Inc.
</TABLE>
9
<PAGE> 12
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
On March 23, 1999 the Company also purchased
the net assets of 132127 Canada, Inc., known
as ProMark, for $1.5 million Canadian.
ProMark is a Canadian corporation
headquartered in Toronto which provides
rebate and information services to retail
customers throughout Canada.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeded
the fair value of the assets acquired by
approximately $639,000 and is being
amortized straight line over 20 years.
Acquisition of Aaron Wire and Metal Products,
Ltd.
On July 1, 1999 the Company acquired all of
the stock of Aaron Wire and Metal Products,
Ltd. ("Aaron Wire") for $2.4 million
Canadian. Aaron Wire manufactures front-end
display racks from manufacturing facilities
in Vancouver, British Columbia.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeded
the fair value of the assets acquired by
approximately $1,794,000 and is being
amortized straight line over 20 years.
</TABLE>
10
<PAGE> 13
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S><C>
5. LONG-TERM DEBT Long-term debt consists of:
AND REVOLVING
CREDIT FACILITY
January 31, July 31,
1999 1999
------------------------------------------------------------------------------------
Revolving Credit Facility $ 3,202,000 $ -
Term note payable to bank - -
Industrial Revenue Bonds - 4,000,000
Unsecured note payable to former owners of
acquired Company, non-interest bearing, payable
in five equal annual installments beginning in
November 1999 300,000 300,000
Term note payable in monthly installments of
$629 through November 1999, collateralized by
an automobile
6,057 2,472
Capital leases - 56,407
------------------------------------------------------------------------------------
Total Long-term Debt 3,508,057 4,358,879
Less current maturities 66,057 375,472
------------------------------------------------------------------------------------
Long-term Debt $ 3,442,000 $ 3,983,407
------------------------------------------------------------------------------------
On March 31, 1999 the Company entered into a
new credit agreement with Wachovia Bank,
N.A. The new credit agreement enables the
Company to borrow up to $15 million under a
revolving credit facility and $15 million
under a term loan. The term loan was repaid
in July 1999 with the proceeds of the
Company's common stock offering. The
revolving credit facility has no termination
date, although, Wachovia Bank has the right
to terminate the revolving credit facility
upon not less than 13 months prior written
notice.
Borrowings under the revolving credit
facility bear interest at a rate equal to
the monthly LIBOR index rate plus a
percentage ranging from 2.0% to 3.5%
depending upon the Company's ratio of funded
debt to earnings before interest, taxes,
depreciation and amortization. The credit
facility is secured by an interest in
substantially all of the Company's assets.
Under the credit agreement, the Company will
be required to maintain certain financial
ratios. Since the end of the quarter,
Wachovia has committed to increase the
credit facility to $40 million.
In connection with the acquisition of MYCO,
Inc., the Company assumed the liabilities of
MYCO's Industrial Revenue Bonds. On January
30, 1995, the City of
</TABLE>
<PAGE> 14
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S><C>
Rockford issued $4 million of its Industrial
Project Revenue Bonds, Series 1995, and the
proceeds were deposited with the Amalgamated
Bank of Chicago, as trustee. Wachovia Bank,
N.A. has issued a rolling 13-month letter of
credit for $4.1 million to the Company. The
bonds are secured by the trustee's indenture
and the $4.1 million letter of credit. The
letter of credit is secured by substantially
all of the assets of the Company. The bonds
bear interest at a variable weekly rate
(approximately 80% of the Treasury Rate) not
to exceed 15% per annum. The bonds mature on
January 1, 2030. Fees related to the letter
of credit are 1% per annum of the
outstanding bond principal plus accrued
interest.
6. EARNINGS PER A reconciliation of the denominators of the
SHARE basic and diluted earnings per share
computations are as follows:
Three Months Ended Six Months Ended
July 31, July 31,
1998 1999 1998 1999
-------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 8,720,594 14,644,334 8,375,035 13,622,388
Effect of dilutive securities
- stock options and warrants 517,589 1,409,635 490,657 1,692,363
-------------------------------------------------------------------------------------
Weighted average number of
common shares outstanding - as
adjusted 9,238,183 16,053,969 8,865,692 15,314,751
-------------------------------------------------------------------------------------
The following options and warrants were not
included in the computation of diluted EPS
because the exercise prices were greater
than the average market price of the common
shares. All were still outstanding at July
31, 1999.
Number of Shares
Exercisable Under Expiration
Options/Warrants Exercise Price Grant Date Date
-------------------------------------------------------------------------------------
5,000 14.94 7/19/99 7/19/09
-------------------------------------------------------------------------------------
7. SUPPLEMENTAL CASH Supplemental information on interest and
FLOW INFORMATION income taxes paid is as follows:
Six Months Ended July 31, 1998 1999
------------------------------------------------------------------------------------
Interest $ 133,000 $ 702,000
Income Taxes $ 189,000 $ 1,947,000
------------------------------------------------------------------------------------
In connection with the acquisitions in
January 1999, the Company issued 2,091,008
shares of Common Stock and 1,473,281 shares
of Class A Convertible Preferred Stock which
were converted to an equal number of common
shares on March 30, 1999.
</TABLE>
12
<PAGE> 15
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S><C>
In connection with the acquisitions in
February 1999, the Company issued 420,329
shares of Common Stock.
8. SEGMENT FINANCIAL The reportable segments of the Company are
INFORMATION claims submission and other information
services and display rack manufacturing.
Segment operating results are measured based
on income before taxes.
Claims
Submission
and Other
Information Display Rack
Services Manufacturing Eliminations Total
- ------------------------------------------------------------------------------------------------------
QUARTER ENDED JULY 31, 1999
- -------------------------------
Revenues 4,457,910 12,203,597 $ (677,571) $ 15,983,936
Depreciation and amortization 210,491 653,737 864,228
-
Income before income taxes 545,891 2,869,137 3,415,028
-
Total Assets 39,573,041 71,891,783 111,464,824
-
Capital Expenditures 2,077,688 50,678 2,128,366
-
QUARTER ENDED JULY 31, 1998
- -------------------------------
Revenues 3,580,588 3,580,588
- -
Depreciation and amortization 128,533 128,533
- -
Income before income taxes 1,355,768 1,355,768
- -
Total Assets 30,294,074 30,294,074
- -
Capital Expenditures 198,236 198,236
- -
SIX MONTHS ENDED JULY 31, 1999
- -------------------------------
Revenues 8,683,520 25,130,158 (1,350,055) 32,463,623
Depreciation and amortization 402,885 1,235,122 1,638,007
-
Income before income taxes 1,648,123 5,152,015 6,800,138
-
Total Assets 39,573,041 71,891,783 111,464,824
-
Capital Expenditures 2,217,747 92,890 2,310,637
-
SIX MONTHS ENDED JULY 31, 1998
- -------------------------------
Revenues 7,175,790 - - 7,175,790
Depreciation and amortization 252,944 - - 252,944
Income before income taxes 2,595,415 - - 2,595,415
Total Assets 30,294,074 - - 30,294,074
Capital Expenditures 325,742 - - 325,742
- ------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We derive our revenues from (1) providing information and management services
for retail magazine sales to U.S. and Canadian retailers, magazine publishers,
confectioners and vendors of general merchandise sold at checkout counters and
(2) manufacturing display racks used by retailers at checkout counters.
During fiscal 1999 and the first six months of fiscal 2000, approximately 80.9%
and 73.4%, respectively, of our service revenues were derived from fees earned
in connection with the collection of incentive payments under our Claim
Submission and Advance Pay Programs. Payments collected from publishers under
the Advance Pay Program grew from 21.9% during fiscal 1998 to 30.4% during
fiscal 1999. Most incentive payment programs offer the retailer a cash rebate,
equal to a percentage of the retailer's net sales of the publisher's titles,
which is payable quarterly upon submission of a properly documented claim. Under
our Claim Submission Program, we submit claims for incentive payments on behalf
of the retailer and receive a fee based on the amounts collected. Under the
Advance Pay Program, we pay participating retailers a negotiated fixed
percentage of total quarterly incentive payments and pocket rental fees and then
collect the payments from the publishers for our own account.
Under both the Claim Submission Program and the Advance Pay Program, service
revenues are recognized at the time claims for incentive payments are
substantially completed for submission to the publishers. Our allowance for
doubtful accounts has to date been approximately 2% of accounts receivable. This
amount has been adequate to satisfy losses from uncollectible accounts
receivable. Under the Advance Pay Program, the revenues we recognize represent
the difference between the amount advanced to the retailer customer and the
amount claimed against the publisher.
PIN revenues consist of subscription fees. Subscribers to PIN pay for their
subscriptions on a quarterly basis. Subscriptions have an initial term of one
year and are automatically renewed for successive one-year terms unless earlier
terminated. PIN revenues are recognized ratably over the subscription term.
Commencing in fiscal 2000, we will begin to receive fees from each publisher
that subscribes to ICN. These fees will be recognized ratably over the annual
subscription term. We will also receive fees from publishers for advertising,
promotions and special programs on ICN.
Front-end management includes configuring and designing front-end display racks,
supervising fixture installation and collecting incentive payments from vendors
for product placement. Front-end management revenues are recognized as services
are performed. Historically, we received front-end management fees from either
retailers or manufacturers of display racks. As a result of our recent
acquisitions, we intend to provide front-end management services as a bundled
product offering with the manufacture of display racks. Consequently, a portion
of future revenue derived from front-end management services will be reflected
in manufacturing revenue.
Since January 1999, we acquired five manufacturers of front-end and
free-standing point-of-purchase display racks. Manufacturing display racks in
our own facilities allows us to be a full-service provider of management
services for the front-end of a customer's store. Beginning in fiscal 2000,
manufacturing will account for a substantial increase in revenues.
We intend to increase the operating margins in our manufacturing segment by
consolidating duplicative administrative functions, through increased purchasing
power, by using more efficient manufacturing methods in our acquired facilities
and by more efficiently utilizing plant capacities.
We generally recognize manufacturing revenues as products are shipped to
customers. When we receive payment prior to shipment, we record the amount as
deferred revenues and recognize the amount as revenues when products are
shipped. Upon request from a customer, the product can be stored for future
delivery for the convenience of the customer. In this case revenue is recognized
when the manufacturing and earnings processes are complete, which is when the
customer accepts title in writing, the product is invoiced with payment due in
the normal course of business, the delivery schedule is fixed and the products
are segregated from other goods. In our manufacturing segment, we also receive
trucking revenues for transporting racks, warehousing revenues for storing racks
and consulting revenues for providing consulting service relating to our
manufacturing. We generally recognize trucking revenues as shipments are
completed. Consulting and warehousing revenues are recognized when services are
rendered.
Cost of revenues generally includes personnel costs, including in some cases,
the cost of independent contractors. For manufacturing, cost of revenues also
includes the cost of materials and supplies directly used in the completion of
display racks. Cost of service revenues is an allocation of operating costs and
is not separately analyzed by management primarily
14
<PAGE> 17
because operating costs do not vary significantly with revenues.
Selling, general and administrative expense includes corporate overhead, project
management, management information systems, executive compensation, human
resource expenses and finance expenses.
Beginning in fiscal 2000, manufacturing will account for a substantial increase
in our cost of revenues due to both the cost of materials and supplies used in
manufacturing and substantially increased personnel costs relating to our
manufacturing facilities. Selling, general and administrative expenses also will
increase substantially due to the increased scope of our operations beginning in
fiscal 2000.
See Note 8 in the "Notes to Consolidated Financial Statements" for certain
financial information on our two business segments, which are claims submission
and other information services, and display rack manufacturing.
RECENT ACQUISITIONS
Since January 7, 1999, we acquired the following companies. Each of the
acquisitions was accounted for as a purchase.
- U.S. MARKETING SERVICES, INC. U.S. Marketing is the parent of Brand
Manufacturing Corporation, a manufacturer of front-end display racks
with manufacturing facilities in Brooklyn, New York and a warehouse and
distribution facility in New Jersey. Through its affiliates, Brand also
provides trucking and freight services and removes and disposes of
display racks no longer required by our customers. We acquired U.S.
Marketing in January 1999 for 1,926,719 shares of our common stock and
1,473,281 shares of our Class A Convertible Preferred Stock, valued at
the time of the acquisition at $26.3 million in total. The Class A
Convertible Preferred Stock was converted into an equal number of shares
of common stock on March 30, 1999.
- YEAGER INDUSTRIES, INC. Yeager manufactures front-end display racks from
facilities in Philadelphia, Pennsylvania. We purchased the assets of
Yeager and assumed its operating liabilities in January 1999 for $2.3
million in cash and 164,289 shares of our common stock, valued at the
time of the acquisition at $1.2 million. The purchase price may be
increased by up to $500,000, depending upon Yeager's performance during
fiscal 2000 and 2001.
- MYCO, INC. MYCO is a Rockford, Illinois manufacturer of front-end
display racks. We purchased the assets and assumed the operating
liabilities of MYCO in February 1999 for $12.0 million in cash and
134,615 shares of our common stock, valued at the time of the
acquisition at $875,000. We also assumed MYCO's industrial revenue bond
indebtedness of $4.0 million and repaid MYCO indebtedness of $1.5
million. The purchase price may be increased by up to an additional
250,000 shares of our common stock depending on MYCO's performance in
the twelve months following the acquisition.
- CHESTNUT DISPLAY SYSTEMS, INC. Chestnut manufactures front-end display
racks from facilities in Greenville, South Carolina and Jacksonville,
Florida. We purchased the assets and assumed the operating liabilities
of Chestnut Display Systems, Inc. and its affiliate, Chestnut Display
Systems (North), Inc. in February 1999 for $3.6 million in cash and
285,714 shares of our common stock, valued at the time of the
acquisition at $1.8 million. The purchase price for Chestnut may be
increased to a value (including the amounts already paid) not to exceed
$9.5 million if Chestnut meets certain performance goals during fiscal
2000 and 2001. Any increase in the purchase price will be paid 50% in
cash and 50% in shares of our common stock. The number of shares will be
calculated using a formula contained in the acquisition agreement,
subject to a minimum value of $5.00 per share and a maximum value of
$7.00 per share.
- PROMARK. We purchased the assets and assumed the operating liabilities
of 132127 Canada Inc., known as ProMark, in March 1999. ProMark is a
Canadian corporation headquartered in Toronto which provides rebate and
information services to retail customers throughout Canada. ProMark
strengthens our ability to obtain information about retail sales from
checkout areas in Canada. We paid a cash purchase price of Cdn$1.5
million for ProMark.
- AARON WIRE AND METAL PRODUCTS, LTD. Aaron Wire manufactures front-end
display racks from its facilities in Vancouver, British Columbia. In July
1999, we acquired the stock of Aaron Wire for approximately Cdn$2.4
million.
- HUCK STORE FIXTURE COMPANY. Huck manufactures wood store fixtures from
its facilities in Quincy, Illinois and Carson City, Nevada. In August
1999, we signed a letter of intent to purchase the assets and assume
certain liabilities of Huck.
15
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, information relating
to our operations expressed as a percentage of Total Revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
-------- --------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service Revenues 100.0% 23.7% 100.0% 22.6%
Manufacturing Revenues -.- 76.3 -.- 77.4
----- ----- ----- -----
Total Revenues 100.0 100.0 100.0 100.0
Cost of Service Revenues 44.1 14.2 43.8 13.1
Cost of Goods Sold -.- 42.9 -.- 44.6
----- ----- ----- -----
Gross Profit 55.9 42.9 56.2 42.3
Selling, General and Administrative Expense 15.5 19.5 17.0 19.9
----- ----- ----- -----
Operating Income 40.4 23.4 39.2 22.4
Interest Expense, Net (2.5) (2.3) (2.9) (2.0)
Other Income (Expense), Net -.- 0.2 (0.1) 0.5
----- ----- ----- -----
Income Before Income Taxes 37.9 21.3 36.2 20.9
----- ----- ----- -----
Net Income 22.1% 12.1% 21.1% 11.8%
===== ===== ===== =====
</TABLE>
QUARTER ENDED JULY 31, 1999 COMPARED TO QUARTER ENDED JULY 31, 1998
Service Revenues. Services, which include the Claim Submission Program, Advance
Pay Program, PIN and front-end management, accounted for approximately 23.7% and
21.8% of our revenues and operating income, respectively, for the quarter ended
July 31, 1999. Service revenues of $3.8 million increased $200,000, or 5.6%
compared to the second quarter of the prior year as a result of a decrease in
front-end management revenues offset by an increase in revenues from the Claim
Submission and Advance Pay Programs. The decrease in revenues from front-end
management resulted from our acquisitions of display rack manufacturers.
Manufacturing Revenues. On January 7, 1999, we acquired Yeager and U.S.
Marketing. On February 1, 1999, and February 28, 1999, we acquired Chestnut and
MYCO, respectively. Results of operations for all companies have been included
in our consolidated financial statements since their respective dates of
acquisition. Manufacturing display racks accounted for approximately 76.3% and
78.2% of our revenues and operating income, respectively, for the quarter ended
July 31, 1999. Manufacturing revenues were $12.2 million in the second quarter
of this year. There were no manufacturing revenues in the second quarter of
fiscal 1999.
Gross Profit. Gross profit increased to $6.9 million for the quarter ended July
31, 1999 from $2.0 million for the quarter ended July 31, 1998, an increase of
approximately $4.9 million, or 243.1%. Approximately $5.4 million of the gross
profit was due to our recently acquired manufacturing subsidiaries. Gross margin
of the service segment decreased to 49.1% for the quarter ended July 31, 1999
from 55.9% for the quarter ended July 31, 1998. The reason for the decrease was
the formation of a unified marketing and sales team that services both the
service and manufacturing segments. All of the team's costs are included as
costs of service revenues.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased to $3.1 million for the quarter ended July 31, 1999 from
$553,000 for the quarter ended July 31, 1998, an increase of $2.5 million, or
464.0%. Of the total, approximately $1.7 million was attributable to our
recently acquired manufacturing subsidiaries. The remaining $800,000 increase
was attributable to our services segment. Selling, general and administrative
expense as a percentage of revenues increased from 15.5% for the quarter ended
July 31, 1998 to 19.5% for the quarter ended July 31, 1999.
Operating Income. Operating income increased to $3.7 million for the quarter
ended July 31, 1999 from $1.4 million for the quarter ended July 31, 1998, an
increase of $2.3 million, or 158.7%. As a percentage of revenues, operating
income decreased to 23.4% for the quarter ended July 31, 1999 from 40.4% for the
quarter ended July 31, 1998. Approximately $2.9 million of operating income was
attributable to the recently acquired manufacturing subsidiaries. Approximately
$800,000 was attributable to the services segment.
16
<PAGE> 19
Interest Expense. Interest expense increased $302,000 compared to the quarter
ended July 31, 1998, principally due to the increased borrowings used to fund
our manufacturing acquisitions and the assumption of the $4 million in
industrial revenue bonds in connection with the MYCO acquisition.
Income Tax Expense. The effective income tax rates for the quarters ended July
31, 1999 and 1998 were 43.5% and 41.7%, respectively. These rates varied from
the federal statutory rate due to state income taxes and expenses not deductible
for income tax purposes. These non-deductible expenses include goodwill
amortization, meals and entertainment and officers' life insurance premiums.
SIX MONTHS ENDED JULY 31, 1999 COMPARED TO SIX MONTHS ENDED JULY 31, 1998
Service Revenues. Services accounted for approximately 22.6% and 29.8% of our
revenues and operating income, respectively, for the six months ended July 31,
1999. Service revenues of $7.3 million increased 158,000, or 2.2% compared to
the first six months of the prior year as a result of a decrease in front-end
management revenues offset by an increase in revenues from the Claim Submission
and Advance Pay Programs. The decrease in revenues from front-end management
resulted from our acquisitions of display rack manufacturers.
Manufacturing Revenues. Manufacturing display racks accounted for approximately
77.4% and 70.2% of our revenues and operating income, respectively, for the six
months ended July 31, 1999. Manufacturing revenues were $25.1 million in the
first six months of this year. There were no manufacturing revenues in the first
six months of fiscal 1999.
Gross Profit. Gross profit increased to $13.7 million for the six months ended
July 31, 1999 from $4.0 million for the six months ended July 31, 1998, an
increase of approximately $9.7 million, or 240.8%. Approximately $10.2 million
of the gross profit was due to our recently acquired manufacturing subsidiaries.
Gross margin of the service segment decreased to 51.1% for the six months ended
July 31, 1999 from 56.2% for the six months ended July 31, 1998. The reason for
the decrease was the formation of a unified marketing and sales team that
services both the service and manufacturing segments. All of the team's costs
are included as costs of service revenues.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased to $6.4 million for the six months ended July 31, 1999 from
$1.2 million for the six months ended July 31, 1998, an increase of $5.2
million, or 429.0%. Of the total, approximately $4.2 million was attributable to
our recently acquired manufacturing subsidiaries. The remaining $1.0 million
increase was attributable to our services segment. Selling, general and
administrative expense as a percentage of revenues increased from 17.0% for the
six months ended July 31, 1998 to 19.9% for the six months ended July 31, 1999.
Operating Income. Operating income increased to $7.3 million for the six months
ended July 31, 1999 from $2.8 million for the six months ended July 31, 1998, an
increase of $4.5 million, or 159.1%. As a percentage of revenues, operating
income decreased to 22.4% for the six months ended July 31, 1999 from 39.2% for
the six months ended July 31, 1998. Approximately $5.1 million of operating
income was attributable to the recently acquired manufacturing subsidiaries.
Approximately $2.2 million was attributable to the services segment.
Interest Expense. Interest expense increased $477,000 compared to the six months
ended July 31, 1998, principally due to the increased borrowings used to fund
our manufacturing acquisitions and the assumption of the $4 million in
industrial revenue bonds in connection with the MYCO acquisition.
Income Tax Expense. The effective income tax rates for the six months ended July
31, 1999 and 1998 were 43.8% and 41.5%, respectively. These rates varied from
the federal statutory rate due to state income taxes and expenses not deductible
for income tax purposes. These non-deductible expenses include goodwill
amortization, meals and entertainment and officers' life insurance premiums.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements for the service segment are for funding the
Advance Pay Program and for meeting general working capital requirements. Our
primary cash requirements for the manufacturing segment are for purchasing
materials and the cost of labor incurred in the manufacturing process.
Historically, we have financed our business activities through cash flows from
operations, short-term borrowings under available lines of credit and through
the issuance of equity securities.
17
<PAGE> 20
During fiscal 1999, 1998 and 1997, we advanced approximately $59.8 million,
$41.7 million and $16.7 million, respectively, under the Advance Pay Program.
These advances grew by 43.4% from fiscal 1998 to fiscal 1999 and from 149.7%
from fiscal 1997 to fiscal 1998. Generally, the primary source of funding the
advances is our credit facility, which is discussed below. During the quarter
ended July 31, 1999, the Program was funded primarily by proceeds from the
recently completed common stock offering. Collections under the Advance Pay
Program are used to pay down any outstanding balance under the credit facility.
Thus, the credit facility is primarily used to manage the timing of payments and
collections under the Advance Pay Program. Growth of the Advance Pay Program
will be monitored and controlled to ensure that funding will be available either
through cash provided by operations or borrowings under our credit facility.
Net cash used by operating activities was $7.7 million for the six months ended
July 31, 1999 compared to net cash provided by operating activities of $1.1
million for the six months ended July 31, 1998.
Net cash used in investing activities was $22.9 million for the six months ended
July 31, 1999 and $2.8 million for the six months ended July 31, 1998. The
increase was due primarily to the acquisitions during the six months. Net cash
provided by financing activities was $32.7 million in the six months ended July
31, 1999 and $1.8 million in the six months ended July 31, 1998. The increase
was due primarily to proceeds from the common stock offering in July.
Our service business has not required significant capital expenditures. As a
result, at July 31, 1999, we did not have any commitments for capital
expenditures. Currently, we do not anticipate any significant capital
expenditures during fiscal 2000.
At July 31, 1999, our total long-term debt obligations were approximately $4.4
million. In March 1999, we amended and restated our Credit Agreement with
Wachovia Bank, N.A. to provide for a $15.0 million term loan and a $15.0 million
revolving credit facility. Proceeds of the term loan, which were received on
March 31, 1999, were used to fund our recent acquisitions and borrowings under
the revolving credit facility were used for general corporate purposes,
including funding our Advance Pay Program. The term loan was repaid in full in
July with proceeds from the public offering. The Credit Agreement is secured by
an interest in substantially all of our assets. Since the end of the quarter,
Wachovia has committed to increase our credit facility to $40 million.
At July 31, 1999, we had no outstanding balance under the revolving credit
facility. The revolving credit facility bears interest at a variable rate based
on the London Interbank Offered Rate and carries a facility fee of 0.375% per
annum on the average daily balance of the unused portion. The revolving credit
facility has no termination date, although Wachovia Bank has the right to
terminate the facility upon not less than thirteen (13) months prior written
notice. We believe that Wachovia will not terminate this arrangement in the
foreseeable future. However, should Wachovia terminate the credit facility, we
would be required to use funds from operations, obtain other financing or issue
equity securities to repay the debt. If we were unable to obtain alternative
financing, our ability to fund the Advance Pay Program would be substantially
impaired.
Under the Credit Agreement, we are subject to various financial and operating
covenants. These include (i) requirements that we satisfy various financial
ratios, (ii) restrictions on our ability to make capital expenditures exceeding
$3.5 million in any fiscal year, and (iii) limitations on the payment of cash
dividends or other distributions on capital stock or payments in connection with
the purchase, redemption, retirement or acquisition of capital stock.
In connection with the acquisition of MYCO, Inc., the Company assumed the
liabilities of MYCO's Industrial Revenue Bonds. On January 30, 1995, the City of
Rockford issued $4 million of its Industrial Project Revenue Bonds, Series 1995,
and the proceeds were deposited with the Amalgamated Bank of Chicago, as
trustee. Wachovia has issued a rolling 13-month letter of credit for $4.1
million to us. The bonds are secured by the trustee's indenture and the $4.1
million letter of credit. The letter of credit is secured by substantially all
of our assets. The bonds bear interest at a variable weekly rate (approximately
80% of the Treasury Rate) not to exceed 15% per annum. The bonds mature on
January 1, 2030. Fees related to the letter of credit are 1% per annum of the
outstanding bond principal plus accrued interest.
In June 1999, we purchased our leased facility in High Point, North Carolina for
$1.8 million. We financed this purchase through available borrowings under our
revolving credit facility.
We believe that our cash flow from operations together with our revolving line
of credit and the proceeds from our common stock offering will be sufficient to
fund our working capital needs and capital expenditures for the foreseeable
future.
18
<PAGE> 21
NEW ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997.
Comprehensive income is defined as net income plus certain items that are
recorded directly to shareholders' equity, such as unrealized gains and losses
on available-for-sale securities. We adopted SFAS No. 130 in the first quarter
of fiscal 1999.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997, but interim reporting is not required in 1998. An operating
segment is defined under SFAS No. 131 as a component of an enterprise that
engages in business activities that generate revenue and expense for which
operating results are reviewed by the chief operating decision maker in the
determination of resource allocation and performance. See Note 8 in the "Notes
to Consolidated Financial Statements."
SOP 98-5, "Reporting on the Costs of Start-Up Activities," requires that the
costs of start-up activities, including organization costs, be expensed as
incurred. This Statement is effective for financial statements issued for fiscal
years beginning after December 15, 1998. The Company believes that the adoption
of SOP 98-5 will have no material effect on the financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company does
not expect the adoption of this statement to have a significant impact on the
results of operations, financial position or cash flows.
YEAR 2000 COMPLIANCE
Year 2000 Overview - Most of the services we provide are dependent upon computer
technology. Since early 1997, we have been analyzing and testing all of our
information technology (IT) and non-IT data systems for possible Year 2000, or
Y2K, problems and have been remediating any Y2K problems detected. As of May 31,
1999, we had analyzed five, or approximately 83%, of our six IT systems and had
tested two, or approximately 33%, of our six IT systems for Y2K compliance. We
are in the process of evaluating the analysis and testing of our non-IT systems
to determine the completion status of our non-IT Y2K compliance efforts. We
intend to complete all analysis by August 1999 and all testing and remediation
by the end of December 1999 for both our IT and non-IT systems.
Claim Submission Program. We developed our Claim Submission Program IT software
with a third party. We completed Y2K compliance analysis and testing on this
software in February 1999 and have corrected all Y2K problems detected during
that testing. In addition, we have upgraded the operating system on the hardware
platform for the Claim Submission Program software to be Y2K compliant. We
expect to conduct follow up testing and remediation, if necessary, on all Claim
Submission Program IT software by the end of October 1999. Our Claim Submission
Program also utilizes non-IT phone lines for electronic data transmission. We
have been unable to confirm Y2K compliance with the third party provider of our
phone services. In the event our telecommunications services experience
Y2K-related failures, we would employ alternative, though less efficient,
methods of data transmission, such as electronic tape transfer and hard copy
data printouts.
Advance Pay Program. The IT component of our Advance Pay Program involves
transporting data on rebate claims into a Microsoft Excel 97 software program
which reformats the data to determine the amount of advance payments due to our
retailer customers. Microsoft Excel 97 has been declared Y2K compliant by the
vendor, which is consistent with our internal testing results. There are no
non-IT functions involved in our Advance Pay Program. Because we do not
anticipate any Y2K problems with our Advance Pay Program, we have not developed
a Y2K failure contingency plan for the program.
PIN Program. The IT component of our PIN Program was developed by our internal
programming staff with Microsoft Visual Foxpro version 6.0, which has been
declared Y2K compliant by the vendor. We expect to complete testing and
remediation, if necessary, of this program by the end of October 1999. As of May
1999, we had not detected any Y2K problems that would adversely affect this
program. There are no non-IT functions upon which the PIN Program is dependent.
We have not developed a Y2K failure contingency plan for the PIN Program because
we do not believe the program will experience any Y2K-related failures.
ICN. The IT functions of our ICN website were developed by our internal
programming staff using Web Connects Software, which has been declared Y2K
compliant by the vendor. Background databases are programmed in Microsoft Visual
Foxpro
19
<PAGE> 22
version 6.0, which has also been declared Y2K compliant by the vendor.
Because the ICN system utilizes a 4-digit date field, we do not anticipate any
Y2K problems. We expect to complete Y2K testing and remediation, if necessary,
of this program by the end of October 1999. The only non-IT function of ICN
involves telecommunications. We intend to establish a contingency plan involving
other methods of data transmission for this component of ICN by December 1999.
Front-end Management Services. Our Front-end Management Services IT software was
developed by a third party software developer with MacroMedia Director software,
which has been declared Y2K compliant by the vendor. The developer also has
confirmed that our customized Front-end Management Services software package is
Y2K compliant. We expect to complete internal testing of this software by
October 1999 and believe that any problems detected will be corrected by the
developer before the end of 1999. There are no non-IT functions related to our
Front-end Management Services. Because we do not anticipate Y2K issues, we have
not developed a contingency plan for our Front-end Management Services.
Display Rack Manufacturing. Our Display Rack Manufacturing subsidiaries were
acquired within the past five months. We are in the process of collecting data
to verify Y2K compliance issues which may affect these subsidiaries. We intend
to complete our Y2K analysis and testing for both the IT and non-IT systems of
our manufacturing subsidiaries by the end of July 1999 and to then commence any
required remediation work if any problems are detected.
IT Systems - We intend to correct any Y2K deficiencies in our manufacturing
subsidiaries' IT systems prior to the end of 1999. Our preliminary analysis and
testing of our manufacturing subsidiaries' IT systems have revealed the
following:
- MYCO's primary computer system and all personal computers have been
tested and verified in writing by the software vendor to be Y2K compliant. All
of Chestnut's personal computers have passed Y2K compliance tests. We are
continuing to analyze and test computers at our other manufacturing
subsidiaries.
- Our preliminary findings indicate that, with the exception of MYCO, the
accounting software of all of our manufacturing subsidiaries is not Y2K
compliant. We intend to select and implement a uniform Y2K compliant accounting
package for all of our manufacturing subsidiaries by the end of 1999.
- The billing software for all of our manufacturing subsidiaries is not Y2K
compliant. We intend to upgrade or replace this software before the end of 1999.
- Currently, the payroll software used by Brand and MYCO is Y2K compliant.
The payroll software used by Yeager and Chestnut, however, is not Y2K compliant.
We intend to replace all non-compliant payroll software with Y2K compliant
programs by the end of 1999.
- Certain aspects of MYCO's inventory and raw materials control software
are not Y2K compliant. We intend to upgrade or replace this software by the end
of 1999.
- Brand utilizes a Novell network which is not currently Y2K compliant. We
intend to correct this problem by the end of 1999.
- Brand's cost sharing software is not Y2K compliant. Internal systems are
currently being designed to replace this system and are expected to be
implemented before the end of 1999.
Non-IT Systems - Our non-IT manufacturing systems consist principally of
software used in our manufacturing equipment and phone systems. Because our
non-IT manufacturing systems are not significantly dependent upon date sensitive
functions, we do not expect any material problems with these operations the
event they are not fully Y2K compliant. We continue to assess and test the Y2K
compliance status of our manufacturing and phone systems and intend to take
necessary steps to ensure that these systems will be substantially Y2K compliant
by the end of 1999. Our preliminary analysis and testing of our manufacturing
subsidiaries' non-IT systems have revealed the following:
- We believe the only non-IT systems used by MYCO are those pertaining to
its manufacturing operations and its phone system. Based on our analysis, there
do not appear to be any Y2K issues associated with MYCO's production process.
MYCO's phone system has been orally declared compliant by the vendor.
- The only non-IT systems in Chestnut's manufacturing operations involve a
wire bender for which we have received written confirmation of Y2K compliance
from the vendor. We are assessing the Y2K status of Chestnut's phone system.
20
<PAGE> 23
- Letters have been received from each vendor of Yeager's production
equipment stating that this equipment is Y2K compliant. We are assessing the Y2K
status of Yeager's phone system.
- We are not aware of any Y2K problems relating to Brand's non-IT
manufacturing systems. We are assessing the Y2K status of Brand's phone system.
Third Party Assessments - We have communicated orally or in writing with
approximately 90% of our magazine wholesaler, national distributor and magazine
publisher trading partners in order to assess their Y2K readiness. Based on
those communications, we believe that almost all of those with whom we have
communicated expect to be Y2K compliant before the end of 1999, and we do not
presently have reason to believe that there will be significant Y2K problems
with any of these third parties that would impair our normal operations. In
addition to our oral communications with magazine wholesalers, national
distributors and magazine publishers, we sent a letter in May 1999 to 139
magazine wholesalers to verify their Y2K compliance. We have received responses
from 13, or 9%, of those contacted. Only one respondent indicated that it is not
Y2K compliant, though it indicated that it intends to upgrade the noncompliant
software by the end of June 1999. We intend to contact all parties who have
failed to respond to our Y2K inquiries by August 1999.
We are in the process of making verbal and written Y2K inquiries of our vendors,
suppliers and customers. We expect to complete these inquiries by August 1999.
We have also communicated with our suppliers of non-IT operations and services
(such as electricity and telecommunications providers). Based on these
communications, we do not presently have reason to believe that there will be
Y2K problems involving any of these third parties that would materially impair
our operations. In the event any of our vendors or suppliers are not Y2K
compliant by the end of 1999, we intend to establish relationships with other
vendors or suppliers to replace those who are non-compliant.
Potential Y2K Risk - We believe that the most reasonably likely worst-case
scenario due to our internal and third party external systems not being Y2K
compliant would be the inability to perform the above-described services in a
most time-efficient manner and thereby meet client deadlines. We depend on data,
materials and other services from third parties in order to provide information
and manufacturing services to our clients. If these third parties have problems
supplying data, materials and other services to us, then deadlines for our
clients may not be met. If our internal systems are not Y2K compliant, data,
materials and services received from third parties cannot be processed in a
timely manner. This could also lead to missed deadlines, which could have a
negative impact on our relationships with our customers and a material and
adverse effect on our financial condition and results of operations.
Contingency Plan - Currently, we have not completed a Y2K contingency plan. A
final contingency plan will be developed upon completion of all system testing
and is expected to be completed by the end of 1999.
Y2K Expenses - As of May 1999, we had incurred expenses of less than $10,000 for
Y2K analysis, testing and remediation. We anticipate that our additional
expenses in connection with our remaining Y2K compliance efforts will not exceed
$40,000. We have not included any expenditures for Y2K compliance in our budget.
There can be no assurance that our additional expenses, in particular in
connection with our manufacturing subsidiaries, will not be significant.
21
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders in the
quarter ended July 31, 1999.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Exhibit Index.
(a) The following Current Reports on Form 8-K were filed during the quarter
ended July 31, 1999.
(i) The Company's Current Report on Form 8-K/A dated May 12,
1999, containing the combined financial statements of MYCO,
Inc. and RY, Inc., together with the related Independent
Auditors' Report, for the years ended December 31, 1998 and
1997 and certain pro forma information.
(ii) The Company's Current Report on Form 8-K/A dated June 10,
1999 containing the combined financial statements of MYCO,
Inc. and RY, Inc., together with the related Independent
Auditors' Report, for the years ended December 31, 1998 and
1997 and certain pro forma information.
(iii) The Company's Current Report on Form 8-K/A dated June 10,
containing the consolidated financial statements of U.S.
Marketing Services, Inc., together with the related Report of
Independent Public Accountants, for the period from March 25,
1998 (inception) through December 31, 1998; combined
financial statements of Brand Manufacturing Corp. ("Brand")
and TCE Corporation ("TCE"), together with the related Report
of Independent Public Accountants, for the period from
January 1, 1998 through May 20, 1998; financial statements of
Brand, together with the related Report of Independent
Auditors, for the year ended December 31, 1997; financial
statements of TCE together with the related Report of
Independent Auditors, for the year ended December 31, 1997;
pro forma financial information; unaudited pro forma combined
condensed balance sheet as of October 31, 1998, including
notes thereto; unaudited pro forma combined condensed
statement of operations for the nine months ended October 31,
1998 and for the year ended January 31, 1998, including notes
thereto; and certain pro forma information.
(iv) The Company's Current Report on Form 8-K/A dated June 25,
1999 containing the combined financial statements of MYCO,
Inc. and RY, Inc., together with the related Independent
Auditors' Report, for the years ended December 31, 1998 and
1997 and certain pro forma information.
22
<PAGE> 25
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE SOURCE INFORMATION MANAGEMENT COMPANY
Date: September 14, 1999 /S/ W. BRIAN RODGERS
-----------------------
W. Brian Rodgers
Chief Financial Officer
23
<PAGE> 26
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
27.1 Financial Data Schedule (Filed in EDGAR version only)
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet at July 31, 1999 (Unaudited) and the Statement of Income for the Six
Months Ended July 31, 1999 (Unaudited) and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 2,897,322
<SECURITIES> 0
<RECEIVABLES> 44,760,857
<ALLOWANCES> 987,858
<INVENTORY> 3,425,176
<CURRENT-ASSETS> 52,574,744
<PP&E> 16,666,510
<DEPRECIATION> 4,890,280
<TOTAL-ASSETS> 111,464,824
<CURRENT-LIABILITIES> 12,147,975
<BONDS> 0
0
0
<COMMON> 166,817
<OTHER-SE> 94,769,163
<TOTAL-LIABILITY-AND-EQUITY> 111,464,824
<SALES> 32,463,623
<TOTAL-REVENUES> 32,463,623
<CGS> 18,730,179
<TOTAL-COSTS> 6,453,748
<OTHER-EXPENSES> (173,944)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 696,135
<INCOME-PRETAX> 6,800,138
<INCOME-TAX> 2,976,934
<INCOME-CONTINUING> 3,823,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,823,204
<EPS-BASIC> .28
<EPS-DILUTED> .25
</TABLE>
