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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[x] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required). For the fiscal year ended January 31, 1999.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required). For the transition period from
_____________ to ______________.
Commission file number 1-13437
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Name of Small Business Issuer in its Charter)
MISSOURI 43-1710906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
11644 LILBURN PARK ROAD
ST. LOUIS, MISSOURI 63146
(Address of Principal Executive Offices) (Zip Code)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
Securities registered under Section 12(g) of the Act: COMMON STOCK $0.01 PAR
VALUE
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $21,099,928.
At April 16, 1999 the aggregate market value of the voting stock held by
non-affiliates of The Source Information Management Company (the "Company") was
approximately $97,700,000 based on the last sale price of the Common Stock
reported by the Nasdaq National Market on April 16, 1999. At April 16, 1999, the
Company had outstanding 13,663,735 shares of Common Stock.
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TABLE OF CONTENTS
PART I
Page
ITEM 1. Description of Business 1
ITEM 2. Description of Property
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
ITEM 7. Financial Statements
ITEM 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation
ITEM 11. Security Ownership of Certain Beneficial Owners and
Management
ITEM 12. Certain Relationships and Related Transactions
ITEM 13. Exhibits and Reports on Form 8-K
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SOME OF THE INFORMATION CONTAINED IN THIS FORM 10-KSB CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. WHEN USED IN THIS
REPORT, THE WORDS "MAY," "WILL," "BELIEVES," "ANTICIPATES," "INTENDS,"
"EXPECTS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. BECAUSE SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES, OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO: (I) OUR DEPENDENCE ON THE
MARKETING AND DISTRIBUTION STRATEGIES OF PUBLISHERS AND OTHER VENDORS; (II) OUR
ABILITY TO ACCESS CHECKOUT AREA INFORMATION; (III) RISKS ASSOCIATED WITH OUR
ADVANCE PAY PROGRAM, INCLUDING PROBLEMS COLLECTING INCENTIVE PAYMENTS FROM
PUBLISHERS; (IV) DEMAND FOR OUR DISPLAY RACKS; (V) OUR ABILITY TO SUCCESSFULLY
IMPLEMENT OUR GROWTH STRATEGY; (VI) COMPETITION; (VII) OUR ABILITY TO
EFFECTIVELY MANAGE OUR EXPANSION; AND (VIII) GENERAL ECONOMIC AND BUSINESS
CONDITIONS NATIONALLY, IN OUR MARKETS AND IN OUR INDUSTRY. INVESTORS ARE ALSO
DIRECTED TO CONSIDER OTHER RISKS AND UNCERTAINTIES DISCUSSED IN OTHER REPORTS
PREVIOUSLY AND SUBSEQUENTLY FILED BY US WITH THE SECURITIES AND EXCHANGE
COMMISSION. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE NO OBLIGATION
TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS, WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
Information stated on a pro forma basis included in this report includes the
results of operations of U. S. Marketing Services, Inc. as if the acquisition
had been consummated on February 1, 1997.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
We are a leading provider of information and management services for retail
magazine sales to U.S. and Canadian retailers and magazine publishers. We are
also a leading manufacturer of display racks used by retailers at checkout
counters. We were organized as a Missouri corporation in 1995 by the
consolidation of two companies, which had provided services to magazine
retailers for over twenty years. Since our organization, we have expanded our
services and our geographic reach through the acquisition of eleven companies,
seven of which provide services for retail magazine sales and four of which are
display rack manufacturers.
Through our information services, we provide sales figures and product placement
and other related information in various user-friendly formats, including print,
CD-ROM and over the Internet. This information helps users to formulate
marketing, distribution and advertising plans and to react more quickly to
changing market conditions. Our information services cover approximately 7,000
magazine titles and are provided to over 1,000 retail chains with approximately
100,000 stores and 500,000 checkout counters. We believe we maintain the most
comprehensive information database available for retail magazine sales and
magazine placement at checkout counters. Our extensive retailer and vendor
relationships allow us to keep this information up to date. We have expanded
upon our experience with retail magazine sales to provide similar
information and services to confectioners and vendors of general merchandise
sold at checkout counters.
Through our management services, we help retailers to increase sales and
incentive payment revenues by reconfiguring and designing front-end display
racks, supervising fixture installation, selecting products and negotiating,
billing and collecting incentive payments from vendors. Historically, as part of
our services, we arranged for the manufacture of display racks for many of our
customers. Since January 1999, we acquired four display rack manufacturers.
Manufacturing display racks in our own facilities allows us to be a full-service
provider of management services for the checkout area, or "front-end," of a
customer's store. We also can integrate the design and manufacturing processes
with our clients' merchandising strategies and better manage the timing of
display rack delivery. We believe this enhances the value of our front-end
management services for our clients. We also manufacture free-standing
"point-of-purchase" display racks for other locations in retail stores that are
designed to increase product visibility and sales.
We believe that we are well positioned to use our existing relationships with
retailers and vendors to cross-sell our information and management services and
display rack manufacturing capability.
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INDUSTRY OVERVIEW
A substantial portion of the products sold in retail stores are bought on
impulse. It is therefore important to vendors that their products be on
prominent display in those areas of a store where they will be seen by the
largest number of shoppers. There are usually two such areas in a store. One is
a dedicated area called a mainline display; the other is the checkout area which
is sometimes referred to as the front-end. The front-end is visited by virtually
every shopper in a store. Shoppers typically must wait to complete the checkout
process and are more likely to see products on display in the front-end, which
increases the likelihood that these products will be bought on impulse. Products
suited to front-end display include magazines, confections and certain general
merchandise such as razor blades, film and batteries.
Vendors of front-end products compete for favorable spaces on display racks,
which we refer to as "pockets." Some vendors make incentive payments to
retailers for favorable pocket locations. For example, magazine publishers and
confectioners often pay retailers an up-front fee to have front-end display
racks configured to provide for their desired pocket placements. Magazine
publishers and general merchandise vendors also pay periodic pocket rental fees
based on the location and size of their products' pockets. Alternatively, some
magazine publishers offer retailers cash rebates based on the sales volumes of
their magazines to encourage retailers to carry and assign favorable pocket
space to their titles. Most retailers have historically outsourced the
information gathering and administration of magazine claims collection to third
parties such as The Source. This relieves them of the substantial administrative
burden associated with that process, including monitoring thousands of titles,
each with a distinct incentive arrangement.
Retailers typically reconfigure their checkout areas every three years, at which
time they install new display racks and negotiate new agreements with magazine
publishers and confectioners. Agreements with vendors of other front-end
products are typically negotiated annually.
In the magazine industry, incentives also are provided for including magazines
on mainline displays. These incentives take the form of a rebate for each copy
sold by the retailer and are intended to encourage retailers to prominently
display titles on mainline displays. In addition to increasing revenues,
additional sales enable magazine publishers to charge higher advertising rates.
Timely delivery of information about retailer activity at the front-end,
including timing of reconfigurations, changes in display position or the
discontinuance of a vendor's products, is important to vendors of front-end
products. This allows them to take advantage of opportunities at the front-end
before final decisions are made by the retailer and to react expeditiously to
changed circumstances. Timely delivery of information about price changes,
special promotions, new product introductions and other vendor plans is
important to retailers because it allows them to react quickly to capitalize on
opportunities presented by a vendor's plans and to take advantage of changes in
the market rate for the fees and incentive payments available from magazine
publishers and other front-end product vendors.
Historically, information available to vendors about retail checkout area
activity and information available to retailers about price changes, special
promotions and other matters has been fragmented and stale. This is the result
of a number of factors, including the following:
- Many front-end products, including magazines, are sold through
distributors, resulting in very little direct contact between vendors
and retailers;
- Retailers generally have not had systems in place to efficiently collect
front-end sales and other information;
- The number of retailers who sell magazines and other front-end products
is large and they are widely dispersed geographically; and
- Until the availability of cost-effective and user-friendly data
processing applications, there was no convenient means to disseminate
this information.
We believe that there is an increasing demand on the part of front-end product
vendors for more frequent and detailed
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information on sales and other front-end activity. For example, timely
information about sales of each magazine title by store would be of particular
importance to magazine publishers, because it would assist them to increase
revenues from advertisers who want to target their advertising to a particular
market.
Our traditional source of retail magazine sales information has been magazine
distributors. They provide us with quarterly information about retail sales of
magazines on a chain-by-chain basis. Accordingly, information we provide to
magazine publishers about magazine sales by retailers is also on a quarterly,
chain-by-chain basis, rather than on a more frequent, store-by-store basis. We
intend to develop the capability to gather and provide magazine sales
information on a weekly, store-by-store basis.
Through our front-end management services we also have access to a significant
amount of information about retail checkout area activity. Our recent
acquisitions of four display rack manufacturers further increase our information
base.
The continual re-merchandising and re-modeling of retail stores drives the
demand for new display racks. Retailers request new displays to promote new
products, to upgrade the appearance of an existing store and to render the
appearance of newly opened stores consistent with the rest of the retail chain.
The continual introduction of new products and rapidly evolving packaging of
existing products also drives the need for new displays.
SERVICES
Our claims submission services for magazine retailers were established over 20
years ago. Our experience in providing these services is the foundation for our
other services. Set forth below are descriptions of our services and products in
each of our segments: claim submission and other information services, and
display rack manufacturing. See Note 16 in our "Notes to Consolidated Financial
Statements" for certain financial information of each of our segments.
Claim Submission and Other Information Services
Claim Submission Program. Through our information gathering capabilities, we
assist U.S. and Canadian retailers to accurately monitor, document, claim and
collect magazine publisher incentive and pocket rental payments. Incentive
payments consist of cash rebates offered to retailers by magazine publishers
equal to a percentage of magazine sales. Pocket rental payments are made by
magazine publishers for providing a specific pocket size and location on a
display rack. Our claim submission program relieves our retailer customers of
the substantial administrative burden of documenting their claims and we believe
increases the amount of claims they collect.
The claim submission process begins at the end of each calendar quarter. Local
distributors detail the titles and number of copies sold by our retailer clients
during that quarter. Display rack manufacturers and our retailer clients provide
us with information about magazine pocket placements. Based on this information,
we prepare claim forms and submit the documented claims to the appropriate
national distributor. After verification of the claim, the national distributor,
on behalf of the publisher, remits to us payment for the retailer. We then
record the payment and forward it to the retailer. We charge the retailer a
negotiated percentage of the amount collected.
Retailer customers who use our claim submission program include Fleming, Kroger,
Southland 7-Eleven, Target and Walgreens. Claim submission services (excluding
our Advance Pay Program) accounted for approximately 13.5% of our fiscal
1999 revenues on a pro forma basis.
Advance Pay Program. As an extension of our claim submission program, we have
established our Advance Pay Program for magazine sales. Under this program, we
pay to participating retailers a negotiated fixed percentage of the total
quarterly incentive payments and pocket rental fees otherwise due the retailer.
We generally make these payments within 90 days after the end of the quarter. We
then collect the payments for our own account. This service provides the
retailer with improved cash flow and relief from the burdensome administrative
task of processing a large number of small checks from publishers. Payments
collected from publishers under the Advance Pay Program as a percentage of all
payments collected from publishers grew from 21.9% during fiscal 1998 to 30.4%
during fiscal 1999.
Our payments to the retailer precede our collections from the publisher. In
order to make these payments to retailers,
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we use funds generated from operations and funds borrowed under our revolving
credit facility. We generally assume the risk of uncollectibility of the
incentive and pocket rental payments.
Customers of our Advance Pay Program include A&P, Ahold USA, Food Lion, Kmart
and W.H. Smith. The Advance Pay Program accounted for approximately 17.0% of our
fiscal 1999 revenues on a pro forma basis.
PIN. We market to magazine publishers our database of magazine-related industry
information that we gather through our claims submission program. This
information assists them in formulating their publishing and distribution
strategies. PIN subscribers have access to a historical database of sales
information for publications, as well as quarterly updates. PIN can generate
reports of total sales, sales by class of trade and sales by retailer. Each
report also provides other sales related information, including returns of
unsold magazines and total sales ranking. We believe that PIN is the most
extensive database available for single-copy retail magazine sales information.
Subscribers to PIN pay for their subscriptions on a quarterly basis.
Subscriptions have an initial term of one year and are automatically renewed for
successive one-year terms unless earlier terminated. At April 30, 1999, we had
17 PIN subscribers, including Globe Marketing Services, Hearst Distribution
Group Magazines, Primedia, Time Distribution Services and Warner Publisher
Services. PIN accounted for 1.5% of our fiscal 1999 revenues on a pro forma
basis.
ICN. In response to the business communications opportunities presented by the
Internet, we have developed our ICN website. The ICN website enables subscribing
magazine publishers to access information regarding pricing, new titles,
discontinued titles and display rack configuration changes on a chain-by-chain
basis. This information is important to publishers because discontinuation and
placement of their titles on the display rack can have a significant impact on
sales. We believe that, prior to ICN, publishers could not react as quickly to
these changes. Publishers also can use ICN to promote special incentives and
advertise and display special editions, new publications and upcoming covers,
all of which can increase their sales.
Retailers can use ICN to order new magazine titles and take advantage of
promotions by publishers. They also can download frequently changing price
information, including Uniform Product Codes, which change often because of
price changes and new title introductions.
As part of our increased emphasis on confections and general merchandise sold at
checkout counters, we intend to adapt ICN for confections and general
merchandise.
The ICN website is configured so that publishers cannot access the strategically
sensitive information of other publishers and retailers. Retailers and
publishers can also exchange information and conduct transactions on the
Internet site without compromising their sensitive, proprietary information. PIN
can also be accessed through ICN.
We receive annual fees from each publisher that subscribes to ICN. We also
receive fees from publishers for advertising, promotions and special programs on
ICN. Since its launch in January 1999, we have signed up over 90 retailer
subscribers, including Ames Department Stores, Eckerd, Kmart, Southland
7-Eleven, W.H. Smith and Wegman's Food Markets and 15 publishers, including
American Media, Hearst Distribution Group Magazines, Time Distribution Services,
Times Mirror and Time Warner. Because of its recent introduction, we received no
revenues from ICN in fiscal 1999.
Front-End Management. We help retailers to increase sales and incentive payment
revenues by reconfiguring and designing front-end display racks, supervising
fixture installation, selecting products and negotiating, billing and collecting
incentive payments from vendors. We also help our retailer clients to develop
specialized marketing and promotional programs, which may include, for example,
special mainline or checkout displays and cross-promotions of magazines and
products of interest to the readers of these magazines.
To further enhance our front-end management service capabilities, we recently
developed our SourcePro software. SourcePro is a three dimensional fixture
design system that analyzes the retailer's store layout, customer traffic
patterns and available front-end merchandising alternatives to develop an
appropriate checkout display configuration.
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We introduced front-end management in July 1997 with a contract to manage the
front-end of approximately 2,200 Kmart stores. The number of stores for which we
provide front-end management services has grown substantially, and involves
arrangements with many prominent retailers, including Eckerd, Fleming, Kmart,
Southland 7-Eleven, SuperValu and Wegman's Food Markets.
Front-end management services accounted for approximately 4.0% of our fiscal
1999 revenues on a pro forma basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent and Pending
Acquisitions."
Front-End and Point-of-Purchase Display Rack Manufacturing
We design, manufacture, deliver and dispose of custom front-end and point-of-
purchase displays for both retail store chains and product manufacturers,
including A&P, American Stores, Food Lion, Kmart and Winn Dixie. For many of our
retail store accounts, we also invoice vendors for rack costs and coordinate the
collection of payments on these invoices. We believe that manufacturing display
racks increases our access to information about sales of magazines and other
products from retail checkout areas, which enhances our ability to provide PIN
and ICN.
Our manufacturing process typically begins when a retail store chain contacts us
to design a display for its stores. We create a computer model of the display
based on the retailer's specifications, from which a prototype is created and
presented to the retailer for its examination. We then work together with the
retailer to finalize the design of the display and negotiate a price per
display. All of our front-end display racks are manufactured to customer
specifications.
We design, manufacture and powder-coat each pocket, shelf and other component of
a display unit separately and then assemble these components to create the
finished display. We believe that our component-oriented manufacturing process
enables us to produce our displays more quickly and efficiently and with a
higher standard of quality than if we used a unit-oriented process.
Materials used in manufacturing our racks include wire, metal tubing and
paneling. At our five manufacturing locations, we cut, shape, bend and weld
wire, tubing and metal paneling and paint and assemble the finished product. We
use a just-in-time inventory practice. This reduces our requirements to carry
inventories of raw materials, which in turn improves our cash flow.
Display rack manufacturing accounted for approximately 73.6% of our fiscal 1999
revenues on a pro forma basis.
MAJOR CUSTOMERS
For fiscal 1999, three customers accounted for approximately 38% of revenues.
One of the three customers, Food Lion, Inc., accounted for approximately 27% of
revenues. Our major customers in terms of revenues are usually retailers in the
process of reconfiguring their checkout areas. Because this process typically
occurs every three years, our major customers vary from year to year.
MARKETING AND SALES
We market our services and display racks through our own direct sales force. Our
sales group consists of four divisional vice presidents and 13 regional
managers. We have integrated our marketing efforts for our traditional
information and management services with our display rack manufacturing. We
market our services primarily through direct contact with clients and
prospective clients. We also market our services at industry trade shows and
through trade publications.
Each of our managers is assigned to a specific geographic territory and is
responsible for the preparation of quotations, program presentations and the
general development of sales, as well as maintenance of existing accounts,
within his or her territory. Our regional managers maintain frequent contact
with our clients in order to provide them with a high level of service and react
quickly to their needs.
COMPETITION
Competition among providers of many of our services, particularly the processing
of incentive payment claims, is intense. We have a substantial number of direct
competitors for our claims submission program, all of which are
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closely-held private companies. We believe there is no significant competition
for PIN and ICN. Information contained in PIN and ICN could be obtained from
other sources, although we believe this would be at greater expense to the user
and that it would take substantially more time to collect.
We compete primarily with five other manufacturers in the front-end display rack
manufacturing business. One of those competitors has substantially greater
financial resources than we do. There also are a substantial number of
competitors in the point-of-purchase display rack business, many of which are
national in scope and have a substantially larger market share, greater name
recognition in this industry segment and substantially greater financial
resources than we do. However, the total market for point-of-purchase display
racks is much larger than the market for front-end display racks and therefore
can support a larger number of manufacturers.
We believe that the principal competitive factors in the retail information
industry include access to information, technological support, accuracy, system
flexibility, financial stability, customer service and reputation. In addition
to financial stability, customer service and reputation, we believe that product
quality, timeliness of delivery and, to a lesser extent, price are competitive
factors in the display rack manufacturing business. We believe we compete
effectively with respect to each of the above factors.
INFORMATION SYSTEMS; INTELLECTUAL PROPERTY
Software used in connection with our claims submission program and in connection
with PIN and ICN, as well as our SourcePro software, was developed specifically
for our use by a combination of in-house software engineers and outside
consultants. We believe that certain elements of all three of these software
systems are proprietary to The Source. Other portions of these systems are
licensed from the third party, MJ Systems, that helped to design the system. We
also receive systems service and upgrades under the license.
We have filed provisional applications with the U.S. Patent Office for patent
protection for our ICN program and intend to seek patent protection for our
SourcePro and PIN innovations. Certain aspects of our ICN, SourcePro and PIN
innovations also have copyright protection.
EMPLOYEES
As of January 31, 1999, we employed 497 persons, of whom 489 were employed on a
full-time basis and eight were employed on a part-time basis. Of such persons,
62 were engaged in administrative activities and 82 were engaged in sales,
customer support and data processing. The remaining employees were engaged in
manufacturing activities.
Of the employees at our Brooklyn, New York facility, 175 are represented by
Local 810 of the Steel, Metal, Alloys and Hardware Fabricators of the
International Brotherhood of Teamsters under a collective bargaining agreement
expiring on September 30, 1999. Of the employees at our Philadelphia,
Pennsylvania facility, 90 are represented by Local 837 of the Teamsters Union
under a collective bargaining agreement expiring on December 31, 2000. We
consider our employee relations to be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
We conduct our business from over twenty manufacturing, data processing, office
and warehouse facilities. All of our manufacturing and warehouse facilities are
used by our manufacturing segment. Our office facilities are shared by our
manufacturing and service segments. All of our owned facilities are subject to
mortgages in favor of our lender.
<TABLE>
<CAPTION>
LOCATION DESCRIPTION SIZE SQ. FT. OWNED/LEASED
---------------- ------------------- ------------ -------------
<S> <C> <C> <C>
Jacksonville, FL Manufacturing/Office 55,000 Leased
Rockford, IL Manufacturing/Office 310,536 Owned
St. Louis, MO Office 8,050 Leased
High Point, NC Data Processing/Office 22,000 Owned
Fair Lawn, NJ Office 2,771 Leased
Brooklyn, NY Manufacturing/Office 92,000 Leased
New York, NY Office 1,900 Leased
Philadelphia, PA Manufacturing/Office 110,000 Owned
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Greenville, SC Manufacturing/Office 30,000 Leased
</TABLE>
In addition, we have warehouse facilities in Florida, New Jersey and South
Carolina and small offices in Pennsylvania, Ohio, Oklahoma, Texas and Ontario.
We believe our facilities are adequate for our current level of operations and
that all of our facilities are adequately insured.
ITEM 3. LEGAL PROCEEDINGS.
We are from time to time parties to various legal proceedings arising out of our
businesses. We believe that there are no proceedings pending or threatened
against us which, if determined adversely, would have a material adverse effect
on our business, financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the security holders during the fourth
quarter of fiscal 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
From February 12, 1996 until June 12, 1998, our Common Stock was quoted on the
Nasdaq SmallCap Market under the symbol "SORC." Beginning June 12, 1998, our
Common Stock has been quoted on the Nasdaq National Market under the symbol
"SORC." The following table sets forth, for the periods indicated, the high and
low closing bid prices for the Common Stock as reported on the Nasdaq SmallCap
Market and the Nasdaq National Market, as applicable.
<TABLE>
<CAPTION>
Fiscal 1998 High Low
- ----------- ---- ---
<S> <C> <C>
First Quarter $3.48 $2.58
Second Quarter $3.70 $1.20
Third Quarter $4.75 $3.17
Fourth Quarter $5.38 $3.56
Fiscal 1999 High Low
First Quarter $6.75 $5.13
Second Quarter $8.00 $5.75
Third Quarter $6.88 $5.00
Fourth Quarter $12.38 $5.75
</TABLE>
As of April 21, 1999, there were 95 holders of record of the Common Stock.
We have never paid dividends on our Common Stock. The Board of Directors
presently intends to retain all of its earnings, if any, for the development of
our business for the foreseeable future. The declaration and payment of cash
dividends in the future will be at the discretion of our Board of Directors and
will depend upon a number of factors, including among others, future earnings,
operations, capital requirements, the general financial condition of the Company
and such other factors that the Board of Directors may deem relevant.
SALES OF UNREGISTERED SHARES
In January 1999, we issued shares of our Common Stock and of our Series A
Convertible Preferred Stock to the former stockholders of two manufacturers of
display racks that we have recently acquired as part of the consideration for
such acquisitions. Based upon representations made by each of the stockholders,
we believe each of them is an "accredited investor" as that term is defined in
Regulation D promulgated under the Securities Act of 1933, as amended (the
"Act"). Each of the stockholders represented to us in writing that he was
acquiring the shares for investment and agreed that the shares could not be sold
or otherwise transferred unless they were first registered under the Act except
in a transaction which, in the opinion of counsel acceptable to us, is exempt
from the registration requirement. The certificates for the shares bear
appropriate restrictive legends. We believe that the issuance of these shares
was exempt from the registration requirements of the Act pursuant to Section
4(2) thereof. The shares were issued as follows:
a. 1,926,719 shares of Common Stock and 1,473,281 shares of Series A
Convertible Preferred Stock to the three stockholders of U.S. Marketing
Services, Inc. The shares of Preferred Stock have since been converted
into an equal number shares of Common Stock;
b. 164,289 shares of Common Stock to the former stockholder of Yeager
Industries, Inc.
In February 1999, we issued shares of our Common Stock to the former
stockholders of two manufacturers of display racks that we have recently
acquired as part of the consideration for such acquisitions. Based upon
representations made by each of the stockholders, we believe each of them is an
"accredited investor" as that term is defined in Regulation D promulgated under
the Act. Each of the stockholders represented to us in writing that he was
acquiring the shares for investment and agreed that the shares could not be sold
or otherwise transferred unless they were first registered under the Act except
in a transaction which, in the opinion of counsel acceptable to us, is exempt
from the registration requirement.
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The certificates for the shares bear appropriate restrictive legends. We believe
that the issuance of these shares was exempt from the registration requirements
of the Act pursuant to Section 4(2) thereof. The shares were issued as follows:
a. 134,615 shares of Common Stock to the former stockholder of MYCO, Inc.;
b. 285,714 shares of Common Stock to the five former stockholders of
Chestnut Display Systems, Inc.
In August 1998, we issued a warrant to purchase 150,000 shares of Common Stock
at $10 per share, beginning February 1, 1999, to Herbert A. Hardt. This warrant
was issued pursuant to a consulting agreement under which Mr. Hardt will provide
us with consulting services. The warrant, which was independently appraised, was
valued at $37,500. The warrant contains vesting provisions which provided that
the right to acquire shares subject to the warrant would vest 15,000 shares per
quarter during each quarter of fiscal 2000 and 22,500 shares per quarter during
each quarter of fiscal 2001. Expense will be recognized in relation to the
vesting schedule. Mr. Hardt provided us with appropriate written investment
representations and agreed that the shares could not be sold or otherwise
transferred unless they were first registered under the Act except in a
transaction which, in the opinion of counsel acceptable to us, is exempt from
the registration requirement. The warrant also provides that any shares of our
Common Stock issued upon exercise of the warrant will bear an appropriate legend
restricting transfer. We believe the issuance of the warrant was and the
issuance of Common Stock upon exercise of the warrant will be exempt from
registration requirements of the Act pursuant to Section 4(2) thereof.
In each of June 1998 and October 1997, we granted to Donald & Co. Securities,
Inc. ("Donald") a warrant to purchase 200,000 shares of our Common Stock
(400,000 shares in aggregate). The warrants were issued to Donald as
underwriting compensation in connection with our offerings of Common Stock in
June 1998 and October 1997, respectively. The exercise prices of the warrants
are $8.40 and $4.80 per share, respectively. Donald provided us with appropriate
written investment representations and agreed that neither the warrant nor the
shares underlying the warrant could be transferred unless they were first
registered under the Act except in a transaction which, in the opinion of
counsel acceptable to us, is exempt from the registration requirement. The
warrant contains an appropriate legend restricting transfer without compliance
with the Act and provides that the Common Shares underlying the warrants will
contain similar restrictions. We believe the issuances of the warrants were and
the issuances of the Common Stock upon exercise will be exempt from the
registration requirements of the Act pursuant to Section 4(2) thereof.
Between March 1996 and July 1997, we issued an aggregate of 15,600 shares of our
convertible Preferred Stock and warrants to purchase an aggregate of 14,917
shares of our Common Stock in "offshore transactions" as defined in Rule 902 of
Regulation S to two entities which are not "U.S. persons" as defined in Rule 902
of Regulation S promulgated under the Act. In July 1997, we issued warrants to
purchase an aggregate of 310,709 shares of our Common Stock to the same two
offshore entities, again in "offshore transactions" as defined in Rule 902. One
of these entities, Cameron Capital Ltd., was the beneficial owner of more than
5% of our outstanding Common Stock at the time of certain of these transactions.
Each of the purchasers gave appropriate investment representations, and the
certificates for the securities (including the warrants) bear appropriate
restrictive legends as required by Regulation S. We believe the transactions
were exempt from the registration requirements of the Act pursuant to Regulation
S promulgated thereunder.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We derive our revenues from (1) providing information and management services
for retail magazine sales to U.S. and Canadian retailers and magazine publishers
and (2) manufacturing display racks used by retailers at checkout counters. We
recently have expanded upon our experience with retail magazine sales to provide
similar information and services to confectioners and general merchandise
vendors for products sold at checkout counters.
During fiscal 1999, approximately 80.9% of our service revenues were derived
from fees earned in connection with the collection of incentive payments under
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.
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<PAGE> 12
Under both the Claim Submission Program and the Advance Pay Program, service
revenues are recognized at the time claims for incentive payments are
substantially completed for submission to the publishers. Our allowance for
doubtful accounts has to date been approximately 2% of accounts receivable. This
amount has been adequate to satisfy losses from uncollectible accounts
receivable. Under the Advance Pay Program, the revenues we recognize represent
the difference between the amount advanced to the retailer customer and the
amount claimed against the publisher.
PIN revenues consist of subscription fees. Subscribers to PIN pay for their
subscriptions on a quarterly basis. Subscriptions have an initial term of one
year and are automatically renewed for successive one-year terms unless earlier
terminated. PIN revenues are recognized ratably over the subscription term.
Commencing in fiscal 2000, we will begin to receive fees from each publisher
that subscribes to ICN. These fees will be recognized ratably over the annual
subscription term. We will also receive fees from publishers for advertising,
promotions and special programs on ICN.
Front-end management includes configuring and designing front-end display
racks, supervising fixture installation and collecting incentive payments from
vendors for product placement. Front-end management revenues are recognized as
services are performed. Historically, we received front-end management fees from
either retailers or manufacturers of display racks. As a result of our recent
acquisitions, we intend to provide front-end management services as a bundled
product offering with the manufacture of display racks. Consequently, a portion
of future revenue derived from front-end management services will be reflected
in manufacturing revenue.
Since January 1999, we acquired four manufacturers of front-end and
free-standing point-of-purchase display racks. Manufacturing display racks in
our own facilities allows us to be a full-service provider of management
services for the front-end of a customer's store. Beginning in fiscal 2000,
manufacturing will account for a substantial increase in revenues.
We intend to increase the operating margins in our manufacturing segment by
consolidating duplicative administrative functions, through increased purchasing
power, by using more efficient manufacturing methods in our acquired facilities
and by more efficiently utilizing plant capacities.
We generally recognize manufacturing revenues as products are shipped to
customers. When we receive payment prior to shipment, we record the amount as
deferred revenues and recognize the amount as revenues when products are
shipped. Upon request from a customer, the product can be stored for future
delivery for the convenience of the customer. In this case revenue is recognized
when the manufacturing and earnings processes are complete, the customer accepts
title in writing, the product is invoiced with payment due in the normal course
of business, the delivery schedule is fixed and the products are segregated from
other goods. In our manufacturing segment, we also receive trucking revenues for
transporting racks, warehousing revenues for storing racks, and consulting
revenues for providing consulting service relating to such manufacturing. We
generally recognize trucking revenues as shipments are completed. Consulting and
warehousing revenues are recognized when services are rendered.
Cost of revenues generally includes personnel costs, including in some cases the
cost of independent contractors. For manufacturing, cost of revenues also
includes the cost of materials and supplies directly used in the completion of
display racks. Cost of service revenues is an allocation of operating costs and
is not separately analyzed by management primarily because operating costs do
not vary significantly with revenues.
Selling, general and administrative expense includes corporate overhead, project
management, management information systems, executive compensation, human
resource expenses and finance expenses.
Beginning in fiscal 2000, manufacturing will account for a substantial increase
in our cost of revenues due to both the cost of materials and supplies used in
manufacturing and substantially increased personnel costs relating to our
manufacturing facilities. Selling, general and administrative expenses also will
increase substantially due to the increased scope of our operations beginning in
fiscal 2000.
RECENT AND PENDING ACQUISITIONS
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<PAGE> 13
Since January 7, 1999, we acquired the following companies. Each of the
acquisitions was accounted for as a purchase. A portion of the cash component of
the acquisition prices was funded by a temporary increase in our revolving
credit facility, which was converted into a $15.0 million term loan in March
1999.
- U.S. MARKETING SERVICES, INC. U.S. Marketing is the parent of Brand
Manufacturing Corporation, a manufacturer of front-end display racks
with manufacturing facilities in Brooklyn, New York and a warehouse and
distribution facility in New Jersey. Through its affiliates, Brand also
provides trucking and freight services and removes and disposes of
display racks no longer required by our customers. We acquired U.S.
Marketing in January 1999 for 1,926,719 shares of our common stock and
1,473,281 shares of our Class A Convertible Preferred Stock, valued at
the time of the acquisition at $26.3 million in total. The Class A
Convertible Preferred Stock was converted into an equal number of shares
of common stock on March 30, 1999.
- YEAGER INDUSTRIES, INC. Yeager manufactures front-end display racks from
facilities in Philadelphia, Pennsylvania. We purchased the assets of
Yeager and assumed its operating liabilities in January 1999 for $2.3
million in cash and 164,289 shares of our common stock, valued at the
time of the acquisition at $1.2 million. The purchase price may be
increased by up to $500,000, depending upon Yeager's performance during
fiscal 2000 and 2001.
- MYCO, INC. MYCO is a Rockford, Illinois manufacturer of front-end
display racks. We purchased the assets and assumed the operating
liabilities of MYCO in February 1999 for $12.0 million in cash and
134,615 shares of our common stock, valued at the time of the
acquisition at $875,000. We also assumed MYCO's industrial revenue bond
indebtedness of $4.0 million and repaid MYCO indebtedness of $1.5
million. The purchase price may be increased by up to an additional
250,000 shares of our common stock depending on MYCO's performance in
the twelve months following the acquisition.
- CHESTNUT DISPLAY SYSTEMS, INC. Chestnut manufactures front-end display
racks from facilities in Greenville, South Carolina and Jacksonville,
Florida. We purchased the assets and assumed the operating liabilities
of Chestnut Display Systems, Inc. and its affiliate, Chestnut Display
Systems (North), Inc. in February 1999 for $3.6 million in cash and
285,714 shares of our common stock, valued at the time of the
acquisition at $1.8 million. The purchase price for Chestnut may be
increased to a value (including the amounts already paid) not to exceed
$9.5 million if Chestnut meets certain performance goals during fiscal
2000 and 2001. Any increase in the purchase price will be paid 50% in
cash and 50% in shares of our common stock. The number of shares will be
calculated using a formula contained in the acquisition agreement,
subject to a minimum value of $5.00 per share and a maximum value of
$7.00 per share.
- PROMARK. We purchased the assets and assumed the operating liabilities
of 132127 Canada Inc., known as ProMark, in March 1999. ProMark is a
Canadian corporation headquartered in Toronto which provides rebate and
information services to retail customers throughout Canada. ProMark
strengthens our ability to obtain information about retail sales from
checkout areas in Canada. We paid a cash purchase price of Cdn$1.5
million for ProMark.
- AARON WIRE AND METAL PRODUCTS, LTD. Aaron Wire manufactures front-end
display racks from its facilities in Vancouver, British Columbia. In
March 1999, we signed a letter of intent to purchase the stock of Aaron
Wire for approximately Cdn$2.4 million.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, information relating
to our operations expressed as a percentage of Total Revenues:
<TABLE>
<CAPTION>
Fiscal Year Ended January 31,
-----------------------------------------
1999 1998
---- ----
<S> <C> <C>
Service Revenues 67.4% 100.0%
</TABLE>
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<PAGE> 14
<TABLE>
<CAPTION>
<S> <C> <C>
Manufacturing Revenues 32.6% -%
Total Revenues 100.0% 100.0%
Cost of Service Revenues 31.6% 49.7%
Cost of Goods Sold 21.8% -%
Gross Profit 46.6% 50.3%
Selling, General and Administrative Expense 14.0% 19.9%
----- -----
Operating Income 32.6% 30.4%
Interest, Net (1.4)% (5.9)%
Other Income (Expense), Net (0.2)% (0.7)%
------ ------
Income Before Income Taxes 31.0% 23.8%
----- -----
Net Income 18.3% 13.5%
===== =====
</TABLE>
SERVICE REVENUES
Services, which include the Claim Submission Program, Advance Pay Program, PIN
and front-end management, accounted for approximately 67.4% and 74.4% of our
revenues and operating income, respectively, for fiscal 1999. Because of its
recent introduction, we received no revenues from ICN in fiscal 1999.
Service revenues increased to $14.2 million in fiscal 1999 from $11.8 million in
fiscal 1998, an increase of 20.3%. Increased retailer participation in the
Advance Pay Program and the acquisition of Periodical Concepts ("PC2")
contributed to the increase. Claim Submission Program, Advance Pay Program and
PIN revenues increased approximately $1.7 million, or 16.8%, over the prior
year. Front-end management revenues increased from $1.5 million in the prior
year to $2.2 million in the current year, or 46.9%. This was due to an increase
in the number of reconfiguration programs that we undertook on behalf of our
retailer clients.
MANUFACTURING REVENUES
On January 7, 1999, we acquired Yeager and U.S. Marketing. Results of operations
for both companies have been included in our consolidated financial statements
since the date of acquisition. Manufacturing display racks accounted for
approximately 32.6% and 25.6% of our revenues and operating income,
respectively, for fiscal 1999. Manufacturing revenues were $6.9 million in
fiscal 1999. There were no manufacturing revenues in the prior fiscal year.
MYCO and Chestnut will be included in our results of operations beginning in
fiscal 2000.
GROSS PROFIT
Gross profit increased to $9.8 million in fiscal 1999 from $5.9 million in
fiscal 1998, an increase of approximately $3.9 million, or 65.4%. Approximately
$2.3 million of the increase in gross profit was due to our recently acquired
manufacturing subsidiaries. The remaining $1.6 million increase was attributable
to our service segment. Gross margin of the service segment increased slightly
to 53.2% in fiscal 1999 from 50.3% in fiscal 1998. The improved service segment
gross margin was due in large part to a 20.3% increase in service revenues
without a corresponding increase in employees.
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<PAGE> 15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased to $2.9 million in fiscal
1999 from $2.3 million in fiscal 1998, an increase of $600,000, or 25.5%. Of the
total, approximately $502,000 was attributable to the recently acquired
manufacturing subsidiaries. The remaining $97,000 increase was attributable to
the services segment. Overall, selling, general and administrative expense as a
percentage of revenues decreased from 19.9% in fiscal 1998 to 14.0% in fiscal
1999.
OPERATING INCOME
Operating income increased to $6.9 million in fiscal 1999 from $3.6 million in
fiscal 1998, an increase of $3.3 million, or 91.7%. As a percentage of revenues,
operating income increased to 31.0% in fiscal 1999 from 23.9% in fiscal 1998. Of
the $3.3 million increase, approximately $1.8 million was attributable to the
recently acquired manufacturing subsidiaries. Approximately $1.5 million was
attributable to the services segment. The significant increase in operating
income from the services segment was primarily a result of higher gross profits
and stable selling, general and administrative expenses during fiscal 1999.
INTEREST EXPENSE
Interest expense decreased $383,000, principally due to the repayment of
borrowings with cash generated by our Common Stock offerings in October 1997 and
June 1998.
INCOME TAX EXPENSE
The effective income tax rates for fiscal years 1999 and 1998 were 40.8% and
43.7%, respectively. These rates varied from the federal statutory rate due to
state income taxes and expenses not deductible for income tax purposes. These
non-deductible expenses include meals and entertainment, goodwill amortization,
and officers' life insurance premiums.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements for the service segment are for funding the
Advance Pay Program and for meeting general working capital requirements. Our
primary cash requirements for the manufacturing segment are for purchasing
materials and the cost of labor incurred in the manufacturing process.
Historically, we have financed our business activities through cash flows from
operations, short-term borrowings under available lines of credit and through
the issuance of equity securities.
During fiscal 1999 and 1998, we advanced approximately $59.8 million and $41.7
million, respectively, under the Advance Pay Program, representing a 43.4%
growth rate. The primary source of funding the advances is our credit facility,
which is discussed below. Collections under the Advance Pay Program are used to
pay down any outstanding balance under the credit facility. Thus, the credit
facility is primarily used to manage the timing of payments and collections
under the Advance Pay Program. Growth of the Advance Pay Program will be
monitored and controlled to ensure that funding will be available either through
cash provided by operations or borrowings under our credit facility.
Net cash provided by operating activities was $3.1 million for fiscal 1999
compared to net cash used by operating activities of $5.5 million for fiscal
1998. The manufacturing segment contributed $2.7 million to cash provided by
operations in fiscal 1999.
Net cash used in investing activities was $5.5 million in fiscal 1999 and
$711,000 in fiscal 1998. The increase was due primarily to the acquisitions
during fiscal 1999. Net cash provided by financing activities was $3.1 million
in fiscal 1999 and $6.0 million in fiscal 1998.
Our service business has not required significant capital expenditures. As a
result, at January 31, 1999, we did not have any commitments for capital
expenditures. Currently, we do not anticipate any significant capital
expenditures during fiscal 2000.
At January 31, 1999, we had total deferred tax assets of $255,000 and total
deferred tax liabilities of $966,000, resulting in a net deferred tax liability
of $711,000. This liability was due to the net tax effects of temporary
differences between the carrying amount of the assets and liabilities for
financial reporting purposes and the amounts used for income tax reporting. We
intend to obtain the funds necessary to satisfy this tax obligation from cash
flows from operations.
The balance outstanding under the revolving credit facility at January 31, 1999
and 1998 was approximately $3.2 million and $8.6 million, respectively. Although
the Advance Pay Program grew in both fiscal 1998 and 1999, the outstanding
balance under our revolving credit facility did not increase due to the
availability of other cash resources.
At January 31, 1999, our total long-term debt obligations were approximately
$3.5 million. In March 1999, we amended and restated our credit agreement with
Wachovia Bank, N.A. to provide for a $15.0 million term loan and a
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<PAGE> 16
$15.0 million revolving credit facility. Proceeds of the term loan, which were
received on March 31, 1999, were used to fund our recent acquisitions and
borrowings under the revolving credit facility were used for general corporate
purposes, including funding our Advance Pay Program. The credit agreement is
secured by an interest in substantially all of our assets. Principal on the term
loan is payable in twelve consecutive quarterly installments beginning on August
1, 1999, with the final payment due May 1, 2002. The first quarterly payment
amount is $900,000. Quarterly installments increase by $350,000 each August 1st.
For the term loan, the interest rate will be periodically adjusted based on
various interest rate calculation formulas that we can choose from. At April 29,
1999, the interest rate for the term loan was 7.4388%.
At April 29, 1999,we had approximately $3.9 million of availability under the
revolving credit facility. The revolving credit facility bears interest at a
variable rate based on the London Interbank Offered Rate and carries a facility
fee of 0.375% per annum on the average daily balance of the unused portion. The
revolving credit facility has no termination date, although Wachovia Bank has
the right to terminate the facility upon not less than thirteen (13) months
prior written notice. We believe that Wachovia will not terminate this
arrangement in the foreseeable future. However, should Wachovia terminate the
credit facility, we would be required to use funds from operations, obtain other
financing or issue equity securities to repay the debt. If we were unable to
obtain alternative financing, our ability to fund the Advance Pay Program would
be substantially curtailed.
Under the Credit Agreement, we are subject to various financial and operating
covenants. These include (i) requirements that we satisfy various financial
ratios, (ii) restrictions on our ability to make capital expenditures exceeding
$1.5 million in any fiscal year and (iii) limitations on the payment of cash
dividends or other distributions on capital stock or payments in connection with
the purchase, redemption, retirement or acquisition of capital stock.
In April 1999, we entered into an agreement to purchase our leased facility in
High Point, North Carolina for $1.8 million. Wachovia Bank, N.A. has committed
to provide funds for the purchase either through an increase in the existing
credit facility or a separate real estate loan.
In April 1999, we filed a registration statement with the Securities and
Exchange Commission covering 4,600,000 shares of our common stock, of which
3,000,000 shares would be sold by us and 1,000,000 shares would be sold by some
of our stockholders in an offering underwritten on a firm commitment basis. The
selling stockholders have also granted the underwriters an option to purchase up
to 600,000 additional shares to cover over-allotments. If the offering is
consummated, we intend to use the estimated $33.8 million net proceeds (after
underwriting discounts and other expenses of the offering and based on a
proposed offering price of $12.25 per share) to repay outstanding balances under
our term loan and revolving credit facility with Wachovia Bank, N.A., to
purchase the North Carolina facility (or repay funds borrowed for the purchase)
and to fund general corporate purposes, including our Advance Pay Program. The
revolving credit facility would remain in place after the offering.
We believe that our cash flow from operations together with our revolving line
of credit and the proceeds from our proposed common stock offering will be
sufficient to fund our working capital needs and capital expenditures for the
foreseeable future. However, if the proposed common stock offering is not
consummated, we may need to seek additional debt or equity financing, which may
or may not be available, to fund anticipated growth, particularly of our Advance
Pay Program.
NEW ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income," was issued in June 1997.
Comprehensive income is defined as net income plus certain items that are
recorded directly to shareholders' equity, such as unrealized gains and losses
on available-for-sale securities. The Company adopted SFAS No. 130 in the first
quarter of fiscal 1999, but had no other material comprehensive income items for
the years presented in the statements of income or accumulated as of the
balances sheet dates presented.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," is effective for financial statements for periods beginning after
December 15, 1997, but interim reporting is not required in 1998. An operating
segment is defined under SFAS No. 131 as a component of an enterprise that
engages in business activities that generate revenue and expense for which
operating results are reviewed by the chief operating decision maker in the
determination of resource allocation and performance. See Note 16.
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<PAGE> 17
SOP 98-5, "Reporting on the Costs of Start-Up Activities," requires that the
costs of start-up activities, including organization costs, be expenses as
incurred. This Statement is effective for financial statements issued for fiscal
years beginning after December 15, 1998. The Company believes that the adoption
of SOP 98-5 will have no material effect on the financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133 is effective for years beginning after June 15,
2000 and requires comparative information 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 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.
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<PAGE> 18
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 complaint.
The payroll software used by Yeager and Chestnut, however, is not Y2K compliant.
We intend to replace all non-compliant payroll software with Y2K compliant
programs by the end of 1999.
- Certain aspects of MYCO's inventory and raw materials control software
are not Y2K compliant. We intend to upgrade or replace this software by the end
of 1999.
- Brand utilizes a Novell network which is not currently Y2K compliant. We
intend to correct this problem by the end of 1999.
- Brand's cost sharing software is not Y2K compliant. Internal systems are
currently being designed to replace this system and are expected to be
implemented before the end of 1999.
Non-IT Systems - Our non-IT manufacturing systems consist principally of
software used in our manufacturing equipment and phone systems. Because our
non-IT manufacturing systems are not significantly dependent upon date sensitive
functions, we do not expect any material problems with these operations the
event they are not fully Y2K compliant. We continue to assess and test the Y2K
compliance status of our manufacturing and phone systems and intend to take
necessary steps to ensure that these systems will be substantially Y2K compliant
by the end of 1999. Our preliminary analysis and testing of our manufacturing
subsidiaries' non-IT systems have revealed the following:
- We believe the only non-IT systems used by MYCO are those pertaining to
its manufacturing operations and its phone system. Based on our analysis, there
do not appear to be any Y2K issues associated with MYCO's production process.
MYCO's phone system has been orally declared compliant by the vendor.
- The only non-IT systems in Chestnut's manufacturing operations involve a
wire bender for which we have received written confirmation of Y2K compliance
from the vendor. We are assessing the Y2K status of Chestnut's phone system.
- Letters have been received from each vendor of Yeager's production
equipment stating that this equipment is Y2K compliant. We are assessing the Y2K
status of Yeager's phone system.
- We are not aware of any Y2K problems relating to Brand's non-IT
manufacturing systems. We are assessing the Y2K status of Brand's phone system.
Third Party Assessments - We have communicated orally or in writing with
approximately 90% of our magazine wholesaler, national distributor and magazine
publisher trading partners in order to assess their Y2K readiness. Based on
those communications, we believe that almost all of those with whom we have
communicated expect to be Y2K compliant before the end of 1999, and we do not
presently have reason to believe that there will be significant Y2K problems
with any of these third parties that would impair our normal operations. In
addition to our oral communications with magazine wholesalers, national
distributors and magazine publishers, we sent a letter in May 1999 to 139
magazine wholesalers to verify their Y2K compliance. We have received responses
from 13, or 9%, of those contacted. Only one respondent indicated that it is not
Y2K compliant, though it indicated that it intends to upgrade the noncompliant
software by the end of June 1999. We intend to contact all parties who have
failed to respond to our Y2K inquiries by August 1999.
We are in the process of making verbal and written Y2K inquiries of our
vendors, suppliers and customers. We expect to complete these inquiries by
August 1999. We have also communicated with our suppliers of non-IT operations
and services (such as electricity and telecommunications providers). Based on
these communications, we do not presently have reason to believe that there will
be Y2K problems involving any of these third parties that would materially
impair our operations. In the event any of our vendors or suppliers are not Y2K
compliant by the end of 1999, we intend to establish relationships with other
vendors or suppliers to replace those who are non-compliant.
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.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS.
The consolidated financial statements of the Company are included herein as a
separate section of this statement which begins on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
16
<PAGE> 19
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth certain information concerning the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Position
S. Leslie Flegel 61 Director, Chairman and Chief Executive Officer
Richard A. Jacobsen 43 Director, Vice-Chairman and Chief Operating Officer
William H. Lee 48 Director, Chairman of the Executive Committee and
Chief Administrative Officer
James R. Gillis 46 President
Dwight L. DeGolia 54 Executive Vice President, Special Projects
W. Brian Rodgers 33 Secretary and Chief Financial Officer
Jason S. Flegel 33 Executive Vice President, Information Services
Stephen E. Borjes 48 President - Display Group
Robert O. Aders 71 Director
Timothy A. Braswell 70 Director
Harry L. "Terry" Franc, III 63 Director
Aron Katzman 61 Director
Randall S. Minix 49 Director
</TABLE>
The Board consists of eight members, each of whom serves in that capacity for a
three year term or until a successor has been elected and qualified, subject to
earlier resignation, removal or death. The number of directors comprising the
Board may be increased or decreased by resolution adopted by the affirmative
vote of a majority of the Board. Our Articles of Incorporation and By-Laws
provide for three classes of directorships serving staggered three year terms
such that one class of the directors is elected at each annual meeting of
stockholders. The terms of Messrs. Katzman and Minix will continue until the
1999 annual meeting of stockholders, the terms of Messrs. Braswell, Franc and
Jacobsen will continue until the 2000 annual meeting of stockholders and the
terms of Messrs. Aders, Flegel and Lee will continue until the 2001 annual
meeting of stockholders.
Each of the executive officers is a full-time employee of The Source.
Non-employee directors of The Source devote such time to the affairs of The
Source as is necessary and appropriate. Set forth below are descriptions of the
backgrounds of the executive officers and Directors of The Source:
S. Leslie Flegel has been the Chairman of the Board of Directors and Chief
Executive Officer of The Source since its inception in March 1995. For more than
14 years prior thereto, Mr. Flegel was the principal owner and Chief Executive
Officer of Display Information Systems Company, a predecessor of The Source. S.
Leslie Flegel is the father of Jason S. Flegel, The Source's Executive Vice
President, Information Services.
17
<PAGE> 20
Richard A. Jacobsen was elected a Director in March 1999 and became Vice
Chairman and Chief Operating Officer in April 1999. Prior thereto, he was
President of Time Distribution Services from 1995 until April 1999; he served
Time Distribution Services in various executive capacities since 1981. He is a
member of the Board of Directors of the International Periodical Distributors
Association, Chairman of the Magazine Publishers Association Retail Advisory
Council and a member of the American Magazine Conference Planning Committee.
William H. Lee has been a director of The Source since its inception in March
1995 and has been Chief Administrative Officer since March 1999. Prior thereto,
Mr. Lee was President and Chief Operating Officer since The Source's inception.
For approximately 14 years prior thereto, Mr. Lee was the principal owner and
Chief Executive Officer of Periodical Marketing and Management, Inc., a
predecessor of The Source.
James R. Gillis has served as President of The Source since December 1998. Prior
thereto, he served as the President of Brand Manufacturing Corporation from
September 1995. Prior to joining Brand, Mr. Gillis was a partner in the
Aders-Wilcox-Gillis Group, which advised supplier companies on industry
retailers worldwide. Mr. Gillis is a member of the Board of Directors of
Broadband Sports, Inc.
Dwight L. DeGolia has served as Executive Vice President of The Source since its
inception in May 1995. For more than ten years prior thereto, Mr. DeGolia served
as Executive Vice President of Sales and Marketing for Display Information
Systems Company. From 1986 to 1993, Mr. DeGolia also served as a director of
Advanced Marketing Services, a leading supplier of books to wholesale clubs.
W. Brian Rodgers has served as Secretary and Chief Financial Officer since
October 1996. Prior to joining The Source, Mr. Rodgers practiced for seven years
as a Certified Public Accountant with BDO Seidman, LLP.
Jason S. Flegel has served as Executive Vice President, Information Services
since March 1999. Prior thereto, he served as Senior Vice President of RDA
Operations since June 1996, and since The Source inception in March 1995, he
served as Vice President -- Western Region. For more than two years prior
thereto, Mr. Flegel was an owner and the Chief Financial Officer of Display
Information Systems Company. Jason S. Flegel is the son of S. Leslie Flegel.
Stephen E. Borjes has served as President - Display Group since September 1997.
For more than 20 years, Mr. Borjes held several positions with Dixie News Co.
("Dixie News") and the News Group, which purchased Dixie News in 1994. His
latest position at the News Group was Vice President of Operations for the
distribution centers in Charlotte and Winston-Salem, North Carolina, and
Johnston City, Tennessee.
Robert O. Aders was elected a director in March 1999. He is Chairman and Chief
Executive Officer of the Advisory Board, Inc. (an international consulting
organization) and a member of the Board of Directors of Food Marketing
Institute, where he served from its founding in 1976 until his retirement in
1993. He is also counsel to Collier, Shannon, Rill & Scott (a Washington, D.C.
law firm). Mr. Aders was the Acting Secretary of Labor in the Ford
administration, is a former advisor to the White House Office of Emergency
Preparedness and has served on the U.S. Wage and Price Commission and as a Vice
Chairman of the National Business Council for Consumer Affairs. From 1970 to
1974, Mr. Aders was Chairman of the Board of the Kroger Company, where he served
in various executive positions beginning in 1957. He is currently a trustee of
the National Urban League. He also is a director of Association International
Distribution Alimentares (Belgium), the Association of Latin American
Supermarkets, a Fellow of the Institute of Grocery Distribution (U.K.) and a
member of the International Self Service Organization (Germany). In addition, he
is a director of Checkpoint Systems, Inc., a company listed on the New York
Stock Exchange, Coinstar, a company listed on Nasdaq and Telepanel, a company
listed on Nasdaq.
Timothy A. Braswell has been a director of The Source since it commenced
operations in May 1995. He established Braswell Investment Company, a consultant
and broker of wholesale magazine businesses in 1994 and is its owner. Prior to
that time, Mr. Braswell was the principal owner and chief executive officer of
City News Co. and Dixie News, each of which is a wholesale periodical company.
Harry L. "Terry" Franc, III, has been a director of The Source since it
commenced operations in May 1995. Mr. Franc is one of the founders of Bridge
Information Systems, Inc. ("BIS"), a global provider of information services to
the securities industry and of BIS's subsidiary, Bridge Trading Company ("BTC"),
a registered broker-dealer and member of the New York Stock Exchange. Mr. Franc
has been Executive Vice President of BTC for more than 20 years and for more
than 20 years
18
<PAGE> 21
prior to 1995, served as a director and an Executive Vice President of BIS. Mr.
Franc is a member of the National Organization of Investment Professionals and a
director of P.J. Holdings, LLC.
Aron Katzman has served as a director of The Source since it commenced
operations in May 1995. Until its sale in May 1994, Mr. Katzman served as the
Chairman and Chief Executive Officer of Roman Company, a manufacturer and
distributor of fashion custom jewelry. Mr. Katzman is a member of the board of
directors of Phonetel Technologies and Southern Internet, Inc.
Randall S. Minix has served as a director of The Source since it commenced
operations in May 1995. For more than five years, Mr. Minix has been the
managing partner of Minix, Morgan & Company, L.L.P., an independent accounting
firm headquartered in Greensboro, North Carolina.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has established an Audit Committee, a Compensation Committee, a
Finance Committee and an Acquisition Committee. The duties and members of each
of these committees are indicated below.
- - The Audit Committee is comprised of two non-employee directors, presently
Messrs. Minix and Katzman, and has the responsibility of recommending the
firm that will serve as our independent auditors, reviewing the scope and
results of the audit and services provided by our independent accountants
and meeting with our financial staff to review accounting procedures and
policies.
- - The Compensation Committee is comprised of three non-employee directors,
presently Messrs. Katzman, Braswell and Franc, and has been given the
responsibility of reviewing our financial records to determine overall
compensation and benefits for executive officers and to establish and
administer the policies which govern employee salaries and benefit plans.
- - The Finance Committee is comprised of two directors, Messrs. Franc and
Katzman. The Finance Committee has been given the responsibility of
monitoring our capital structure, reviewing available alternatives to
satisfy our liquidity and capital requirements and recommending the firm or
firms which will provide investment banking and financial advisory services
to us.
- - The Acquisition Committee is comprised of three directors, presently Messrs.
Franc, Braswell and Katzman, and has been given the responsibility of
monitoring our search for attractive acquisition opportunities, consulting
with members of management to review plans and strategies for the
achievement of our external growth objectives and recommending the firm or
firms that will serve as advisors to us in connection with the evaluation of
potential business combinations.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company during its most recent fiscal year and Form 5 and amendments
thereto, or written representations that no Form 5 is required, two persons,
Messrs. Gillis and Aders, failed to timely file a Form 3, Initial Statement of
Beneficial Ownership of Securities. Three persons, Messrs. Katzman, Watkins and
Franc, failed to timely file Form 4, Statement of Changes in Beneficial
Ownership. Six persons, Messrs. Leslie Flegel, Lee, Watkins, DeGolia, Rodgers
and Jason Flegel failed to timely file a Form 5, Annual Statement of Changes in
Beneficial Ownership. All such reports have since been filed.
ITEM 10. EXECUTIVE COMPENSATION.
The following table summarizes information concerning cash and non-cash
compensation paid to or accrued for the benefit of the named executive officers
for all services rendered in all capacities to the Company and its predecessors.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
19
<PAGE> 22
<TABLE>
<CAPTION>
SECURITIES
NAME OF PRINCIPAL FISCAL UNDERLYING OTHER ANNUAL ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION($) COMPENSATION(1)($)
- -------------------- ----- ---------- ---------- ------------------ ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
S. Leslie Flegel 1999 $260,857 $ 23,795 360,000 $ 16,188 $5,450
Chief Executive 1998 255,000 96,300 89,256 16,550 9,093
Officer 1997 227,500 176,398 -- 21,531 9,093
William H. Lee 1999 $246,430 $ 23,795 -- $ 12,109 $3,056
Chief Administrative 1998 245,494 70,382 49,091 9,573 3,056
Officer 1997 224,830 30,000 -- 10,888 3,056
Dwight L. DeGolia 1999 $175,000 $ -- 40,000 $ 11,699 $3,553
Executive Vice 1998 150,000 29,200 10,909 10,777 --
President, 1997 140,000 4,773 -- 11,223 --
Special Projects
Stephen E. Borjes(2) 1999 $140,000 $ -- 40,000 $ 6,790 --
President-- Display 1998 26,667 8,333 -- 2,000 --
Group 1997 -- -- -- -- --
Jason S. Flegel 1999 $112,500 $ -- 10,000 $ 7,005 $ 381
Executive Vice 1998 100,000 9,600 9,091 6,205 381
President, 1997 90,000 -- -- 5,266 381
Information
Services
</TABLE>
- ----------
(1) In fiscal 1999, the estimated incremental cost to The Source of life
insurance premiums paid on behalf of Messrs. S. Leslie Flegel, Lee DeGolia,
Borjes and Jason Flegel was $5,450, $3,056, $3,553, $0 and $381. In fiscal
1998, the estimated incremental cost to The Source of life insurance
premiums paid on behalf of Messrs. S. Leslie Flegel, Lee, DeGolia, Borjes
and Jason Flegel was $9,093, $3,056, $0, $0 and $381, respectively. In
fiscal 1997, such cost to The Source was $9,093, $3,056, $0, $0 and $381,
respectively.
(2) Since February 1999, Mr. Borjes has been Vice President, Database Operations
of The Source.
OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Securities % of Total Options Exercise or
Underlying Options Granted to Employees Base Price Expiration
Name Granted # in Fiscal Year ($/Sh) Date
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C>
S. Leslie Flegel 360,000(1) 35% $5.13 2-01-08
William H. Lee - - - -
Dwight L. DeGolia 10,000(2) 1 5.13 2-01-08
Dwight L. DeGolia 30,000(3) 3 5.00 10-07-08
Stephen E. Borjes 20,000(3) 2 5.00 10-07-08
Stephen E. Borjes 20,000(4) 2 6.63 4-30-08
Jason S. Flegel 10,000(5) 1 5.00 10-07-98
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
</TABLE>
(1) Options were granted February 2, 1998 and vest in four equal annual
installments.
(2) Options were granted February 2, 1998 and are exercisable immediately.
(3) Options were granted October 8, 1998 and vest in three equal annual
installments.
(4) Options were granted May 1, 1998 and vest in five equal annual installments
(5) Options were granted October 8, 1998 and vest in five equal annual
installments.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
- --------------------------------------------------------------------------------
20
<PAGE> 23
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at Fiscal Year In-the Money Options/
Shares End (#) Exercisable/ at Fiscal Year End ($)
Acquired on Value Unexercisable Exercisable/
Name Exercise (#) Realized ($) Unexercisable
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C>
S. Leslie Flegel 0 0 29,752 / 419,504 251,851 / 2,301,901
William H. Lee 0 0 16,364 / 32,727 122,157 / 244,307
Dwight L. DeGolia 0 0 24,364 / 26,545 134,825 / 152,929
Stephen E. Borjes 0 0 10,666 / 29,334 48,143 / 124,257
Jason S. Flegel 0 0 5,636 / 13,455 38,265 / 83,031
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
</TABLE>
DIRECTOR COMPENSATION.
Under the Company's present policy, each director of the Company who is
not also an employee receives $15,000 annually payable quarterly in either cash
or shares Common Stock valued at 90% of market on the date of grant as of the
payment date. Directors also annually receive options to purchase 3,000 shares
of Common Stock at an exercise price equal to market on the date of grant.
Directors are also entitled to be reimbursed for expenses incurred by them in
attending meetings of the Board and its committees.
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS.
In October 1997, we entered into separate employment agreements with S. Leslie
Flegel, William H. Lee and W. Brian Rodgers, each of which expires January 31,
2000 and are subject to annual renewal thereafter. Under the employment
agreements, Mr. Flegel will serve as the Chairman of the Board and Chief
Executive Officer of The Source in exchange for annual base compensation of
$255,000, Mr. Lee will serve as Chairman of the Executive Committee and Chief
Administrative Officer of The Source in exchange for annual base compensation of
$240,573, and W. Brian Rodgers will serve as Chief Financial Officer of The
Source and receive annual base compensation of $100,000, subject to annual
adjustment by the Compensation Committee of the Board (the "Base Compensation").
In the event the employment of any such person with The Source is terminated for
reasons other than for cause, permanent disability or death or there occurs a
significant reduction in the position, duties or responsibilities thereof (a
"Termination") within two years following a "Change of Control" (as defined in
the employment agreement and which does not include this offering), the
discharged person will be entitled to an additional bonus of 300% of his then
current annual Base Compensation. Such person also will agree to refrain from
disclosing information confidential to The Source or engaging, directly or
indirectly, in the rendering of services competitive with those offered by The
Source during the term of his employment and for two years thereafter, without
the prior written consent of The Source.
In December 1998, we entered into an employment agreement with James R. Gillis,
which expires January 31, 2001 (subject to renewal). The employment agreement
provides that Mr. Gillis will serve as President of The Source and receive
annual base compensation of $250,000, subject to annual adjustment by the Board.
In addition, Mr. Gillis is entitled to receive an annual bonus of $50,000 for
each of fiscal 2000, 2001 and 2002 if certain performance goals are met. The
annual bonus amounts may increase if the performance of our front-end display
rack manufacturers exceeds certain thresholds. However, under his employment
agreement, Mr. Gillis is not entitled to an annual bonus of more than $250,000.
In the event the employment of Mr. Gillis is terminated for reasons other than
cause, permanent disability or death, Mr. Gillis will be entitled to receive the
remainder of his base salary and benefits for the balance of the term of the
agreement and a pro rata portion of his annual bonus for the year of
termination. Mr. Gillis agreed to refrain from disclosing information
confidential to The Source during the term of the employment agreement and
agreed not to engage, directly or indirectly, in the rendering of services
competitive with those offered by The Source during the term of his employment
and for two years thereafter.
In March 1999, we entered into an employment agreement with Richard A. Jacobsen,
which expires January 31, 2004 (subject to renewal). Under his agreement, Mr.
Jacobsen will serve as Vice Chairman and Chief Operating Officer of The Source
and receive annual base compensation of $235,000 for fiscal 2000, $255,000 for
fiscal 2001 and $275,000 for fiscal 2002. For fiscal 2003 and 2004, Mr.
Jacobsen's salary will be determined by the Board, but it may not be less than
$275,000. Mr. Jacobsen will also be entitled to receive an annual bonus equal to
a percentage of our net income before taxes ranging from
21
<PAGE> 24
0.69% to 2.7% if certain performance goals are met. Mr. Jacobsen will not be
entitled to a bonus if our pre-tax net income is not at least 82% of our
budgeted pre-tax net income. In connection with his employment by The Source, we
made two loans to Mr. Jacobsen in the amounts of $600,000 ("Loan 1") and
$375,000 ("Loan 2"). Loan 1, including interest, will be forgiven over a 5-year
term and Loan 2, including interest, will be forgiven over a 7-year term
provided, in each case, that Mr. Jacobsen remains an employee of the Company.
Under this employment agreement, Mr. Jacobsen also is entitled to receive
payments compensating him for his annual tax liabilities in connection with
forgiveness of the loans. In the event (1) the employment of Mr. Jacobsen is
terminated for reasons other than for cause, permanent disability or death, (2)
there occurs an assignment of duties or responsibilities inconsistent with Mr.
Jacobsen's appointed positions or (3) there is a "Change of Control" (as defined
in his employment agreement) (each of the foregoing being a "Termination"), Mr.
Jacobsen will be entitled to receive his accrued but unpaid base salary, his
base salary for the remainder of the term of the employment agreement,
forgiveness of Loan 1 and Loan 2, immediate vesting of options granted to Mr.
Jacobsen under the employment agreement and payment of a bonus in an amount
equal to the greater of the annual bonus due in the year of termination or the
annual bonus for the prior year. Under the agreement, Mr. Jacobsen agreed to
refrain from disclosing information confidential to The Source or engaging,
directly or indirectly, in the rendering of services competitive with those
offered by The Source during the term of his employment and for two years
thereafter, without the prior written consent of The Source.
Under the terms of a written agreement with us, Dwight L. DeGolia has agreed to
refrain from disclosing information confidential to us or engaging directly or
indirectly, in any activity which is competitive with our business during the
term of his employment and for two years thereafter.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of April 16, 1999
concerning the beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to be the beneficial owner of more than five percent
of the outstanding Common Stock, (ii) each executive officer named in the
Summary Compensation Table contained in this Form 10-KSB, and (iii) all
directors and executive officers of the Company as a group. Each person named
has sole voting and investment power with respect to the shares indicated,
except as otherwise stated in the notes to the table:
Beneficial Ownership (1)
<TABLE>
<CAPTION>
Name and Address
of Beneficial Owner Number of Shares Percent
- ------------------- ---------------- -------
<S> <C> <C>
Jonathon J. Ledecky 3,140,000(2) 23.0%
800 Connecticut Avenue NW, Suite 1111
Washington, D.C. 20006
S. Leslie Flegel 1,373,774(2)(3) 9.9
11644 Lilburn Park Road
St. Louis, Missouri 63146
William H. Lee 907,623(3) 6.6
711 Gallimore Dairy Road
High Point, North Carolina 27265
Timothy A. Braswell 339,644(3)(5) 2.5
711 Gallimore Dairy Road
High Point, North Carolina 27265
Aron Katzman 212,961(3)(5) 1.6
10 Layton Terrace
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
<S> <C> <C>
St. Louis, Missouri 63124
Jason S. Flegel 139,405(3) 1.0
711 Gallimore Dairy Road
High Point, North Carolina 27265
James R. Gillis 130,000 *
711 Gallimore Dairy Road
High Point, North Carolina 27265
Dwight L. DeGolia 121,468(3) *
11644 Lilburn Park Road
St. Louis, Missouri 63146
Harry L. Franc, III 50,157(3)(5) *
19 Briarcliff
St. Louis, Missouri 63124
Stephen E. Borjes 14,667(3) *
711 Gallimore Dairy Road
High Point, North Carolina 27265
Randall S. Minix 13,866(3) *
5502 White Blossom Drive
Greensboro, North Carolina 27410
Robert O. Aders 8,000(3) *
132 S. Delancey Place
Atlantic City, NJ 08401
All directors and executive 3,322,595(2)(6) 23.7
officers as a group (13 persons)
</TABLE>
- ------------------------
*Less than 1%
(1) Under the rules of the Commission, some of the shares of the Company's
common stock which a person has the right to acquire within 60 days
after April 16, 1999 in connection with the exercise of stock options
and warrants are deemed to be outstanding for the purpose of computing
beneficial ownership and the percentage of ownership of that person.
(2) S. Leslie Flegel and Jonathan J. Ledecky entered into a Voting
Agreement on January 7, 1999, under which Mr. Ledecky granted a proxy
to Mr. Flegel to vote his shares of common stock with regard to certain
corporate matters. The number of shares shown for Mr. Flegel in the
table does not include Mr. Ledecky's shares.
(3) Includes exercisable options to acquire shares of common stock in the
following amounts per beneficial owner: S. Leslie Flegel - 180,754
shares; William H. Lee - 16,364 shares; Timothy A. Braswell - 3,000
shares; Aron Katzman - 3,000 shares; Jason S. Flegel - 5,636 shares;
and Dwight L. DeGolia - 14,364 shares; Harry L. Franc, III - 3,000
shares; Stephen E. Borjes - 14,667; Randall S. Minix - 3,000 shares;
and Robert O. Aders - 3,000 shares.
(4) This amount, as reflected on Schedule 13G filed on February 11, 1999,
consists of sole voting power with respect to 455,475 shares, sole
dispositive power with respect to 832,225 shares and no shared voting
or dispositive power.
(5) Includes exercisable warrants to acquire shares of common stock in the
following amounts per beneficial owner: Timothy A. Braswell - 40,180
shares; Aron Katzman - 40,180 shares; Harry L.
Franc, III - 8,929 shares.
(6) Includes options and warrants to acquire 11,030 shares of common stock,
excluded in the names indicated in the footnotes above.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
23
<PAGE> 26
From time to time, we and our predecessors have engaged in various transactions
with our directors, executive officers and other affiliated parties. The
following paragraphs summarize certain information concerning these transactions
and relationships to the extent that they occurred during the past two fiscal
years or which are presently proposed.
PREDECESSOR TRANSACTIONS
S. Leslie Flegel and Dwight L. DeGolia have from time to time received cash
advances from The Source and one of its predecessors. The largest aggregate
amount of advances outstanding at any time since February 1, 1997 was $270,675
and $22,093, respectively. All outstanding advances have been repaid in full.
On June 28, 1991, a predecessor of ours entered into a lease with 711 Gallimore
Partnership in which William H. Lee, is a partner. Under the terms of the lease,
711 Gallimore Partnership leased office space to us in High Point, North
Carolina. In fiscal 1998 and 1997, we paid 711 Gallimore Partnership $174,888
and $157,498, respectively, in rent.
In June 1999, we purchased the property that we leased from 711 Gallimore
Partnership for $1.8 million in cash. Our Board appointed Timothy Braswell, an
independent director, to negotiate this transaction on our behalf and, based on
Mr. Braswell's recommendation, the Board determined that the terms of the
purchase were fair to The Source.
COMPANY TRANSACTIONS
2532 Partnership, a North Carolina partnership in which Mr. Lee is a partner,
has occasionally provided us with the use of an airplane. In fiscal 1999 and
1998, we paid 2532 Partnership $800 and $11,692, respectively, for use of the
airplane.
In July 1997, an affiliated party, along with the other holder of our 1996
Series 7% Convertible Preferred Stock, exchanged all 5,600 outstanding shares
for (1) 186,667 shares of common stock at an exchange price of $3.00 per share
and (2) nontransferable warrants, expiring on July 1, 2002, to purchase 310,709
shares of common stock at an exercise price of $3.00 per share.
In September 1997, we issued to Messrs. Katzman, Franc and Braswell
non-transferable warrants, expiring on September 2, 2000, to purchase an
aggregate of 89,289 shares of our common stock at an exercise price of $3.00 per
share.
The terms of the foregoing transactions were not negotiated on an arm's-length
basis, but were ratified by a majority of the independent and disinterested
outside directors who had access, at our expense, to our legal counsel. All
future transactions between The Source and its officers, directors, principal
stockholders and affiliates will be approved by a majority of the independent
and disinterested outside directors who will have access, at our expense, to our
legal counsel.
For a description of certain loans made to Richard Jacobson, see Item 10
"Executive Compensation - Employment Agreements with Named Executive Officers."
24
<PAGE> 27
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Exhibit Index.
(b) Reports on Form 8-K.
A report on Form 8-K dated November 19, 1998 reporting the letters of
intent to acquire MYCO, Inc and an affiliated real estate holding
company and Chestnut Display Systems, Inc. ("Chestnut") and an
affiliate of Chestnut was filed on December 11, 1998.
A report on Form 8-K dated January 7, 1999 reporting the acquisitions
of U.S. Marketing Services, Inc. and Yeager Industries, Inc. was filed
on January 21, 1999.
<PAGE> 28
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENT OF THE SOURCE INFORMATION MANAGEMENT COMPANY PAGE
The Report of the Independent Certified Public Accountants F-2
Consolidated Balance Sheet of January 31, 1999 F-3
Consolidated Statements of Operations for the fiscal years ended January 31, 1999 and 1998 F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-9
</TABLE>
F-1
<PAGE> 29
The Report of the Independent Certified Public Accountants
Board of Directors
The Source Information Management Company
St. Louis, Missouri
We have audited the consolidated balance sheet of The Source Information
Management Company as of January 31, 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended January 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Source
Information Management Company at January 31, 1999 and the results of its
operations and its cash flows for each of the two years in the period ended
January 31, 1999 in conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
St. Louis, Missouri
April 16, 1999
F-2
<PAGE> 30
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEET
January 31, 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS (NOTE 7)
CURRENT
Cash $ 752,695
Trade receivables (net of allowance for doubtful accounts of $469,658) (Note 3) 32,593,428
Income taxes receivable 262,877
Inventories (Note 4) 1,395,699
Other current assets 263,692
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 35,268,391
- --------------------------------------------------------------------------------------------------------------------
Land 120,000
Manufacturing Plant 680,000
Office equipment and furniture 5,713,459
Less accumulated depreciation and amortization (3,179,359)
- --------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 3,334,100
- --------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net of accumulated amortization of $648,600 (Note 5) 29,608,254
Deferred tax asset (Note 8) 7,000
Other 789,307
- --------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 30,404,561
- --------------------------------------------------------------------------------------------------------------------
$ 69,007,052
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 31
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEET
January 31, 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Checks issued against future deposits $ 2,876,922
Accounts payable and accrued expenses 3,727,529
Due to retailers (Note 6) 2,737,077
Deferred revenues 3,129,241
Deferred income taxes (Note 8) 718,000
Current maturities of long-term debt (Note 7) 66,057
- --------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 13,254,826
- --------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 7) 3,442,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 16,696,826
- --------------------------------------------------------------------------------------------------------------------
COMMITMENTS (NOTES 9 AND 13)
- --------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Contributed Capital:
Common Stock, $.01 par - shares authorized, 16,528,925; 11,751,425 issued, of which 117,513
8,000 are being held as Treasury Stock (Note 10)
Preferred Stock, $.01 par - shares authorized, 2,000,000; outstanding 1,473,281 (Note 11) 14,733
Additional paid-in-capital 46,451,971
- --------------------------------------------------------------------------------------------------------------------
Total contributed capital 46,584,217
Retained earnings 5,767,140
- --------------------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 52,351,357
Less: Treasury Stock (8,000 shares at cost) (41,131)
- --------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 52,310,226
- --------------------------------------------------------------------------------------------------------------------
$ 69,007,052
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 32
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service Revenues $ 14,229,072 $ 11,803,844
Manufacturing Revenues 6,870,856 -
- --------------------------------------------------------------------------------------------------------------------
21,099,928 11,803,844
- --------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues 6,658,814 5,860,653
Cost of Goods Sold 4,608,941 -
- --------------------------------------------------------------------------------------------------------------------
11,267,755 5,860,653
- --------------------------------------------------------------------------------------------------------------------
9,832,173 5,943,191
Selling, General and Administrative Expense 2,949,382 2,350,622
- --------------------------------------------------------------------------------------------------------------------
Operating Income 6,882,791 3,592,569
- --------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 28,407 21,164
Interest expense (331,058) (714,404)
Other (46,602) (79,321)
- --------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (349,253) (772,561)
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 6,533,538 2,820,008
Income Tax Expense (Note 8) (2,667,000) (1,231,000)
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 3,866,538 $ 1,589,008
- --------------------------------------------------------------------------------------------------------------------
Earnings per Share - Basic (Note 12) $ 0.42 $ 0.23
- --------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Basic (Note 12) 9,132,383 6,561,761
- --------------------------------------------------------------------------------------------------------------------
Earnings per Share - Diluted (Note 12) $ 0.40 $ 0.22
- --------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Diluted (Note 12) 9,775,673 6,693,666
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 33
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Additional Total
Preferred Stock Common Stock Paid - in Retained Treasury Stock Stockholders'
----------------------------------------- ----------------
Shares Amount Shares Amount Capital Earnings Shares Amount Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1997 - $ - 5,727,465 $ 57 $ 2,757 $ 331 - $ - $ 3,145
Issuance of Common Stock 2,000,000 20 6,701 - 6,721
(Note 10)
Directors fees 1,811 - 8 - 8
Exercise of stock options 2,182 - 5 - 5
Dividend on Preferred Stock 6,381 - 19 (19) -
Exchange of 7% Preferred 186,667 2 521 - 523
Stock to Common Stock
(Note 11)
Redeemable Common Stock 91,938 1 503 - 504
converted to Common Stock
Purchase fractional shares (77) - - - -
from reverse stock split
Net income for the year - - - 1,589 1,589
- -----------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1998 10,514 $ 1,901 $ 12,495
8,016,367 $ 80 $
Issuance of Common Stock 1,538,334 15 8,001 8,016
Directors fees 993 3 3
Exercise of stock options 103,542 1 505 506
Exercise of warrants 1,181 6 6
Warrants issued for 27 27
consulting services (Note
10)
Purchase of treasury stock 8,000 (41) (41)
Acquisition of US 1,473,281 15 1,926,719 19 26,248 26,282
Marketing (Note 5)
Acquisition of Yeager 164,289 2 1,148 1,150
Industries, Inc. (Note 5)
Net income for the year 3,866 3,866
- -----------------------------------------------------------------------------------------------------------------------
Balance, January 31, 1999 1,473,281 $ 15 11,751,425 $ 117 $ 46,452 $ 5,767 8,000 $ (41) $ 52,310
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 34
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,866,538 $ 1,589,008
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 713,037 432,632
Loss on disposition of equipment - 1,338
Provision for losses on accounts receivable 8,760 97,311
Impairment of investment in limited partnership 20,000 20,000
Deferred income taxes (438,000) 470,000
Services received in exchange for Common Stock 3,000 8,000
Services received in exchange for Common Stock Warrants 27,012 -
Changes in assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable (2,143,300) (5,537,689)
Decrease in inventories 3,298,263 -
Decrease (increase) in other assets 914,666 (421,882)
Increase (decrease) in checks issued against future deposits 2,528,342 (3,093,479)
(Decrease) increase in accounts payable and accrued expenses (631,434) 120,614
Decrease in deferred revenues (5,650,890) -
Increase in amounts due customers 601,597 794,271
- --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,117,591 (5,519,876)
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Acquisition of Periodical Concepts (2,500,000) -
Cash acquired in acquisition of U.S. Marketing Services, Inc. 295,945 -
Acquisition of Yeager Industries, Inc. (2,365,433) -
Acquisition of Mike Kessler & Associates, Inc., net of cash acquired - (608,650)
Capital expenditures (642,514) (344,847)
Loans to officers - (10,000)
Collection on officers notes receivable 22,093 221,485
Proceeds from sale of fixed assets - 2,000
Direct costs of companies acquired subsequent to year end (224,112) -
Increase in cash surrender value of life insurance (42,272) (55,333)
Proceeds from surrender of life insurance policies - 83,959
- --------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (5,456,293) (711,386)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 35
<TABLE>
<CAPTION>
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 31, 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 8,527,870 6,725,882
Borrowings under credit facility 36,483,000 37,777,000
Principal payments on credit facility (41,879,000) (36,303,000)
Repayments under short-term debt agreements (30,997) (2,221,961)
Common Stock reacquired (41,131) -
Other financing activities 200 (125)
- --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 3,059,942 5,977,796
- --------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 721,240 (253,466)
CASH, beginning of period 31,455 284,921
- --------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 752,695 $ 31,455
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 36
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1 SUMMARY OF Business
ACCOUNTING
POLICIES The Source Information Management Company
(the "Company") is a provider of merchandise
management information and related services
primarily in connection with the display and
marketing of magazines and other
periodicals. The Company assists retailers
in monitoring, documenting, claiming and
collecting incentive payments, primarily
from publishers of periodicals, and performs
consulting and other services in exchange
for commissions. The Company also obtains
revenues from consulting and other services
rendered to clients on other than a
commission basis.
The Company also designs and manufactures
custom-designed product display units that
are categorized as front-end merchandisers
or point-of-purchase displays used by
retailers and consumer product manufacturers
nationwide.
Principles of Consolidation
The consolidated financial statements
include the accounts of The Source
Information Management Company and its
wholly-owned subsidiaries (collectively, the
"Company"). The results of operations of
Source-Yeager Industries, Inc. and
Source-U.S. Marketing Services, Inc. and its
subsidiary are included in the accompanying
financial statements as of the date of
acquisition. All material intercompany
accounts and transactions have been
eliminated in consolidation.
Concentrations of Credit Risk
During fiscal 1999 approximately 55% of the
Company's revenues were derived from the
services provided in connection with the
collection of payments owed to the Company's
retailer clients from magazine publishers
under programs designed by the publishers to
provide incentives to increase single copy
magazine sales. The incentive programs,
although part of the publishers' marketing
strategy for over 20 years, are governed by
short-term contracts. If magazine publishers
discontinue or significantly modify the
incentive programs in such a manner which
makes the Company's services incompatible
with the modified programs, the Company's
results of operations and financial
condition may be materially and adversely
affected.
In the Advance Pay Program (Note 3), the
Company assumes the risk otherwise borne by
the retailer that magazine publishers will
refuse or be unable to pay the amount of
incentive payments claimed. Based on
historical experience, the Company maintains
a reserve for claims submitted but subject
to such a refusal or inability to pay.
However, if a prominent magazine publisher
files a petition in bankruptcy, seeks other
protection from its creditors or otherwise
refuses to pay, this reserve may be
inadequate. The results of operations and
the financial condition of the Company could
be materially affected.
In the display rack manufacturing segment,
the Company does have significant client
concentration. Substantially all of the
Company's services are performed under
short-term contracts, thus permitting the
Company's clients to obtain services from
other providers without further obligation
to the Company. If the Company experiences a
significant reduction in business from its
clients, the Company's results of operations
and financial condition may be materially
and adversely affected.
F-9
<PAGE> 37
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Revenue Recognition
Under both the standard arrangement and the
Advance Pay Program, service revenues are
recognized at the time claims for incentive
payments are substantially completed for
submission to the publishers. The service
revenues recognized are based on the amount
claimed, less an estimated reserve necessary
to maintain an allowance for doubtful
accounts of approximately 2% of trade
accounts receivable. Under the standard
arrangement, invoices for claim processing
services are not issued until the Company
receives settlement of the claim. However,
under the Advance Pay Program, the customer
is not invoiced for the commission, which is
the difference between the claim and the
advance amount.
Revenues from annual PIN contracts are
recognized ratably over a year.
Front-end management revenues are
recognized as services are performed.
The Company generally recognizes
manufacturing revenues when products are
shipped. Upon request from a customer, the
product can be stored for future delivery
for the convenience of the customer. This
only occurs when the manufacturing and
earnings processes are complete, the
customer accepts title in writing, the
product is invoiced with payment due in the
normal course of business, the delivery
schedule is fixed and the product is
segregated from other goods. Sales
recognized under such a bill and hold basis
totaled approximately $3,600,000 during the
year ended January 31, 1999.
Inventories
Inventories are valued at the lower of cost
or market. Cost is determined by the
first-in, first-out (FIFO) method.
Equipment and Furniture
Equipment and furniture are stated at cost.
Depreciation is computed using the
straight-line method for financial reporting
and accelerated methods for income tax
purposes over the estimated useful lives of
5 to 7 years.
Income Taxes
The Company accounts for income taxes under
an asset and liability approach that
requires the recognition of deferred tax
assets and liabilities for the expected
future tax consequences of events that have
been recognized in the Company's financial
statements or tax returns. In estimating
future tax consequences, the Company
generally considers all expected future
events other than enactments of changes in
the tax laws or rates.
Goodwill
Goodwill represents the excess of the cost
of a company acquired over the fair value of
the net assets acquired which is amortized
over 15 to 20 years.
Stock-Based Compensation
F-10
<PAGE> 38
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company grants stock options for a fixed
number of shares to employees with an
exercise price greater than or equal to the
fair value of the shares at the date of
grant. The Company accounts for stock option
grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB Opinion
No. 25). That Opinion requires that
compensation cost related to fixed stock
option plans be recognized only to the
extent that the fair value of the shares at
the grant date exceeds the exercise price.
Accordingly, the Company recognizes no
compensation expense for its stock option
grants. In October 1995, the Financial
Accounting Standards Board, issued Statement
of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based
Compensation". SFAS No. 123 allows companies
to continue to account for their stock
option plans in accordance with APB Opinion
No. 25, but encourages the adoption of a new
accounting method based on the estimated
fair value of employee stock options. Pro
forma net income and earnings per share,
determined as if the Company had applied the
new method, are disclosed within Note 13.
Accounting Estimates
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make estimates and assumptions that affect
the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported
amounts of revenues and expenses during the
reporting period. Actual results could
differ from those estimates.
Long-Lived Assets
In March 1995, SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for
Long-Lived Assets Disposed Of" was issued.
SFAS No. 121 requires that long-lived assets
and certain identifiable intangibles to be
held and used or disposed of by an entity be
reviewed for impairment whenever events or
changes in circumstances indicate that the
carrying amount of an asset may not be
recoverable. Management periodically reviews
the carrying value of property and equipment
and intangibles in relation to the operating
performance and future undiscounted cash
flows of the underlying business to
determine whether impairment exists. No
impairment was identified for the years
ended January 31, 1999 and 1998.
Earnings Per Share
In February 1997, the Financial Accounting
Standards Board issued SFAS No. 128,
"Earnings per Share," which requires the
presentation of "basic" earnings per share,
computed by dividing net income available to
common shareholders by the weighted average
number of common shares outstanding for the
period, and "diluted" earnings per share,
which reflects the potential dilution that
could occur if securities or other contracts
to issue common stock were exercised or
converted into common stock or resulted in
the issuance of common stock that then
shared in the earnings of the entity. The
Company adopted SFAS No. 128 in the fourth
quarter of fiscal 1998 and has restated all
prior period earnings per share data
presented. The adoption of SFAS No. 128 did
not have a material effect on the Company's
previously reported earnings per share
information.
F-11
<PAGE> 39
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Software Capitalization Policy
The Company capitalizes software in
accordance with Statement of Position 98-1
("SOP 98-1"). The SOP allows capitalization
of costs of computer software developed or
obtained for internal use only for (i)
external direct costs of materials and
services incurred in developing or obtaining
internal-use computer software, (ii) payroll
and payroll-related costs for employees who
are directly associated with and devote time
to the internal-use computer software
project, to the extent of the time spent
directly on the project, or (iii) interest
costs incurred while developing internal-use
computer software.
Reclassifications
Certain 1998 amounts have been reclassified
to conform to the 1999 presentation.
New Accounting Standards
SFAS No. 130, "Reporting Comprehensive
Income," was issued in June 1997.
Comprehensive income is defined as net
income plus certain items that are recorded
directly to shareholders' equity, such as
unrealized gains and losses on
available-for-sale securities. The Company
adopted SFAS No. 130 in the first quarter of
fiscal 1999, but had no "other"
comprehensive income items for the years
presented in the statements of income or
accumulated as of the balance sheet date
presented.
SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," is
effective for financial statements for
periods beginning after December 15, 1997,
but interim reporting is not required in
1998. An operating segment is defined under
SFAS No. 131 as a component of an enterprise
that engages in business activities that
generate revenue and expense for which
operating results are reviewed by the chief
operating decision maker in the
determination of resource allocation and
performance. See Note 16.
SOP 98-5, "Reporting on the Costs of
Start-Up Activities," requires that the
costs of start-up activities, including
organization costs, be expenses as incurred.
This Statement is effective for financial
statements issued for fiscal years beginning
after December 15, 1998. The Company
believes that the adoption of SOP 98-5 will
have no material effect on the financial
statements.
In June 1998, the FASB issued SFAS No. 133
"Accounting for Derivatives and Hedging
Activities," which establishes accounting
and reporting standards for derivative
instruments, including certain derivative
instruments embedded in other contracts,
(collectively referred to as derivatives)
and for hedging activities. SFAS No. 133 is
effective for years beginning after June
15, 1999 and requires comparative
information for all fiscal quarters of
fiscal years beginning after June 15, 1999.
The Company does not expect the adoption of
this statement to have a significant impact
on the results of operations, financial
position or cash flows.
2. RELATED PARTY The Company currently leases certain office
TRANSACTIONS space and from time to time leases an
airplane from partnerships controlled by
stockholders of the Company. Amounts paid
for the office space were approximately
$278,000 and $223,000 for 1999 and 1998,
respectively. Amounts paid for the airplane
were approximately $1,800 and
F-12
<PAGE> 40
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
$12,000 for 1999 and 1998, respectively.
Certain officers of the Company, have from
time to time, received cash advances from
the Company. The officers executed
promissory notes in favor of the Company in
the aggregate amounts of $295,293. All notes
were paid in full by January 31, 1999.
3. ADVANCE PAY
PROGRAM The Company has established an Advance Pay
Program. Under this program the Company
advances an agreed upon percentage of the
incentive payments otherwise due the
retailer from magazine publishers upon
quarterly submission of claims for such
payments. The claims otherwise due the
retailer become due the Company. Included in
trade receivables at January 31, 1999 is
$19,965,882 due the Company under the
Advance Pay Program (net of $6,210,636 due
the program participants). Service revenues
from the program were approximately
$6,668,000 and $4,576,000 during 1999 and
1998, respectively.
4. INVENTORIES Inventories consist of the following:
<TABLE>
<CAPTION>
January 31, 1999
-----------------------------------------------------------------------------------
<S> <C>
Raw materials $ 576,101
Work-in-process 805,932
Finished goods 13,666
-----------------------------------------------------------------------------------
$ 1,395,699
-----------------------------------------------------------------------------------
</TABLE>
5. BUSINESS Acquisition of Mike Kessler and Associates,
COMBINATIONS Inc.
On May 30, 1997, the Company acquired
all of the stock of Mike Kessler and
Associates, Inc. (MKA) for $2,500,000 of
which $350,000 was paid upon closing and the
balance was paid on January 5, 1998 with
interest at 6.25%. The seller operated MKA
as a business engaged in the collection of
retail display allowances for retail store
chains. The Company has continued the
operation of such business and has continued
servicing MKA's customer base.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeded
the fair value of the assets acquired in the
amount of $2,382,900 and is being amortized
straight line over 15 years.
F-13
<PAGE> 41
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Acquisition of Periodical Concepts
On July 27, 1998, the Company acquired all
the assets of Periodical Concepts, a Texas
general partnership doing business as PC2,
for $2,500,000 in cash. Prior to the
acquisition, PC2 provided information and
marketing services to retail stores selling
magazines and other periodicals. The Company
intends to continue the operation of such
business and does not intend to
substantially change the nature of PC2's
operation.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeds
the fair value of the assets acquired by
approximately $2,400,000 and is being
amortized straight line over 15 years.
Acquisition of Yeager Industries, Inc.
On January 7, 1999, the Company acquired the
net of Yeager Industries, Inc. for $2.3
million in cash and 164,289 shares of the
Company's Common Stock, valued at the time
of the acquisition at $1.15 million. The
purchase price could be increased by up to
$500,000 depending on Yeager's performance
over the next two years. Yeager manufactures
front-end display racks from facilities in
Philadelphia, Pennsylvania.
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeds
the fair value of the assets acquired by
approximately $1,038,000 and is being
amortized straight line over 20 years.
Acquisition of U.S. Marketing Services, Inc.
On January 7, 1999 the Company acquired all
of the stock of U.S. Marketing Services,
Inc. ("U.S. Marketing") in exchange for
1,926,719 shares of the Company's Common
Stock and 1,473,281 shares of the Company's
Class A Convertible Preferred Stock, valued
at the time of the acquisition at $26.3
million in total. The Class A Convertible
Preferred Stock was converted into an equal
number of Common Shares on March 30, 1999.
U.S. Marketing's subsidiary Brand
Manufacturing Corporation ("Brand")
manufactures front-end display racks from
manufacturing facilities in Brooklyn, New
York and a warehouse and distribution
facility in New Jersey. Through its
affiliates, Brand provides trucking and
freight services and removes and disposes of
display racks no longer required by its
customers.
F-14
<PAGE> 42
This transaction has been accounted for as a
purchase, and accordingly, the assets and
liabilities have been recorded at fair
market value. Results of operations have
been included as of the effective date of
the transaction. The purchase price exceeded
the fair value of the assets acquired by
approximately $23,064,000 and is being
amortized straight line over 20 years.
Unaudited Pro Forma Results of Operations
Unaudited pro forma results of operations
for 1997 and 1998 for the Company, MKA, PC2
Yeager and U.S. Marketing are listed below
(in thousands):
<TABLE>
<CAPTION>
Year Ended January 31, 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenues As reported $21,100 $11,804
Pro forma 38,959 37,889
Net Income As reported 3,867 1,589
Pro forma 1,747 3,920
Earnings Per Share
Basic As reported $ .42 $ .23
Diluted As reported .40 .22
Basic Pro forma .14 .38
Diluted Pro forma .13 .37
</TABLE>
6. DUE TO RETAILERS For the service segment, the Company has
arrangements with certain of its customers
whereby the Company is authorized to collect
and deposit in its own accounts, checks
payable to its customers for incentive
payments. The Company retains the commission
related to such payments and pays the
customer the difference. The Company owes
retailers $1,235,718 at January 31, 1999
under such arrangements.
For the display rack manufacturing segment,
Due to Retailers represents funds collected
on behalf of the retailers on front-end
racking programs not yet remitted to the
retailer.
7. LONG-TERM DEBT Long-term debt consists of:
AND REVOLVING
CREDIT FACILITY
F-15
<PAGE> 43
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, 1999
-----------------------------------------------------------------------------------
<S> <C>
Revolving Credit Facility $ 3,202,000
Unsecured note payable to former owners of
acquired Company, non-interest bearing, payable
in five equal annual installments beginning in November 1999 300,000
Term note payable in monthly installments of $629
through November 1999, collateralized by an automobile 6,057
-----------------------------------------------------------------------------------
Total Long-term Debt 3,508,057
Less current maturities 66,057
-----------------------------------------------------------------------------------
Long-term Debt $ 3,442,000
-----------------------------------------------------------------------------------
</TABLE>
Annual maturities of long-term debt are as
follows: 2000 - $66,057; 2001 - $3,262,000;
2002 - $60,000; 2003 - $60,000; 2004 -
$60,000.
The Company has an agreement providing for
revolving loans up to $15,000,000. The bank
has the right to terminate the agreement
upon not less than thirteen months prior
written notice. Borrowings bear interest at
a rate related to the monthly LIBOR index
rate plus a percentage ranging from 2.5% to
3.5%, depending upon the ratio of funded
debt to earnings before interest, taxes,
depreciation and amortization (effectively
8.4727% at January 31, 1999). Borrowings are
secured by a security interest in
substantially all the Company's assets
including receivables, inventory, equipment,
goods and fixtures, software, contract
rights, notes, and general intangibles.
The revolving loan agreement requires the
Company to maintain certain ratios and a
specified level of net worth, restricts
payment of dividends, and limits additional
indebtedness. The Company was in compliance
with such ratios at January 31, 1999.
On March 31, 1999 the Company entered into a
new credit agreement with Wachovia Bank,
N.A. See Note 17, Subsequent Events.
8. INCOME TAXES Provision for federal and state income taxes
in the consolidated statements of operations
consist of the following components:
F-16
<PAGE> 44
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C>
Current
Federal $ 2,473,000 $ 606,000
State 632,000 155,000
------------------------------------------------------------------------------------
Total Current 3,105,000 761,000
------------------------------------------------------------------------------------
Deferred
Federal (349,000) 376,000
State (89,000) 94,000
------------------------------------------------------------------------------------
Total Deferred (438,000) 470,000
------------------------------------------------------------------------------------
Total Income Tax Expense $ 2,667,000 $ 1,231,000
------------------------------------------------------------------------------------
Deferred income taxes reflect the net tax
effects of temporary differences between the
carrying amount of the assets and liabilities
for financial reporting purposes and the
amounts used for income tax purposes. The
sources of the temporary differences and their
effect on deferred taxes are as follows:
<CAPTION>
January 31, 1999
------------------------------------------------------------------------------------
<S> <C>
Deferred Tax Assets
Net operating loss carryforward $ 1,082,000
Allowance for doubtful accounts 185,000
Deferred compensation 52,000
Other 73,000
------------------------------------------------------------------------------------
1,392,000
Less: Valuation allowance (1,137,000)
------------------------------------------------------------------------------------
Deferred Tax Asset, Net 255,000
------------------------------------------------------------------------------------
Deferred Tax Liabilities
Book/tax difference in accounts receivable 849,000
Income not previously taxed under cash
basis of accounting for income tax purposes 72,000
Depreciation 43,000
Other 2,000
------------------------------------------------------------------------------------
Total Deferred Tax Liabilities 966,000
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Net Deferred Tax Liability $ 711,000
------------------------------------------------------------------------------------
Classified as
Non-current asset 7,000
Current liability 718,000
------------------------------------------------------------------------------------
Net Deferred Tax Liability $ 711,000
------------------------------------------------------------------------------------
</TABLE>
F-17
<PAGE> 45
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The deferred tax asset in the accounts of
Source-U.S. Marketing Services, Inc.
("Source-U.S. Marketing") totaling $1,137,000
is fully offset by a valuation allowance of the
same amount due to uncertainty regarding its
ultimate utilization. At January 31, 1999,
Source-U.S. Marketing had net operating loss
("NOL") carryforwards of approximately
$1,800,000 expiring through 2018. Brand, a
wholly owned subsidiary of Source-U.S.
Marketing, had NOL carryforwards at January 31,
1999 of approximately $880,000 expiring through
2018.
All of the valuation allowance for deferred tax
assets for subsequent recognized tax benefits
will be allocated to reduce goodwill.
The following summary reconciles income taxes
at the maximum federal statutory rate with the
effective rates for 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended January 31, 1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C>
Income tax expense (benefit) at statutory rate $ 2,221,000 $ 960,000
State income tax expense (benefit), net of
federal income tax benefit 379,000 200,000
Non-deductible meals and entertainment 37,000 30,000
Non-deductible officers' life insurance (6,000) 7,000
Non-deductible goodwill amortization 134,000 61,000
Utilization of NOL carryforwards - (19,000)
Other, net (98,000) (8,000)
-----------------------------------------------------------------------------------
Income Tax Expense $ 2,667,000 $ 1,231,000
-----------------------------------------------------------------------------------
</TABLE>
9. COMMITMENTS Leases
The Company leases office and manufacturing
space, an apartment, computer equipment, and
vehicles under leases that expire over the next
five years. The Company also leases an
administrative facility from a related party
under an operating lease that expires in 2012.
The Company has reached an agreement to
purchase this property for $1.8 million in
cash. The value of the property was appraised
at $1.6 million in August 1998. The Board
appointed Timothy Braswell, an independent
director, to negotiate this transaction on the
Company's behalf and, based on Mr. Braswell's
recommendation, the Board believes the terms of
the proposed purchase are fair to the Company.
In most other cases, management expects that in
the normal course of business, leases will be
renewed or replaced with other leases. Rent
expense was approximately $622,000 and $462,000
for the years ended January 31, 1999 and 1998,
respectively. Amounts paid to related parties
included in total rent expense were
approximately $278,000 and $223,000 for 1999
and 1998, respectively.
Future minimum payments, by year and in the
aggregate, under noncancelable operating leases
with initial or remaining terms of one year or
more consisted of the following at January 31,
1999:
F-18
<PAGE> 46
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Operating
Year Ending January 31, leases
------------------------------------------------------------------------------------
<S> <C>
2000 959,299
2001 589,357
2002 330,035
2003 299,711
2004 292,449
Thereafter 2,563,865
------------------------------------------------------------------------------------
Total minimum lease payments $ 5,034,716
------------------------------------------------------------------------------------
</TABLE>
Litigation
The Company has pending certain legal actions
and claims incurred in the normal course of
business and is actively pursuing the defense
thereof. In the opinion of management, these
actions and claims are either without merit or
are covered by insurance and will not have a
material adverse effect on the Company's
financial condition, results of operations or
liquidity.
Employment agreements
The Company has entered into employment
agreements with certain officers and key
employees. These agreements expire at dates
ranging from January 2000 to January 2004, are
subject to annual renewal, and require annual
salary levels and termination benefits, should
a termination occur.
Consulting agreements
On May 31, 1997, the Company entered into a
three year consulting agreement with a company
owned by the former shareholder of Mike Kessler
and Associates, Inc. The agreement requires the
Company to make payments aggregating $75,000,
$65,000 and $50,000 annually for the first,
second and third years of the agreement.
The Company entered into a consulting agreement
with Herbert A. Hardt commencing on August 31,
1998 and ending November 25, 2000. The
agreement requires the Company to issue a
warrant, expiring January 31, 2001, to purchase
150,000 shares of Common Stock, which was
independently appraised at $37,500. This
value will be recognized as expense in relation
to the vesting period of the warrant. The
warrant vests 15,000 shares per quarter during
each quarter of fiscal year 2000 and 22,500
shares per quarter during each quarter of
fiscal year 2001.
Union Contracts
At January 31, 1999 approximately 265 of the
Company's 497 employees were members of a
collective bargaining unit. The Company is
party to two collective bargaining agreements,
which expire on September 30, 1999 and December
31, 2000.
Company contributions to the Union funds
charged to operations were approximately
$64,000 for the period ended January 31, 1999.
F-19
<PAGE> 47
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
10. COMMON STOCK In September 1997, the Company issued to Aron
Katzman, Harry L. Franc, III and Timothy A.
Braswell, each a director of the Company,
non-transferable warrants, expiring in 2000, to
purchase an aggregate of 89,289 shares of
Common Stock at an exercise price of $3.00 per
share. These warrants will vest at a rate of
25% on August 1, 1998, 25% on November 1, 1998,
25% on February 1, 1999 and 25% on May 1, 1999.
The related cost as determined by independent
appraisal of approximately $54,000 will be
recognized ratably over those periods.
In October 1997, the Company sold in a public
offering (the "Offering"), 2,000,000 shares of
the Company's Common Stock. Concurrent with the
Offering, the Company effected the 1 for 1.21
reverse stock split previously approved by the
Company's shareholders. The weighted average
number of common shares presented in the
financial statements have been retroactively
restated to give effect to such reverse stock
split.
11. PREFERRED STOCK The Company has authorized 2,000,000 shares of
$.01 par Preferred Stock. On March 13, 1996,
65,000 shares were designated as 1996 Series 7%
Convertible Preferred Stock. Rights and
restrictions on the remaining shares will be
established if, and when, any shares are
issued.
Each share of the 1996 Series 7% Convertible
Preferred Stock entitles its holder to receive
an annual dividend, when and as declared by the
Board of Directors, of $7 per share payable in
shares of the Company's Common Stock; to
convert it into shares of Common Stock; to
receive $100 per share in the event of
dissolution, liquidation, or winding up of the
Company, whether voluntary or involuntary; and
subject to certain conditions in the
Certificate of Designations, Preferences and
Relative Rights of 1996 Series 7% Convertible
Preferred Stock, may be redeemed at the option
of the Company at a price of $100 per share
within 30 days following the effective date of
a merger or consolidation in which the Company
is not the surviving entity.
Each share of the 1996 Series 7% Convertible
Preferred Stock shall be convertible, at the
option of the holder thereof, into shares of
the Common Stock of the Company, at the
conversion price equal to 80% of the current
market price of the Common Stock, provided,
however, the conversion price shall not be less
than $4.24 nor more than $6.66 per share of
Common Stock. For purposes of such conversion,
each share of the 1996 Series 7% Convertible
Preferred Stock shall be accepted by the
Company for surrender at its Liquidation Amount
of $100 per share.
On February 28, 1997, the Company issued a
Common Stock dividend to investors who held the
Company's 1996 Series 7% Convertible Preferred
Stock. At this date there were 5,600 shares of
such stock outstanding. The 7% dividend
resulted in a Common Stock dividend of 6,381
shares based on an issuance price of $3.06 per
share.
In July 1997, the Company exchanged all 5,600
outstanding shares of the Company's 1996 Series
7% Convertible Preferred Stock for an aggregate
of 186,667 shares of Common Stock and
non-transferable warrants, expiring in 2000, to
purchase 310,709 shares of Common Stock at an
exercise price of $3.00 per share. Such
exchange resulted in a constructive dividend,
based on the independently appraised value of
the non-transferable warrants, of $109,937
which was reported in the fiscal quarter ended
F-20
<PAGE> 48
July 31, 1997.
On January 6, 1999, 1,500,000 shares of
Preferred Stock were designated as Class A
Convertible Preferred Stock. The shares of
Class A Convertible Preferred Stock carry no
voting rights; however, the Company shall not,
without the approval of at least a majority of
the outstanding shares of Preferred Stock, (i)
amend the Articles of Incorporation or any
other document to alter or change any rights,
preferences or privileges of the Preferred
Stock or to materially and adversely affect the
Preferred Stock, (ii) increase or decrease the
authorized number of shares of Preferred stock
or effect a stock split or reverse stock split
of the Preferred Stock, or (iii) authorize
another class or series of shares senior to or
pari passu with the Preferred Stock with
respect to distribution of assets on
liquidation. The holders of Preferred Stock are
entitled to receive dividends at the same rate,
on the same conditions at the same time and to
the same extent dividend are paid or declared
by the Company on the Common Stock. In the
event of any voluntary or involuntary
liquidation, dissolution or winding-up of the
Company, the holders of the Preferred Stock
shall be entitled to receive in cash out of the
assets of the Company, before any amount shall
be paid to the holders of the Common Stock, a
liquidation preference amount of $7.73 per
share plus any dividends previously declared
but unpaid (the "Liquidation Preference
Amount"). Upon approval by the holders of a
majority of the shares of Common Stock voting
at a Special Meeting , each share of Preferred
Stock shall be converted automatically into one
share of Common Stock. If shareholder approval
is not obtained on or before June 30, 1999, the
Company shall, at the election of any holder of
the Preferred Stock, convert all of the shares
of the Preferred Stock held by such holder into
a demand note of the Company with a principal
amount per share equal to the Liquidation
Preference Amount. For the shares of Preferred
Stock which are to be converted, the Company is
obligated to deliver to the holder thereof a
note in a principal amount equal to the
Liquidation Preference Amount times the number
of shares of Preferred Stock to be converted.
Such note shall be payable on demand with 30
days notice and shall bear interest at the
Prime Rate (as announced from time to time by
J.P. Morgan) plus 1% from the date of
conversion.
On January 7, 1999, 1,473,281 shares of Class A
Convertible Preferred Stock were issued in
connection with the acquisition of U.S.
Marketing Services, Inc. On March 30, 1999 the
Preferred Stock was converted to 1,473,281
shares of Common Stock.
12. EARNINGS PER SHARE In calculating earnings per share, Net Income
for the year ended January 31, 1998 was reduced
by a constructive dividend of $109,937, which
resulted from the exchange of all 5,600
outstanding shares of Preferred Stock for
186,667 shares of Common Stock and
non-transferable warrants.
A reconciliation of the denominators of the
basic and diluted earnings per share
computations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C>
Weighted average number of common shares outstanding 9,132,383 6,561,761
Effect of dilutive securities - stock options and warrants 643,289 131,905
------------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE> 49
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Weighted average number of common shares outstanding - as
adjusted 9,775,673 6,693,666
------------------------------------------------------------------------------------
</TABLE>
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 January 31, 1999:
<TABLE>
<CAPTION>
Number of Shares
Exerciseable Under Exercise Grant Expiration
Options/Warrants Price Date Date
------------------ -------- ----- ----------
<S> <C> <C> <C>
5,000 $ 7.38 11-30-98 11-30-08
202,000 7.81 12-14-98 12-14-08
255,000 10.88 1-7-99 1-7-09
200,000 8.40 6-15-98 6-15-03
150,000 10.00 8-31-98 1-31-01
</TABLE>
13. EMPLOYEE Profit Sharing and 401(k) Plan
BENEFIT PLANS
The Company has a combined profit sharing and
401(k) Plan. Annual contributions to the profit
sharing portion of the Plan are determined by
the Board of Directors and may not exceed the
amount that may be deducted for federal income
tax purposes. There were no profit sharing
contributions charged against operations for
the years ended January 31, 1999 and 1998.
Under the 401(k) portion of the Plan, all
eligible employees may elect to contribute 2%
to 20% of their compensation up to the maximum
allowed under the Internal Revenue Code. The
Company matches one half of an employee's
contribution, not to exceed 5% of the
employee's salary. The amounts matched by the
Company during the years ended January 31, 1999
and 1998 pursuant to this Plan were
approximately $63,000 and $63,000,
respectively.
Deferred Compensation Plan
During fiscal year 1997, the Company
established an unfunded deferred compensation
plan for certain officers, who elect to defer a
percentage of their current compensation. The
Company does not make contributions to the plan
and is responsible only for the administrative
costs associated with the plan. Benefits are
payable to the participating officers upon
their death or termination of employment. From
the deferred funds, the Company has purchased
certain life insurance policies. However, the
proceeds and surrender value of these policies
are not restricted to pay deferred compensation
benefits when they are due.
Stock Option Plan
In August 1995, the Company established its
1995 Incentive Stock Option Plan ("the Plan")
for key employees and reserved 520,661 shares
of Common Stock for the Plan. At a Special
Meeting of Shareholders on March 30, 1999, the
shares reserved for issuance under this Plan
were increased by 1 million shares to
1,520,661. Under the Plan, the Stock Option
Committee may grant stock options to key
employees at not less than one hundred percent
(100%) of the fair market value of the
Company's Common Stock at the date of grant.
The durations and exercisability of the grants
vary according to the individual options
granted.
<TABLE>
<CAPTION>
Weighted
Range of Average
Number of Exercise Exercise
Options Prices Price
--------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at
January 31, 1997 165,288 5.30 - 5.60 5.45
Options granted 327,275 1.66 - 5.60 2.97
Options expired 92,554 2.42 - 5.60 5.26
</TABLE>
F-22
<PAGE> 50
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Options exercised 2,182 2.42 2.42
--------------------------------------------------------
Options outstanding at
January 31, 1998 397,827 1.66 -5.60 3.47
Options granted 1,036,820 5.00 - 10.88 7.09
Options expired 56,047 2.42 - 5.60 4.36
Options exercised 103,542 2.42 - 5.60 4.88
--------------------------------------------------------
Options outstanding at
January 31, 1999 1,275,058 1.66 - 10.88 6.26
--------------------------------------------------------
</TABLE>
The following table summarizes information
about the stock options outstanding at
January 31, 1999:
<TABLE>
<CAPTION>
Remaining
Number Contractual Options
Exercise Price Outstanding Life (Months) Exercisable
-------------------------------------------------------------------------------------
<S> <C> <C>
1.66 89,256 40 29,752
2.42 45,455 101 18,182
2.42 16,445 101 8,445
2.66 49,091 41 16,364
5.00 70,000 116 23,333
5.00 58,347 116 17,014
5.00 50,000 116 10,000
5.13 10,000 108 0
5.13 360,000 108 0
5.30 42,644 100 42,644
6.13 910 113 303
6.63 20,000 111 4,000
6.63 910 111 303
7.38 5,000 118 1,000
7.81 202,000 118 0
10.88 155,000 119 31,000
10.88 100,000 119 33,333
------- ------
1,275,058 235,673
-------------------------------------------------------------------------------------
</TABLE>
Options exercisable at January 31, 1999 totaled
235,673 with a weighted average exercise price
of $5.82. Options exercisable at January 31,
1998 totaled 131,528 with a weighted average
exercise price of $4.82. The weighted average
fair value of each option granted during the
year was $1.34 and $.61 (at grant date) in 1999
and 1998, respectively.
The options above were issued at exercise
prices which approximate fair market value at
the date of grant. At January 31, 1999, 26,879
shares were available for grant under the Plan.
As of January 31, 1999, 527,000 options had
been granted
F-23
<PAGE> 51
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
by the Stock Option Committee that were subject
to approval of the proposal to increase the
authorized shares of the Plan by 1 million. The
proposal was approved at a Special Meeting of
the Shareholders on March 30, 1999. Had
shareholder approval not been obtained, the
options issued would have been treated as
non-qualified options.
As discussed in the Summary of Accounting
Policies, the Company applies APB Opinion No.
25 and related interpretations in accounting
for this plan. Accordingly, no compensation
cost has been recognized for its incentive
stock option plan. Had compensation cost for
the Company's stock-based compensation plan
been determined based on the fair value at the
grant dates for awards under the plan
consistent with the method of SFAS No. 123, the
Company's consolidated net income and
consolidated income per share would have been
reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Year Ended January 31, 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income As reported $ 3,866,538 $1,589,008
Pro forma 3,766,441 1,575,534
Basic earnings per share As reported .42 .23
Pro forma .41 .22
Diluted earnings per share As reported .40 .22
Pro forma .39 .22
------------------------------------------------------------------------------------
</TABLE>
The pro forma amounts reflected above are not
representative of the effects on reported net
income in future years because in general, the
options granted typically do not vest for
several years and additional awards are made
each year. The fair value of each option grant
is estimated on the grant date using the
Black-Scholes option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
Year Ended January 31, 1999 1998
-------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Dividend yield 0% 0%
Range of expected lives (years) 1.0 - 2.05 3.6 -10
Range of expected volatility 0.30 - 0.40 0.40 - 0.60
Risk-free interest rate 4.11% - 5.66% 5.90%
-------------------------------------------------- ----------------- ----------------
</TABLE>
Stock Award Plan
In September 1996, the Company adopted its
Stock Award Plan for all employees and reserved
41,322 shares of Common Stock for such plan.
Under the plan, the Stock Award Committee,
appointed by the Board of Directors of the
Company, shall determine the employees to whom
awards shall be granted. No awards were granted
during the years ended January 31, 1999 or
1998.
14. SUPPLEMENTAL CASH
FLOW INFORMATION Supplemental information on interest and income
taxes paid is as follows:
F-24
<PAGE> 52
<TABLE>
<CAPTION>
Year Ended January 31, 1999 1998
------------------------------------------------------------------------------------
<S> <C> <C>
Interest $ 357,000 $ 700,000
Income Taxes $ 2,222,000 $ 1,081,000
------------------------------------------------------------------------------------
</TABLE>
On February 28, 1997, 6,381 shares of Common
Stock were issued as a dividend to the
preferred shareholders as of that date.
As part of the acquisition of Mike Kessler &
Associates, Inc. the Company entered into a
short-term debt agreement for $2,150,000. The
obligation was paid in full at its due date in
January 1998.
As part of the acquisitions in January 1999,
the Company issued 2,091,008 shares of Common
Stock and 1,473,281 shares of Class A
Convertible Preferred Stock.
15. FAIR VALUES OF The following methods and assumptions were
FINANCIAL INSTRUMENTS used to estimate the fair values of each class
of financial instruments for which it is
practicable to estimate that value:
Trade Receivables
The carrying amounts approximate fair value
because of the short maturity of those
instruments.
Accounts Payable and Accrued Expenses, and
Amounts Due to Retailers
Carrying amounts are reasonable estimates of
fair value due to the relatively short period
between origination and expected repayment of
these instruments.
Long-term Debt and Revolving Credit Facility
It is presumed that the carrying amount of the
revolving credit facility is a reasonable
estimate of fair value because the financial
instrument bears a variable interest rate.
The carrying amount of long-term debt has been
discounted to its present value.
The estimated fair values of the Company's
financial instruments are as follows:
F-25
<PAGE> 53
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Carrying Fair
January 31, 1999 value value
------------------------------------------------------------------------------------
<S> <C> <C>
Financial Assets
Trade receivables $ 32,593,428 $ 32,593,428
Financial Liabilities
Accounts payable and accrued
expenses $ 3,727,529 3,727,529
$
Due to retailers $ 2,737,077 2,737,077
$
Long-term debt $ 3,508,057 3,442,958
$
------------------------------------------------------------------------------------
</TABLE>
16. SEGMENT FINANCIAL The reportable segments of the Company are
INFORMATION claims submission and other information
services and display rack manufacturing. The
accounting policies of the segments are the
same as those described in the Summary of
Accounting Policies. Segment operating results
are measured based on income before taxes.
There were no intersegment sales during 1999 or
1998.
<TABLE>
<CAPTION>
Claims
Submission
and Other
Information Display Rack
Services Manufacturing Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999
-----------------------------------
Revenues from external customers $ 14,229,072 $ 6,870,856 $ 21,099,928
Depreciation and amortization 622,110 90,927 713,037
Income before taxes 4,776,949 1,756,589 6,533,538
Total Assets 33,026,229 35,980,823 69,007,052
Capital Expenditures 640,573 1,941 642,514
1998
-----------------------------------
Revenues from external customers 11,803,844 - 11,803,844
Depreciation and amortization 432,632 - 432,632
Income before taxes 2,820,008 - 2,820,008
Total Assets 23,807,857 - 23,807,857
Capital Expenditures 344,847 - 344,847
-------------------------------------------------------------------------------------
</TABLE>
17. MAJOR CUSTOMERS For the year ended January 31, 1999, three
customers accounted for approximately 38% of
revenues. One of the three customers, Food
Lion, Inc., accounted for approximately 27%
revenues. There were no major customers
during 1998.
18. SUBSEQUENT EVENTS Acquisitions
On February 26, 1999 the Company acquired the
net assets of MYCO, Inc. ("MYCO") for $12
million in cash and 134,615 shares of the
Company's Common Stock, valued at the time of
acquisition at $875,000. The Company also
assumed MYCO's industrial revenue bond
indebtedness of $4 million and repaid MYCO's
indebtedness of $1.5 million. The purchase
price may be increased by up to an additional
250,000 shares of Common Stock depending on
MYCO's performance in the twelve months
following the acquisition. MYCO is a Rockford,
Illinois manufacturer of front-end display
racks.
<PAGE> 54
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On February 26, 1999 the Company also acquired
the net assets of Chestnut Display Systems,
Inc. and its affiliate Chestnut Display Systems
(North), Inc. for $3.6 million in cash and
285,714 shares of the Company's Common Stock,
valued at the time of acquisition at $1.8
million. The purchase price for Chestnut may be
increased to a value (including the amounts
already paid) not to exceed $9.5 million if
Chestnut meets certain performance goals during
fiscal 2000 and 2001. Any increase in the
purchase price will be paid 50% in cash and 50%
in shares of Common Stock. The shares will be
valued using a formula contained in the
acquisition agreement, subject to a minimum
value of $5.00 per share and a maximum value of
$7.00 per share. Chestnut manufactures
front-end display racks from facilities in
Greenville, South Carolina and Jacksonville,
Florida.
On March 23, 1999 the Company also purchased
the net assets of 132127 Canada, Inc., known as
ProMark, for $1.5 million Canadian. ProMark is
a Canadian corporation headquartered in Toronto
which provides rebate and information services
to retail customers throughout Canada.
In March 1999 the Company signed a letter of
intent to purchase the stock of Aaron Wire for
approximately $2.4 million Canadian. Aaron Wire
manufactures front-end display racks from its
facilities in Vancouver, British Columbia.
Credit Facility
On March 31, 1999 the Company entered into a
new credit agreement with Wachovia Bank, N.A.
The new credit agreement enables the Company to
borrow up to $15 million under a revolving
credit facility and $15 million under a term
loan. The term loan matures in May 2002. The
revolving credit facility has no termination
date, although, Wachovia Bank has the right to
terminate the revolving credit facility upon
not less than 13 months prior written notice.
Borrowings under the revolving credit facility
bear interest at a rate equal to the monthly
LIBOR index rate plus a percentage ranging from
2.0% to 3.5% depending upon the Company's
ratio of funded debt to earnings before
interest, taxes, depreciation and amortization.
The term loan bears interest, at the Company's
election, at either (i) the London Interbank
Offered Rates for periods of 30, 60, 90 or 180
days, at our option, plus a percentage ranging
from 2.0% to 3.5,%, depending upon the
Company's ratio of funded debt to earnings
before interest, taxes, depreciation and
amortization or (ii) the higher of the prime
rate or the federal funds rate plus .5%. The
credit facility is secured by an interest in
substantially all of the Company's assets.
Under the credit agreement, the Company will be
required to maintain certain financial ratios.
Registration Statement (unaudited)
Subsequent to year end, the Board of Directors
approved a plan in which the Company would sell
additional shares of its Common Stock. The
Company will be required to file a registration
statement for the sale of these securities. It
is anticipated that the aggregate selling price
of all of the securities will approximate
$56,350,000. The proposed issue date of these
securities is expected to be June 1999.
F-27
<PAGE> 55
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
F-28
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE SOURCE INFORMATION MANAGEMENT COMPANY
<TABLE>
<S> <C>
Date: June 9, 1999 /s/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Secretary and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
June 9, 1999 /s/ S. LESLIE FLEGEL
--------------------
S. Leslie Flegel
Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
June 9, 1999 /s/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
June 9, 1999 /s/ RICHARD A. JACOBSEN
-----------------------
Richard A. Jacobsen
Vice Chairman, Chief Operating Officer and
Director
June 9, 1999 /s/ WILLIAM H. LEE
------------------
William H. Lee
Chief Administrative Officer and
Director
June 9, 1999 /s/ ROBERT O. ADERS
-------------------
Robert O. Aders
Director
June 9, 1999 /s/ TIMOTHY A. BRASWELL
-----------------------
Timothy A. Braswell
Director
June 9, 1999 /s/ HARRY L. "TERRY" FRANC, III
-------------------------------
Harry L. "Terry" Franc, III
Director
June 9, 1999 /s/ ARON KATZMAN
----------------
Aron Katzman
Director
June 9, 1999 /s/ RANDALL S. MINIX
--------------------
Randall S. Minix
Director
</TABLE>
<PAGE> 57
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
3.3 Amendment to Articles of Incorporation(2)
3.4 Amendments to Bylaws(2)
3.5 Amendment to Articles of Incorporation(3)
3.6 Amendment to Articles of Incorporation*
4.1 Form of Common Stock Certificate(2)
4.2 Form of Representative's Warrants(2)
4.3 Form of Privately Issued Warrant(2)
9.1 Voting Agreement dated January 7, 1999 between S.
Leslie Flegel and Jonathan J. Ledecky.(4)
10.1 Form of Indemnity Agreement with Officers and
Directors(1)
10.2 Lease Agreement dated June 22, 1991 with 711
Gallimore Partnership(1)
10.3 Addendum to the Lease Agreement, dated as of
January 1, 1994, with 711 Gallimore Partnership(3)
10.4 Addendum to the Lease Agreement, dated as of
January 1, 1996, with 711 Gallimore Partnership(3)
10.5 Addendum to the Lease Agreement, dated as of
April 1, 1996, with 711 Gallimore Partnership(3)
10.6 Addendum to the Lease Agreement, dated as of
April 25, 1996, with 711 Gallimore Partnership(3)
10.7 Amended and Restated Credit Agreement dated as of
March 31, 1999 among The Source Information
Management Company, its subsidiaries and Wachovia
Bank National Association(4)
10.8 The Source Information Management Company Amended
and Restated 1995 Incentive Stock Option Plan (5)
10.9 The Source Information Management Company Stock
Award Plan(6)
10.10 Form of Employment Agreement with S. Leslie
Flegel, William H. Lee and W. Brian
Rodgers(2)
10.11 Employment and Non-Competition Agreement with
James R. Gillis dated as of December 14, 1998*
10.12 Employment Agreement with Richard A. Jacobsen
dated as of March 24, 1999.*
10.13 Agreement with Dwight L. DeGolia(2)
10.14 Form of Financial Consulting Agreement with Donald
& Co. Securities Inc.(2)
10.15 Asset Purchase Agreement dated as of July 10, 1998
by and among The Source Information Management
Company, PC-SUB, Inc. and Periodical Concepts.(7)
10.16 Agreement and Plan of Merger dated as of
January 7, 1999 by and among The Source
Information Management Company, Source-U.S.
Marketing Services, Inc., U.S. Marketing
Services, Inc. and U.S. Marketing Shareholders.(8)
10.17 Asset Purchase Agreement dated as January 7, 1999
by and among The Source Information Management
Company and Yeager Industries, Inc.(8)
10.18 Asset Purchase Agreement dated as of February 1,
1999 by and among The Source Information
Management Company, Chestnut Display Systems, Inc.
and Chestnut Display Systems (North), Inc.(9)
10.19 Asset Purchase Agreement dated as of February 26,
1999 by and among The Source Information
Management Company, MYCO, Inc. and RY, Inc.(9)
10.20 Amendment to Asset Purchase Agreement dated as of
February 26, 1999 by and among The Source
Information Management Company, MYCO, Inc. and
RY, Inc.(9)
10.21 Asset Purchase Agreement dated March 19, 1999
between The Source Information Management Company,
The Source-Canada Corp. and 132127 Canada Inc.*
10.22 Real Estate Sale Contract dated as of April 20,
1999 by and between 711 Gallimore Partnership and
The Source Information Management Company*
10.23 Consulting agreement dated August 31, 1998
between Herbert A. Hardt and The Source
Information Management Company*
21.1 Subsidiaries of the Company*
23.1 Consent of BDO Seidman, LLP**
- ----------
* Previously filed.
** Filed herewith.
(1) Incorporated by reference to Registration Statement on Form 10-SB
(File no. 0-26238)
<PAGE> 58
(2) Incorporated by reference to Registration Statement on Form SB-2
(File no. 333-32733)
(3) Incorporated by reference to Form 10-KSB for the fiscal year ended
January 31, 1996
(4) Incorporated by reference to Registration Statement on Form S-2 (File No.
333-76979)
(5) Incorporated by reference to Schedule 14A filed on March 9, 1999
(6) Incorporated by reference to Form S-8 (File no. 333-16059) filed on
November 13, 1996.
(7) Incorporated by reference to Current Report on Form 8-K filed on August 10,
1998.
(8) Incorporated by reference to Current Report on Form 8-K filed on January 22,
1999
(9) Incorporated by reference to Current Report on Form 8-K filed on March 12,
1999
<PAGE> 1
Exhibit 23.1
[BDO SEIDMAN, LLP LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Source Information Management Company
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Registration
Statement Form S-8 (No. 333-16039) of The Source Information Management Company
(the Company) of our report dated April 16, 1999, relating to the consolidated
financial statements of the Company appearing in the Company's Annual Report on
Form 10-KSB as of and for the year ended January 31, 1999.
St. Louis, Missouri BDO Seidman, LLP
June 8, 1999
