<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended October 31, 2000
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to _________
Commission file number 1-13437
-------
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Exact Name of Small Business Issuer as Specified in Its Charter)
MISSOURI 43-1710906
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
TWO CITY PLACE DRIVE, SUITE 380
ST. LOUIS, MISSOURI 63141
(Address of Principal Executive Offices)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
Class Outstanding on December 13, 2000
Common Stock, $.01 Par Value 17,393,217
<PAGE> 2
THE SOURCE INFORMATION MANAGEMENT COMPANY
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
October 31, 2000 and January 31, 2000
Consolidated Statements of Income for the three months and nine
months ended October 31, 2000 and 1999
Consolidated Statements of Comprehensive Income for the three
months and nine months ended October 31, 2000 and 1999
Consolidated Statement of Stockholders'
Equity for the nine months ended October 31, 2000
Consolidated Statements of Cash Flows for
the nine months ended October 31, 2000 and 1999
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE> 3
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
January 31, 2000 October 31, 2000
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 1,738 $ 1,082
Trade receivables (net of allowance for doubtful accounts of $1,123 at
January 31, 2000 and $1,394 at October 31, 2000) 64,836 67,166
Income taxes receivable - 3,178
Inventories (Note 3) 9,994 6,695
Other current assets 1,448 905
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 78,016 79,026
-----------------------------------------------------------------------------------------------------------------------------
Land 2,233 2,233
Plants and buildings 11,896 11,956
Office equipment and furniture 12,337 12,925
-----------------------------------------------------------------------------------------------------------------------------
Property, Plants and Equipment 26,466 27,114
Less accumulated depreciation and amortization 4,670 4,880
-----------------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANTS AND EQUIPMENT 21,796 22,234
-----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net of accumulated amortization of $3,360 and $5,579, at January
31, 2000 and October 31, 2000, respectively (Note 4) 53,930 52,663
Investment at fair value - 1,794
Notes receivable (Note 2) 975 702
Other 2,042 1,860
-----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 56,947 57,019
-----------------------------------------------------------------------------------------------------------------------------
$ 156,759 $ 158,279
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(unaudited)
January 31, 2000 October 31, 2000
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Checks issued against future deposits $ 1,217 $ 2,413
Accounts payable and accrued expenses 9,239 6,738
Income taxes payable 1,093 -
Due to retailers 3,723 1,834
Deferred income taxes 1,115 1,328
Current maturities of long-term debt (Note 5) 174 176
----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 16,561 12,489
----------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 5) 32,215 32,350
----------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 569 35
----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 49,345 44,874
----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS
STOCKHOLDERS' EQUITY
Contributed Capital:
Common Stock, $.01 par - shares authorized, 40,000,000; 17,345,071 issued,
of which 42,250 are being held as Treasury Stock at January 31, 2000 and
18,092,866 issued, of which 348,650 is being held as Treasury Stock at
October 31, 2000 173 181
Preferred Stock, $.01 par - shares authorized, 2,000,000; -0- issued and
outstanding at January 31, 2000 and October 31, 2000 - -
Additional paid-in-capital 91,770 96,219
----------------------------------------------------------------------------------------------------------------------------
Total contributed capital 91,943 96,400
Accumulated other comprehensive income 80 (1,192)
Retained earnings 15,878 21,271
----------------------------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 107,901 116,479
Less: Treasury Stock (42,250 and 348,650 shares at cost, respectively at
January 31, 2000 and October 31, 2000) (487) (3,074)
----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 107,414 113,405
----------------------------------------------------------------------------------------------------------------------------
$ 156,759 $ 158,279
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1999 2000 1999 2000
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service Revenues $ 4,245 $ 7,491 $ 12,929 $ 18,027
Product Sales 20,970 18,768 44,750 55,397
---------------------------------------------------------------------------------------------------------------------------
25,215 26,259 57,679 73,424
---------------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues 2,556 2,528 6,804 8,416
Cost of Goods Sold 13,603 13,761 28,085 37,723
---------------------------------------------------------------------------------------------------------------------------
16,159 16,289 34,889 46,139
---------------------------------------------------------------------------------------------------------------------------
9,056 9,970 22,790 27,285
Selling, General and Administrative Expense 4,048 4,040 10,502 12,116
Unusual Items - 4,059 - 4,059
---------------------------------------------------------------------------------------------------------------------------
Operating Income 5,008 1,871 12,288 11,110
---------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 44 5 87 33
Interest expense (95) (646) (792) (1,770)
Other 2 18 176 79
---------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (49) (623) (529) (1,658)
---------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 4,959 1,248 11,759 9,452
Income Tax Expense 2,091 596 5,068 4,059
---------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,868 $ 652 $ 6,691 $ 5,393
---------------------------------------------------------------------------------------------------------------------------
Earnings per Share -- Basic $ 0.17 $ 0.04 $ 0.45 $ 0.31
---------------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding -- Basic (Note 6) 16,914 17,761 14,731 17,635
---------------------------------------------------------------------------------------------------------------------------
Earnings per Share -- Diluted $ 0.16 $ 0.04 $ 0.41 $ 0.29
---------------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding -- Diluted 18,171 18,092 16,151 18,528
(Note 6)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1999 2000 1999 2000
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 2,868 $ 652 $ 6,691 $ 5,393
Net Unrealized Holding Loss on Available-for-Sale
Securities - (407) - (1,024)
Currency Translation Adjustment 84 (164) 15 (248)
---------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 2,952 $ 81 $ 6,706 $ 4,121
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
(in thousands, except shares)
<TABLE>
<CAPTION>
Other
Common Stock Additional Compre- Treasury Stock Total
--------------------- Paid - in Retained hensive -------------------- Stockholders'
Shares Amount Capital Earnings Income Shares Amount Equity
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 2000 17,345,071 $ 173 $ 91,770 $ 15,878 $ 80 42,250 $ (487) $ 107,414
Exercise of stock options 103,165 1 826 827
Exercise of warrants 499,109 5 2,542 2,547
Acquisition contingency 142,987 2 1,040 1,042
payment
Purchase of Treasury Stock 306,400 (2,587) (2,587)
Foreign currency (248) (248)
translation adjustment
Net unrealized holding loss (1,024) (1,024)
on available-for-sale
securities
Other 2,534 41 41
Net income 5,393 5,393
---------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2000 18,092,866 $ 181 $ 96,219 $ 21,271 $(1,192) 348,650 $ (3,074) $ 113,405
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 7
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended October 31, 1999 2000
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,691 $ 5,393
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,664 3,673
Provision for losses on accounts receivable 4 272
Deferred income taxes 300 369
Other 91 (46)
Changes in assets and liabilities:
Increase in accounts receivable (15,291) (2,602)
Decrease in inventories 2,217 3,299
Decrease (increase) in other assets 340 (2,495)
Decrease in accounts payable and accrued expenses and
other liabilities (3,682) (3,592)
Increase (decrease) in amounts due to retailers 4,120 (1,889)
-----------------------------------------------------------------------------------------------------------------------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,546) 2,382
-----------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Acquisitions, net of cash acquired (30,507) -
Investment - (3,500)
Capital expenditures (2,687) (1,848)
Loans to officers (975) -
Collections on loan to officer - 273
Other (32) (21)
-----------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (34,201) (5,096)
-----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in checks issued against future deposits 4,735 1,196
Proceeds from issuance of Common Stock 37,232 3,374
Borrowings under credit facility 50,363 69,070
Principal payments on credit facility (53,565) (68,922)
Borrowings under long-term debt agreements 15,000 -
Principal payments on long-term debt agreements (15,016) -
Purchase of Treasury Stock (290) (2,587)
Deferred loan costs (222) (57)
Other - (16)
-----------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 38,237 2,058
-----------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH 1,490 (656)
CASH, beginning of period 753 1,738
-----------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 2,243 $ 1,082
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 8
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The consolidated financial statements as of October 31, 2000 and for the three
and nine month periods ended October 31, 2000 and 1999, include, in the opinion
of management, all adjustments (consisting of normal recurring adjustments and
reclassifications) necessary to present fairly the financial position, results
of operations and cash flows at October 31, 2000 and for all periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-K for the year
ended January 31, 2000. The results of operations for the three and nine month
periods ended October 31, 2000 are not necessarily indicative of the operating
results to be expected for the full year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
2. RELATED PARTY TRANSACTIONS
In connection with his employment as Chief Operating Officer of the Company,
Richard Jacobsen received two loans in the amounts of $600,000 ("Loan 1") and
$375,000 ("Loan 2"). Loan 1, including interest, was to be forgiven over a
5-year term and Loan 2, including interest, was to be forgiven over a 7-year
term, provided, in each case, that he remained an employee of the Company. The
loans bear interest at 5% per annum. Mr. Jacobsen resigned in August 2000. The
Company has extended the due date of the notes to December 2000.
In May 1999, the Company purchased its facility in High Point, North Carolina
for $1.8 million. The facility was owned by a partnership in which stockholders
of the Company were partners. The Board of Directors appointed Timothy Braswell,
an independent director who has since resigned from the Board, to negotiate the
transaction on the Company's behalf and, based on Mr. Braswell's recommendation,
the Board believes the terms of the purchase were fair to the Company.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
January 31, 2000 October 31, 2000
--------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 3,433 $ 3,052
Work-in-process 2,286 2,471
Finished goods 4,275 1,172
--------------------------------------------------------------------------------------
$ 9,994 $ 6,695
--------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 9
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4. BUSINESS COMBINATIONS
Acquisition of Chestnut Display Systems, Inc.
On February 1, 1999 the Company acquired the net assets of Chestnut Display
Systems, Inc. and its affiliate Chestnut Display Systems (North), Inc. for $3.6
million in cash and 285,714 shares of the Company's Common Stock, valued at the
time of acquisition at $1.8 million. The purchase price was increased by an
additional 130,000 shares of Common Stock issued in August and November based
upon Chestnut meeting certain performance goals during fiscal 2000 and 2001.
Chestnut manufactures front-end display racks from its facility in Jacksonville,
Florida.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired by approximately
$6,611,000 and is being amortized straight line over 20 years.
Acquisition of MYCO, Inc.
On February 26, 1999 the Company acquired the net assets of MYCO, Inc. 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 was increased by an additional 100,000 shares of
Common Stock issued in October 2000 based on MYCO's performance in the twelve
months following the acquisition. MYCO is a Rockford, Illinois manufacturer of
front-end display racks.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired by approximately
$12,603,000 and is being amortized straight line over 20 years.
Acquisition of 132127 Canada, Inc.
On March 23, 1999 the Company purchased the net assets of 132127 Canada, Inc.,
known as ProMark, for $1.5 million Canadian. ProMark is a Canadian corporation
headquartered in Toronto which provides rebate and information services to
retail customers throughout Canada.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired by approximately
$682,000 and is being amortized straight line over 20 years.
Acquisition of Aaron Wire and Metal Products, Ltd.
On July 1, 1999 the Company acquired all of the stock of Aaron Wire and Metal
Products, Ltd. for $2.4 million Canadian. Aaron Wire manufactures front-end
display racks from manufacturing facilities in Vancouver, British Columbia.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired by approximately
$1,519,000 and is being amortized straight line over 20 years.
7
<PAGE> 10
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Acquisition of Huck Store Fixture Company
On September 21, 1999 the Company purchased the net assets of Huck Store Fixture
Company for $3.0 million in cash and 100,000 shares of the Company's common
stock, valued at the time of acquisition at approximately $1.5 million. The
Company also repaid Huck Store Fixture Company's indebtedness of approximately
$6.8 million. The sellers were entitled to a payment, based on performance,
which was calculated and paid in January, 2000. The payment was an additional
$6.7 million in cash and 267,883 shares of the Company's common stock, valued at
the time of issuance at $3.8 million. The sellers will be entitled to an earnout
payment in the amount (if any) by which four times the average of Huck's EBITDA
for its years ending November, 1999 and 2000 exceeds four times the average of
Huck's EBITDA for its years ending November 1998 and 1999. The earnout will be
paid 70% in cash and 30% in the Company's common shares, with shares valued for
such purposes at the closing value on the date of the letter of intent. The
closing price on the date of the letter of intent was $11.375. Huck manufactures
wood store fixtures from its facilities in Quincy, Illinois and Carson City,
Nevada.
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 fair market value of the assets acquired by
approximately $5,897,000 and is being amortized straight line over 20 years.
Acquisition of Arrowood, Inc.
On September 27, 1999 the Company acquired the net assets of Arrowood, Inc. for
$939,000 in cash and two separate notes for a total of $380,000. Arrowood
manufactures wood store fixtures from its facility in Norwood, North Carolina.
Huck Store Fixture Company had entered into a letter of intent to purchase
Arrowood prior to the Company acquisition of Huck. With the North Carolina
facility, the Company has wooden store fixture manufacturing facilities to
service accounts on the East Coast, the Midwest and the West Coast.
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 fair market value of the assets acquired by
approximately $435,000 and is being amortized straight line over 20 years.
Unaudited pro forma results of operations for the year ended January 31, 2000
for the Company, MYCO and Huck are listed below (in thousands):
<TABLE>
<CAPTION>
------------------------------------------------------------------------
<S> <C> <C>
Total Revenues As reported $ 82,488
Pro forma 95,528
Net Income As reported 10,111
Pro forma 11,376
Earnings Per Share
Basic As reported $ .66
Diluted As reported .60
Basic Pro forma .73
Diluted Pro forma .67
------------------------------------------------------------------------
</TABLE>
8
<PAGE> 11
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
5. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
Long-term debt consists of (in thousands):
<TABLE>
<CAPTION>
January 31, October 31,
2000 2000
---------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Facility $ 27,899 $ 28,147
Industrial Revenue Bonds 4,000 4,000
Unsecured note payable to former owners of acquired
company, non-interest bearing, payable in five equal annual
installments beginning in November 1999 240 240
Unsecured note payable to former owner of acquired company,
7% annual interest, payable in two annual installments
beginning in September 2000 200 100
Other 50 39
---------------------------------------------------------------------------------------------
Total Long-term Debt 32,389 32,526
Less current maturities 174 176
---------------------------------------------------------------------------------------------
Long-term Debt $ 32,215 $ 32,350
---------------------------------------------------------------------------------------------
</TABLE>
On December 22, 1999, the Company entered into an unsecured credit agreement
with Bank of America, N.A., replacing its previous credit agreement with
Wachovia Bank, N.A. The credit agreement enables the Company to borrow up to $50
million under a revolving credit facility that terminates December 31, 2002.
Borrowings under the credit facility bear interest at a rate equal to the
monthly London Interbank Offered Rate ("LIBOR") plus a percentage ranging from
1.0% to 2.1% depending on the Company's ratio of funded debt to earnings before
interest, taxes, depreciation and amortization. Under the credit agreement, the
Company is required to maintain certain financial ratios. The Company was in
compliance with such ratios at October 31, 2000. The availability at October 31,
2000 on the revolving credit facility was approximately $17.8 million.
In connection with the acquisition of MYCO, Inc., the Company assumed the
liabilities of MYCO's Industrial Revenue Bonds. On January 30, 1995, the City of
Rockford issued $4.0 million of its Industrial Project Revenue Bonds, Series
1995, and the proceeds were deposited with the Amalgamated Bank of Chicago, as
trustee. Bank of America, N.A. has issued an unsecured letter of credit for $4.1
million in connection with the bonds with an initial expiration date of April
20, 2001. The bonds are secured by the trustee's indenture and the $4.1 million
letter of credit. The bonds bear interest at a variable weekly rate
(approximately 80% of the Treasury Rate) not to exceed 15% per annum. The bonds
mature on January 1, 2030. Fees related to the letter of credit are .75% per
annum of the outstanding bond principal plus accrued interest.
9
<PAGE> 12
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
6. EARNINGS PER SHARE
A reconciliation of the denominators of the basic and diluted earnings per share
computations are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
1999 2000 1999 2000
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 16,914 17,761 14,731 17,635
Effect of dilutive securities 1,257 331 1,420 893
----------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding -
as adjusted 18,171 18,092 16,151 18,528
----------------------------------------------------------------------------------------------------------------
</TABLE>
Options and warrants to purchase 1,636,597 and 200,000, respectively, shares of
common stock were outstanding during the third quarter of 2001 but were not
included in the computation of diluted EPS because the options' and warrants'
exercise prices were greater than the average market price of the common shares.
Options to purchase 731,930 shares of common stock were outstanding during the
nine months ended October 31, 2000 but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the average
market price of the common shares.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental information on interest and income taxes paid is as follows (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended October 31, 1999 2000
-----------------------------------------------------------------------------------------
<S> <C> <C>
Interest $ 757 $ 1,661
Income Taxes $ 2,330 $ 7,947
-----------------------------------------------------------------------------------------
</TABLE>
In connection with the acquisitions in January 1999, the Company issued
2,091,008 shares of Common Stock and 1,473,281 shares of Class A Convertible
Preferred Stock which were converted to an equal number of common shares on
March 30, 1999.
In April 2000, the parties terminated the Earnout provision with Yeager and the
Company issued 12,987 shares of the Company's common stock. Additionally, in
August 2000, the Company issued 30,000 shares of the Company's common stock in
connection with the Earnout provision with Chestnut. In connection with the
Earnout provision with MYCO, the Company issued 100,000 shares of its common
stock in October 2000.
In connection with the acquisitions in February 1999, the Company issued 420,329
shares of Common Stock.
10
<PAGE> 13
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
8. SEGMENT FINANCIAL INFORMATION
The Company is engaged in two lines of business based on the reporting of senior
management to the Chief Executive Officer. The reportable segments of the
Company are services and display rack and store fixture manufacturing. The
nature and scope, as well as the accounting policies, of the segments are
described in greater detail in the Summary of Accounting Policies footnote
included in the Company's Form 10-K. Segment operating results are measured
based on gross profit. All intersegment sales during the periods presented were
eliminated.
<TABLE>
<CAPTION>
Display Rack &
Store Fixture
Services Manufacturing Consolidated
(in thousands) ----------------------------------------------------
Three Months Ended October 31, 2000
---------------------------------------------------
<S> <C> <C> <C>
Revenue $7,491 $18,768 $26,259
Cost of Revenue 2,528 13,761 16,289
----------------------------------------------------
Gross Profit 4,963 5,007 9,970
Selling, General & Administrative 4,040
Unusual Items 4,059
----------------
Operating Income 1,871
Other Expenses, net (623)
----------------
Income Before Income Taxes $1,248
----------------
Total Assets $55,781 $102,498 $158,279
----------------------------------------------------
Three Months Ended October 31, 1999
---------------------------------------------------
Revenue $4,245 $20,970 $25,215
Cost of Revenue 2,556 13,603 16,159
----------------------------------------------------
Gross Profit 1,689 7,367 9,056
Selling, General & Administrative 4,048
----------------
Operating Income 5,008
Other Expenses, net (49)
----------------
Income Before Income Taxes $4,959
----------------
Total Assets $57,092 $84,542 $141,634
----------------------------------------------------
</TABLE>
11
<PAGE> 14
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Display Rack &
Store Fixture
Services Manufacturing Consolidated
(in thousands) ----------------------------------------------------
Nine Months Ended October 31, 2000
---------------------------------------------------
<S> <C> <C> <C>
Revenue $18,027 $55,397 $73,424
Cost of Revenue 8,416 37,723 46,139
----------------------------------------------------
Gross Profit 9,611 17,674 27,285
Selling, General & Administrative 12,116
Unusual Items 4,059
----------------
Operating Income 11,110
Other Expenses, net (1,658)
----------------
Income Before Income Taxes $9,452
----------------
Total Assets $55,781 $102,498 $158,279
----------------------------------------------------
Nine Months Ended October 31, 1999
---------------------------------------------------
Revenue $12,929 $44,750 $57,679
Cost of Revenue 6,804 28,085 34,889
----------------------------------------------------
Gross Profit 6,125 16,665 22,790
Selling, General & Administrative 10,502
----------------
Operating Income 12,288
Other Expenses, net (529)
----------------
Income Before Income Taxes $11,759
----------------
Total Assets $57,092 $84,542 $141,634
----------------------------------------------------
</TABLE>
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We derive our revenues from (1) providing information and management services
relating to retail magazine sales to U.S. and Canadian retailers and magazine
publishers and confectioners and vendors of gum and general merchandise sold at
checkout counters and (2) manufacturing display racks and store fixtures used by
retailers at checkout counters and other areas of their stores.
Fees earned in connection with the collection of incentive payments under our
Traditional Claim Submission and Advance Pay Programs continue to be significant
contributors to our service revenues. Payments collected from publishers under
the Advance Pay Program as a percentage of all incentive payments collected from
publishers grew from 21.9% during fiscal 1998 to 30.4% during fiscal 1999 and
32.6% during fiscal 2000. 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 Traditional Claim Submission Program, we submit
claims for incentive payments on behalf of the retailer and receive a fee based
on the amounts collected. Under the Advance Pay Program, we pay participating
retailers a negotiated fixed percentage of total quarterly incentive payments
and pocket rental fees and then collect the payments from the publishers for our
own account.
Under both the Traditional 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 is approximately 2.0% of accounts receivable. We believe this
amount will be 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.
ICN, PIN and store level data revenues consist of subscription fees. Subscribers
pay for their subscriptions on a quarterly basis for ICN and PIN and on a
monthly basis for store level data. Subscriptions have an initial term of one
year and are automatically renewed for successive one-year terms unless earlier
terminated. Revenues are recognized ratably over the subscription term. We 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 installation and collecting incentive payments from vendors for
product placement. Front-end management revenues are recognized as services are
performed.
Since January 7, 1999, we acquired five manufacturers of front-end and
free-standing point-of-purchase display racks and two manufacturers of wooden
store fixtures. Manufacturing display racks and store fixtures in our own
facilities allows us to be a full-service provider of management services for
the front-end of a customer's store.
We generally recognize manufacturing revenues as products are shipped to
customers. When we receive payment prior to shipment, we record the amount as a
liability 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 display rack and store fixture manufacturing segment, we
also receive trucking revenues for transporting racks and warehousing revenues
for storing racks. We generally recognize trucking revenues as shipments are
completed. 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 and store fixtures. 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.
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<PAGE> 16
Manufacturing has accounted 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 increased
substantially due to the increased scope of our operations.
See Note 8 in the "Notes to Consolidated Financial Statements" for certain
financial information on our two business segments, which are services and
display rack and store fixture manufacturing.
RECENT ACQUISITIONS
Since January 7, 1999, we acquired the following companies. Each of the
acquisitions was accounted for as a purchase.
o SOURCE-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 the stock of 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.
o SOURCE-YEAGER INDUSTRIES, INC. Yeager manufactures front-end display
racks from facilities in Philadelphia, Pennsylvania. We purchased the
assets of Yeager Industries, Inc. 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 could have been increased by up to $500,000 (the
"Earnout"), depending upon Yeager's performance during fiscal 2000 and
2001. In April 2000, the parties terminated the Earnout provision and
we issued to Yeager 12,987 shares of our common stock.
o SOURCE-MYCO, INC. MYCO is a Rockford, Illinois manufacturer of front-end
display racks. We purchased the assets and assumed the operating
liabilities of MYCO, Inc. 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 Inc.'s industrial revenue
bond indebtedness of $4.0 million and repaid MYCO, Inc.'s indebtedness
of $1.5 million. The purchase price was increased by an additional
100,000 shares of our common stock issued in October 2000 based on
MYCO's performance in the twelve months following the acquisition.
o SOURCE-CHESTNUT DISPLAY SYSTEMS, INC. Chestnut manufactures front-end
display racks from facility in 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 was increased by an additional 130,000 shares of our
common stock issued in August and November based upon Chestnut meeting
certain performance goals during fiscal 2000 and 2001.
o PROMARK. We purchased the assets and assumed the operating liabilities
of 132127 Canada Inc., known as ProMark, in March 1999. Headquartered
in Toronto, this operation provides rebate and information services to
retail customers throughout Canada and 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.
o AARON WIRE AND METAL PRODUCTS, LTD. Aaron Wire manufactures front-end
display racks from its facilities in Vancouver, British Columbia. In
July 1999, we acquired the stock of Aaron Wire for approximately
Cdn$2.4 million.
o SOURCE-HUCK STORE FIXTURE COMPANY. Huck manufactures wooden store
fixtures from its facilities in Quincy, Illinois and Carson City,
Nevada. In September 1999, we purchased the assets and assumed certain
operating liabilities of Huck Store Fixture Company for $3.0 million in
cash and 100,000 shares of our common stock, valued at the time of
acquisition at approximately $1.5 million. We also repaid Huck Store
Fixture Company's indebtedness of approximately $6.8 million. The
sellers were entitled to a payment, based on performance, which was
calculated and paid in January, 2000. That payment was an additional
$6.7 million in cash and 267,883 shares of our common stock, valued at
the time of issuance at $3.8 million. The sellers will be entitled to
an additional payment, an earnout payment,
14
<PAGE> 17
in the amount (if any) by which four times the average of Huck's EBITDA
for its years ending November, 1999 and 2000 exceeds four times the
average of Huck's EBITDA for its years ending November 1998 and 1999.
The earnout will be paid 70% in cash and 30% in our common shares, with
shares valued for such purposes at the closing value on the date of the
letter of intent. The closing price on the date of the letter of intent
was $11.375.
o HUCK STORE FIXTURE COMPANY OF NORTH CAROLINA. In September 1999, our
subsidiary, Huck Store Fixture Company of North Carolina, acquired the
net assets of Arrowood, Inc. for $939,000 in cash and two separate
notes for a total of $380,000. This company manufactures wooden store
fixtures from its facility in Norwood, North Carolina. Huck Store
Fixture Company had entered into a letter of intent to purchase
Arrowood prior to our acquisition of Huck.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, information relating
to our operations expressed as a percentage of Total Revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
OCTOBER 31, OCTOBER 31,
------------------- ------------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Service Revenues 16.8% 28.5% 22.4% 24.6%
Product Sales 83.2 71.5 77.6 75.4
---- ----- ---- -----
Total Revenues 100.0 100.0 100.0 100.0
Cost of Service Revenues 10.1 9.6 11.8 11.4
Cost of Goods Sold 54.0 52.4 48.7 51.4
----- ---- ----- ----
Gross Profit 35.9 38.0 39.5 37.2
Selling, General and Administrative Expense 16.0 15.4 18.2 16.5
Unusual Items -.- 15.5 -.- 5.5
--- ---- --- ---
Operating Income 19.9 7.1 21.3 15.2
Interest Expense, Net (0.2) (2.5) (1.2) (2.4)
Other Income (Expense), Net -.- 0.1 0.3 0.1
---- ---- ---- ----
Income Before Income Taxes 19.7 4.7 20.4 12.9
---- --- ---- ----
Net Income 11.4% 2.5% 11.6% 7.4%
===== ===== ===== =====
</TABLE>
QUARTER ENDED OCTOBER 31, 2000 COMPARED TO QUARTER ENDED OCTOBER 31, 1999
Service Revenues. Services, which include the Claim Submission Program, Advance
Pay Program, PIN/ICN and front-end management, accounted for approximately 28.5%
and 16.8% of our revenues for the quarters ended October 31, 2000 and 1999,
respectively. Service revenues of $7.5 million in third quarter of fiscal 2001
increased $3.2 million compared to the third quarter of fiscal 2000 primarily
due to an increase in ICN related revenues. Most of the anticipated ICN related
revenue will be from agreements which contain revenue sharing elements which
require us to pay a certain portion of such revenues to third parties which
provide data to us. However, ICN related revenue recognized during the quarter
ended October 31, 2000 had no revenue sharing element associated with it.
Product Sales. In September, 1999, we acquired Huck and Arrowood. Results of
operations for all companies have been included in our consolidated financial
statements since their respective dates of acquisition. Manufacturing display
racks and store fixtures accounted for approximately 71.5% and 83.2% of our
revenues for the quarters ended October 31, 2000 and 1999, respectively. Product
sales of $18.8 million in the third quarter of fiscal 2001 decreased $2.2
million compared to the third quarter of fiscal 2000. Revenues attributable to
Huck and Arrowood increased $2.9 million offset by a decrease in the remaining
manufacturers of $5.1 million. The decrease in the remaining manufacturers was
primarily related to volume and, to a small degree, pricing. Volume was impacted
by customer postponements. Although we enjoy a significant market share in
excess of 60%, we have experienced a limited degree of pricing pressure.
Gross Profit. Gross profit of $10.0 million in the quarter ended October 31,
2000 increased approximately $0.9 million compared to the quarter ended October
31, 1999. Huck and Arrowood accounted for an increase of $0.4 million which was
offset by decreases in gross profits of $2.8 million from the remaining
manufacturers. Services gross profit increased $3.3 million due primarily to the
increased ICN related revenues. Overall, the gross margin increased from 35.9%
to 38.0% resulting from the increase in ICN related revenues offset by a
decrease in the gross margin from product sales from 35.1% to 26.7% resulting
from lower volume and pricing pressure.
15
<PAGE> 18
Selling, General and Administrative Expense. Selling, general and administrative
expense remained constant at $4.0 million. Selling, general and administrative
expense as a percentage of revenues decreased slightly from 16.1% in the third
quarter of fiscal 2000 to 15.4% in the third quarter of fiscal 2001.
Unusual Items. During the quarter ended October 31, 2000 we incurred one-time
charges of $4.1 million to write-off accounts receivable and inventory. The
majority of the write-offs related to the manufacturing segment.
Interest Expense. The increase of $0.6 million in interest expense is due
primarily to the increase in the average balance outstanding on our credit
facility from $1.1 million during the quarter ended October 31, 1999 to $29.2
million for the quarter ended October 31, 2000.
Income Tax Expense. The effective income tax rates for the quarters ended
October 31, 2000 and 1999 were 47.7% and 42.2%, respectively. These rates varied
from the federal statutory rate due to state income taxes and expenses not
deductible for income tax purposes. These non-deductible expenses include
goodwill amortization, meals and entertainment and officers' life insurance
premiums. Such non-deductible expenses as a percentage of income before taxes
increased resulting in a higher effective tax rate.
NINE MONTHS ENDED OCTOBER 31, 2000 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
1999
Service Revenues. Services, which include the Claim Submission Program, Advance
Pay Program, PIN/ICN and front-end management, accounted for approximately 24.6%
and 22.4% of our revenues for the nine months ended October 31, 2000 and 1999,
respectively. Service revenues of $18.0 million in first nine months of fiscal
2001 increased $5.1 million compared to the first nine months of fiscal 2000
primarily as a result of an increase in ICN related revenues and front-end
management revenues. Most of the anticipated ICN related revenue will be from
agreements which contain revenue sharing elements which require us to pay a
certain portion of such revenues to third parties which provide data to us.
However, ICN related revenue recognized during the quarter ended October 31,
2000 had no revenue sharing element associated with it.
Product Sales. In February, 1999, we acquired Chestnut and MYCO. In July, 1999,
we acquired Aaron Wire and in September, 1999, we acquired Huck and Arrowood.
Results of operations for all companies have been included in our consolidated
financial statements since their respective dates of acquisition. Manufacturing
display racks and store fixtures accounted for approximately 75.4% and 77.6% of
our revenues for the nine months ended October 31, 2000 and 1999, respectively.
Product sales of $55.4 million in the first nine months of fiscal 2001 increased
$10.6 million compared to the first nine months of fiscal 2000. The acquisitions
of Aaron Wire, Huck and Arrowood contributed to an increase of $17.5 million
over the same nine months of the prior year. The other manufacturers experienced
a decrease in sales of $6.9 million ($5.1 million of which was from the third
quarter) primarily related to volume and, to a small degree, pricing. Volume was
impacted by customer postponements. Although we enjoy a significant market share
in excess of 60%, we have experienced a limited degree of pricing pressure.
Gross Profit. Gross profit increased to $27.3 million in the nine months ended
October 31, 2000 from $22.8 million in the nine months ended October 31, 1999,
an increase of approximately $4.5 million. The increase in gross profit for
services was $3.5 million. The gross profit for manufacturing increased $1.0
million with Huck and Arrowood contributing $4.0 million offset by a $3.0
million decrease from the remaining manufacturers. The manufacturing gross
margin decreased from 37.2 % to 31.9% resulting from lower margins associated
with Huck and Arrowood, neither of which were included in the first eight months
of the prior year and from lower volume and pricing pressure experienced during
the third quarter of this year.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased to $12.1 million in the nine months ended October 31, 2000
from $10.5 million in the nine months ended October 31, 1999, an increase of
$1.6 million, of which Huck's increased expenses were $0.9 million. Selling,
general and administrative expense as a percentage of revenues decreased from
18.2% in the first nine months of fiscal 2000 to 16.5% in the first nine months
of fiscal 2001.
Unusual Items. During the quarter ended October 31, 2000 we incurred one-time
charges of $4.1 million to write off accounts receivable and inventory. The
majority of the write-offs related to the manufacturing segment.
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<PAGE> 19
Interest Expense. The increase of $1.0 million in interest expense is due
primarily to the increase in the average balance outstanding on our credit
facility from $10.0 million during the nine months ended October 31, 1999 to
$27.0 million for the nine months ended October 31, 2000.
Income Tax Expense. The effective income tax rates for the nine months ended
October 31, 2000 and 1999 were 42.9% and 43.1%, respectively. These rates varied
from the federal statutory rate due to state income taxes and expenses not
deductible for income tax purposes. These non-deductible expenses include
goodwill amortization, meals and entertainment and officers' life insurance
premiums.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements for the service segment are for funding the
Advance Pay Program and for meeting general working capital requirements. Our
primary cash requirements for the display rack and store fixture 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, borrowings under available lines of credit and through
the issuance of equity securities.
During the nine months ended October 31, 2000, we advanced approximately $64.6
million under the Advance Pay Program. During fiscal 2000, 1999 and 1998, we
advanced approximately $68.9 million, $59.8 million and $41.7 million,
respectively, under the Advance Pay Program. These advances grew by 15.2% from
fiscal 1999 to fiscal 2000 and 43.4% from fiscal 1998 to fiscal 1999. Generally,
the primary source of funding the advances is our credit facility, which is
discussed below. During the nine months ended October 31, 2000, the Program was
funded by borrowings under the revolving credit facility and cash flows from
operations. 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 $7.7 million for the quarter ended
October 31, 2000 compared to $2.7 million for the quarter ended October 31,
1999. Net cash provided by operating activities of $2.4 million for the nine
months ended October 31, 2000 was primarily from net income, non cash items of
depreciation and amortization and the decrease in inventories offset by the
increases in accounts receivable and other assets and decreases in accounts
payable and accrued expenses and amounts due to retailers. The average
collection period for the nine months ended October 31, 2000 was approximately
165 days (considered to be within an acceptable range by management based on the
nature of our business and historical experience). The collection period cannot
be calculated by examining our financial statements because reported revenue
associated with the Advance Pay Program includes only the difference between
what we advance the retailer and what is due from the publisher. The receivable
equals the amount due from the publisher, not the amount of revenue recorded. If
the revenues were reported in a manner consistent with the recording of the
receivables, revenues would have been approximately $64.6 million higher than
reported, or approximately $137.8 million. Dividing the average accounts
receivable into $137.8 million results in an average collection period of
approximately 165 days. Net cash used by operating activities of $2.5 million
for the nine months ended October 31, 1999 was primarily from the increase in
accounts receivable, decreases in accounts payable and accrued expenses offset
by the increase in amounts due to retailers and net income.
Net cash used in investing activities was $5.1 million for the nine months ended
October 31, 2000 and $34.2 million for the nine months ended October 31, 1999.
The primary use of cash during the nine months ended October 31, 1999 was for
acquisitions.
Net cash provided by financing activities was $2.1 million in the nine months
ended October 31, 2000 and $38.2 million in the nine months ended October 31,
1999. The primary source of cash during the nine months ended October 31, 1999
was proceeds from the common stock offering in July 1999. During the nine months
ended October 31, 2000 we have reacquired $2.6 million of our common stock. We
believe our common stock is undervalued and remains an attractive investment at
current market prices.
At October 31, 2000, we did not have any commitments for capital expenditures.
Currently, we do not anticipate any significant capital expenditures during the
remainder of fiscal 2001.
At October 31, 2000, our total long-term debt obligations were approximately
$32.4 million. In December 1999, we entered into an unsecured credit agreement
with Bank of America, N.A. to provide for a $50.0 million revolving credit
facility. The
17
<PAGE> 20
revolving credit facility bears interest at a rate equal to the LIBOR plus a
percentage ranging from 1.0% to 2.1% depending on our ratio of funded debt to
earnings before interest, taxes, depreciation and amortization and carries a
facility fee of 1/4% per annum on the difference between $25.0 million and the
average principal amount outstanding under the loan (if less than $25.0 million)
plus 3/8% per annum of the difference between the maximum amount of the loan and
the greater of (i) $25.0 million or (ii) the average principal amount
outstanding under this loan. The revolving credit facility terminates December
31, 2002.
Under the Credit Agreement, we are subject to various financial and operating
covenants. These include (i) requirements that we satisfy various financial
ratios and (ii) limitations on the payment of cash dividends or other
distributions on capital stock or payments in connection with the purchase,
redemption, retirement or acquisition of capital stock.
In connection with the acquisition of MYCO, Inc., the Company assumed MYCO's
Industrial Revenue Bonds (IRB). On January 30, 1995, the City of Rockford issued
$4.0 million of its Industrial Project Revenue Bonds, Series 1995, and the
proceeds were deposited with the Amalgamated Bank of Chicago, as trustee. Bank
of America has issued an unsecured letter of credit for $4.1 million in
connection with the IRB with an initial expiration date of April 20, 2001. The
bonds are secured by the trustee's indenture and the $4.1 million letter of
credit. The bonds bear interest at a variable weekly rate (approximately 80% of
the Treasury Rate) not to exceed 15% per annum. The bonds mature on January 1,
2030. Fees related to the letter of credit are .75% per annum of the outstanding
bond principal plus accrued interest.
We believe that our cash flow from operations together with our revolving credit
will be sufficient to fund our working capital needs and capital expenditures
for the foreseeable future.
NEW ACCOUNTING STANDARDS
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, as amended by SFAS No. 137, is effective for 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.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". In
July 2000, the Emerging Issues Task Force issued EITF 99-19, "Reporting Revenue
Gross as a Principal versus Net as an Agent". SAB 101 and EITF 99-19 provide
guidance on applying generally accepted accounting principles to revenue
recognition issues in financial statements. The Company will adopt SAB 101 and
EITF 99-19 as required in the fourth quarter of fiscal 2001 and is still
evaluating the impact these pronouncements will have on its consolidated
financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risks include fluctuations in interest rates and
exchange rate variability. Substantially all of the Company's debt relates to a
three-year credit agreement with an outstanding principal balance of
approximately $28.1 million as of October 31, 2000. Interest on the outstanding
balance is charged based on a variable interest rate related to LIBOR plus a
margin specified in the credit agreement, and is subject to market risk in the
form of fluctuations in interest rates. The Company does not trade in derivative
financial instruments.
The Company also conducts operations in Canada. For the nine months ended
October 31, 2000, approximately 3.2% of our revenues were earned in Canada and
collected in local currency. In addition, we generally pay operating expenses in
the corresponding local currency and will be subject to increased risk for
exchange rate fluctuations between such local currency and the dollar. We do not
conduct any significant hedging activities.
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<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of the Shareholders of the Company was held on October
23, 2000. Of the 17,834,283 shares entitled to vote at such meeting, 16,129,241
shares were present at the meeting in person or by proxy.
(b) The proposal to amend the Company's 1995 Incentive Stock Option Plan ("Stock
Plan") to provide for an increase in the number of shares of the Company's
Common Stock available under the Stock Plan by 250,000 shares, was approved. The
purpose of the amendment was to increase the number of available shares so as to
enable the Company to continue the Stock Plan in future years. The number of
shares voted for, against and withheld were as follows:
<TABLE>
<CAPTION>
For Against Withheld Non-Vote
--------- ------- -------- ---------
<S> <C> <C> <C>
9,181,700 999,739 27,677 5,920,125
</TABLE>
The proposal to amend the Company's 1998 Omnibus Plan, as amended, to provide
for an increase the number of shares of the Company's Common Stock available
under the Omnibus Plan by 1,250,000 shares, was approved. The purpose of the
amendment was to increase the number of available shares so as to enable the
Company to continue the Omnibus Plan in future years. The number of shares voted
for, against and withheld were as follows:
<TABLE>
<CAPTION>
For Against Withheld Non-Vote
--------- --------- -------- ---------
<S> <C> <C> <C>
9,028,459 1,142,424 38,233 5,920,125
</TABLE>
Each of the management nominees for director was duly elected to serve an
additional term of three years. The number of shares voted for and withheld were
as follows:
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
Harry L. Franc, III 16,011,917 117,324
Kenneth F. Teasdale 16,009,652 119,589
</TABLE>
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<PAGE> 22
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Exhibit Index.
(b) There were no Current Reports on Form 8-K filed during the quarter ended
October 31, 2000.
20
<PAGE> 23
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE SOURCE INFORMATION MANAGEMENT COMPANY
Date: December 15, 2000 /S/ W. BRIAN RODGERS
-----------------------------------------
W. Brian Rodgers
Chief Financial Officer
21
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
10.3 The Source Information Management Company Amended and Restated
1995 Incentive Stock Option Plan
10.20 The Source Information Management Company Amended and Restated
1998 Omnibus Plan
27.1 Financial Data Schedule (Filed in EDGAR version only)
</TABLE>
22
