<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended July 31, 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.
<TABLE>
<CAPTION>
Class Outstanding on September 5, 2000
<S> <C>
Common Stock, $.01 Par Value 17,834,283
</TABLE>
<PAGE> 2
THE SOURCE INFORMATION MANAGEMENT COMPANY
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ITEM 1. Financial Statements
Consolidated Balance Sheets as of
July 31, 2000 and January 31, 2000
Consolidated Statements of Income for the three months and six months
ended July 31, 2000 and 1999
Consolidated Statements of Comprehensive Income for the three months and
six months ended July 31, 2000 and 1999
Consolidated Statement of Stockholders'
Equity for the six months ended July 31, 2000
Consolidated Statements of Cash Flows for
the six months ended July 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)
(unaudited)
<TABLE>
<CAPTION>
January 31, 2000 July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 1,738 $ 1,903
Trade receivables (net of allowance for doubtful accounts of $1,123 at
January 31, 2000 and $1,121 at July 31, 2000) 64,836 71,074
Income taxes receivable - 3,344
Inventories (Note 3) 9,994 8,014
Other current assets (Note 2) 1,448 1,083
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 78,016 85,418
-----------------------------------------------------------------------------------------------------------------------------
Land 2,233 2,233
Plants and buildings 11,896 11,953
Office equipment and furniture 12,337 12,649
-----------------------------------------------------------------------------------------------------------------------------
Property, Plants and Equipment 26,466 26,835
Less accumulated depreciation and amortization 4,670 4,385
-----------------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANTS AND EQUIPMENT 21,796 22,450
-----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net of accumulated amortization of $3,360 and $4,838, at January
31, 2000 and July 31, 2000, respectively (Note 4) 53,930 52,633
Investment at fair value - 2,471
Notes receivable (Note 2) 975 801
Other 2,042 1,962
-----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 56,947 57,867
-----------------------------------------------------------------------------------------------------------------------------
$ 156,759 $ 165,735
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
January 31, 2000 July 31, 2000
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Checks issued against future deposits $ 1,217 $ 572
Accounts payable and accrued expenses 9,239 6,807
Income taxes payable 1,093 -
Due to retailers 3,723 1,503
Deferred income taxes 1,115 1,434
Current maturities of long-term debt (Note 5) 174 175
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 16,561 10,491
-----------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, LESS CURRENT MATURITIES (NOTE 5) 32,215 41,360
-----------------------------------------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 569 297
-----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 49,345 52,148
-----------------------------------------------------------------------------------------------------------------------------
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
17,910,599 issued, of which 147,250 is being held as Treasury Stock at 173 179
July 31, 2000
Preferred Stock, $.01 par - shares authorized, 2,000,000; -0- issued and
outstanding at January 31, 2000 and July 31, 2000 - -
Additional paid-in-capital 91,770 95,195
-----------------------------------------------------------------------------------------------------------------------------
Total contributed capital 91,943 95,374
Accumulated other comprehensive income 80 (621)
Retained earnings 15,878 20,619
-----------------------------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 107,901 115,372
Less: Treasury Stock (42,250 and 147,250 shares at cost, respectively at
January 31, 2000 and July 31, 2000) (487) (1,785)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 107,414 113,587
-----------------------------------------------------------------------------------------------------------------------------
$ 156,759 $ 165,735
-----------------------------------------------------------------------------------------------------------------------------
</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 July 31, Six Months Ended July 31,
1999 2000 1999 2000
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service Revenues $ 4,458 $ 4,993 $ 8,683 $ 10,537
Product Sales 11,526 17,311 23,780 36,629
----------------------------------------------------------------------------------------------------------------------------------
15,984 22,304 32,463 47,166
----------------------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues 2,267 2,965 4,248 5,888
Cost of Goods Sold 6,851 11,757 14,482 23,962
----------------------------------------------------------------------------------------------------------------------------------
9,118 14,722 18,730 29,850
----------------------------------------------------------------------------------------------------------------------------------
6,866 7,582 13,733 17,316
Selling, General and Administrative Expense 3,120 4,012 6,453 8,077
----------------------------------------------------------------------------------------------------------------------------------
Operating Income 3,746 3,570 7,280 9,239
----------------------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 35 13 43 27
Interest expense (401) (644) (696) (1,124)
Other 35 41 173 62
----------------------------------------------------------------------------------------------------------------------------------
Total Other Income (Expense) (331) (590) (480) (1,035)
----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 3,415 2,980 6,800 8,204
Income Tax Expense 1,486 1,213 2,977 3,463
----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,929 $ 1,767 $ 3,823 $ 4,741
----------------------------------------------------------------------------------------------------------------------------------
Earnings per Share - Basic $ .13 $ .10 $ .28 $ .27
----------------------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Basic (Note 6) 14,644 17,653 13,622 17,571
----------------------------------------------------------------------------------------------------------------------------------
Earnings per Share - Diluted $ .12 $ .10 $ .25 $ .25
----------------------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Diluted (Note 6) 16,054 18,594 15,315 18,830
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended July 31, Six Months Ended July 31,
1999 2000 1999 2000
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 1,929 $ 1,767 $ 3,823 $ 4,741
Market Value Decrease in Marketable Securities - (617) - (617)
Foreign Currency Translation Adjustment (94) (5) (69) (84)
---------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 1,835 $ 1,145 $ 3,754 $ 4,040
---------------------------------------------------------------------------------------------------------------------------
</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 101,832 1 819 820
Exercise of warrants 450,000 5 2,395 2,400
Acquisition 12,987 196 196
contingency payment
Reacquire Common Stock 105,000 (1,298) (1,298)
Foreign currency (84) (84)
translation adjustment
Net unrealized (617) (617)
holding loss on
available-for-sale
securities
Other 709 15 15
Net income 4,741 4,741
---------------------------------------------------------------------------------------------------------------------------
Balance, July 31, 2000 17,910,599 $ 179 $ 95,195 $ 20,619 $ (621) 147,250 $ (1,785) $ 113,587
---------------------------------------------------------------------------------------------------------------------------
</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>
Six Months Ended July 31, 1999 2000
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,823 $ 4,741
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,638 2,393
Deferred income taxes 362 466
Other (251) 13
Changes in assets and liabilities:
Increase in accounts receivable (7,171) (6,236)
Decrease in inventories 111 1,980
Increase in other assets (679) (2,902)
Decrease in accounts payable and accrued expenses and (5,134) (3,524)
other liabilities
Decrease in amounts due to retailers 2,029 (2,220)
-----------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (5,272) (5,289)
-----------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES
Acquisitions, net of cash acquired (19,592) -
Investment - (3,500)
Capital expenditures (2,311) (1,556)
Loans to officers (975) -
Collections on loan to officer - 174
Other (22) (24)
-----------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (22,900) (4,906)
-----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Decrease in checks issued against future deposits (2,430) (645)
Proceeds from issuance of Common Stock 36,138 3,220
Borrowings under credit facility 36,944 52,640
Principal payments on credit facility (40,146) (43,486)
Borrowings under long-term debt agreements 15,000 -
Principal payments on long-term debt agreements (15,011) -
Common Stock reacquired - (1,299)
Deferred loan costs (179) (57)
Other - (13)
-----------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 30,316 10,360
-----------------------------------------------------------------------------------------------------------------------
INCREASE IN CASH 2,144 165
CASH, beginning of period 753 1,738
-----------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 2,897 $ 1,903
-----------------------------------------------------------------------------------------------------------------------
</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 July 31, 2000 and for the three and
six month periods ended July 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 July 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 six month
periods ended July 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 July 31, 2000
-----------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 3,433 $ 2,696
Work-in-process 2,286 3,955
Finished goods 4,275 1,363
-----------------------------------------------------------------------
$ 9,994 $ 8,014
-----------------------------------------------------------------------
</TABLE>
6
<PAGE> 9
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
4. BUSINESS COMBINATIONS
Acquisition of Yeager Industries, Inc.
On January 7, 1999, the Company acquired the net assets of Yeager Industries,
Inc. for $2.3 million in cash and 164,289 shares of the Company's Common Stock,
valued at the time of the acquisition at $1.15 million. The purchase price could
have been increased by up to $500,000 (the "Earnout") depending on Yeager's
performance over the next two years. In April 2000, the parties terminated the
Earnout provision and the Company issued to Yeager 12,987 shares of the
Company's common stock. 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
$1,247,000 and is being amortized straight line over 20 years.
Acquisition of U.S. Marketing Services, Inc.
On January 7, 1999 the Company acquired all of the stock of U.S. Marketing
Services, Inc. ("U.S. Marketing") in exchange for 1,926,719 shares of the
Company's Common Stock and 1,473,281 shares of the Company's Class A Convertible
Preferred Stock, valued at the time of the acquisition at $26.3 million in
total. The Class A Convertible Preferred Stock was converted into an equal
number of Common Shares on March 30, 1999. U.S. Marketing's subsidiary Brand
Manufacturing Corporation ("Brand") manufactures front-end display racks from
manufacturing facilities in Brooklyn, New York and a warehouse and distribution
facility in New Jersey. Through its affiliates, Brand provides trucking and
freight services and removes and disposes of display racks no longer required by
its customers.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired by approximately
$23,499,000 and is being amortized straight line over 20 years.
Acquisition of Chestnut Display Systems, Inc.
On February 1, 1999 the Company acquired the net assets of Chestnut Display
Systems, Inc. and its affiliate Chestnut Display Systems (North), Inc. for $3.6
million in cash and 285,714 shares of the Company's Common Stock, valued at the
time of acquisition at $1.8 million. The purchase price for Chestnut may be
increased to a value (including the amounts already paid) not to exceed $9.5
million if Chestnut meets certain performance goals during fiscal 2000 and 2001.
Any increase in the purchase price will be paid 50% in cash and 50% in shares of
Common Stock. The shares will be valued using a formula contained in the
acquisition agreement, subject to a minimum value of $5.00 per share and a
maximum value of $7.00 per share. Chestnut manufactures front-end display racks
from 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
$6,301,000 and is being amortized straight line over 20 years.
7
<PAGE> 10
The Source Information Management Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Acquisition of 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 may be increased by up to an additional 250,000
shares of Common Stock and cash up to $342,000 depending on MYCO's performance
in the twelve months following the acquisition. MYCO is a Rockford, Illinois
manufacturer of front-end display racks.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired by approximately
$12,067,000 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.
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.
8
<PAGE> 11
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
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>
<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>
9
<PAGE> 12
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, July 31,
2000 2000
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Facility $ 27,899 $ 37,053
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 200 200
Other 50 42
---------------------------------------------------------------------------------------------------
Total Long-term Debt 32,389 41,535
Less current maturities 174 175
---------------------------------------------------------------------------------------------------
Long-term Debt $ 32,215 $ 41,360
---------------------------------------------------------------------------------------------------
</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 July 31, 2000. The availability at July 31, 2000
on the revolving credit facility was approximately $8.9 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.
10
<PAGE> 13
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 Six Months Ended
July 31, July 31,
1999 2000 1999 2000
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding 14,644 17,653 13,622 17,571
Effect of dilutive securities:
Stock options 826 746 684 975
Warrants 584 195 536 284
Incremental shares from assumed conversion of
preferred stock - - 472 -
----------------------------------------------------------------------------------------------------------------
Total effect of dilutive securities 1,410 941 1,692 1,259
----------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding -
as adjusted 16,054 18,594 15,315 18,830
----------------------------------------------------------------------------------------------------------------
</TABLE>
7. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental information on interest and income taxes paid is as follows (in
thousands):
<TABLE>
<CAPTION>
Six Months Ended July 31, 1999 2000
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest $ 702 $ 998
Income Taxes $ 1,947 $ 7,435
----------------------------------------------------------------------------------------------------
</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. Additionally, in April 2000, the parties terminated the Earnout
provision with Yeager and the Company issued 12,987 shares of the Company's
common stock.
In connection with the acquisitions in February 1999, the Company issued 420,329
shares of Common Stock.
11
<PAGE> 14
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
accounting policies of the segments are the same as those described in the
Summary of Accounting Policies. 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 July 31, 2000
-----------------------------------------------
<S> <C> <C> <C>
Revenue $4,993 $17,311 $22,304
Cost of Revenue 2,965 11,757 14,722
----------------------------------------------------
Gross Profit 2,028 5,554 7,582
Selling, General & Administrative 4,012
--------------
Operating Income 3,570
Other Expenses, net (590)
--------------
Income Before Income Taxes $2,980
--------------
Total Assets $59,487 $107,277 $166,764
----------------------------------------------------
Three Months Ended July 31, 1999
-----------------------------------------------
Revenue $4,458 $11,526 $15,984
Cost of Revenue 2,267 6,851 9,118
----------------------------------------------------
Gross Profit 2,191 4,675 6,866
Selling, General & Administrative 3,120
----------------
Operating Income 3,746
Other Expenses, net (331)
----------------
Income Before Income Taxes $3,415
----------------
Total Assets $39,573 $71,892 $111,465
----------------------------------------------------
Six Months Ended July 31, 2000
-----------------------------------------------
Revenue $10,537 $36,629 $47,166
Cost of Revenue 5,888 23,962 29,850
----------------------------------------------------
Gross Profit 4,649 12,667 17,316
Selling, General & Administrative 8,077
----------------
Operating Income 9,239
Other Expenses, net (1,035)
----------------
Income Before Income Taxes $8,204
----------------
Total Assets $59,487 $107,277 $166,764
----------------------------------------------------
Six Months Ended July 31, 1999
---------------------------------------------------
Revenue $8,683 $23,780 $32,463
</TABLE>
12
<PAGE> 15
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Cost of Revenue 4,248 14,482 18,730
----------------------------------------------------
Gross Profit 4,435 9,298 13,733
Selling, General & Administrative 6,453
----------------
Operating Income 7,280
Other Expenses, net (480)
----------------
Income Before Income Taxes $6,800
----------------
Total Assets $39,573 $71,892 $111,465
----------------------------------------------------
</TABLE>
13
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
We derive our revenues from (1) providing information and management services
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 has to date been approximately 1.5% to 2.0% 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.
ICN and PIN revenues consist of subscription fees. Subscribers 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. 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 intend to continue to increase the operating margins in our display rack and
store fixture 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 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.
14
<PAGE> 17
Selling, general and administrative expense includes corporate overhead, project
management, management information systems, executive compensation, human
resource expenses and finance expenses.
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.
- 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.
- 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.
- 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 may be increased by
up to an additional 250,000 shares of our common stock and cash up to
$342,000 depending on MYCO's performance in the twelve months
following the acquisition.
- 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 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 in a combination of cash and 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. 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.
- 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.
- SOURCE-HUCK STORE FIXTURE COMPANY. Huck manufactures wooden store
fixtures from its facilities in Quincy, Illinois
15
<PAGE> 18
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, 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.
- 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 SIX MONTHS ENDED
JULY 31, JULY 31,
-------- --------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Service Revenues 27.9% 22.4% 26.7% 22.3%
Product Sales 72.1 77.6 73.3 77.7
----- ----- ----- -----
Total Revenues 100.0 100.0 100.0 100.0
Cost of Service Revenues 14.2 13.3 13.1 12.5
Cost of Goods Sold 42.9 52.7 44.6 50.8
----- ----- ----- -----
Gross Profit 42.9 34.0 42.3 36.7
Selling, General and Administrative Expense 19.5 18.0 19.9 17.1
----- ----- ----- -----
Operating Income 23.4 16.0 22.4 19.6
Interest Expense, Net (2.3) (2.8) (2.0) (2.3)
Other Income (Expense), Net 0.2 0.2 0.5 0.1
----- ----- ----- -----
Income Before Income Taxes 21.3 13.4 20.9 17.4
----- ----- ----- -----
Net Income 12.1% 7.9% 11.8% 10.1%
===== ===== ===== =====
</TABLE>
QUARTER ENDED JULY 31, 2000 COMPARED TO QUARTER ENDED JULY 31, 1999
Service Revenues. Services, which include the Claim Submission Program, Advance
Pay Program, PIN/ICN and front-end management, accounted for approximately 22.4%
and 27.9% of our revenues for the quarters ended July 31, 2000 and 1999,
respectively. Service revenues of $5.0 million in second quarter of fiscal 2001
increased $0.5 million compared to the second quarter of fiscal 2000 primarily
due to an increase in front end management revenues.
Product Sales. In January, 1999, we acquired Yeager and U.S. Marketing. 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 77.6% and 72.1% of our
revenues for the quarters ended July 31, 2000 and 1999, respectively. Product
sales of $17.3 million in the second quarter of fiscal 2001 increased $5.8
million compared to the second quarter of fiscal 2000 primarily from the
acquisitions of Aaron Wire, Huck and Arrowood. Sales were impacted by a customer
request to postpone the delivery of approximately $6.0 million of fixture
displays into the second half of the fiscal year.
Gross Profit. Gross profit of $7.6 million in the quarter ended July 31, 2000
increased approximately $0.7 million compared to the quarter ended July 31,
1999. Huck and Arrowood accounted for an increase of $1.8 million which was
offset by decreases in gross profits of $0.2 million from services and $0.9
million from manufacturing other than from Huck and Arrowood. Overall,
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<PAGE> 19
the manufacturing gross margin decreased from 40.6% to 32.1% resulting primarily
from lower margins associated with Huck and Arrowood, neither of which were
included in the second quarter of the prior year.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased to $4.0 million in the quarter ended July 31, 2000 from $3.1
million in the quarter ended July 31, 1999, an increase of $0.9 million, of
which Huck's expenses were $0.4 million. Selling, general and administrative
expense as a percentage of revenues decreased from 19.5% in the second quarter
of fiscal 2000 to 18.0% in the second quarter of fiscal 2001.
Interest Expense. The increase of $0.2 million in interest expense is primarily
due to the financing of the acquisitions of Aaron Wire, Huck and Arrowood.
Income Tax Expense. The effective income tax rates for the quarters ended July
31, 2000 and 1999 were 40.7% and 43.5%, respectively. These rates varied from
the federal statutory rate due to state income taxes and expenses not deductible
for income tax purposes. These non-deductible expenses include goodwill
amortization, meals and entertainment and officers' life insurance premiums.
SIX MONTHS ENDED JULY 31, 2000 COMPARED TO SIX MONTHS ENDED JULY 31, 1999
Service Revenues. Services, which include the Claim Submission Program, Advance
Pay Program, PIN/ICN and front-end management, accounted for approximately 22.3%
and 26.7% of our revenues for the six months ended July 31, 2000 and 1999,
respectively. Service revenues of $10.5 million in first six months of fiscal
2001 increased $1.9 million compared to the first six months of fiscal 2000
primarily as a result of an increase in front-end management revenues.
Product Sales. In January, 1999, we acquired Yeager and U.S. Marketing. 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 77.7% and 73.3% of our
revenues for the six months ended July 31, 2000 and 1999, respectively. Product
sales of $36.6 million in the first six months of fiscal 2001 increased $12.8
million compared to the first six months of fiscal 2000 primarily from the
acquisitions of Aaron Wire, Huck and Arrowood. Sales were impacted by a customer
request to postpone the delivery of approximately $6.0 million of fixture
displays into the second half of the fiscal year.
Gross Profit. Gross profit increased to $17.3 million in the six months ended
July 31, 2000 from $13.7 million in the six months ended July 31, 1999, an
increase of approximately $3.6 million. The increase in gross profit for
services of $0.2 million was offset by a decrease in gross profit for
manufacturing of $0.2 million, with Huck and Arrowood accounting for the overall
increase in gross profit of $3.6 million. The manufacturing gross margin
decreased from 39.1% to 34.6% resulting primarily from lower margins associated
with Huck and Arrowood, neither of which were included in the first six months
of the prior year.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased to $8.1 million in the six months ended July 31, 2000 from
$6.5 million in the six months ended July 31, 1999, an increase of $1.6 million,
of which Huck's expenses were $0.9 million. Selling, general and administrative
expense as a percentage of revenues decreased from 19.9% in the first six months
of fiscal 2000 to 17.1% in the first six months of fiscal 2001.
Interest Expense. The increase of $0.4 million in interest expense is primarily
due to the financing of the acquisitions of Aaron Wire, Huck and Arrowood.
Income Tax Expense. The effective income tax rates for the six months ended July
31, 2000 and 1999 were 42.2% and 43.8%, 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
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<PAGE> 20
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 six months ended July 31, 2000, we advanced approximately $45.6
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 six months ended July 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 $2.7 million for the quarter ended
July 31, 2000 compared to cash used in operating activities of $2.1 million for
the quarter ended July 31, 1999. Net cash used by operating activities of $5.3
million for the six months ended July 31, 2000 was primarily from the increases
in accounts receivable and other assets, decreases in accounts payable and
accrued expenses and amounts due to retailers offset by net income and non cash
items of depreciation and amortization. The average collection period for the
six months ended July 31, 2000 was approximately 168 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 $45.6 million higher than reported, or approximately
$92.7 million. Dividing the average accounts receivable into $92.7 million
results in an average collection period of approximately 168 days. Net cash used
by operating activities of $5.3 million for the six months ended July 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 $4.9 million for the six months ended
July 31, 2000 and $22.9 million for the six months ended July 31, 1999. The
primary use of cash during the six months ended July 31, 1999 was for
acquisitions. Net cash provided by financing activities was $10.4 million in the
six months ended July 31, 2000 and $30.3 million in the six months ended July
31, 1999. The primary source of cash during the six months ended July 31, 1999
was proceeds from the common stock offering in July 1999.
At July 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 July 31, 2000, our total long-term debt obligations were approximately $41.4
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 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
18
<PAGE> 21
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 $37.1 million as of July 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 six months ended July
31, 2000, approximately 3.4% 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> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders in the
quarter ended July 31, 2000.
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Exhibit Index.
(a) There were no Current Reports on Form 8-K filed during the quarter
ended April 30, 2000.
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<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: September 14, 2000 /S/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Chief Financial Officer
21
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
27.1 Financial Data Schedule (Filed in EDGAR version only)
</TABLE>
22
