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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|x| Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (No fee required). For the fiscal year ended January 31, 2000.
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required). For the transition period from _____________
to ______________.
Commission file number 1-13437
THE SOURCE INFORMATION MANAGEMENT COMPANY
(Exact Name of Registrant 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) (Zip Code)
(314) 995-9040
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
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Name of Each Exchange
Title of Each Class on Which Registered
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Securities registered under Section 12(g) of the Act: COMMON STOCK $0.01 PAR
VALUE
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-K is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 31, 2000 the aggregate market value of the voting and non-voting stock
held by non-affiliates of The Source Information Management Company (the
"Company") was approximately $230,388,000 based on the last sale price of the
Common Stock reported by the Nasdaq National Market on March 31, 2000. At March
31, 2000, the Company had outstanding 17,624,324 shares of Common Stock.
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TABLE OF CONTENTS
PART I
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Page
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ITEM 1. Description of Business
ITEM 2. Description of Property
ITEM 3. Legal Proceedings
ITEM 4. Submission of Matters to a Vote of Security Holders
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
ITEM 6. Selected Financial Data
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 8. Financial Statements
ITEM 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
PART III
ITEM 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management
ITEM 13. Certain Relationships and Related Transactions
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
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SOME OF THE INFORMATION CONTAINED IN THIS FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. WHEN USED IN THIS
REPORT, THE WORDS "MAY," "WILL," "BELIEVES," "ANTICIPATES," "INTENDS,"
"EXPECTS," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS. BECAUSE SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND
UNCERTAINTIES, OUR ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO: (I) OUR DEPENDENCE ON THE
MARKETING AND DISTRIBUTION STRATEGIES OF PUBLISHERS AND OTHER VENDORS; (II) OUR
ABILITY TO ACCESS CHECKOUT AREA INFORMATION; (III) RISKS ASSOCIATED WITH OUR
ADVANCE PAY PROGRAM, INCLUDING PROBLEMS COLLECTING INCENTIVE PAYMENTS FROM
PUBLISHERS; (IV) DEMAND FOR OUR DISPLAY RACKS AND STORE FIXTURES; (V) OUR
ABILITY TO SUCCESSFULLY IMPLEMENT OUR GROWTH STRATEGY; (VI) COMPETITION; (VII)
OUR ABILITY TO EFFECTIVELY MANAGE OUR EXPANSION; AND (VIII) GENERAL ECONOMIC AND
BUSINESS CONDITIONS NATIONALLY, IN OUR MARKETS AND IN OUR INDUSTRY. INVESTORS
ARE ALSO DIRECTED TO CONSIDER OTHER RISKS AND UNCERTAINTIES DISCUSSED IN OTHER
REPORTS PREVIOUSLY AND SUBSEQUENTLY FILED BY US WITH THE SECURITIES AND EXCHANGE
COMMISSION. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE NO OBLIGATION
TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING
STATEMENTS, WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
We are a leading provider of information and management services for retail
magazine sales to U.S. and Canadian retailers and magazine publishers. We are
also a leading manufacturer of display rack and store fixtures used by
retailers.
Through our information services, we provide sales figures and product placement
and other related information in various user-friendly formats, including print,
CD-ROM and over the Internet. This information helps users to formulate
marketing, distribution and advertising plans and to react more quickly to
changing market conditions. Our information services cover approximately 7,000
magazine titles and are provided to over 1,300 retail chains with approximately
100,000 stores and 500,000 checkout counters. We believe we maintain the most
comprehensive information database available for retail magazine sales and
magazine placement at checkout counters. We have expanded upon our experience
with retail magazine sales to provide similar information and services to
confectioners and vendors of general merchandise sold at checkout counters.
Through our management services, we help retailers to increase sales and
incentive payment revenues by reconfiguring and designing front-end display
racks, supervising installation, selecting products and negotiating, billing and
collecting incentive payments from vendors. Historically, as part of our
services, we arranged for the manufacture of display racks for many of our
customers. Since January 1999, we acquired five display rack manufacturers.
Manufacturing display racks in our own facilities allows us to be a full-service
provider of management services for the checkout area, or "front-end," of a
customer's store. We also can integrate the design and manufacturing processes
with our clients' merchandising strategies and better manage the timing of
display rack delivery.
In September 1999, we acquired Huck Store Fixture Company, a major manufacturer
and supplier of custom wood displays and fixtures to national retailers. Also,
in September, we acquired Arrowood, Inc., another manufacturer of wooden display
fixtures. These acquisitions enable us to meet demands for customized wooden
display fixtures from our major retail customers. This strategic broadening of
our base business provides access to new markets, solidifies existing
relationships, and further strengthens our leading position as the front-end
one-stop shop for retailers.
We believe that we are well positioned to use our existing relationships with
retailers and vendors to cross-sell our information and management services and
display rack and store fixture manufacturing capability.
INDUSTRY OVERVIEW
A substantial portion of the products sold in retail stores are bought on
impulse. It is therefore important to vendors that their products be on
prominent display in those areas of a store where they will be seen by the
largest number of
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shoppers. There are usually two such areas in a store. One is a dedicated area
called a mainline display; the other is the checkout area which is sometimes
referred to as the front-end. The front-end is visited by virtually every
shopper in a store. Shoppers typically must wait to complete the checkout
process and are more likely to see products on display in the front-end, which
increases the likelihood that these products will be bought on impulse. Products
suited to front-end display include magazines, confections and certain general
merchandise such as razor blades, film and batteries.
Vendors of front-end products compete for favorable spaces on display racks,
which we refer to as "pockets." Some vendors make incentive payments to
retailers for favorable pocket locations. These payments may include up-front
fees to have display racks configured to provide for a vendor's desired pocket
placements, recurring pocket rental fees based on the location and size or
rebate payments on a product's sales volume.
Timely delivery of information about retailer activity at the front-end,
including timing of reconfigurations, changes in display position or the
discontinuance of a vendor's products, is important to vendors of front-end
products. Timely delivery of information about price changes, special
promotions, new product introductions and other vendor plans is important to
retailers. We believe that there is an increasing demand on the part of
front-end product vendors for more frequent and detailed information on sales
and other front-end activity.
BUSINESS SEGMENTS
Our claims submission services for magazine retailers were established over 20
years ago. Our experience in providing these services is the foundation for our
other services. Set forth below are descriptions of our services and products in
each of our segments: services (22.1% of our fiscal 2000 revenues) and display
rack and store fixture manufacturing (77.9% of our fiscal 2000 revenues). See
Note 16 in our "Notes to Consolidated Financial Statements" for certain
financial information of each of our segments.
Services
Claim Submission Program. Through our information gathering capabilities, we
assist U.S. and Canadian retailers to accurately monitor, document, claim and
collect magazine publisher incentive and pocket rental payments. Incentive
payments consist of cash rebates offered to retailers by magazine publishers
equal to a percentage of magazine sales. Pocket rental payments are made by
magazine publishers for providing a specific pocket size and location on a
display rack. Our claim submission program relieves our retailer customers of
the substantial administrative burden of documenting their claims and we believe
increases the amount of claims they collect.
The claim submission process begins at the end of each calendar quarter. Local
distributors detail the titles and number of copies sold by our retailer clients
during that quarter. Display rack manufacturers and our retailer clients provide
us with information about magazine pocket placements. Based on this information,
we prepare claim forms and submit the documented claims to the appropriate
national distributor. After verification of the claim, the national distributor,
on behalf of the publisher, remits to us payment for the retailer. We then
record the payment and forward it to the retailer. We charge the retailer a
negotiated percentage of the amount collected.
Retailer customers who use our claim submission program include Fleming, Kroger,
Southland 7-Eleven, Target (converted to Advance Pay subsequent to year end) and
Walgreens.
Advance Pay Program. As an extension of our claim submission program, we have
established our Advance Pay Program for magazine sales. Under this program, we
pay to participating retailers a negotiated fixed percentage of the total
quarterly incentive payments and pocket rental fees otherwise due the retailer.
We generally make these payments within 90 days after the end of the quarter. We
then collect the payments for our own account. This service provides the
retailer with improved cash flow and relief from the burdensome administrative
task of processing a large number of small checks from publishers. Payments
collected from publishers under the Advance Pay Program as a percentage of all
incentive payments collected from publishers grew from 21.9% during fiscal 1998
to 30.4% during fiscal 1999 to 32.6% during fiscal 2000.
Our payments to the retailer precede our collections from the publisher. In
order to make these payments to retailers,
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we use funds generated from operations and funds borrowed under our revolving
credit facility. We generally assume the risk of uncollectibility of the
incentive and pocket rental payments.
Customers of our Advance Pay Program include A&P, Ahold USA, Food Lion, Kmart
and W.H. Smith.
ICN and PIN. In response to the business communications opportunities presented
by the Internet, we have developed our ICN website. The ICN website enables
subscribing magazine publishers to access information regarding pricing, new
titles, discontinued titles and display rack configuration changes on a
chain-by-chain basis. This information is important to publishers because
discontinuation and placement of their titles on the display rack can have a
significant impact on sales. We believe that, prior to ICN, publishers could not
react as quickly to these changes. Publishers also can use ICN to promote
special incentives and advertise and display special editions, new publications
and upcoming covers, all of which can increase their sales. We have begun to
receive weekly single-copy magazine sales information on a store-by-store basis
from a number of magazine distributors and we recently entered into an agreement
with Barnes & Noble, Inc. to jointly offer their store-by-store daily sales data
to magazine publishers. We believe the more timely, store-by-store information
will increase the attractiveness of our ICN website to publishers.
Retailers can use ICN to order new magazine titles and take advantage of
promotions by publishers. They also can download frequently changing price
information, including Uniform Product Codes, which change often because of
price changes and new title introductions.
As part of our increased emphasis on confections and general merchandise sold at
checkout counters, we intend to adapt ICN for confections and general
merchandise.
The ICN website is configured so that publishers cannot access the strategically
sensitive information of other publishers and retailers. Retailers and
publishers can also exchange information and conduct transactions on the
Internet site without compromising their sensitive, proprietary information.
We market to magazine publishers our database of magazine-related industry
information (referred to as "PIN") that we gather through our claims submission
program. This information assists them in formulating their publishing and
distribution strategies. PIN subscribers have access to a historical database of
sales information for publications, as well as quarterly updates. PIN can
generate reports of total sales, sales by class of trade and sales by retailer.
Each report also provides other sales related information, including returns of
unsold magazines and total sales ranking. We believe that PIN is the most
extensive database available for single-copy retail magazine sales information.
We receive annual fees, paid quarterly, from each publisher and general
merchandiser that subscribes to ICN and/or PIN. We also receive fees from
publishers for advertising, promotions and special programs on ICN. Since ICN's
launch in January 1999, we have signed up over 130 retailer subscribers,
including Ames Department Stores, Eckerd, Kmart, Southland 7-Eleven, W.H. Smith
and Wegman's Food Markets, over 20 publishers, including Globe Marketing
Services, Hearst Distribution Group Magazines, Murdoch Magazines, Time
Distribution Services and Times Mirror, and four general merchandisers including
Hershey Food Corporation, Nestle USA and Rayovac Corporation.
Front-End Management. We help retailers to increase sales and incentive payment
revenues by reconfiguring and designing front-end display racks, supervising
fixture installation, selecting products and negotiating, billing and collecting
incentive payments from vendors. We also help our retailer clients to develop
specialized marketing and promotional programs, which may include, for example,
special mainline or checkout displays and cross-promotions of magazines and
products of interest to the readers of these magazines.
To further enhance our front-end management service capabilities, we developed
our SourcePro software. SourcePro is a three dimensional fixture design system
that analyzes the retailer's store layout, customer traffic patterns and
available front-end merchandising alternatives to develop an appropriate
checkout display configuration.
Display Rack and Store Fixture Manufacturing
Front-End and Point-of-Purchase Displays. We design, manufacture, deliver and
dispose of custom front-end and
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point-of-purchase displays for both retail store chains and product
manufacturers, including Ahold USA, American Stores, Kmart, Rite-Aid and Winn
Dixie. For many of our retail store accounts, we also invoice vendors for rack
costs and coordinate the collection of payments on these invoices. We believe
that manufacturing display racks increases our access to information about sales
of magazines and other products from retail checkout areas, which enhances our
ability to provide PIN and ICN.
Our manufacturing process typically begins when a retail store chain requests us
to design a display for its stores. We create a computer model of the display
based on the retailer's specifications, from which a prototype is created and
presented to the retailer for its examination. We then work together with the
retailer to finalize the design of the display and negotiate a price per
display. All of our front-end display racks are manufactured to customer
specifications.
We design, manufacture and powder-coat each pocket, shelf and other component of
a display unit separately and then assemble these components to create the
finished display. We believe that our component-oriented manufacturing process
enables us to produce our displays more quickly and efficiently and with a
higher standard of quality than if we used a unit-oriented process.
Materials used in manufacturing our racks include wire, metal tubing and
paneling. At our five manufacturing locations, we cut, shape, bend and weld
wire, tubing and metal paneling and paint and assemble the finished product. We
use a just-in-time inventory practice. This reduces our requirements to carry
inventories of raw materials, which in turn improves our cash flow.
Wooden Store Fixtures. In September 1999, we acquired Huck, a major manufacturer
and supplier of custom wood displays and fixtures to national retailers. Also,
in September, we acquired Arrowood, another manufacturer of wooden display
fixtures. These acquisitions enable us to meet demands for customized wooden
display fixtures from our major retail customers. This strategic broadening of
our base business provides access to new markets, solidifies existing
relationships, and further strengthens our leading position as the front-end
one-stop shop for retailers.
Current customers for wooden store fixtures include bookstore chains, discount
stores, department stores, convenience stores, pizza delivery stores and other
niche retailers. Our fixtures are primarily made from wood veneers or laminated
wood. Other raw materials used include paints and varnishes and hardware such as
hinges, drawer slides, aluminum and other metals to support and assemble the
wood product. Our production process includes cutting, machining, assembly and
finish. Virtually all product is shipped assembled ready to place in service at
a retailer's store.
All wooden store fixtures are custom made and as such we do not manufacture
product without a customer commitment for the product. Engineering and design
teams work closely with retailers to create product to meet specific
requirements. The process includes use of computer assisted drawings (CAD) and
"photo rendering" that allow a retailer to see an image of the product from
various angles and make changes. Once the CAD drawing is finalized, a prototype
is typically manufactured for approval prior to large scale manufacturing.
Products we make for retailers are check out counters, service desks, fitting
rooms, customized room kits, bookshelves, magazine racks and other merchandise
display fixtures.
To meet seasonal demands for product, customers will typically provide
commitments well in advance of needing the product in its stores so that enough
product is available for shipment when needed. As such, our inventory levels
increase during seasonal periods when customers are not opening or remodeling
stores, typically November through April. Inventory levels decrease during
periods when the majority of store openings and remodelings occur, typically
July through October.
MAJOR CUSTOMERS
For fiscal 2000, two customers accounted for approximately 26% of revenues. Winn
Dixie accounted for approximately 15% of revenues and Ahold USA accounted for
approximately 11% of revenues. For fiscal 1999, three customers accounted for
approximately 38% of revenues. One of the three customers, Food Lion, Inc.,
accounted for approximately 27% of revenues. No customer exceeded 10% of
revenues for fiscal 1998. Our major
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customers in terms of revenues are usually retailers in the process of
reconfiguring their checkout areas. Because this process typically occurs every
three years, our major customers vary from year to year.
MARKETING AND SALES
We market our services and display fixtures through our own direct sales force.
Our sales group consists of three divisional vice presidents and 22 regional
managers. We have integrated our marketing efforts for our traditional
information and management services with our display rack manufacturing. We
market our services primarily through direct contact with clients and
prospective clients. We also market our services at industry trade shows and
through trade publications.
Each of our managers is assigned to a specific geographic territory and is
responsible for the preparation of quotations, program presentations and the
general development of sales, as well as maintenance of existing accounts,
within his or her territory. Our regional managers maintain frequent contact
with our clients in order to provide them with a high level of service and react
quickly to their needs.
COMPETITION
We face significant competition for many of our services. For example, we have a
substantial number of direct competitors for our claims submission program, all
of which are closely-held private companies. We also compete with five other
manufacturers for front-end display rack manufacturing business. There also are
a substantial number of competitors for our point-of-purchase rack business,
many of which are national in scope. Any of these competitors could also compete
for our front-end display fixture business.
In addition, some of our information and management services may be performed
directly by our retailer customers or by vendors, distributors or other
information service providers. Other organizations, including ACNielsen,
Information Resources and Audit Bureau of Circulations, also collect sales data
from retail stores. While none of these organizations currently compete with us,
any one of them could do so. If any of them were to compete with us, given their
experience in collecting information and their industry reputation, they could
be a formidable competitor.
Our competitors also may introduce services that are perceived by our clients to
be more attractive than those we provide. In addition, many of our current and
possible competitors have substantially greater financial resources than we do.
We believe that the principal competitive factors in the retail information
industry include access to information, technological support, accuracy, system
flexibility, financial stability, customer service and reputation. In addition
to financial stability, customer service and reputation, we believe that product
quality, timeliness of delivery and, to a lesser extent, price are competitive
factors in the display rack manufacturing business. We believe we compete
effectively with respect to each of the above factors.
Competitive pressures may result in a decrease in the number of clients we serve
and a decrease in our revenues. Either of these could materially harm our
business, financial condition and future results.
INFORMATION SYSTEMS; INTELLECTUAL PROPERTY
Software used in connection with our claims submission program and in connection
with PIN and ICN, as well as our SourcePro software, was developed specifically
for our use by a combination of in-house software engineers and outside
consultants. We believe that certain elements of all three of these software
systems are proprietary to The Source. Other portions of these systems are
licensed from the third party, MJ Systems, that helped to design the system. We
also receive systems service and upgrades under the license.
We have filed applications with the U.S. Patent Office for patent protection for
our ICN, SourcePro and PIN innovations. Certain aspects of our ICN, SourcePro
and PIN innovations also have copyright protection.
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EMPLOYEES
As of March 31, 2000, we employed approximately 900 persons. Of the employees at
our Brooklyn, New York facility, 175 are represented by Local 810 of the Steel,
Metal, Alloys and Hardware Fabricators of the International Brotherhood of
Teamsters under a collective bargaining agreement expiring on September 30,
2004. Of the employees at our Philadelphia, Pennsylvania facility, 68 are
represented by Local 837 of the Teamsters Union under a collective bargaining
agreement expiring on December 31, 2000. We consider our employee relations to
be satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY.
We conduct our business from over twenty manufacturing, data processing, office
and warehouse facilities. All of our manufacturing and warehouse facilities are
used by our display rack and store fixture manufacturing segment. Our office
facilities are shared by our manufacturing and services segments.
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LOCATION DESCRIPTION SIZE SQ. FT. OWNED/LEASED
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St. Louis, MO Office 5,100 Leased
Upper Saddle River, NJ Office 8,000 Leased
High Point, NC Data Processing/Office 22,000 Owned
Don Mills, Ontario Office 3,900 Leased
Rockford, IL Manufacturing/Office 310,500 Owned
Jacksonville, FL Manufacturing/Office 55,000 Leased
Brooklyn, NY Manufacturing/Office 92,000 Leased
Philadelphia, PA Manufacturing/Office 110,000 Owned
Vancouver, British Columbia Manufacturing/Office 20,000 Leased
Quincy, IL Manufacturing/Office 260,000 Owned
Carson City, NV Manufacturing/Office 135,000 Owned
Norwood, NC Manufacturing/Office 52,000 Leased
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In addition, we have warehouse facilities in Florida, New Jersey and South
Carolina and small offices in New York, Arizona, Pennsylvania, Ohio, Oklahoma,
Texas, Massachusetts, Wisconsin, Alberta and Ontario. We believe our facilities
are adequate for our current level of operations and that all of our facilities
are adequately insured.
ITEM 3. LEGAL PROCEEDINGS.
We are from time to time parties to various legal proceedings arising out of our
businesses. We believe that there are no proceedings pending or threatened
against us which, if determined adversely, would have a material adverse effect
on our business, financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The Annual Meeting of the Shareholders of the Company was held on November
22, 1999. Of the 16,874,345 shares entitled to vote at such meeting,
15,917,624 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 1,000,000 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:
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For Against Withheld Non-Vote
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10,857,197 438,281 31,221 4,590,925
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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:
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For Withheld
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Aron Katzman 15,832,243 85,381
Randall S. Minix 15,832,443 85,181
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
From February 12, 1996 until June 12, 1998, our Common Stock was quoted on the
Nasdaq SmallCap Market under the symbol "SORC." Beginning June 12, 1998, our
Common Stock has been quoted on the Nasdaq National Market under the symbol
"SORC." The following table sets forth, for the periods indicated, the high and
low closing bid prices for the Common Stock as reported on the Nasdaq SmallCap
Market and the Nasdaq National Market, as applicable.
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Fiscal 1999 High Low
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First Quarter $6.75 $5.13
Second Quarter $8.00 $5.75
Third Quarter $6.88 $5.00
Fourth Quarter $12.38 $5.75
Fiscal 2000 High Low
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First Quarter $14.00 $9.75
Second Quarter $17.38 $10.75
Third Quarter $15.88 $11.00
Fourth Quarter $17.13 $10.44
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As of March 31, 2000, there were approximately 4,500 holders of record of the
Common Stock.
We have never paid dividends on our Common Stock. The Board of Directors
presently intends to retain all of its earnings, if any, for the development of
our business for the foreseeable future. The declaration and payment of cash
dividends in the future will be at the discretion of our Board of Directors and
will depend upon a number of factors, including among others, future earnings,
operations, capital requirements, the general financial condition of the Company
and such other factors that the Board of Directors may deem relevant. Currently,
the credit agreement with Bank of America, N.A., limits 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.
SALES OF UNREGISTERED SHARES
In February 1999, September 1999 and January 2000, we issued shares of our
Common Stock to the former stockholders of manufacturers that we acquired as
part of the consideration for such acquisitions. Based upon representations made
by each of the stockholders, we believe each of them is an "accredited investor"
as that term is defined in Regulation D promulgated under the Act. Each of the
stockholders represented to us in writing that he was acquiring the shares for
investment and agreed that the shares could not be sold or otherwise transferred
unless they were first registered under the Act except in a transaction which,
in the opinion of counsel acceptable to us, is exempt from the registration
requirement. The certificates for the shares bear appropriate restrictive
legends. We believe that the issuance of these shares was exempt from the
registration requirements of the Securities Act of 1933 (the "Act") pursuant to
Section 4(2) thereof. The shares were issued as follows:
a. 134,615 shares of Common Stock to the former stockholder of MYCO, Inc.;
b. 285,714 shares of Common Stock to the former stockholders of Chestnut
Display Systems, Inc.;
c. 100,000 shares in September and 267,883 shares in January of Common Stock
to the former stockholders of Huck Store Fixture Company
In August 1999, Donald & Co. Securities, Inc. ("Donald") exercised warrants to
purchase 200,000 shares of common stock at $4.80 per share. The warrants were
issued to Donald in 1997 as underwriting compensation in connection with our
public offering in October 1997. These shares have since been registered under
the Act on Form S-3 for resale by Donald.
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ITEM 6. SELECTED FINANCIAL DATA
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Fiscal Year Ended January 31,
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1996 1997 1998 1999 2000
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(in thousands, except for per share data)
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STATEMENT OF OPERATIONS INFORMATION:
Service revenues $ 8,121 $ 7,298 $ 11,804 $ 14,229 $ 18,249
Product sales - - - 6,871 64,239
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Total revenues 8,121 7,298 11,804 21,100 82,488
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Cost of service revenues 4,409 5,064 5,861 6,659 9,305
Cost of goods sold - - - 4,609 39,564
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Total costs of revenues 4,409 5,064 5,861 11,268 48,869
Gross profit 3,712 2,234 5,934 9,832 33,619
Selling, general and administrative expense 2,800 2,904 2,351 2,949 14,880
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Operating income (loss) 912 (670) 3,592 6,883 18,738
Interest expense (120) (312) (714) (331) (1,033)
Interest income 25 31 21 29 114
Other income (expense) (219) (29) (79) (47) (151)
--------- --------- --------- ---------- -----------
Income (loss) before income taxes 598 (980) 2,820 6,534 17,668
Income tax (provision) benefit (406) 377 (1,231) (2,667) (7,557)
--------- --------- --------- ---------- -----------
Net income (loss) $ 192 $ (603) $ 1,589 $ 3,867 $ 10,111
--------- --------- --------- ---------- -----------
Earnings (loss) per share
Basic $ 0.04 $ (0.11) $ 0.23 $ 0.42 $ 0.66
Diluted 0.04 (0.11) 0.22 0.40 0.60
Weighted average outstanding shares
Basic 5,028 5,557 6,562 9,132 15,332
Diluted 5,028 5,557 6,694 9,776 16,815
</TABLE>
<TABLE>
<CAPTION>
At January 31,
-------------------------------------------
1996 1997 1998 1999 2000
------ ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Working capital $1,306 $ 2,323 $16,988 $22,014 $ 61,456
Total assets 5,346 15,570 23,808 65,878 156,759
Total debt 92 7,216 8,635 3,508 32,389
Redeemable stock - 1,026 - - -
Stockholders' equity 2,018 3,146 12,495 52,310 107,414
</TABLE>
For a discussion on acquisitions that affect comparability of results, see Note
5 in the "Notes to the Consolidated Financial Statements."
ITEM 7. 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
9
<PAGE> 12
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 2% of accounts receivable. This
amount has been adequate to satisfy losses from uncollectible accounts
receivable. Under the Advance Pay Program, the revenues we recognize represent
the difference between the amount advanced to the retailer customer and the
amount claimed against the publisher.
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 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.
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 16 in the "Notes to Consolidated Financial Statements" for certain
financial information on our two business
10
<PAGE> 13
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 be 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 may be increased by
up to an additional 250,000 shares of our common stock depending on
MYCO's performance in the twelve months following the acquisition.
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 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.
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
11
<PAGE> 14
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 the amounts previously paid.. 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>
Fiscal Year Ended January 31,
-----------------------------
2000 1999 1998
<S> <C> <C> <C>
Service Revenues ................................. 22.1% 67.4% 100.0%
Product Sales .................................... 77.9% 32.6% -%
---- ---- ------
Total Revenues .............................. 100.0% 100.0% 100.0%
Cost of Service Revenues ......................... 11.3% 31.6% 49.7%
Cost of Goods Sold ............................... 48.0% 21.8% -%
---- ---- ------
Gross Profit ................................ 40.7% 46.6% 50.3%
Selling, General and Administrative Expense ...... 18.0% 14.0% 19.9%
---- ---- ------
Operating Income ............................ 22.7% 32.6% 30.4%
Interest, Net .................................... (1.1)% (1.4)% (5.9)%
Other Income (Expense), Net ...................... (0.2)% (0.2)% (0.7)%
---- ---- ------
Income Before Income Taxes ....................... 21.4% 31.0% 23.8%
---- ---- ------
Net Income .................................. 12.3% 18.3% 13.5%
==== ==== ======
</TABLE>
FISCAL 2000 COMPARED TO FISCAL 1999
Service Revenues. Services, which include the Claim Submission Program, Advance
Pay Program, PIN/ICN and front-end management, accounted for approximately 22.1%
and 46.7% of our revenues and operating income, respectively, for fiscal 2000
and 1999. Service revenues of $18.2 million in fiscal 2000 increased $4.0, or
28.2%, compared to fiscal 1999 as a result of an increase in front-end
management revenues and the acquisition in March 1999 of ProMark.
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 77.9% and 83.0% of our
revenues and operating income, respectively, for fiscal 2000. Product sales were
$64.2 and $6.9 million, respectively, in fiscal 2000 and 1999.
Gross Profit. Gross profit increased to $33.6 million in fiscal 2000 from $9.8
million in fiscal 1999, an increase of approximately $23.8 million. All of the
increase in gross profit was due to our recently acquired manufacturing
subsidiaries. Gross margin of the services segment decreased from 53.2% in
fiscal 1999 to 49.0% in fiscal 2000. Cost of service revenues includes all costs
dedicated to generating service revenues as well as an allocation of the
non-dedicated costs, which include administrative costs. ProMark's gross profit
contribution caused the gross profit percentage to decrease 1.4 percentage
points. ProMark is a wholly-owned Canadian subsidiary acquired in March 1999
which has continued to operate relatively autonomously. The remaining 2.8
percentage point decline was due to a $500,000
12
<PAGE> 15
increase in dedicated costs. This increase was due to dedicated costs associated
with the accumulation of store-level magazine sales data and ICN in general. In
addition, growth in wage rates contributed to the $500,000 increase in dedicated
costs.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased to $14.9 million in fiscal 2000 from $2.9 million in fiscal
1999, an increase of $11.9 million. Of the total increase, approximately $8.6
million was attributable to the recently acquired manufacturing subsidiaries.
The remaining $3.2 million increase was attributable to general corporate
expenses. Selling, general and administrative expense as a percentage of
revenues increased from 14.0% in fiscal 1999 to 18.0% in fiscal 2000.
Operating Income. Operating income increased to $18.7 million in fiscal 2000
from $6.9 million in fiscal 1999, an increase of $11.8 million. Operating
margins decreased from 32.6% to 22.7% as a result of acquiring manufacturing
subsidiaries which have lower operating margins than the services segment. The
service segment contributed approximately $8.8 million to operating income and
the display rack and store fixture manufacturing segment contributed
approximately $15.5 million. General corporate expenses included in selling,
general and administrative expense and allocated to cost of service revenues
reduced operating income by approximately $5.6 million.
Interest Expense. Interest expense for fiscal 2000 increased $702,000 compared
to fiscal 1999 principally due to the increased borrowings used to fund the
manufacturing acquisitions and the assumption of the $4 million in industrial
revenue bonds in connection with the MYCO acquisition.
Income Tax Expense. The effective income tax rates for fiscal years 2000 and
1999 were 42.8% and 40.8%, 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.
FISCAL 1999 COMPARED TO FISCAL 1998
Service Revenues. Services, which include the Claim Submission Program, Advance
Pay Program, PIN and front-end management, accounted for approximately 67.4% and
74.4% of our revenues and operating income, respectively, for fiscal 1999.
Because of its recent introduction, we received no revenues from ICN in fiscal
1999. Service revenues increased to $14.2 million in fiscal 1999 from $11.8
million in fiscal 1998, an increase of 20.3%. Increased retailer participation
in the Advance Pay Program and the acquisition of Periodical Concepts
contributed to the increase. Claim Submission Program, Advance Pay Program and
PIN revenues increased approximately $1.7 million, or 16.8%, over the prior
year. Front-end management revenues increased from $1.5 million in the prior
year to $2.2 million in the current year, or 46.9%. This was due to an increase
in the number of reconfiguration programs that we undertook on behalf of our
retailer clients.
Product Sales. On January 7, 1999, we acquired Yeager and U.S. Marketing.
Results of operations for both companies have been included in our consolidated
financial statements since the date of acquisition. Manufacturing display racks
accounted for approximately 32.6% and 25.6% of our revenues and operating
income, respectively, for fiscal 1999. Product sales were $6.9 million in fiscal
1999. There were no product sales in fiscal 1998.
Gross Profit. Gross profit increased to $9.8 million in fiscal 1999 from $5.9
million in fiscal 1998, an increase of approximately $3.9 million, or 65.4%.
Approximately $2.3 million of the increase in gross profit was due to our
recently acquired manufacturing subsidiaries. The remaining $1.6 million
increase was attributable to our services segment. Gross margin of the services
segment increased slightly to 53.2% in fiscal 1999 from 50.3% in fiscal 1998.
The improved services segment gross margin was due in large part to a 20.3%
increase in service revenues without a corresponding increase in employees.
Selling, General and Administrative Expense. Selling, general and administrative
expense increased to $2.9 million in fiscal 1999 from $2.3 million in fiscal
1998, an increase of $600,000, or 25.5%. Of the total, approximately $502,000
was attributable to the recently acquired manufacturing subsidiaries. The
remaining $97,000 increase was attributable to the services segment. Overall,
selling, general and administrative expense as a percentage of revenues
decreased from 19.9% in fiscal 1998 to 14.0% in fiscal 1999.
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<PAGE> 16
Operating Income. Operating income increased to $6.9 million in fiscal 1999 from
$3.6 million in fiscal 1998, an increase of $3.3 million, or 91.7%. As a
percentage of revenues, operating income increased to 31.0% in fiscal 1999 from
23.9% in fiscal 1998. Of the $3.3 million increase, approximately $1.8 million
was attributable to the recently acquired manufacturing subsidiaries.
Approximately $1.5 million was attributable to the services segment. The
significant increase in operating income from the services segment was primarily
a result of higher gross profits and stable selling, general and administrative
expenses during fiscal 1999.
Interest Expense. Interest expense decreased $383,000, principally due to the
repayment of borrowings with cash generated by our Common Stock offerings in
October 1997 and June 1998.
Income Tax Expense. The effective income tax rates for fiscal years 1999 and
1998 were 40.8% and 43.7%, respectively. These rates varied from the federal
statutory rate due to state income taxes and expenses not deductible for income
tax purposes. These non-deductible expenses include meals and entertainment,
goodwill amortization, and officers' life insurance premiums.
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements for the services 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 manufacturing
segment are for purchasing materials and the cost of labor incurred in the
manufacturing process. Historically, we have financed our business activities
through cash flows from operations, borrowings under available lines of credit
and through the issuance of equity securities.
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 fiscal 2000,
the Program was funded by (i) proceeds from the common stock offering, (ii)
borrowings under the revolving credit facility, and (iii) 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 used by operating activities of $16.4 million for fiscal 2000 was
primarily from the increase in accounts receivable, increase in other assets and
decrease in accounts payable and accrued expenses offset by net income and non
cash items of depreciation and amortization. Accounts receivable increased only
120.1% from $29.5 million at January 31, 1999 to $64.8 million at January 31,
2000 despite a 290.9% increase in revenues. The average collection period for
2000 was approximately 145 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
$68.9 million higher than reported, or approximately $151.3 million. Dividing
the average accounts receivable into $151.3 million results in an average
collection period of approximately 145 days. Net cash provided by operating
activities of $590,000 for fiscal 1999 was primarily from net income enhanced by
a decrease in inventories and other assets, partially offset by an increase in
accounts receivable. Net cash used by operating activities of $2.4 million for
fiscal 1998 was primarily from the increase in accounts receivable offset by net
income, an increase in amounts due customers and non cash items of depreciation
and amortization.
Net cash used in investing activities was $42.1 million, $5.5 million, and
$711,000 in fiscal year 2000, 1999 and 1998, respectively. The increases were
primarily due to the acquisitions in fiscal 2000 and 1999. Net cash provided by
financing activities was $59.4 million, $5.6 million and $2.9 million in fiscal
year 2000, 1999 and 1998. The increase in fiscal 2000 is due to the public
offering in July 1999 and an increase in the balance on the revolving credit
facility.
14
<PAGE> 17
At January 31, 2000, we did not have any commitments for capital expenditures.
Currently, we do not anticipate any significant capital expenditures during
fiscal 2001.
At January 31, 2000, we had total deferred tax assets of $315,000 and total
deferred tax liabilities of $2.0 million, resulting in a net deferred tax
liability of $1.7 million. This liability was due to the net tax effects of
temporary differences between the carrying amount of the assets and liabilities
for financial reporting purposes and the amounts used for income tax reporting.
We intend to obtain the funds necessary to satisfy this tax obligation from cash
flows from operations.
The balance outstanding under the revolving credit facility at January 31, 2000
and 1999 was approximately $27.9 million and $3.2 million, respectively.
Borrowings have increased primarily as a result of funding acquisitions and
funding increases in the Advance Pay Program.
At January 31, 2000, our total long-term debt obligations were approximately
$32.2 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. At April 13, 2000, we had approximately $24.3 million of availability
under the revolving credit facility. The revolving credit facility bears
interest at a rate equal to the London Interbank Offered Rate 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 million and the average
principal amount outstanding under the loan (if less than $25 million) plus 3/8%
per annum of the difference between the maximum amount of the loan and the
greater of (i) $25 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 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.
In June 1999, we purchased our facility in High Point, North Carolina for $1.8
million. We financed this purchase through available borrowings under our
revolving credit facility.
We believe that our cash flow from operations together with our revolving credit
facility 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 is effective for years beginning after June 15, 2000
and requires comparative information for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of this
statement to have a significant impact on the results of operations, financial
position or cash flows.
YEAR 2000
The Company successfully completed its Year 2000 project including all
assessment, remediation and testing of all internal systems by December 31,
1999. Subsequent to that date, no adverse developments have occurred which would
affect the Company's business, financial condition or results of operations. All
internal systems have functioned as
15
<PAGE> 18
planned in 2000, and no third party vendors, suppliers or customers have failed
to provide the required levels of service. The Company will continue to monitor
both its systems and its transactions with third parties during the year and
address any problems as needed.
The costs of the Year 2000 project were expensed as incurred. The total cost of
this project through the end of 1999 was approximately $40,000. Hardware
purchases to replace existing computers that were not Y2K compliant accounted
for $39,000 of the total amount. The remaining $1,000 was used to cover travel
expenses for trips to our third party software consultant. The time spent at the
third party consultant was for testing software upgrades to ensure programs were
Y2K compliant. All costs were expensed during fiscal year 2000.
ITEM 7A. 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 $27.8 million as of January 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 year ended January 31,
2000, approximately 2.2% 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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS.
The consolidated financial statements of the Company are included herein as a
separate section of this statement which begins on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
16
<PAGE> 19
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The following table sets forth certain information concerning the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
S. Leslie Flegel 62 Director, Chairman and Chief Executive Officer
Richard A. Jacobsen 43 Director, Vice-Chairman and Chief Operating Officer
William H. Lee 48 Director, Chairman of the Executive Committee and Chief
Administrative Officer
James R. Gillis 46 Director, President
W. Brian Rodgers 34 Secretary and Chief Financial Officer
Dwight L. DeGolia 54 Executive Vice President, Special Projects
Jason S. Flegel 34 Executive Vice President, Information Services
Cameron Cloeter 44 Executive Vice President, Sales and Marketing
Monte Weiner 49 Executive Vice President & Chief Executive Officer - Source
Display
James W. Brinkerhoff 56 Vice President - Human Resources
Robert O. Aders 71 Director
Harry L. "Terry" Franc, III 63 Director
Aron Katzman 61 Director
Randall S. Minix 49 Director
George W. Off 53 Director
Kenneth F. Teasdale 65 Director
</TABLE>
The Board consists of ten members, each of whom serves in that capacity for a
three year term or until a successor has been elected and qualified, subject to
earlier resignation, removal or death. The number of directors comprising the
Board may be increased or decreased by resolution adopted by the affirmative
vote of a majority of the Board. Our Articles of Incorporation and By-Laws
provide for three classes of directorships serving staggered three year terms
such that one class of the directors is elected at each annual meeting of
stockholders. The terms of Messrs. Off, Franc and Jacobsen will continue until
the 2000 annual meeting of stockholders, the terms of Messrs. Aders, Flegel and
Lee will continue until the 2001 annual meeting of stockholders and the terms of
Messrs. Katzman, Minix, Gillis and Teasdale will continue until the 2002 annual
meeting of stockholders.
Each of the executive officers is a full-time employee of The Source.
Non-employee directors of The Source devote such time to the affairs of The
Source as is necessary and appropriate. Set forth below are descriptions of the
backgrounds of the executive officers and directors of The Source:
17
<PAGE> 20
S. Leslie Flegel has been the Chairman of the Board of Directors and Chief
Executive Officer of The Source since its inception in March 1995. For more than
14 years prior thereto, Mr. Flegel was the principal owner and Chief Executive
Officer of Display Information Systems Company, a predecessor of The Source. S.
Leslie Flegel is the father of Jason S. Flegel, The Source's Executive Vice
President, Information Services.
Richard A. Jacobsen was elected a Director in March 1999 and became Vice
Chairman and Chief Operating Officer in April 1999. Prior thereto, he was
President of Time Distribution Services from 1995 until April 1999; he served
Time Distribution Services in various executive capacities since 1981. He is a
member of the Board of Directors of the International Periodical Distributors
Association, Chairman of the Magazine Publishers Association Retail Advisory
Council and a member of the American Magazine Conference Planning Committee.
William H. Lee has been a director of The Source since its inception in March
1995 and has been Chief Administrative Officer since March 1999. Prior thereto,
Mr. Lee was President and Chief Operating Officer since The Source's inception.
For approximately 14 years prior thereto, Mr. Lee was the principal owner and
Chief Executive Officer of Periodical Marketing and Management, Inc., a
predecessor of The Source.
James R. Gillis has been a director of The Source since March 2000 and has
served as President since December 1998. Prior thereto, he served as the
President of Brand Manufacturing Corporation from September 1995. Prior to
joining Brand, Mr. Gillis was a partner in the Aders-Wilcox-Gillis Group, which
advised supplier companies on industry retailers worldwide. Mr. Gillis is a
member of the Board of Directors of Broadband Sports, Inc.
Dwight L. DeGolia has served as Executive Vice President of The Source since its
inception in May 1995. For more than ten years prior thereto, Mr. DeGolia served
as Executive Vice President of Sales and Marketing for Display Information
Systems Company. From 1986 to 1993, Mr. DeGolia also served as a director of
Advanced Marketing Services, a leading supplier of books to wholesale clubs.
W. Brian Rodgers has served as Secretary and Chief Financial Officer since
October 1996. Prior to joining The Source, Mr. Rodgers practiced for seven years
as a Certified Public Accountant with BDO Seidman, LLP.
Jason S. Flegel has served as Executive Vice President, Information Services
since March 1999. Prior thereto, he served as Senior Vice President of RDA
Operations since June 1996, and since The Source inception in March 1995, he
served as Vice President -- Western Region. For more than two years prior
thereto, Mr. Flegel was an owner and the Chief Financial Officer of Display
Information Systems Company. Jason S. Flegel is the son of S. Leslie Flegel.
Cameron Cloeter has served as Executive Vice President, Sales and Marketing
since August 1999. For five years prior thereto, Mr. Cloeter was Senior Vice
President of Sales at Time-Warner Inc.'s Time Distribution Services. Prior to
joining Time Distribution Services, Mr. Cloeter worked for M&M Mars for 15 years
where his last position was Director of Sales for the Eastern United States.
Monte Weiner has served as Executive Vice President and Chief Executive Officer
- - Source Display since September 1999. For more than 15 years prior thereto, Mr.
Weiner served as President of TCE Corporation and Secretary and Treasurer of
Brand Manufacturing Corporation.
James W. Brinkerhoff has served as Vice President - Human Resources since
October 1999. Prior to joining The Source, Mr. Brinkerhoff was Vice President
Human Resources and Administration for Ganes Chemical, Inc. from June 1995.
Previous to Ganes, Mr. Brinkerhoff was Director, Human Resources for Potters
Industries, Inc.
Robert O. Aders was elected a director in March 1999. He is Chairman and Chief
Executive Officer of the Advisory Board, Inc. (an international consulting
organization) and a member of the Board of Directors of Food Marketing
Institute, where he served from its founding in 1976 until his retirement in
1993. He is also counsel to Collier, Shannon, Rill & Scott (a Washington, D.C.
law firm). Mr. Aders was the Acting Secretary of Labor in the Ford
administration, is a former advisor to the White House Office of Emergency
Preparedness and has served on the U.S. Wage and Price Commission and as a Vice
Chairman of the National Business Council for Consumer Affairs. From 1970 to
1974, Mr. Aders was Chairman of the Board of the Kroger Company, where he served
in various executive positions beginning in 1957. He is currently a trustee of
the National Urban League. He also is a director of Association International
Distribution Alimentares (Belgium), the Association
18
<PAGE> 21
of Latin American Supermarkets, a Fellow of the Institute of Grocery
Distribution (U.K.) and a member of the International Self Service Organization
(Germany). In addition, he is a director of Checkpoint Systems, Inc., a company
listed on the New York Stock Exchange, Coinstar, a company listed on Nasdaq and
Telepanel, a company listed on Nasdaq.
Harry L. "Terry" Franc, III, has been a director of The Source since it
commenced operations in May 1995. Mr. Franc is one of the founders of Bridge
Information Systems, Inc. ("BIS"), a global provider of information services to
the securities industry and of BIS's subsidiary, Bridge Trading Company ("BTC"),
a registered broker-dealer and member of the New York Stock Exchange. Mr. Franc
has been Executive Vice President of BTC for more than 20 years and for more
than 20 years prior to 1995, served as a director and an Executive Vice
President of BIS. Mr. Franc is a member of the National Organization of
Investment Professionals and a director of P.J. Holdings, LLC.
Aron Katzman has served as a director of The Source since it commenced
operations in May 1995. Until its sale in May 1994, Mr. Katzman served as the
Chairman and Chief Executive Officer of Roman Company, a manufacturer and
distributor of fashion custom jewelry. Mr. Katzman is a member of the board of
directors of Phonetel Technologies and Southern Internet, Inc.
Randall S. Minix has served as a director of The Source since it commenced
operations in May 1995. For more than five years, Mr. Minix has been the
managing partner of Minix, Morgan & Company, L.L.P., an independent accounting
firm headquartered in Greensboro, North Carolina.
George W. Off was elected as a director of The Source in January 2000. Mr. Off,
one of the founders of Catalina Marketing Corporation, is the company's Chairman
of its Board of Directors. Prior to this position, he served as president and
chief executive officer, responsible for overall corporate management and
guiding of long-term corporate strategy. He also held the positions of vice
president of operations, executive vice president and chief operating officer.
An expert on scanning data applications in the retail grocery industry, Mr. Off
was instrumental in the development of Catalina Marketing from its earliest
phases. During his nearly 35 years in the retail marketing industry, he has held
operations and executive positions at two major supermarket chains. Mr. Off is a
member of the Food Merchandisers' Education Council and a member of the board of
directors of Telephone and Data Systems, Inc., Take Stock in Children and Eckerd
College in St. Petersburg, Florida.
Kenneth F. Teasdale was elected as a director of The Source in March 2000. Mr.
Teasdale has been the Chairman of Armstrong Teasdale LLP, a law firm, since 1993
and before that was Managing Partner from 1986 to 1993. He has been associated
with Armstrong Teasdale since 1964. Prior thereto, Mr. Teasdale served as
General Counsel to the Democratic Policy Committee of the United States Senate
beginning in 1962. In that position, he also served for three years as Legal
Assistant to the Majority Leader of the United States Senate. Mr. Teasdale is
Chairman of the Board of Regents for St. Louis University, Member of the Board
of Trustees for the St. Louis Science Center, member of the Board of Directors
for the United Way of Greater St. Louis, member of the Board of Trustees for St.
Louis University and member of the Board of Trustees for the St. Louis Art
Museum.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has established an Audit Committee, a Compensation Committee, a
Finance Committee and an Acquisition Committee. The duties and members of each
of these committees are indicated below.
o The Audit Committee is comprised of two non-employee directors, presently
Messrs. Minix and Katzman, and has the responsibility of recommending the
firm that will serve as our independent auditors, reviewing the scope and
results of the audit and services provided by our independent accountants
and meeting with our financial staff to review accounting procedures and
policies.
o The Compensation Committee is comprised of three non-employee directors,
presently Messrs. Aders, Katzman and Minix, and has been given the
responsibility of reviewing our financial records to determine overall
compensation and benefits for executive officers and to establish and
administer the policies which govern employee salaries and benefit plans.
o The Finance Committee is comprised of two directors, Messrs. Franc and
Katzman. The Finance Committee has been given the responsibility of
monitoring our capital structure, reviewing available alternatives to
satisfy our liquidity and capital requirements and recommending the firm or
firms which will provide investment banking and financial advisory services
19
<PAGE> 22
to us.
o The Acquisition Committee is comprised of four directors, presently Messrs.
Katzman, Aders, Franc and Minix, and has been given the responsibility of
monitoring our search for attractive acquisition opportunities, consulting
with members of management to review plans and strategies for the
achievement of our external growth objectives and recommending the firm or
firms that will serve as advisors to us in connection with the evaluation
of potential business combinations.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
the Company during its most recent fiscal year and Form 5 and amendments
thereto, or written representations that no Form 5 is required, all executive
officers and directors of the Company timely filed with the Securities and
Exchange Commission all reports required by Section 16(a) of the Securities
Exchange Act of 1934 except that Mr. Cloeter filed a Form 3, Initial Statement
of Beneficial Ownership of Securities, more than 10 days after he became an
executive officer of the Company.
20
<PAGE> 23
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes information concerning cash and non-cash
compensation paid to or accrued for the benefit of the named executive officers
for all services rendered in all capacities to the Company and its predecessors.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
SECURITIES
NAME OF PRINCIPAL FISCAL UNDERLYING ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION(1)($)
- -------------------- ----- ---------- ---------- ------------- ------------------
<S> <C> <C> <C> <C> <C>
S. Leslie Flegel 2000 $330,000 $ 140,000 525,000 $5,450
Chief Executive Officer 1999 260,857 23,795 360,000 5,450
1998 255,000 96,300 89,256 9,093
William H. Lee 2000 $246,430 $ 100,000 -- $2,847
Chief Administrative Officer 1999 246,430 23,795 -- 3,056
1998 245,494 70,382 49,091 3,056
Richard A. Jacobsen 2000 $166,458 $ 512,902 375,000 $2,360
Chief Operating Officer 1999
1998
James R. Gillis 2000 $250,000 $ 150,000 -- $2,860
President 1999 21,308 -- 202,000 --
1998
Monte Weiner 2000 $150,000 $ 100,000 25,000 --
Executive Vice President & 1999 -- -- 100,000 --
CEO - Source Display 1998
</TABLE>
- ----------
(1) In fiscal 2000, the estimated incremental cost to The Source of life
insurance premiums paid on behalf of Messrs. Flegel, Lee, Jacobsen, Gillis
and Weiner was $5,450, $2,847, $2,360, $2,860 and $0, respectively. In
fiscal 1999, the estimated incremental cost to The Source of life insurance
premiums paid on behalf of Messrs. Flegel, Lee, Jacobsen, Gillis and Weiner
was $5,450, $2,695, $0, $0 and $0. In fiscal 1998, the estimated
incremental cost to The Source of life insurance premiums paid on behalf of
Messrs. Flegel, Lee, Jacobsen, Gillis and Weiner was $9,093, $1,050, $0, $0
and $0, respectively.
21
<PAGE> 24
<TABLE>
<CAPTION>
OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- ------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Number of % of Total Assumed Annual Rates of
Securities Options Stock Price Appreciation
Underlying Granted to Exercise or for Option Term
Options Employees in Base Price Expiration -----------------------------------------
Name Granted # Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ----------------------- -------------- --------------- -------------- -------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
S. Leslie Flegel 125,000(1) 7% 11.41 3-15-04 394,047 870,740
S. Leslie Flegel 100,000(2) 6% 13.25 8-22-09 833,285 2,111,709
S. Leslie Flegel 100,000(2) 6% 15.00 7-28-09 943,342 2,390,614
S. Leslie Flegel 100,000(2) 6% 18.00 7-28-09 1,132,010 2,868,736
S. Leslie Flegel 100,000(3) 6% 21.60 7-28-09 1,358,412 3,442,484
Richard Jacobsen 375,000(4) 21% 10.94 3-23-09 2,580,040 6,538,328
Monte Weiner 25,000(5) 1% 13.25 8-23-09 208,321 527,927
- ----------------------- -------------- --------------- -------------- -------------- ------------------- ---------------------
</TABLE>
(1) Options were granted March 16, 1999 and vest in four equal annual
installments.
(2) Options were granted July 29, 1999 and are exercisable in three annual
installments.
(3) Options were granted August 23, 1999 and vest in three equal annual
installments.
(4) Options were granted March 24, 1999 and vest as follows: 50,000 on first
anniversary, 112,500 on second anniversary, 162,500 on third anniversary
and 50,000 on fourth anniversary.
(5) Options were granted August 23, 1999 and vest in five equal annual
installments.
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Number of Unexercised In-the Money Options/
Shares Options at Fiscal Year at Fiscal Year End ($)
Acquired on Value End (#) Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
- --------------------------- ------------------------ ------------------------ ------------------------ -----------------------
<S> <C> <C> <C> <C>
S. Leslie Flegel 0 0 314,086/660,170 1,929,304/3,678,341
William H. Lee 0 0 32,727/16,364 413,997/207,005
Richard A. Jacobsen 0 0 0/375,000 0/1,638,750
James R. Gillis 0 0 67,333/134,667 505,000/1,010,003
Monte Weiner 0 0 71,667/53,333 305,635/188,865
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
</TABLE>
DIRECTOR COMPENSATION.
Under the Company's present policy, each director of the Company who is not also
an employee receives $15,000 annually payable quarterly in either cash or shares
Common Stock valued at 90% of market on the date of grant as of the payment
date. Directors also annually receive options to purchase 10,000 shares of
Common Stock at an exercise price equal to market on the date of grant.
Directors are also entitled to be reimbursed for expenses incurred by them in
attending meetings of the Board and its committees.
EMPLOYMENT AGREEMENTS WITH NAMED EXECUTIVE OFFICERS.
In October 1997, we entered into separate employment agreements with S. Leslie
Flegel, William H. Lee and W. Brian Rodgers, each for initial terms expiring on
January 31, 1999, and thereafter automatically continue for additional one year
terms unless terminated by either the executive or us. Under the employment
agreements, Mr. Flegel serves as the Chairman
22
<PAGE> 25
of the Board and Chief Executive Officer of The Source for initial annual base
compensation of $255,000, Mr. Lee serves as Chairman of the Executive Committee
and Chief Administrative Officer of The Source for an initial annual base
compensation of $240,573, and Mr. Rodgers serves as Chief Financial Officer of
The Source for an initial annual base compensation of $100,000, subject to
annual adjustment by the Compensation Committee of the Board (the "Base
Compensation"). In the event the employment of any such person with The Source
is terminated for reasons other than for cause, permanent disability or death or
there occurs a significant reduction in the position, duties or responsibilities
thereof (a "Termination") within two years following a "Change of Control" (as
defined in the employment agreement), the discharged person will be entitled to
an additional bonus of 300% of his then current annual Base Compensation. Such
person also will agree to refrain from disclosing information confidential to
The Source or engaging, directly or indirectly, in the rendering of services
competitive with those offered by The Source during the term of his employment
and for two years thereafter, without the prior written consent of The Source.
In December 1998, we entered into an employment agreement with James R. Gillis,
which expires January 31, 2001 (subject to renewal). The employment agreement
provides that Mr. Gillis serves as President of The Source and receives annual
base compensation of $250,000, subject to annual adjustment by the Board. In
addition, Mr. Gillis is entitled to receive an annual bonus of $50,000 for each
of fiscal 2000, 2001 and 2002 if certain performance goals are met. The annual
bonus amounts may increase if the performance of our front-end display rack
manufacturers exceeds certain thresholds. However, under his employment
agreement, Mr. Gillis is not entitled to an annual bonus of more than $250,000.
In the event the employment of Mr. Gillis is terminated for reasons other than
cause, permanent disability or death, Mr. Gillis will be entitled to receive the
remainder of his base salary and benefits for the balance of the term of the
agreement and a pro rata portion of his annual bonus for the year of
termination. Mr. Gillis agreed to refrain from disclosing information
confidential to The Source during the term of the employment agreement and
agreed not to engage, directly or indirectly, in the rendering of services
competitive with those offered by The Source during the term of his employment
and for two years thereafter.
In March 1999, we entered into an employment agreement with Richard A. Jacobsen,
which expires January 31, 2004 (subject to renewal). Under his agreement, Mr.
Jacobsen serves as Vice Chairman and Chief Operating Officer of The Source and
receives annual base compensation of $235,000 for fiscal 2000, $255,000 for
fiscal 2001 and $275,000 for fiscal 2002. For fiscal 2003 and 2004, Mr.
Jacobsen's salary will be determined by the Board, but it may not be less than
$275,000. The Board may increase the annual base compensation above the
foregoing amounts at its discretion. Mr. Jacobsen will also be entitled to
receive an annual bonus equal to a percentage of our net income before taxes
ranging from 0.69% to 2.7% if certain performance goals are met. Mr. Jacobsen
will not be entitled to a bonus if our pre-tax net income is not at least 82% of
our budgeted pre-tax net income. In connection with his employment by The
Source, we made two loans to Mr. Jacobsen in the amounts of $600,000 ("Loan 1")
and $375,000 ("Loan 2"). Loan 1, including interest, will be forgiven over a
5-year term and Loan 2, including interest, will be forgiven over a 7-year term
provided, in each case, that Mr. Jacobsen remains an employee of the Company.
Under this employment agreement, Mr. Jacobsen also is entitled to receive
payments compensating him for his annual tax liabilities in connection with
forgiveness of the loans. In the event (1) the employment of Mr. Jacobsen is
terminated for reasons other than for cause, permanent disability or death, (2)
there occurs an assignment of duties or responsibilities inconsistent with Mr.
Jacobsen's appointed positions or (3) there is a "Change of Control" (as defined
in his employment agreement) (each of the foregoing being a "Termination"), Mr.
Jacobsen will be entitled to receive his accrued but unpaid base salary, his
base salary for the remainder of the term of the employment agreement,
forgiveness of Loan 1 and Loan 2, immediate vesting of options granted to Mr.
Jacobsen under the employment agreement and payment of a bonus in an amount
equal to the greater of the annual bonus due in the year of termination or the
annual bonus for the prior year. Under the agreement, Mr. Jacobsen agreed to
refrain from disclosing information confidential to The Source or engaging,
directly or indirectly, in the rendering of services competitive with those
offered by The Source during the term of his employment and for two years
thereafter, without the prior written consent of The Source.
In August 1999, we entered into an employment agreement with Cameron J. Cloeter,
which expires July 31, 2004 (subject to renewal). Under his agreement, Mr.
Cloeter serves as Executive Vice President of Sales and Marketing of The Source
and receives annual base compensation of $175,000. Mr. Cloeter will also be
entitled to receive an annual bonus equal to a percentage of our net income
before taxes not to exceed $65,700 if certain performance goals are met. Mr.
Cloeter will not be entitled to a bonus if our pre-tax net income is not at
least 82% of our budgeted pre-tax net income. In the event (1) the employment of
Mr. Cloeter is terminated for reasons other than for cause, permanent disability
or death, (2) there occurs an assignment of duties or responsibilities
inconsistent with Mr. Cloeter's appointed positions or (3) there is a "Change of
Control" (as defined in his employment agreement) (each of the foregoing being a
"Termination"), Mr. Cloeter will be entitled to receive his accrued but unpaid
base salary, his base salary for the remainder of the term of the employment
23
<PAGE> 26
agreement, immediate vesting of options granted to Mr. Cloeter under the
employment agreement and payment of a bonus in an amount equal to the greater of
the annual bonus due in the year of termination or the annual bonus for the
prior year. Under the agreement, Mr. Cloeter agreed to refrain from disclosing
information confidential to The Source or engaging, directly or indirectly, in
the rendering of services competitive with those offered by The Source during
the term of his employment and for two years thereafter, without the prior
written consent of The Source.
Under the terms of a written agreement with us, Dwight L. DeGolia has agreed to
refrain from disclosing information confidential to us or engaging directly or
indirectly, in any activity which is competitive with our business during the
term of his employment and for two years thereafter.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of March 31, 2000
concerning the beneficial ownership of the Company's Common Stock by: (i) each
person known by the Company to be the beneficial owner of more than five percent
of the outstanding Common Stock, (ii) each executive officer named in the
Summary Compensation Table contained in this Form 10-K, (iii) each director of
the Company and (iv) all directors and executive officers of the Company as a
group. Each person named has sole voting and investment power with respect to
the shares indicated, except as otherwise stated in the notes to the table:
<TABLE>
<CAPTION>
Beneficial Ownership(1)
Name and Address
of Beneficial Owner Number of Shares Percent
- ------------------- ---------------- -------
<S> <C> <C>
Jonathon J. Ledecky 2,640,000(2) 15.0%
800 Connecticut Avenue NW, Suite 1111
Washington, D.C. 20006
S. Leslie Flegel 1,313,407(2)(3) 7.3
Two City Place Drive, Suite 380
St. Louis, Missouri 63141
FMR Corporation 1,188,000(4) 6.7
82 Devonshire Street
Boston, Massachusetts, 02109
Firstar Corporation 1,017,058(5) 5.8
425 Walnut Street
Cincinnati, Ohio 45201
William H. Lee 423,986(3) 2.4
711 Gallimore Dairy Road
High Point, North Carolina 27265
Aron Katzman 256,528(3)(6) 1.5
10 Layton Terrace
St. Louis, Missouri 63124
Monte Weiner 135,167(3) *
744 Berriman Street
Brooklyn, New York 11208
Harry L. Franc, III 74,105(3)(6) *
19 Briarcliff
St. Louis, Missouri 63124
</TABLE>
24
<PAGE> 27
<TABLE>
<S> <C> <C>
James R. Gillis 68,501(3) *
10 Mountainview Road, S. Wing, Suite 301
Upper Saddle River, New Jersey 07458
Richard A. Jacobsen 50,000(3) *
10 Mountainview Road, S. Wing, Suite 301
Upper Saddle River, New Jersey 07458
Kenneth F. Teasdale 45,000(3) *
33 Kingsbury Place
St. Louis, Missouri 63112
Randall S. Minix 33,030(3) *
5502 White Blossom Drive
Greensboro, North Carolina 27410
Robert O. Aders 25,000(3) *
132 S. Delancey Place
Atlantic City, New Jersey 08401
George W. Off 20,090(3) *
6853 Westwoods Circle
Arvada, Colorado 80007
A ll directors and executive 2,716,667(2)(7) 14.7
officers as a group (16 persons)
</TABLE>
- ------------------------
*Less than 1%
(1) Under the rules of the Commission, some of the shares of the Company's
common stock which a person has the right to acquire within 60 days after
March 31, 2000 in connection with the exercise of stock options and
warrants are deemed to be outstanding for the purpose of computing
beneficial ownership and the percentage of ownership of that person.
(2) S. Leslie Flegel and Jonathan J. Ledecky entered into a Voting Agreement on
January 7, 1999, under which Mr. Ledecky granted a proxy to Mr. Flegel to
vote his shares of common stock with regard to certain corporate matters.
The number of shares shown for Mr. Flegel in the table does not include Mr.
Ledecky's shares.
(3) Includes exercisable options to acquire shares of common stock in the
following amounts per beneficial owner: S. Leslie Flegel - 435,337 shares;
William H. Lee - 32,727 shares; Aron Katzman -20,000 shares; Monte Weiner -
71,667; Harry L. Franc, III - 20,000 shares; James R. Gillis - 67,333;
Richard A. Jacobsen - 50,000; Kenneth Teasdale - 10,000; Randall S. Minix -
20,000 shares; Robert O. Aders - 20,000 shares; and George W. Off - 10,000
shares.
(4) This amount, as reflected on Schedule 13G filed on February 14, 2000,
consists of sole voting power with respect to 0 shares, sole dispositive
power with respect to 1,188,000 shares and no shared voting or dispositive
power.
(5) This amount, as reflected on Schedule 13G filed on February 14, 2000,
consists of sole voting power with respect to 1,017,058 shares, sole
dispositive power with respect to 1,017,033 shares and no shared voting or
dispositive power.
(6) Includes exercisable warrants to acquire shares of common stock in the
following amounts per beneficial owner: Aron Katzman - 40,180 shares and
Harry L. Franc, III - 8,929 shares.
(7) Includes options and warrants to acquire 89,879 shares of common stock,
excluded in the names indicated in the footnotes above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From time to time, we and our predecessors have engaged in various transactions
with our directors, executive officers and other affiliated parties. The
following paragraphs summarize certain information concerning these transactions
and relationships to the extent that they occurred since the beginning of our
last fiscal year.
25
<PAGE> 28
On June 28, 1991, a predecessor of ours entered into a lease with 711 Gallimore
Partnership in which William H. Lee, is a partner. Under the terms of the lease,
711 Gallimore Partnership leased office space to us in High Point, North
Carolina. In fiscal 2000, we paid 711 Gallimore Partnership approximately
$97,000 in rent.
In June 1999, we purchased the property that we leased from 711 Gallimore
Partnership for $1.8 million in cash. Our Board appointed Timothy Braswell, an
independent director who has since resigned from the Board, to negotiate this
transaction on our behalf and, based on Mr. Braswell's recommendation, the Board
determined that the terms of the purchase were fair to The Source.
For a description of certain loans made to Richard Jacobsen, see Item 11
"Executive Compensation - Employment Agreements with Names Executive Officers."
26
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial statements. The following consolidated financial statements of
The Source Information Management Company included in the Annual Report are
incorporated by reference herein in Item 8:
Report of Independent Certified Public Accountants
Consolidated balance sheets - January 31, 2000 and 1999
Consolidated statements of operations - years ended January 31, 2000, 1999
and 1998
Consolidated statements of comprehensive income - years ended January 31,
2000, 1999 and 1998
Consolidated statements of stockholders' equity - years ended January 31,
2000, 1999 and 1998
Consolidated statements of cash flows - years ended January 31, 2000, 1999
and 1998
Notes to consolidated financial statements
2. Financial statement schedules. The following consolidated financial
statement schedule of The Source Information Management Company and
subsidiaries is included herein:
Report of Independent Certified Public Accountants S-1
Schedule II Valuation and qualifying accounts S-2
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
3. Exhibits.
See Exhibit Index.
(b) Reports on Form 8-K.
The Company's Current Report on Form 8-K/A dated December 2, 1999,
containing the financial statements of Huck Store Fixture Company together
with the related Independent Auditors' Report, for the years ended November
7, 1998 and November 8, 1997 and certain pro forma information.
27
<PAGE> 30
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AUDITED CONSOLIDATED FINANCIAL STATEMENT OF THE SOURCE INFORMATION MANAGEMENT COMPANY PAGE
<S> <C>
The Report of the Independent Certified Public Accountants F-2
Consolidated Balance Sheets of January 31, 2000 and 1999 F-3
Consolidated Statements of Operations for the fiscal years ended January 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Comprehensive Income for the fiscal years ended January 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Stockholders' Equity F-6
Consolidated Statements of Cash Flows for the fiscal years ended January 31, 2000, 1999 and 1998 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE> 31
The Report of the Independent Certified Public Accountants
Board of Directors
The Source Information Management Company
St. Louis, Missouri
We have audited the consolidated balance sheets of The Source Information
Management Company as of January 31, 2000 and 1999 and the related consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for each of the three years in the period ended January 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Source
Information Management Company at January 31, 2000 and 1999 and the results of
its operations and its cash flows for each of the three years in the period
ended January 31, 2000 in conformity with generally accepted accounting
principles.
/s/BDO Seidman, LLP
St. Louis, Missouri
April 14, 2000
F-2
<PAGE> 32
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 1,737,578 $ 752,695
Trade receivables (net of allowance for doubtful accounts of $1,122,734 and
$469,658 at January 31, 2000 and 1999, respectively) 64,835,978 29,464,187
Income taxes receivable - 262,877
Inventories (Note 4) 9,994,342 1,395,699
Other current assets 1,448,305 263,692
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 78,016,203 32,139,150
=============================================================================================================================
Land 2,233,345 120,000
Manufacturing plants 11,896,119 680,000
Office equipment and furniture 12,336,974 5,713,459
- -----------------------------------------------------------------------------------------------------------------------------
Property, Plants and Equipment 26,466,438 6,513,459
Less accumulated depreciation and amortization 4,670,708 3,179,359
- -----------------------------------------------------------------------------------------------------------------------------
NET PROPERTY, PLANTS AND EQUIPMENT 21,795,730 3,334,100
=============================================================================================================================
OTHER ASSETS
Goodwill, net of accumulated amortization of $3,359,572 and $648,600 at 53,929,629 29,608,254
January 31, 2000 and 1999, respectively (Note5)
Deferred tax asset (Note 8) - 7,000
Notes receivable - officer (Note2) 975,000 -
Other 2,042,154 789,307
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 56,946,783 30,404,561
=============================================================================================================================
$ 156,758,716 $ 65,877,811
=============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 33
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Checks issued against future deposits $ 1,216,936 $ 2,876,922
Accounts payable and accrued expenses 9,238,407 3,727,529
Income taxes payable 1,092,349 --
Due to retailers (Note 6) 3,722,944 2,737,077
Deferred income taxes (Note 8) 1,115,000 718,000
Current maturities of long-term debt (Note 7) 174,392 66,057
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 16,560,028 10,125,585
=============================================================================================================================
LONG-TERM DEBT, LESS CURRENT MATURITIES (Note 7) 32,214,810 3,442,000
=============================================================================================================================
DEFERRED INCOME TAXES (Note 8) 569,486 --
=============================================================================================================================
TOTAL LIABILITIES 49,344,324 13,567,585
=============================================================================================================================
COMMITMENTS (Note 9)
- -----------------------------------------------------------------------------------------------------------------------------
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
11,751,425 issued, of which 8,000 are being held as Treasury
Stock at January 31, 1999 173,450 117,513
Preferred Stock, $.01 par -- shares authorized, 2,000,000; -0- and
1,473,281 issued and outstanding, respectively, at January 31, 2000 and -- 14,733
1999
Additional paid-in-capital 91,769,491 46,451,971
- -----------------------------------------------------------------------------------------------------------------------------
Total contributed capital 91,942,941 46,584,217
Accumulated other comprehensive income 80,159 --
Retained earnings 15,877,924 5,767,140
- ----------------------------------------------------------------------------------------------------------------------------
Total contributed capital and retained earnings 107,901,025 52,351,357
Less: Treasury Stock (42,250 and 8,000 shares at cost, respectively, at
January 31, 2000 and 1999, respectively) (486,633) (41,131)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 107,414,392 52,310,226
=============================================================================================================================
$ 156,758,716 $ 65,877,811
=============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 34
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended January 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Revenues $ 18,248,540 $ 14,229,072 $ 11,803,844
Product Sales 64,239,420 6,870,856 -
====================================================================================================================
82,487,960 21,099,928 11,803,844
- --------------------------------------------------------------------------------------------------------------------
Cost of Service Revenues 9,305,607 6,658,814 5,860,653
Cost of Goods Sold 39,563,664 4,608,941 -
====================================================================================================================
48,869,271 11,267,755 5,860,653
- --------------------------------------------------------------------------------------------------------------------
33,618,689 9,832,173 5,943,191
Selling, General and Administrative Expense 14,880,239 2,949,382 2,350,622
- --------------------------------------------------------------------------------------------------------------------
Operating Income 18,738,450 6,882,791 3,592,569
- --------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
Interest income 113,765 28,407 21,164
Interest expense (1,032,876) (331,058) (714,404)
Other (151,555) (46,602) (79,321)
====================================================================================================================
Total Other Income (Expense) (1,070,666) (349,253) (772,561)
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 17,667,784 6,533,538 2,820,008
Income Tax Expense (Note 8) 7,557,000 2,667,000 1,231,000
====================================================================================================================
Net Income $ 10,110,784 $ 3,866,538 $ 1,589,008
====================================================================================================================
Earnings per Share - Basic $ 0.66 $ 0.42 $ 0.23
- --------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Basic (Note 12) 15,332,218 9,132,383 6,561,761
- --------------------------------------------------------------------------------------------------------------------
Earnings per Share - Diluted $ 0.60 $ 0.40 $ 0.22
- --------------------------------------------------------------------------------------------------------------------
Weighted Average of Shares Outstanding - Diluted (Note 12) 16,814,657 9,775,673 6,693,666
====================================================================================================================
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Years Ended January 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 10,110,784 $ 3,866,538 $ 1,589,008
Foreign Currency Translation Adjustment 80,159 - -
- --------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 10,190,943 $ 3,866,538 $ 1,589,008
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 35
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Other
Preferred Stock Common Stock Additional Compre- Treasury Stock Total
-------------------------------------- Paid-in Retained hensive -------------- Stockholders'
Shares Amount Shares Amount Capital Earnings Income Shares Amount Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, - $ - 5,727,465 $ 57 $ 2,757 $ 331 $ - - $- $ 3,145
1997
Issuance of Common 2,000,000 20 6,701 - 6,721
Stock
Exercise of stock 2,182 - 5 - 5
options
Preferred Stock 6,381 - 19 (19) -
Dividend
Exchange of 7% 186,667 2 521 - 523
Preferred Stock to
Common Stock -
Redeemable Common 91,938 1 503 - 504
Stock converted to
Common Stock
Other 1,734 - 8 - 8
Net income for the year - - - 1,589 1,589
- ------------------------------------------------------------------------------------------------------------------------
Balance, January 31,
1998 8,016,367 80 $ 10,514 $ 1,901 $ - $ 12,495
Issuance of Common 1,538,334 15 8,001 8,016
Stock
Exercise of stock 103,542 1 505 506
options
Exercise of warrants 1,181 6 6
Vesting of warrants 27 27
issued for consulting
services -
Purchase of treasury 8,000 (41) (41)
stock
Acquisitions 1,473,281 15 2,091,008 21 27,396 27,432
Other 993 3 3
Net income for the year 3,866 3,866
- ------------------------------------------------------------------------------------------------------------------------
Balance, January 31,
1999 1,473,281 $15 11,751,425 $ 117 $ 46,452 $ 5,767 $ - 8,000 $(41) $ 52,310
Conversion of (1,473,281) (15) 1,473,281 15 -
Preferred Stock to
Common Stock
Issuance of Common 3,000,000 30 35,694 35,724
Stock
Exercise of stock 88,020 1 452 453
options
Exercise of warrants 242,047 2 1,082 1,084
Vesting of warrants 27 27
issued for consulting
services -
Warrants issued for 15 15
consulting services
Purchase of treasury 34,250 (446) (446)
stock
Acquisitions - 788,212 8 8,030 8,038
Foreign currency $ 80 80
translation adjustment
Other 2,086 18 18
Net income for the year 10,111 10,111
- ------------------------------------------------------------------------------------------------------------------------
Balance, January 31, - $ - 17,345,071 $ 173 $ 91,770 $ 15,878 $ 80 42,250 $(487) $107,414
2000
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 36
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended January 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 10,110,784 $ 3,866,538 $ 1,589,008
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,981,397 713,037 432,632
Loss on disposition of equipment 50,020 - 1,338
Write-off of deferred loan costs 217,358 - -
Deferred income taxes 570,000 (438,000) 470,000
Other 5,434 58,772 125,311
Changes in assets and liabilities, net of effects
of acquisitions:
Increase in accounts receivable (27,715,115) (7,794,190) (5,537,689)
(Increase) decrease in inventories (52,743) 3,298,263 -
(Increase) decrease in other assets (2,294,713) 914,666 (421,882)
(Decrease) increase in accounts payable and (2,210,012) (631,434)
accrued expenses 120,614
Increase in amounts due to retailers 985,867 601,597 794,271
- --------------------------------------------------------------------------------------------------------------------
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (16,351,723) 589,249 (2,426,397)
====================================================================================================================
INVESTING ACTIVITIES
Acquisitions, net of cash acquired (37,347,767) (4,793,600) (608,650)
Capital expenditures (3,772,615) (642,514) (344,847)
Loans to officers (975,000) - (10,000)
Collection on officers notes receivable - 22,093 221,485
Proceeds from sale of fixed assets 4,750 - 2,000
Decrease (increase) in cash surrender value of life 24,150 (42,272) (55,333)
insurance
Proceeds from surrender of life insurance policies - - 83,959
- --------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (42,066,482) (5,456,293) (711,386)
====================================================================================================================
FINANCING ACTIVITIES
(Decrease) increase in checks issued against future (1,659,986) 2,528,342
deposits (3,093,479)
Proceeds from issuance of Common Stock 37,260,557 8,527,870 6,725,882
Borrowings under credit facility 99,548,138 36,483,000 37,777,000
Principal payments on credit facility (74,927,548) (41,879,000) (36,303,000)
Repayments under short-term debt agreements - (30,997) (2,221,961)
Deferred loan costs (372,572) - -
Common Stock reacquired (445,501) (41,131) -
Other financing activities - 200 (125)
- --------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 59,403,088 5,588,284 2,884,317
====================================================================================================================
INCREASE (DECREASE) IN CASH 984,883 721,240 (253,466)
CASH, beginning of period 752,695 31,455 284,921
- --------------------------------------------------------------------------------------------------------------------
CASH, end of period $ 1,737,578 $ 752,695 $ 31,455
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 37
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF ACCOUNTING POLICIES
Business
The Source Information Management Company (the Company) is a provider of
merchandise management information and related services primarily in connection
with the display and marketing of magazines and other periodicals throughout the
United States and Canada. The Company assists retailers in monitoring,
documenting, claiming and collecting incentive payments, primarily from
publishers of periodicals, and performs consulting and other services in
exchange for commissions. The Company also obtains revenues from consulting and
other services rendered to clients on other than a commission basis.
The Company also designs and manufactures custom-designed product display units
that are categorized as front-end merchandisers or point-of-purchase displays
used by retailers and consumer product manufacturers throughout the United
States and Canada. And in September 1999, the Company acquired two manufacturers
of custom wood displays and fixtures used by national retailers.
Principles of Consolidation
The consolidated financial statements include the accounts of The Source
Information Management Company and its wholly-owned subsidiaries (collectively,
the Company). The results of operations of Source-Canada Corp. and its
subsidiary, Source-Yeager Industries, Inc., Source-U.S. Marketing Services, Inc.
and its subsidiaries, Source-MYCO, Inc., Source-Chestnut Display Systems, Inc.,
and Source-Huck Store Fixture Company and its subsidiary are included in the
accompanying financial statements as of the date of acquisition. All material
intercompany accounts and transactions have been eliminated in consolidation.
Concentrations of Credit Risk
During fiscal 2000 approximately 14.2% of the Company's revenues were derived
from the services provided in connection with the collection of payments owed to
the Company's retailer clients from magazine publishers under programs designed
by the publishers to provide incentives to increase single copy magazine sales
(referred to as claim submission program services). The incentive programs,
although part of the publishers' marketing strategy for over 20 years, are
governed by short-term contracts. If magazine publishers discontinue or
significantly modify the incentive programs in such a manner which makes the
Company's services incompatible with the modified programs, the Company's
results of operations and financial condition may be materially and adversely
affected.
In the Advance Pay Program, the Company assumes the risk otherwise borne by the
retailer that magazine publishers will refuse or be unable to pay the amount of
incentive payments claimed. Based on historical experience, the Company
maintains a reserve for claims submitted but subject to such a refusal or
inability to pay. However, if a prominent magazine publisher files a petition in
bankruptcy, seeks other protection from its creditors or otherwise refuses to
pay, this reserve may be inadequate. The results of operations and the financial
condition of the Company could be materially affected.
In the display rack and store fixture manufacturing segment, the Company does
have significant client concentration. Substantially all of the Company's
services are performed under short-term contracts, thus permitting the Company's
clients to obtain services from other providers without further obligation to
the Company. If the Company experiences a significant reduction in business from
its clients, the Company's results of operations and financial condition may be
materially and adversely affected.
For fiscal 2000, two customers accounted for approximately 26% of revenues. Winn
Dixie accounted for approximately 15% of revenues and Ahold USA accounted for
approximately 11% of revenues. For fiscal 1999,
F-8
<PAGE> 38
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
three customers accounted for approximately 38% of revenues. One of the three
customers, Food Lion, Inc., accounted for approximately 27% of revenues. No
customer exceeded 10% of revenues for fiscal 1998. Our major customers in terms
of revenues are usually retailers in the process of reconfiguring their checkout
areas. Because this process typically occurs every three years, our major
customers vary from year to year.
Revenue Recognition
Under both the standard arrangement and the Advance Pay Program, service
revenues are recognized at the time claims for incentive payments are
substantially completed for submission to the publishers. The service revenues
recognized are based on the amount claimed multiplied by a commission rate, less
an estimated reserve necessary to maintain an allowance for doubtful accounts of
approximately 2% of trade accounts receivable. Under the standard arrangement,
invoices for claim processing services are not issued until the Company receives
settlement of the claim. However, under the Advance Pay Program, the customer is
not invoiced for the commission, which is the difference between the claim and
the advance amount.
Revenues from annual ICN and PIN contracts are recognized ratably over the
subscription term, generally one year.
Front-end management revenues are recognized as services are performed.
The Company generally recognizes manufacturing revenues when products are
shipped. Upon request from a customer, the product can be stored for future
delivery for the convenience of the customer. This only occurs when the
manufacturing and earnings processes are complete, the customer accepts title in
writing, the product is invoiced with payment due in the normal course of
business, the delivery schedule is fixed and the product is segregated from
other goods. In our display rack and store fixture 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.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the
first-in, first-out (FIFO) method.
Equipment and Furniture
Equipment and furniture are stated at cost. Depreciation is computed using the
straight-line method for financial reporting and accelerated methods for income
tax purposes over the estimated useful lives of 5 to 7 years.
Income Taxes
The Company accounts for income taxes under an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, the
Company generally considers all expected future events other than enactments of
changes in the tax laws or rates.
Goodwill
Goodwill represents the excess of the cost of a company acquired over the fair
value of the net assets acquired which is amortized over 15 to 20 years.
F-9
<PAGE> 39
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deferred Loan Costs
Deferred loan costs represent the costs incurred relating to the Company's
revolving credit facility. These costs are being amortized by use of the
interest method over the life of the debt.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price greater than or equal to the fair value of the shares at the
date of grant. The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25). That Opinion requires that compensation cost
related to fixed stock option plans be recognized only to the extent that the
fair value of the shares at the grant date exceeds the exercise price.
Accordingly, the Company recognizes no compensation expense for its stock option
grants.
In October 1995, the Financial Accounting Standards Board, issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 allows companies to continue to account for their
stock option plans in accordance with APB Opinion No. 25, but encourages the
adoption of a new accounting method based on the estimated fair value of
employee stock options. Pro forma net income and earnings per share, determined
as if the Company had applied the new method, are disclosed within Note 13.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Long-Lived Assets
In March 1995, SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets Disposed Of" was issued. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used or
disposed of by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Management periodically reviews the carrying value of property and
equipment and intangibles in relation to the operating performance and future
undiscounted cash flows of the underlying business to determine whether
impairment exists. No impairment was identified for the years ended January 31,
2000, 1999 and 1998.
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company's foreign
subsidiaries are determined using local currency as the functional currency.
Assets and liabilities of these subsidiaries are translated at the exchange rate
in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in the other comprehensive income account in stockholders' equity.
Gains and losses resulting from foreign currency transactions are included in
the Consolidated Statements of Operations.
Comprehensive Income
F-10
<PAGE> 40
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. The Company's
only item of comprehensive income is foreign currency translation adjustments.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share," which requires the presentation of "basic" earnings per
share, computed by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the period, and
"diluted" earnings per share, which reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity.
At January 31, 2000, 1999 and 1998, options and warrants to purchase 681,740,
462,000 and 436,713 shares of common stock, respectively, were not included in
the computation of diluted EPS because the options' exercise prices were greater
than the average market price of the Company's common stock for 2000, 1999 and
1998, respectively.
Software Capitalization Policy
The Company capitalizes software in accordance with Statement of Position 98-1
("SOP 98-1"). The SOP allows capitalization of costs of computer software
developed or obtained for internal use only for (i) external direct costs of
materials and services incurred in developing or obtaining internal-use computer
software, (ii) payroll and payroll-related costs for employees who are directly
associated with and devote time to the internal-use computer software project,
to the extent of the time spent directly on the project, or (iii) interest costs
incurred while developing internal-use computer software.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
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 is effective for years beginning after June 15, 2000
and requires comparative information for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of this
statement to have a significant impact on the results of operations, financial
position or cash flows.
2. RELATED PARTY TRANSACTIONS
In connection with his employment with the Company, the Chief Operating Officer
received two loans from the Company in the amounts of $600,000 ("Loan 1") and
$375,000 ("Loan 2"). Loan 1, including interest, will be forgiven over a 5-year
term and Loan 2, including interest, will be forgiven over a 7-year term,
provided, in each case, that Mr. Jacobsen remains an employee of the Company.
The loans bear interest at 5% per annum.
The Company leased certain office space from partnerships controlled by
stockholders of the Company. Amounts paid for the office space were
approximately $114,000, $278,000 and $223,000 for 2000, 1999 and 1998,
respectively.
F-11
<PAGE> 41
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. ADVANCE PAY PROGRAM
The Company has established an Advance Pay Program. Under this program the
Company advances an agreed upon percentage of the incentive payments otherwise
due the retailer from magazine publishers upon quarterly submission of claims
for such payments. The claims otherwise due the retailer become due the Company.
Included in trade receivables at January 31, 2000 and 1999 is $24,249,421 and
$19,965,882, respectively, due the Company under the Advance Pay Program (net of
$16,986,034 and $6,210,636, respectively, due the program participants).
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
January 31, 2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 3,432,769 $ 576,101
Work-in-process 2,285,847 805,932
Finished goods 4,275,726 13,666
---------------------------------------------------------------------------------------------------
$ 9,994,342 $1,395,699
---------------------------------------------------------------------------------------------------
</TABLE>
5. BUSINESS COMBINATIONS
Acquisition of Mike Kessler and Associates, Inc.
On May 30, 1997, the Company acquired all of the stock of Mike Kessler and
Associates, Inc. (MKA) for $2,500,000 of which $350,000 was paid upon closing
and the balance was paid on January 5, 1998 with interest at 6.25%. The seller
operated MKA as a business engaged in the collection of retail display
allowances for retail store chains. The Company has continued servicing MKA's
customer base through its operations in High Point, North Carolina.
This transaction has been accounted for as a purchase, and accordingly, the
assets and liabilities have been recorded at fair market value. Results of
operations have been included as of the effective date of the transaction. The
purchase price exceeded the fair value of the assets acquired in the amount of
$2,382,900 and is being amortized straight line over 15 years.
Acquisition of Periodical Concepts
On July 27, 1998, the Company acquired all the assets of Periodical Concepts, a
Texas general partnership doing business as PC2, for $2,500,000 in cash. Prior
to the acquisition, PC2 provided information and marketing services to retail
stores selling magazines and other periodicals. The Company has continued
servicing PC2's customer base through its operations in High Point, North
Carolina.
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
F-12
<PAGE> 42
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
exceeds the fair value of the assets acquired by approximately
$2,400,000 and is being amortized straight line over 15 years.
Acquisition of Yeager Industries, Inc.
On January 7, 1999, the Company acquired the net assets of Yeager Industries,
Inc. for $2.3 million in cash and 164,289 shares of the Company's Common Stock,
valued at the time of the acquisition at $1.15 million. The purchase price could
be increased by up to $500,000 (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
$1,050,000 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
$23,471,000 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.
F-13
<PAGE> 43
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 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 the amount previously paid.
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
F-14
<PAGE> 44
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
Unaudited pro forma results of operations for 2000 and 1999 for the Company,
U.S. Marketing, MYCO and Huck, assuming the acquisitions took place on February
1, 1998, are listed below (in thousands):
<TABLE>
<CAPTION>
Year Ended January 31, 2000 1999
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenues As reported $82,488 $21,100
Pro forma 95,528 71,721
Net Income As reported 10,111 3,867
Pro forma 11,376 3,867
Earnings Per Share
Basic As reported $ .66 $ .42
Diluted As reported .60 .40
Basic Pro forma .73 .30
Diluted Pro forma .67 .29
------------------------------------------------------------------------------------------------
</TABLE>
6. DUE TO RETAILERS
For the services segment, the Company has arrangements with certain of its
customers whereby the Company is authorized to collect and deposit in its own
accounts, checks payable to its customers for incentive payments. The Company
retains the commission related to such payments and pays the customer the
difference.
For the display rack and store fixture manufacturing segment, Due to Retailers
represents funds collected on behalf of the retailers on front-end racking
programs and not yet remitted to the retailer.
The Company owes retailers $3,722,944 and $2,737,077, respectively, at January
31, 2000 and 1999 under such arrangements.
F-15
<PAGE> 45
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
Long-term debt consists of:
<TABLE>
<CAPTION>
January 31, 2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Facility $27,899,438 $3,202,000
Industrial Revenue Bonds 4,000,000 -
Unsecured note payable to former owners of acquired company,
non-interest bearing, payable in five equal
annual installments beginning in November 1999 240,000 300,000
Unsecured note payable to former owner of acquired company, 7%
annual interest, payable in two annual
installments beginning in September 2000 200,000 -
Term note payable in monthly installments of $629
through November 1999, collateralized by an automobile - 6,057
Other 49,764 -
-------------------------------------------------------------------------------------------------
Total Long-term Debt 32,389,202 3,508,057
Less current maturities 174,392 66,057
-------------------------------------------------------------------------------------------------
Long-term Debt $32,214,810 $3,442,000
=================================================================================================
</TABLE>
Annual maturities of long-term debt are as follows: 2001 - $174,392; 2002 -
$176,004; 2003 - $27,977,236; 2004 - $61,570; thereafter - $4,000,000.
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 LIBOR rate 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 January 31, 2000. The availability at January 31, 2000 on the
revolving credit facility was approximately $18.0 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 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
F-16
<PAGE> 46
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
January 1, 2030. Fees related to the letter of credit are .75% per annum of the
outstanding bond principal plus accrued interest.
8. INCOME TAXES
Provision (benefit) for federal and state income taxes in the consolidated
statements of operations consist of the following components:
<TABLE>
<CAPTION>
Year Ended January 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $5,590,000 $2,473,000 $ 606,000
State 1,397,000 632,000 155,000
-----------------------------------------------------------------------------------------------------
Total Current 6,987,000 3,105,000 761,000
-----------------------------------------------------------------------------------------------------
Deferred
Federal 456,000 (349,000) 376,000
State 114,000 (89,000) 94,000
-----------------------------------------------------------------------------------------------------
Total Deferred 570,000 (438,000) 470,000
-----------------------------------------------------------------------------------------------------
Total Income Tax Expense $7,557,000 $2,667,000 $1,231,000
-----------------------------------------------------------------------------------------------------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of the assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The sources of
the temporary differences and their effect on deferred taxes are as follows:
F-17
<PAGE> 47
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, 2000 1999
-----------------------------------------------------------------------------------------------------
Deferred Tax Assets
<S> <C> <C>
Net operating loss carryforward 1,082,000 1,082,000
Allowance for doubtful accounts 190,000 185,000
Deferred compensation 73,000 52,000
Other 107,000 73,000
-----------------------------------------------------------------------------------------------------
1,452,000 1,392,000
Less: Valuation allowance (1,137,000) (1,137,000)
-----------------------------------------------------------------------------------------------------
Deferred Tax Asset, Net 315,000 255,000
-----------------------------------------------------------------------------------------------------
Deferred Tax Liabilities
Book/tax difference in accounts receivable 1,303,000 849,000
Income not previously taxed under cash
basis of accounting for income tax purposes 69,000 72,000
Book/tax difference in property and equipment 116,000 43,000
Goodwill 511,486 -
Other - 2,000
-----------------------------------------------------------------------------------------------------
Total Deferred Tax Liabilities 1,999,486 966,000
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
Net Deferred Tax Liability 1,684,486 711,000
-----------------------------------------------------------------------------------------------------
Classified as:
Non-current asset - 7,000
Current liability 1,115,000 718,000
Long-term liability 569,486 -
-----------------------------------------------------------------------------------------------------
Net Deferred Tax Liability 1,684,486 711,000
-----------------------------------------------------------------------------------------------------
</TABLE>
The deferred tax asset in the accounts of Source-U.S. Marketing Services, Inc.
("Source-U.S. Marketing") totaling $1,137,000 for the years ended January 31,
2000 and 1999 are fully offset by a valuation allowance of the same amount due
to uncertainty regarding its ultimate utilization. At January 31, 2000 and 1999,
Source-U.S. Marketing had net operating loss ("NOL") carryforwards of
approximately $1,800,000 expiring through 2018. Brand, a wholly owned subsidiary
of Source-U.S. Marketing, had NOL carryforwards at January 31, 2000 and 1999 of
approximately $880,000 expiring through 2018.
All of the valuation allowance for deferred tax assets for subsequently
recognized tax benefits will be allocated to reduce goodwill.
The following summary reconciles income taxes at the maximum federal statutory
rate with the effective rates for 2000, 1999 and 1998:
F-18
<PAGE> 48
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 2000 1999 1998
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $ 6,007,000 $ 2,221,000 $ 960,000
State income tax expense (benefit), net of
federal income tax benefit 887,000 379,000 200,000
Non-deductible meals and entertainment 60,000 37,000 30,000
Non-deductible officers' life insurance 35,000 (6,000) 7,000
Non-deductible goodwill amortization 510,000 134,000 61,000
Utilization of NOL carryforwards -- -- (19,000)
Difference in foreign tax rates 50,000 -- --
Other, net 8,000 (98,000) (8,000)
--------------------------------------------------------------------------------------------------------
Income Tax Expense $ 7,557,000 $ 2,667,000 $ 1,231,000
--------------------------------------------------------------------------------------------------------
</TABLE>
9. COMMITMENTS
Leases
The Company leases office and manufacturing space, an apartment, computer
equipment, and vehicles under leases that expire over the next five years.
Management expects that in the normal course of business, leases will be renewed
or replaced with other leases. Rent expense was approximately $1,734,000,
$622,000 and $462,000 for the years ended January 31, 2000, 1999 and 1998,
respectively. Amounts paid to related parties included in total rent expense
were approximately $114,000, $278,000 and $223,000 for 2000, 1999 and 1998,
respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial or remaining terms of one year or more consisted
of the following at January 31, 2000:
<TABLE>
<CAPTION>
Capital Operating
Year Ending January 31, Leases leases
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
2001 $ 19,011 $1,050,131
2002 19,011 651,509
2003 19,011 400,981
2004 1,584 368,290
2005 -- 322,145
Thereafter -- 152,200
-----------------------------------------------------------------------------------------------------
Total minimum lease payments 58,617 $2,945,256
============================
Amount representing interest (8,853)
-------------------------------------------------------------------------
Present Value of Net Minimum Lease Payments $ 49,764
=========================================================================
</TABLE>
Litigation
The Company has pending certain legal actions and claims incurred in the normal
course of business and is actively pursuing the defense thereof. In the opinion
of management, these actions and claims are either without merit or are
F-19
<PAGE> 49
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
covered by insurance and will not have a material adverse effect on the
Company's financial condition, results of operations or liquidity.
Employment agreements
The Company has entered into employment agreements with certain officers and key
employees. These agreements expire at dates ranging from January 2001 to August
2005, are subject to annual renewal, and require annual salary levels and
termination benefits, should a termination occur. Annual requirements in
connection with the employment agreements are approximately as follows: 2001 -
$1,540,000; 2002 - $455,000; 2003 - $455,000; 2004 - $455,000; 2005 - $90,000.
Consulting agreements
On May 31, 1997, the Company entered into a three year consulting agreement with
a company owned by the former shareholder of Mike Kessler and Associates, Inc.
The agreement requires the Company to make payments aggregating $75,000, $65,000
and $50,000 annually for the first, second and third years of the agreement.
The Company entered into a consulting agreement with Herbert A. Hardt commencing
on August 31, 1998 and ending November 25, 2000. The agreement requires the
Company to issue a warrant, expiring January 31, 2001, to purchase 150,000
shares of Common Stock, which was independently appraised at $37,500. This value
will be recognized as expense in relation to the vesting period of the warrant.
The warrant vests 15,000 shares per quarter during each quarter of fiscal year
2000 and 22,500 shares per quarter during each quarter of fiscal year 2001.
Union Contracts
At January 31, 2000, approximately 240 of the Company's 900 employees were
members of a collective bargaining unit. The Company is party to two collective
bargaining agreements, which expire on December 31, 2000 and September 30, 2004.
Company contributions to the Union funds charged to operations were
approximately $435,000 and $64,000 for the years ended January 31, 2000 and
1999, respectively. There were no employees under union contracts for the year
ended January 31, 1998.
10. COMMON STOCK
In September 1997, the Company issued to Aron Katzman, Harry L. Franc, III and
Timothy A. Braswell, each a director of the Company, non-transferable warrants,
expiring in 2000, to purchase an aggregate of 89,289 shares of Common Stock at
an exercise price of $3.00 per share. These warrants vested at a rate of 25% on
August 1, 1998, 25% on November 1, 1998, 25% on February 1, 1999 and 25% on May
1, 1999. The related cost as determined by independent appraisal of
approximately $54,000 was recognized ratably over those periods.
In October 1997, the Company sold in a public offering (the "Offering"),
2,000,000 shares of the Company's Common Stock. Concurrent with the Offering,
the Company effected the 1 for 1.21 reverse stock split previously approved by
the Company's shareholders. The weighted average number of common shares
presented in the financial statements have been retroactively restated to give
effect to such reverse stock split.
F-20
<PAGE> 50
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. PREFERRED STOCK
The Company has authorized 2,000,000 shares of $.01 par Preferred Stock. On
March 13, 1996, 65,000 shares were designated as 1996 Series 7% Convertible
Preferred Stock. Rights and restrictions on the remaining shares will be
established if, and when, any shares are issued.
Each share of the 1996 Series 7% Convertible Preferred Stock entitles its holder
to receive an annual dividend, when and as declared by the Board of Directors,
of $7 per share payable in shares of the Company's Common Stock; to convert it
into shares of Common Stock; to receive $100 per share in the event of
dissolution, liquidation, or winding up of the Company, whether voluntary or
involuntary; and subject to certain conditions in the Certificate of
Designations, Preferences and Relative Rights of 1996 Series 7% Convertible
Preferred Stock, may be redeemed at the option of the Company at a price of $100
per share within 30 days following the effective date of a merger or
consolidation in which the Company is not the surviving entity.
Each share of the 1996 Series 7% Convertible Preferred Stock shall be
convertible, at the option of the holder thereof, into shares of the Common
Stock of the Company, at the conversion price equal to 80% of the current market
price of the Common Stock, provided, however, the conversion price shall not be
less than $4.24 nor more than $6.66 per share of Common Stock. For purposes of
such conversion, each share of the 1996 Series 7% Convertible Preferred Stock
shall be accepted by the Company for surrender at its Liquidation Amount of $100
per share.
On February 28, 1997, the Company issued a Common Stock dividend to investors
who held the Company's 1996 Series 7% Convertible Preferred Stock. At this date
there were 5,600 shares of such stock outstanding. The 7% dividend resulted in a
Common Stock dividend of 6,381 shares based on an issuance price of $3.06 per
share.
In July 1997, the Company exchanged all 5,600 outstanding shares of the
Company's 1996 Series 7% Convertible Preferred Stock for an aggregate of 186,667
shares of Common Stock and non-transferable warrants, expiring in 2000, to
purchase 310,709 shares of Common Stock at an exercise price of $3.00 per share.
Such exchange resulted in a constructive dividend, based on the independently
appraised value of the non-transferable warrants, of $109,937 which was reported
in the fiscal quarter ended July 31, 1997.
On January 6, 1999, 1,500,000 shares of Preferred Stock were designated as Class
A Convertible Preferred Stock. On January 7, 1999, 1,473,281 shares of Class A
Convertible Preferred Stock were issued in connection with the acquisition of
U.S. Marketing Services, Inc. On March 30, 1999 the Preferred Stock was
converted to 1,473,281 shares of Common Stock.
12. EARNINGS PER SHARE
In calculating earnings per share, Net Income for the year ended January 31,
1998 was reduced by a constructive dividend of $109,937, which resulted from the
exchange of all 5,600 outstanding shares of Preferred Stock for 186,667 shares
of Common Stock and non-transferable warrants.
A reconciliation of the denominators of the basic and diluted earnings per share
computations are as follows:
F-21
<PAGE> 51
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 2000 1999 1998
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average number of common shares outstanding 15,332,218 9,132,383 6,561,761
Effect of dilutive securities:
Stock options 759,936 258,171 70,814
Warrants 488,393 288,245 61,091
Incremental shares from assumed conversion of
preferred stock 234,110 96,873 -
--------------------------------------------------------------------------------------------------------
Total effect of dilutive securities 1,482,439 643,289 131,905
--------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding -- as
adjusted 16,814,657 9,775,673 6,693,666
========================================================================================================
</TABLE>
13. EMPLOYEE BENEFIT PLANS
Profit Sharing and 401(k) Plan
The Company has a combined profit sharing and 401(k) Plan. Annual contributions
to the profit sharing portion of the Plan are determined by the Board of
Directors and may not exceed the amount that may be deducted for federal income
tax purposes. There were no profit sharing contributions charged against
operations for the years ended January 31, 2000, 1999 and 1998.
Under the 401(k) portion of the Plan, all eligible employees may elect to
contribute 2% to 20% of their compensation up to the maximum allowed under the
Internal Revenue Code. The Company matches one half of an employee's
contribution, not to exceed 5% of the employee's salary. The amounts matched by
the Company during the years ended January 31, 2000, 1999 and 1998 pursuant to
this Plan were approximately $214,000, $63,000 and $63,000, respectively.
Deferred Compensation Plan
During fiscal year 1997, the Company established an unfunded deferred
compensation plan for certain officers, who elect to defer a percentage of their
current compensation. The Company does not make contributions to the plan and is
responsible only for the administrative costs associated with the plan. Benefits
are payable to the participating officers upon their death or termination of
employment. From the deferred funds, the Company has purchased certain life
insurance policies. However, the proceeds and surrender value of these policies
are not restricted to pay deferred compensation benefits when they are due.
Stock Option Plans
Under the Company's stock option plans, options to acquire shares of Common
Stock have been made available for grant to certain employees and non-employee
directors. Each option granted has an exercise price of not less than 100% of
the market value of the Common Stock on the date of grant. The contractual life
of each option is generally 10 years. The exercisability of the grants vary
according to the individual options granted.
F-22
<PAGE> 52
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Weighted
Range of Average
Number of Exercise Exercise
Options Prices Price
----------------------------------------------
<S> <C> <C> <C>
Options outstanding at
January 31, 1997 165,288 5.30 - 5.60 5.45
Options granted 327,275 1.66 - 5.60 2.97
Options expired 92,554 2.42 - 5.60 5.26
Options exercised 2,182 2.42 2.42
----------------------------------------------
Options outstanding at
January 31, 1998 397,827 1.66 - 5.60 3.47
Options granted 1,036,820 5.00 - 10.88 7.09
Options expired 56,047 2.42 - 5.60 4.36
Options exercised 103,542 2.42 - 5.60 4.88
----------------------------------------------
Options outstanding at
January 31, 1999 1,275,058 1.66 - 10.88 6.26
Options granted 1,797,640 9.75 - 21.60 13.93
Options expired 20,883 2.42 - 13.94 6.13
Options exercised 88,020 2.42 - 7.38 5.14
----------------------------------------------
Options outstanding at
January 31, 2000 2,963,795 1.66 - 21.60 10.95
----------------------------------------------
</TABLE>
The following table summarizes information about the stock options outstanding
at January 31, 2000:
F-23
<PAGE> 53
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Remaining
Number Contractual Options
Exercise Price Outstanding Life (Months) Exercisable
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
1.66 89,256 28 59,504
2.42 45,455 89 27,273
2.42 8,088 89 8,088
2.66 49,091 29 32,727
5.00 56,800 104 33,467
5.00 30,700 104 16,362
5.00 49,000 104 19,000
5.13 10,000 96 10,000
5.13 360,000 96 90,000
6.13 455 101 303
6.63 12,000 99 0
6.63 910 99 606
7.38 2,000 106 0
7.81 202,000 106 67,327
9.75 7,500 108 7,500
10.38 12,000 110 12,000
10.44 20,000 117 4,000
10.88 155,000 107 62,000
10.88 100,000 107 66,667
10.94 375,000 110 0
11.41 125,000 50 31,250
12.44 100,000 114 0
13.25 340,000 115 68,000
13.25 28,000 115 28,000
13.25 100,000 115 33,333
13.88 1,000 114 333
14.00 1,000 115 333
14.31 10,000 116 2,000
14.44 5,000 115 1,000
14.94 5,000 114 1,000
15.00 1,500 115 500
15.00 100,000 114 33,333
15.31 150,000 116 0
16.38 20,000 118 4,000
16.63 140,000 118 28,000
16.63 52,040 118 17,347
18.00 100,000 114 33,333
21.60 100,000 114 33,333
------- ------
2,963,795 831,919
===================================================================================
</TABLE>
Options exercisable at January 31, 2000 totaled 831,919 with a weighted average
exercise price of $9.72. Options exercisable at January 31, 1999 totaled 235,673
with a weighted average exercise price of $5.82. Options exercisable
F-24
<PAGE> 54
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
at January 31, 1998 totaled 131,528 with a weighted average exercise price of
$4.82. The weighted average fair value of each option granted during the year
was $4.17, $1.34 and $.61 (at grant date) in 2000, 1999 and 1998, respectively.
The options above were issued at exercise prices which were equal to or exceeded
quoted market price at the date of grant. At January 31, 2000, 38,122 shares
were available for grant under the plans.
As discussed in the Summary of Accounting Policies, the Company applies APB
Opinion No. 25 and related interpretations in accounting for this plan.
Accordingly, no compensation cost has been recognized for its stock option
plans. Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant dates for awards under the plan
consistent with the method of SFAS No. 123, the Company's consolidated net
income and consolidated income per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended January 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $ 10,110,784 $ 3,866,538 $ 1,589,008
Pro forma 9,373,549 3,766,441 1,575,534
Basic earnings per share As reported .66 .42 .23
Pro forma .61 .41 .22
Diluted earnings per share As reported .60 .40 .22
Pro forma .56 .39 .22
------------------------------------------------------------------------------------------------------
</TABLE>
The pro forma amounts reflected above are not representative of the effects on
reported net income in future years because in general, the options granted
typically do not vest for several years and additional awards are made each
year. The fair value of each option grant is estimated on the grant date using
the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
Year Ended January 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Range of expected lives (years) 1.5 - 3.0 1.0 - 2.05 1.0 - 2.0
Range of expected volatility 0.49 0.30 - 0.40 0.40 - 0.60
Risk-free interest rate 4.65% - 6.00% 4.11% - 5.66% 5.90%
------------------------------------------------------------------------------------------------------
</TABLE>
Stock Award Plan
In September 1996, the Company adopted its Stock Award Plan for all employees
and reserved 41,322 shares of Common Stock for such plan. Under the plan, the
Stock Award Committee, appointed by the Board of Directors of the Company, shall
determine the employees to whom awards shall be granted. No awards were granted
during the years ended January 31, 2000, 1999 or 1998.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental information on the approximate amount of interest and income taxes
paid is as follows:
F-25
<PAGE> 55
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended January 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest $ 999,000 $ 357,000 $ 700,000
Income Taxes $5,653,000 $ 2,222,000 $ 1,081,000
======================================================================================================
</TABLE>
On February 28, 1997, 6,381 shares of Common Stock were issued as a dividend to
the preferred shareholders as of that date.
As part of the acquisition of Mike Kessler & Associates, Inc. the Company
entered into a short-term debt agreement for $2,150,000. The obligation was paid
in full at its due date in January 1998.
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 connection with the acquisitions in February 1999, the Company issued 420,329
shares of Common Stock.
In connection with the acquisition in September 1999, the Company issued 367,883
shares of Common Stock.
In conjunction with business acquisitions, the Company used cash as follows:
<TABLE>
<CAPTION>
Year Ended January 31,
2000 1999 1998
-------------------------------------------------------
<S> <C> <C> <C>
Fair Value of assets acquired, excluding cash $59,611,720 $37,842,557 $3,330,648
Less: Liabilities assumed and created upon acquisition 14,225,798 5,616,934 2,721,998
Less: Stock issued 8,038,155 27,432,023 -
-------------------------------------------------------
Net cash paid $37,347,767 $ 4,793,600 608,650
----------------------------------------------------------
</TABLE>
15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair values of
each class of financial instruments for which it is practicable to estimate that
value:
Trade Receivables and Income Taxes Receivable
The carrying amounts approximate fair value because of the short maturity of
those instruments.
Notes Receivable -- Officer
The Carrying amount of notes receivable -- officer has been discounted to its
present value.
F-26
<PAGE> 56
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Accounts Payable and Accrued Expenses, Income Taxes Payable and Amounts Due to
Retailers
Carrying amounts are reasonable estimates of fair value due to the relatively
short period between origination and expected repayment of these instruments.
Long-term Debt and Revolving Credit Facility
It is presumed that the carrying amount of the revolving credit facility is a
reasonable estimate of fair value because the financial instrument bears a
variable interest rate.
The carrying amount of other long-term debt has been discounted to its present
value.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
Carrying Fair
January 31, 2000 value value
--------------------------------------------------------------------------------
<S> <C> <C>
Financial Assets
Trade receivables $64,835,978 $64,835,978
Notes receivable -- officer $ 975,000 $ 920,000
Financial Liabilities
Accounts payable and accrued expenses $ 9,238,407 $ 9,238,407
Income taxes payable $ 1,092,349 $ 1,092,349
Due to retailers $ 3,772,944 $ 3,772,944
Long-term debt $32,389,202 $32,313,771
--------------------------------------------------------------------------------
January 31, 1999
--------------------------------------------------------------------------------
Financial Assets
Trade receivables $29,464,187 $32,593,428
Income taxes receivable $ 262,877 $ 262,877
Financial Liabilities
Accounts payable and accrued expenses $ 3,727,529 $ 3,727,529
Due to retailers $ 2,737,077 $ 2,737,077
Long-term debt $ 3,508,057 $ 3,442,958
---------------------------------------------------------------------------------
</TABLE>
16. SEGMENT FINANCIAL 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
operating income. There were no intersegment sales during 2000 or 1999.
F-27
<PAGE> 57
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Display Rack &
Store Fixture
Services Manufacturing Consolidated
----------------------------------------------------
Year Ended January 31, 2000
---------------------------------------------------
<S> <C> <C> <C>
Revenue $18,248,540 $ 64,239,420 $82,487,960
Cost of Revenue 9,305,607 39,563,664 48,869,271
---------------------------------------------------
Gross Profit 8,942,933 24,675,756 33,618,689
Selling, General & Administrative 14,880,239
-----------
Operating Income 18,738,450
Other Expenses, net 1,070,666
-----------
Income Before Income Taxes $17,667,784
===========
Total Assets $48,407,815 $108,350,901 $156,758,716
===================================================
Year Ended January 31, 1999
---------------------------------------------------
Revenue $14,229,072 $ 6,870,856 $21,099,928
Cost of Revenue 6,658,814 4,608,941 11,267,755
---------------------------------------------------
Gross Profit 7,570,258 2,261,915 9,832,173
Selling, General & Administrative 2,949,382
---------
Operating Income 6,882,791
Other Expenses, net 349,253
----------
Income Before Income Taxes $6,533,538
==========
Total Assets $33,026,229 $32,761,582 $65,877,811
===================================================
</TABLE>
During fiscal year ended January 31, 1998, the Company only operated one
segment.
F-28
<PAGE> 58
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
17. QUARTERLY INFORMATION (Unaudited) (in thousands, except per share data)
<TABLE>
<CAPTION>
Quarter ended
April 30 July 31 October 31 January 31
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000
Total Revenue $16,480 $15,985 $25,215 $24,808
Gross Profit 6,868 6,867 9,056 10,828
Net Income 1,894 1,930 2,868 3,419
EPS - Basic $0.15 $0.13 $0.17 $0.20
Weighted Average Shares
Outstanding - Basic 12,574 14,644 16,914 17,115
EPS - Diluted $0.13 $0.12 $0.16 $0.19
Weighted Average Shares
Outstanding - Diluted 14,557 16,054 18,171 18,479
1999
Total Revenue $3,595 $3,581 $3,960 $9,964
Gross Profit 2,029 2,001 2,309 3,493
Net Income 727 791 959 1,390
EPS - Basic $0.09 $0.09 $0.10 $0.14
Weighted Average Shares
Outstanding - Basic 8,018 8,721 9,586 10,169
EPS - Diluted $0.09 $0.09 $0.10 $0.12
Weighted Average Shares
Outstanding - Diluted 8,499 9,238 10,030 11,360
--------------------------------------------------------------------------------------------------
</TABLE>
F-29
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE SOURCE INFORMATION MANAGEMENT COMPANY
Date: May 1, 2000 /S/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Secretary and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
May 1, 2000 /S/ S. LESLIE FLEGEL
--------------------
S. Leslie Flegel
Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
May 1, 2000 /S/ W. BRIAN RODGERS
--------------------
W. Brian Rodgers
Secretary and Chief Financial Officer
(Principal Financial and Accounting Officer)
May 1, 2000 /S/ RICHARD A. JACOBSEN
-----------------------
Richard A. Jacobsen
Vice Chairman, Chief Operating Officer and
Director
May 1, 2000 /S/ WILLIAM H. LEE
------------------
William H. Lee
Chief Administrative Officer and
Director
May 1, 2000 /S/ JAMES R. GILLIS
-------------------
James R. Gillis
President
Director
May 1, 2000 /S/ ROBERT O. ADERS
-------------------
Robert O. Aders
Director
May 1, 2000 /S/ HARRY L. "TERRY" FRANC, III
-------------------------------
Harry L. "Terry" Franc, III
Director
May 1, 2000 /S/ ARON KATZMAN
----------------
Aron Katzman
Director
May 1, 2000 /S/ RANDALL S. MINIX
--------------------
Randall S. Minix
Director
F-30
<PAGE> 60
May 1, 2000 /S/ GEORGE W. OFF
-----------------
George W. Off
Director
May 1, 2000 /S/ KENNETH F. TEASDALE
-----------------------
Kenneth F. Teasdale
Director
<PAGE> 61
Report of Independent Certified Public Accountants
Board of Directors
The Source Information Management Company
St. Louis, Missouri
The audits referred to in our report dated April 14, 2000, relating to the
consolidated financial statements of The Source Information Management Company,
which is referred to in Item 8 of this Form 10-K, include the audits of the
accompanying financial statement schedule. This financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion of this financial statement schedule based upon our audits. In our
opinion, such financial statement schedule presents fairly, in all material
respects, the information set forth therein.
/s/BDO Seidman, LLP
St. Louis, Missouri
April 14, 2000
S-1
<PAGE> 62
The Source Information Management Company
Valuation and Qualifying Accounts Schedule
January 31, 2000
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- -------------------------------------- ------------ ------------------------- ------------ ---------------
Charged to
Balance at Charged to other
beginning of costs and accounts - Deductions - Balance at
Description period expenses describe (1) describe end of period
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended January 31, 2000:
Allowance for doubtful accounts 469,658 4,830 648,246 - 1,122,734
Year ended January 31, 1999:
Allowance for doubtful accounts 460,898 8,760 - 469,658
-
Year ended January 31, 1998:
Allowance for doubtful accounts 323,587 97,311 40,000 - 460,898
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Additions due to acquisitions
S-2
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- --------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
3.3 Amendment to Articles of Incorporation(2)
3.4 Amendments to Bylaws(2)
3.5 Amendment to Articles of Incorporation(3)
3.6 Amendment to Articles of Incorporation(4)
4.1 Form of Common Stock Certificate(2)
4.2 Form of Representative's Warrants(2)
4.3 Form of Privately Issued Warrant(2)
9.1 Voting Agreement dated January 7, 1999 between S. Leslie Flegel and Jonathan J.
Ledecky(4)
10.1 Form of Indemnity Agreement with Officers and Directors(1)
10.2 Credit Agreement between The Source Information Management Company and Bank of America,
N.A. dated December 22, 1999*
10.3 The Source Information Management Company Amended and Restated 1995 Incentive Stock
Option Plan (5)
10.4 The Source Information Management Company Stock Award Plan(6)
10.5 Form of Employment Agreement with S. Leslie Flegel, William H. Lee and W. Brian
Rodgers(2)
10.6 Employment and Non-Competition Agreement with James R. Gillis dated as of December
14, 1998(10)
10.7 Employment Agreement with Richard A. Jacobsen dated as of March 24, 1999(10)
10.8 Agreement with Dwight L. DeGolia(2)
10.9 Form of Financial Consulting Agreement with Donald & Co. Securities Inc.(2)
10.10 Agreement and Plan of Merger dated as of January 7, 1999 by and among The Source
Information Management Company, Source-U.S. Marketing Services, Inc., U.S. Marketing
Services, Inc. and U.S. Marketing Shareholders(8)
10.11 Asset Purchase Agreement dated as January 7, 1999 by and among The Source
Information Management Company and Yeager Industries, Inc.(8)
10.12 Asset Purchase Agreement dated as of February 1, 1999 by and among The Source
Information Management Company, Chestnut Display Systems, Inc. and Chestnut Display
Systems (North), Inc.(9)
10.13 Asset Purchase Agreement dated as of February 26, 1999 by and among The Source
Information Management Company, MYCO, Inc. and RY, Inc.(9)
10.14 Amendment to Asset Purchase Agreement dated as of February 26, 1999 by and among The
Source Information Management Company, MYCO, Inc. and RY, Inc.(9)
10.15 Asset Purchase Agreement dated March 19, 1999 between The Source Information
Management Company, The Source-Canada Corp. and 132127 Canada Inc.(4)
10.16 Real Estate Sale Contract dated as of April 20, 1999 by and between 711 Gallimore
Partnership and The Source Information Management Company (4)
10.17 Consulting agreement dated August 31, 1998 between Herbert A. Hardt and The Source
Information Management Company(2)
10.18 Asset Purchase Agreement dated as of September 21, 1999 by and among Huck Store Fixture
Company of North Carolina, Source-Huck Store Fixture Company, Arrowood, Inc., Bryce
Russell, Jr. and Sybil Russell (11)
21.1 Subsidiaries of the Company*
23.1 Consent of BDO Seidman, LLP*
</TABLE>
- ----------
* Filed herewith.
(1) Incorporated by reference to Registration Statement on Form 10-SB (File no.
0-26238)
(2) Incorporated by reference to Registration Statement on Form SB-2 (File no.
333-32733)
<PAGE> 64
(3) Incorporated by reference to Form 10-KSB for the fiscal year ended January
31, 1996
(4) Incorporated by reference to Registration Statement on Form S-2 (File no.
333-76979)
(5) Incorporated by reference to Schedule 14A filed on March 9, 1999
(6) Incorporated by reference to Form S-8 (File no. 333-16059) filed on
November 13, 1996
(7) Incorporated by reference to Current Report on Form 8-K filed on August 10,
1998
(8) Incorporated by reference to Current Report on Form 8-K filed on January
22, 1999
(9) Incorporated by reference to Current Report on Form 8-K filed on March 12,
1999
(10) Incorporated by reference to Form 10-KSB for the fiscal year ended January
31, 1999
(11) Incorporated by reference to Current Report on Form 8-K filed on October 6,
1999
<PAGE> 1
EXHIBIT 10.2
================================================================================
CREDIT AGREEMENT
BETWEEN
THE SOURCE INFORMATION MANAGEMENT COMPANY
AND
BANK OF AMERICA, N.A.
$50,000,000 REVOLVING LINE OF CREDIT
DECEMBER 22, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS.....................................................................................1
Section 1.1 Defined Terms..........................................................................1
Section 1.2 Accounting Terms......................................................................13
Section 1.3 Singular/Plural.......................................................................13
Section 1.4 Other Terms...........................................................................13
ARTICLE II REVOLVING LOANS................................................................................14
Section 2.1 Revolving Line of Credit..............................................................14
Section 2.2 Term..................................................................................15
Section 2.3 Repayment.............................................................................15
Section 2.4 Use of Proceeds.......................................................................16
Section 2.5 Guaranty Agreement....................................................................16
Section 2.6 Non-Use Fee...........................................................................16
Section 2.7 Termination of Facility...............................................................16
Section 2.8 Termination Fee.......................................................................17
Section 2.9 Commitment Fee........................................................................17
ARTICLE III INTEREST ON THE REVOLVING LOANS................................................................17
Section 3.1 Interest..............................................................................17
Section 3.2 Computation...........................................................................18
Section 3.3 Maximum Interest Rate.................................................................18
Section 3.4 Default Rate; Post-Petition Interest..................................................18
Section 3.5 Payment...............................................................................18
Section 3.6 Taxes.................................................................................18
ARTICLE IV CLOSING; CONDITIONS OF CLOSING AND BORROWING...................................................19
Section 4.1 Closing...............................................................................19
Section 4.2 Conditions of Loans and Advances......................................................19
(a) Executed Documents....................................................................19
(b) Certificate of the Borrower...........................................................19
(c) Certificate of Secretary of Borrower and Guarantors...................................19
(d) Real Estate Reports; Negative Pledges.................................................20
(e) UCC Searches..........................................................................20
(f) Payment of Wachovia Debt..............................................................20
(g) Opinion of Counsel....................................................................20
(h) Certificates of Good Standing.........................................................20
(i) Borrowing Base Report.................................................................20
(j) Commitment Fee........................................................................21
(k) No Event of Default...................................................................21
(l) Other Documents.......................................................................21
Section 4.3 Conditions to all Loans and Advances..................................................21
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Section 4.4 Waiver of Conditions Precedent........................................................21
ARTICLE V REPRESENTATIONS AND WARRANTIES.................................................................21
Section 5.1 Corporate Organization and Power......................................................21
Section 5.2 Authority; No Conflict With Other Instruments or Law..................................22
Section 5.3 Due Execution and Delivery............................................................22
Section 5.4 Enforceability........................................................................22
Section 5.5 Governmental Approval.................................................................22
Section 5.6 Margin Stock..........................................................................22
Section 5.7 Investment Company....................................................................23
Section 5.8 Taxes.................................................................................23
Section 5.9 Litigation............................................................................23
Section 5.10 Compliance with Laws..................................................................23
Section 5.11 ERISA.................................................................................23
Section 5.12 No Other Debt.........................................................................24
Section 5.13 Real Estate; Material Locations.......................................................24
Section 5.14 Financial Statements; No Material Adverse Change......................................24
Section 5.15 Full Disclosure.......................................................................24
Section 5.16 No Default............................................................................24
Section 5.17 Year 2000 Compliance..................................................................24
ARTICLE VI AFFIRMATIVE COVENANTS..........................................................................25
Section 6.1 Financial and Business Information....................................................25
Section 6.2 Notice of Certain Events..............................................................27
Section 6.3 Existence.............................................................................27
Section 6.4 Maintenance of Properties.............................................................28
Section 6.5 Compliance with Law...................................................................28
Section 6.6 Compliance with ERISA.................................................................28
Section 6.7 Payment of Indebtedness...............................................................28
Section 6.8 Payment of Taxes......................................................................28
Section 6.9 Maintenance of Insurance..............................................................28
Section 6.10 Maintenance of Books and Records; Inspection..........................................29
Section 6.11 Name Change...........................................................................29
Section 6.12 New Material Locations................................................................29
Section 6.13 New Subsidiaries......................................................................29
Section 6.14 After-Acquired Real Estate............................................................30
Section 6.15 Further Assurances....................................................................30
ARTICLE VII NEGATIVE COVENANTS.................................................................................30
Section 7.1 Transfer of Assets....................................................................30
Section 7.2 Merger or Consolidation...............................................................31
Section 7.3 Acquisitions..........................................................................31
Section 7.4 Liens.................................................................................31
Section 7.5 Investments...........................................................................31
Section 7.6 Restricted Payments...................................................................32
Section 7.7 Indebtedness..........................................................................32
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
Section 7.8 Related Party Transactions............................................................32
Section 7.9 Character of Business.................................................................33
Section 7.10 Management Change.....................................................................33
Section 7.11 Environmental Compliance..............................................................33
Section 7.12 Other Ventures........................................................................34
Section 7.13 Dissolution, etc......................................................................34
Section 7.14 Fiscal Year...........................................................................34
Section 7.15 Limitation on Negative Pledge Clauses.................................................34
ARTICLE VIII FINANCIAL COVENANTS............................................................................35
Section 8.1 Financial Condition...................................................................35
(a) Debt to Tangible Net Worth............................................................35
(b) Cash Flow Coverage Ratio..............................................................35
(c) Funded Debt to EBITDA.................................................................35
(d) Minimum EBITDA........................................................................35
ARTICLE IX EVENTS OF DEFAULT; REMEDIES....................................................................35
Section 9.1 Events of Default.....................................................................35
Section 9.2 Remedies..............................................................................37
(a) Termination of Revolving Line of Credit; Acceleration of
Indebtedness..........................................................................37
(b) Right of Setoff.......................................................................37
(c) Rights and Remedies Cumulative; Non-Waiver; etc.......................................38
ARTICLE X MISCELLANEOUS..................................................................................38
Section 10.1 Expenses..............................................................................38
Section 10.2 Waiver, Amendments, Etc...............................................................38
Section 10.3 Address for Notices, Etc..............................................................38
Section 10.4 Enforcement and Waiver................................................................39
Section 10.5 Survival of Agreements................................................................40
Section 10.6 Assignment and Participation..........................................................40
Section 10.7 Governing Law.........................................................................41
Section 10.8 Arbitration...........................................................................41
Section 10.9 Waivers by the Borrower...............................................................42
Section 10.10 Severability..........................................................................42
Section 10.11 Entire Agreement......................................................................42
Section 10.12 Binding Effect........................................................................42
Section 10.13 Definitional Provisions...............................................................42
Section 10.14 Conflict of Terms.....................................................................42
</TABLE>
iii
<PAGE> 5
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (this "Credit Agreement" or "Agreement"), dated
as of December 22, 1999, is made and entered into by and between THE SOURCE
INFORMATION MANAGEMENT COMPANY, a Missouri corporation (the "Borrower"), and
BANK OF AMERICA, N.A., a national banking association with offices in
Greensboro, North Carolina (the "Bank").
W I T N E S S E T H:
A. The Borrower has requested that the Bank make a $50,000,000
revolving line of credit available to the Borrower.
B. The Bank is willing to make such revolving line of credit available
to the Borrower, subject to and on the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the premises and in order to induce
the Bank to extend the revolving line of credit described herein, the parties
hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Defined Terms. In addition to the words and terms defined
elsewhere in this agreement, the following terms when used herein shall have the
following respective meanings:
"Acquisition" shall mean the acquisition, whether by purchase, merger
or otherwise, of (i) a controlling equity interest in another Person (including
the purchase of an option, warrant or convertible or similar type security to
acquire such a controlling interest at the time it becomes exercisable by the
holder thereof), whether by purchase of such equity interest or upon exercise of
an option or warrant for, or conversion of securities into, such equity
interest, or (ii) assets of another Person which constitute all or substantially
all of the assets of such Person or of a line or lines of business conducted by
such Person.
"Acquisition Cost" shall mean, with respect to any Acquisition, as at
the date of entering into an agreement therefor, the sum of the following
(without duplication): (i) the value of the capital stock, warrants or options
to acquire capital stock of Borrower or any Subsidiary to be transferred in
connection therewith, (ii) the amount of any cash and the fair market value of
other property (excluding property described in clause (i) and the unpaid
principal amount of any debt instrument) given as consideration, (iii) the
amount (determined by using the face amount or the amount payable at maturity,
whichever is greater) of any Indebtedness incurred, assumed or acquired by the
Borrower or any Subsidiary in connection with such Acquisition, (iv) all
additional purchase price amounts in the form of earn-outs and other contingent
obligations that should be recorded on the financial statements of Borrower and
its Subsidiaries in accordance with GAAP, (v) all amounts paid in respect of
covenants not to compete, consulting agreements
<PAGE> 6
that should be recorded on financial statements of the Borrower and its
Subsidiaries in accordance with GAAP, and other affiliated contracts in
connection with such Acquisition, (vi) the aggregate fair market value of all
other consideration given by the Borrower in connection with such Acquisition,
(vii) out-of-pocket transaction costs for the services and expenses of
attorneys, accountants and other consultants incurred in effecting such
transaction, and other similar transaction costs so incurred. For purposes of
determining the Acquisition Cost for any transaction, (A) the capital stock of
the Borrower or its Subsidiaries shall be valued (i) in the case of capital
stock that is then listed on a national securities exchange or a national market
system, the average of the last reported bid and ask quotations or the last
prices reported thereon, and (ii) with respect to any other shares of capital
stock of the Borrower or its Subsidiaries, as determined by the Board of
Directors of Borrower, and (B) with respect to any Acquisition accomplished
pursuant to the exercise of options or warrants or the conversion of securities,
the Acquisition Cost shall include both the cost of acquiring such option,
warrant or convertible security, as well as the cost of exercise or conversion.
"Affiliate" shall mean, as to any Person, (i) any other Person which
directly, or indirectly through one or more intermediaries, controls such
Person, (ii) any other Person which directly, or indirectly through one or more
intermediaries, is controlled by or is under common control with such Person, or
(iii) any other Person of which such Person owns, directly or indirectly, 20% or
more of the common stock or equivalent equity interests. As used herein, the
term "control" means possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of a Person, whether
through the ownership of voting securities or otherwise.
"Agreement" or "this Agreement" or "Credit Agreement" shall mean this
Credit Agreement and all schedules and exhibits hereto, together with any
amendments, modifications, replacements and supplements hereto, any substitutes
therefor, and any restatements, replacements, renewals or extensions hereof, in
whole or in part, and shall refer to this Agreement as the same may be in effect
at the time such reference becomes operative.
"Applicable Margin" shall mean, for the three-month period beginning on
the first day of April, July, October and January of each year (the "Calculation
Date") and ending on the day preceding the next succeeding Calculation Date, the
percentage set forth below determined with reference to the Funded Debt to
EBITDA Ratio of Borrower at the end of the Fiscal Quarter most recently ended as
of such Calculation Date:
<TABLE>
<CAPTION>
Funded Debt to Applicable
EBITDA Ratio Margin
-------------- ---------
<S> <C>
Greater than or equal to 2.25 to 1.0 Default Rate applies
Greater than or equal to 2.00 to 1.0 but less than 2.25 to 1.0 2.10%
Greater than or equal to 1.75 to 1.0 but less than 2.00 to 1.0 1.85%
Greater than or equal to 1.50 to 1.0 but less than 1.75 to 1.0 1.60%
</TABLE>
2
<PAGE> 7
<TABLE>
<CAPTION>
Funded Debt to Applicable
EBITDA Ratio Margin
-------------- ---------
<S> <C>
Greater than or equal to 1.0 to 1.0 but less than 1.50 to 1.0 1.35%
Less than 1.00 to 1.0 1.0%
</TABLE>
At least five Business Days prior to each Calculation Date, the Borrower shall
submit a duly completed interest rate calculation worksheet in form satisfactory
to the Bank reflecting the computation of Funded Debt to EBITDA Ratio as of the
end of the applicable Fiscal Quarter. Changes in the Applicable Margin will be
effective on the Calculation Date. From the date of this Credit Agreement until
the first Calculation Date following the date of this Credit Agreement, the
Applicable Margin shall be one percent (1%). If the annual financial statements
of Borrower delivered to the Bank pursuant to Section 6.1(b) hereof shall
indicate that an incorrect interest rate has been applied to the Loans based on
the unaudited quarterly financial statements delivered to the Bank with respect
to the last quarter of Borrower's then most recently completed Fiscal Year, or
if an interest rate calculation worksheet contains an error resulting in an
incorrect interest rate applied to the Loans less than the rate derived from an
interest rate calculation worksheet absent error (the incorrect interest rate in
any such case being the "Error Rate" and the correct rate in any such case being
the "Correct Rate"), then the Borrower shall pay to the Bank, on demand, an
amount equal to the sum of (a) the difference between (i) the total interest
amount on the Loans calculated with the Correct Rate for the period the Error
Rate was applied to the Loans and (ii) the total interest amount on the Loans
paid to the Bank calculated using the Error Rate and (b) interest at the Correct
Rate on the amount derived in (a) above. If the Error Rate is greater than the
Correct Rate, the Bank shall refund the amount of any excess interest paid by
the Borrower. If on any Calculation Date the Borrower shall have failed to
deliver to the Bank the financial statements required to be delivered pursuant
to Section 6.1(a) hereof with respect to the Fiscal Quarter most recently ended
prior to such Calculation Date, then for the period beginning on such
Calculation Date and ending on the earlier of (A) the date on which Borrower
shall deliver to the Bank the financial statements of the Borrower to be
delivered pursuant to Section 6.1(a) with respect to such Fiscal Quarter or any
subsequent Fiscal Quarter, or (B) the date on which the Borrower shall deliver
to the Bank annual financial statements of the Borrower required to be delivered
pursuant to Section 6.1 with respect to the Fiscal Year which includes such
Fiscal Quarter, the Applicable Margin shall be determined as if the Funded Debt
to EBITDA Ratio was greater than or equal to 2.25 to 1.0 at all times during
such period.
"Bank" shall mean Bank of America, N.A., a national banking association
with offices in Greensboro, North Carolina, and its successors and assigns.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as
amended, and any successor statute or statutes having substantially the same
function.
"Borrowing Base" shall have the meaning set forth in Section 2.1(b)
hereof.
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<PAGE> 8
"Borrowing Base Certificate" shall mean the certificates of the
Borrower submitted to the Bank pursuant to Section 2.1(c) hereof.
"Business Day" shall mean any day of the year on which banks are open
for business in Greensboro, North Carolina.
"Capitalized Lease" shall mean any lease or similar arrangement which
is of such a nature that payment obligations of the lessee or obligor thereunder
at the time are or should be capitalized and shown as liabilities (other than
current liabilities) upon a balance sheet of such lessee or obligor prepared in
accordance with GAAP, including Statement of Financial Accounting Standards No.
13.
"Change of Control" shall mean, at any time:
(i) any "person" or "group" (each as used in Sections
13(d)(iii) and 14(d)(ii) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), either (A) becomes the "beneficial
owner" (as defined in Rule 13d-3 of the Exchange Act), directly or
indirectly, of voting securities of the Borrower (or securities
convertible into or exchangeable for such voting securities)
representing thirty percent (30%) or more of the combined voting power
of all voting securities of the Borrower (on a fully diluted basis), or
(B) otherwise has the ability, directly or indirectly, to elect a
majority of the Board of Directors of the Borrower; or
(ii) during any period of up to twenty-four (24) consecutive
months, commencing on the Closing Date, individuals who at the
beginning of such 24-month period were directors of the Borrower shall
cease for any reason (other than the death, disability or retirement of
an officer of the Borrower who is serving as a director at such time,
so long as another officer of the Borrower replaces such person as a
director), to constitute a majority of the Board of Directors of the
Borrower; or
(iii) the Borrower shall merge or consolidate, or shall be a
party to a merger or consolidation, in a transaction in which Borrower
is not the surviving entity or in a transaction that results in the
voting securities of Borrower outstanding immediately prior to such
merger or consolidation not continuing to represent at least eighty
percent (80%) of the combined voting power of the voting securities of
Borrower outstanding immediately after such merger or consolidation.
"Closing Date" shall mean the date of this Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or any
successor Federal tax code. Any reference to any provision of the Code shall
also include the income tax regulations promulgated thereunder, whether final,
temporary or proposed.
4
<PAGE> 9
"Controlled Group" shall mean all members of a controlled group of
corporations and all trades or businesses (whether or not incorporated) under
common control which, together with the Borrower, are treated as a single
employer under Section 414 of the Code.
"Credit Documents" shall mean and collectively refer to this Agreement,
the Note, the Guaranty Agreement, and any and all agreements, instruments and
documents, including, without limitation, notes, guaranties, mortgages, deeds to
secure debt, deeds of trust, negative pledge agreements, chattel mortgages,
pledges, powers of attorney, consents, assignments, contracts, notices, security
agreements, trust account agreements and all other written matters whether
heretofore, now or hereafter executed by or on behalf of the Borrower or the
Guarantors with respect to this Agreement or with respect to the transactions
contemplated by this Agreement, and in each case, together with any amendments,
modifications and supplements thereto, any replacements, renewals, extensions
and restatements thereof, and any substitutes therefor, in whole or in part.
"Current Maturities" shall mean, with reference to the period of four
(4) consecutive Fiscal Quarters ending on the date of calculation thereof, the
sum of: (a) interest expense of the Borrower and its Subsidiaries (including
payments in the nature of interest with respect to Capitalized Lease
obligations), plus (b) the aggregate amount of all mandatory scheduled payments
of principal on any Funded Debt, plus (c) the aggregate amount of all payments
in the nature of principal under Capitalized Lease obligations, all of the
foregoing as determined on a consolidated basis for Borrower and its
Subsidiaries in accordance with GAAP, plus (d) an amount equal to one seventh
(1/7) of the principal and accrued interest outstanding under the Revolving Line
of Credit.
"Default" shall mean any event which with the giving of notice, lapse
of time, or both, would become an Event of Default.
"Default Rate" shall mean (i) the LIBOR Rate, plus the Applicable
Margin, plus three percent (3%) per annum, and (ii) in any case, the maximum
rate permitted by applicable law, if lower.
"Depreciation" shall mean for any period the sum of all depreciation
expenses of the Borrower and its Subsidiaries for such period, as determined on
a consolidated basis in accordance with GAAP.
"Dollar" or "$" shall mean dollars in lawful currency of the United
States of America.
"EBITDA" shall mean, for the applicable period of four (4) consecutive
Fiscal Quarters, the net income (or loss) of the Borrowers and its Subsidiaries
determined in accordance with GAAP on a consolidated basis (excluding the
write-up of assets, retirement of debt for less than face value and
extraordinary gains), plus the sum of (a) all amounts deducted in computing such
combined net income in respect of interest expense (including payments in the
nature of interest under Capitalized Leases), (b) taxes based upon or measured
by net income, (c) Depreciation, and (d) amortization.
5
<PAGE> 10
"Eligible Accounts Receivable" shall mean good and bona fide accounts
owed to members of the Source Group by their account debtors, but excluding
therefrom all the following: (a) accounts which are not due and payable within
three hundred sixty-five (365) days after their invoice dates; (b) all of the
accounts owing by a single account debtor, to the extent that the aggregate
balance of such accounts exceeds twenty five percent (25%) of the aggregate
amount of all Eligible Accounts Receivable; (c) all of the accounts owing by a
single account debtor, together with its Affiliates, to the extent that the
aggregate balance of such accounts collectively exceeds thirty five percent
(35%) of all Eligible Accounts Receivable; (d) all of the accounts owing by a
single account debtor, together with its Affiliates, if as much as thirty five
percent (35%) of the balance owing by said account debtor and its Affiliates to
the Source Group remains unpaid more than 365 days after their respective
invoice due dates; (e) accounts with respect to which the account debtor is the
United States of America or any state, city, county or governmental authority or
any department, agency or instrumentality of any of them; (f) all accounts that
have not been invoiced to the account debtor as of any particular date; (g) all
accounts owed by any debtor situated in a foreign country (other than Canada)
unless payment of any such account is secured by a letter of credit acceptable
to the Bank; (h) accounts that are subject to offset, discount, counterclaim,
contra accounts, or any other account owed by an account debtor to whom such
Person owes an account payable; (i) accounts owed by any account debtor if such
account debtor generally suspends business, becomes insolvent, makes a general
assignment for the benefit of creditors, or fails to pay its debts generally as
they become due; (j) accounts owed by any account debtor if a petition is filed
by or against such account debtor under any state or federal bankruptcy law or
any other receivership, insolvency relief or other law for the relief of
debtors; (k) accounts owed to a member of the Source Group by any Affiliate
thereof; (l) accounts evidenced by chattel paper or an instrument of any kind,
unless such chattel paper or instrument is duly endorsed to and is in the
possession of the Bank; or (m) any other account reasonably deemed doubtful or
uncollectible by the Bank.
"Environmental Law" shall mean any federal, state or local law,
statute, ordinance, rule, Regulation, permit, license, approval, interpretation,
order, guidance or other legal requirement (including without limitation any
subsequent enactment, amendment or modification) relating to the Protection of
human health or the environment, including, but not limited to, any requirement
Pertaining to the manufacture, processing, distribution, use, treatment,
storage, disposal, transportation, handling, reporting, licensing, permitting,
investigation or remediation of materials that are or may constitute a threat to
human health or the environment.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, and all rules and regulations from time to time
promulgated thereunder.
"Event of Default" shall have the meaning specified in Article IX
hereof.
"Financial Statements" shall mean the annual audited financial
statements of the Borrower at January 31, 1999, and for the Fiscal Year then
ended.
"Fiscal Quarter" means the three month fiscal Period of Borrower and
its Subsidiaries ending on April 30, July 31, October 31 and January 31 of each
Fiscal Year.
6
<PAGE> 11
"Fiscal Year" means the twelve month fiscal period of Borrower and its
Subsidiaries commencing on February 1 of each calendar year and ending on
January 31 of the following calendar year.
"Funded Debt" shall mean, without duplication, as of the end of the
applicable Fiscal Quarter, all obligations of the Borrower and its Subsidiaries
on a consolidated basis, whether contingent or otherwise, in respect of (a)
Indebtedness for Money Borrowed, (b) other obligations classified as long-term
Indebtedness, including any letter of credit reimbursement obligations, (c)
Capitalized Lease Obligations, and (d) guarantees of any of the foregoing
Indebtedness, other than guarantees now or hereafter arising pursuant to the
Guaranty Agreement.
"Funded Debt to EBITDA Ratio" shall mean, as of the end of any Fiscal
Quarter of Borrower, the ratio of (a) Funded Debt on such date to (b) EBITDA for
the period of four consecutive Fiscal Quarters ending on such date.
"GAAP" shall mean generally accepted accounting principles, as
recognized by the American Institute of Certified Public Accountants,
consistently applied and maintained on a consistent basis for the Borrower
throughout the period indicated and consistent with the financial practice of
the Borrower after the date hereof, provided, however, that, in the event that
changes in generally accepted accounting principles shall be mandated by the
Financial Accounting Standards Board, or similar accounting body of comparable
standing, or shall be recommended by the Borrower's certified public
accountants, to the extent that such changes would modify the accounting terms
contained or referenced herein or the interpretation or computation thereof,
such changes shall be followed in defining such accounting terms only from and
after the date this Agreement shall have been amended to the extent necessary to
reflect any such changes in the financial covenants and other terms and
conditions of this Agreement.
"Governmental Authority" shall mean any nation or government, any
state, department, agency or other political subdivision thereof, and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to any government, and any corporation or other
entity owned or controlled (through stock or capital ownership or otherwise) by
any of the foregoing.
"Guarantors" shall collectively mean each of the present and, as
applicable, future Subsidiaries of the Borrower, other than Inactive
Subsidiaries. Reference to a particular "Guarantor" shall mean the particular
Subsidiary indicated.
"Guaranty Agreement" shall mean a Guaranty Agreement substantially in
the form of Exhibit A attached hereto, as executed and delivered by the
Guarantors as of the Closing Date and as otherwise delivered to the Bank
pursuant to Section 2.5 and Section 6.13 hereof, in each case as such Guaranty
Agreement may be amended, modified, supplemented or restated from time to time.
"Hazardous Material" shall mean any substance or material meeting any
one or more of the following criteria: (i) it is or contains a substance
designated as a hazardous waste, hazardous
7
<PAGE> 12
substance, pollutant, contaminant or toxic substance under any Environmental
Law; (ii) it is toxic, explosive, corrosive, ignitable, infectious, radioactive,
mutagenic or otherwise hazardous, (iii) its presence requires investigation or
remediation under an Environmental Law or common law; (iv) it constitutes a
danger, nuisance, trespass or health or safety hazard to persons or property;
and/or (v) it is or contains, without limiting the foregoing, petroleum
hydrocarbons.
"Inactive Subsidiary" shall mean a Subsidiary of the Borrower that is
not engaged in any business or activity and that does not own, hold or lease
assets with a fair market value exceeding $10,000.
"Indebtedness" shall mean as to any Person at any particular time,
without duplication, (i) indebtedness for borrowed money or for the deferred
purchase price of property or services in respect of which such Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise, and (ii)
obligations under leases which shall have been or should be, in accordance with
GAAP, recorded as a Capitalized Lease, in respect of which such Person is
liable, contingently or otherwise, as obligor, guarantor or otherwise.
"Indebtedness for Money Borrowed" shall mean, at any time with respect
to any Person, all indebtedness of such Person, or any Subsidiary of such
Person, in respect of money borrowed, including without limitation the deferred
purchase price of any property or asset or indebtedness evidenced by a
promissory note, bond or similar written obligation for the payment of money
(including, but not limited to, conditional sales or similar title retention
agreements), but excluding open accounts payable.
"LIBOR Rate" shall mean, for any day, that rate per annum quoted for
such day by the Bank, in its discretion, as its LIBOR Rate, as such rate may
change from time to time. The LIBOR Rate shall be based upon the rate per annum
at which, as determined by the Bank, United States Dollars in the amount of
$5,000,000 are being offered to major banks from time to time for settlement in
immediately available funds by major banks in the London Interbank Market for a
period of thirty (30) days, which rate shall be adjusted for the Bank's
Eurocurrency reserve requirements and any other applicable fees or assessments.
The LIBOR Rate represents a reference rate used by the Bank in determining the
interest rate on certain loans and is not intended to be the lowest rate of
interest charged on any extension of credit to any customer. If quotations of
interest rates are not being provided by the relevant Persons in the relevant
amounts for the relevant maturities for the purposes of determining the LIBOR
Rate (as determined by the Bank in good faith), the Bank shall give the Borrower
prompt notice thereof, and so long as such condition remains in effect, the rate
of interest announced from time to time by the Bank as its prime rate will be
substituted therefor.
"Lien" shall mean, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset. For the purpose of this Agreement, the Borrower and its Subsidiaries
shall be deemed to own subject to a Lien any asset leased under any "sale and
lease back" or similar arrangement and any asset acquired or held subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement relating to such asset.
8
<PAGE> 13
"Loan Documents" shall mean the "Credit Documents."
"Loans" shall mean and refer to the Revolving loans made under the
Revolving Line of Credit referred to in Article II hereof.
"Material Adverse Effect" or "Material Adverse Change" shall mean a
material adverse effect upon, or a material adverse change in, any of (i) the
financial condition, operations, business, properties or prospects of the
Borrower and its Subsidiaries, taken as a whole; (ii) the ability of the
Borrower or any of its Subsidiaries to perform under this Agreement or any
Credit Document in any material respect or in any material respect under any
other material contract to which any the Borrower or such Subsidiary is a party;
(iii) the legality, validity or enforceability of this Agreement or any other
Credit Document; or (iv) the perfection or priority of the Liens of the Bank
granted under this Agreement or any other Credit Document or the rights and
remedies of the Bank under this Agreement or any other Credit Document (other
than a change resulting from any action or inaction by the Bank).
"Material Location" shall mean any office, place of business or
facility owned or leased by the Borrower or any Subsidiary, excluding leased or
other nonowned locations or places of business (i) at which no books and records
are maintained with respect to the accounts receivable of Borrower or any
Subsidiary and at which no payment for any such account receivable is received
or collected, and (ii) at which the property of the Borrower or its Subsidiaries
owned or leased and located thereon does not exceed $5,000.
"Multiemployer Plan" shall mean any "multiemployer plan" within the
meaning of Section 4001(a)(3) of ERISA.
"Myco Letter of Credit" shall mean the Irrevocable Letter of Credit in
the amount of $4,073,973, as issued by Wachovia Bank, National Association, in
favor of Amalgamated Bank of Chicago, as trustee, in respect of the Industrial
Project Revenue Bonds, Series 1995 (MYCO, Inc. Project), as issued pursuant to
the Indenture of Trust dated as of January 1, 1995 between the City of Rockford,
Illinois and Amalgamated Bank of Chicago, as trustee and tender agent.
"Myco Letter of Credit Reimbursement Obligation" shall mean (i) the
obligations of Borrower and its Subsidiary, Source-Myco, Inc., pursuant to the
terms of that certain Reimbursement Agreement dated February 26, 1999, among
Source-Myco, Inc., the Borrower and Wachovia Bank, National Association, in
respect of the Myco Letter of Credit, as the same may be amended, modified,
supplemented, restated or replaced from time to time, and (ii) any other
obligation of the Borrower, any Subsidiary or the Bank (pursuant to standby
letter of credit or otherwise) to Wachovia Bank, National Association, for
payment or reimbursement of amounts paid by Wachovia Bank, National Association,
under the Myco Letter of Credit.
"Net Fixed Assets" shall mean the net fixed assets of Borrower and its
Subsidiaries, expressed as a number, as determined on a consolidated basis in
accordance with GAAP, but excluding all assets of the kind deducted from the
total assets of Borrower and its Subsidiaries for purposes of determining
Tangible Net Worth. For purposes of the Borrowing Base, Net
9
<PAGE> 14
Fixed Assets shall change on a quarterly basis based upon the financial
statements delivered to the Bank pursuant to Section 6.1 hereof. The parties
agree that, as of November 30, 1999, and until changed as provided herein, Net
Fixed Assets shall equal $21,329,531.
"Note" shall mean the Revolving Credit Note.
"Obligations" shall mean and include, without duplication, (i) the
Loans and all other loans, advances, indebtedness, liabilities, obligations,
covenants and duties owing, arising, due or payable from the Borrower or the
Guarantors to the Bank of any kind or nature, present or future, arising under
this Agreement, the Note or the other Credit Documents, whether direct or
indirect (including those acquired by assignment), absolute or contingent,
primary or secondary, due or to become due, now existing or hereafter arising
and however acquired; and (ii) all interest (including, to the extent permitted
by law, all post-petition interest), charges, expenses, fees, attorneys' fees
and any other sums payable by the Borrower or the Guarantors to the Bank under
this Agreement or any of the other Credit Documents.
"Permitted Asset Dispositions" shall mean the sale, transfer,
assignment or other disposition of properties or assets by Borrower and its
Subsidiaries, determined on a consolidated basis, for an aggregate consideration
not exceeding $1,000,000 in any Fiscal Year.
"Permitted Liens" shall mean any of the following Liens securing any
Indebtedness of the Borrower or any of its Subsidiaries on the property, real or
personal, of the Borrower or any of its Subsidiaries, whether now owned or
hereafter acquired:
(a) Liens granted to the Bank;
(b) Liens imposed by mandatory provisions of law of carriers,
warehousemen, mechanics or materialmen incurred in the ordinary course of
business for sums not yet due and payable;
(c) Liens incurred in the ordinary course of business in connection
with workers' compensation, unemployment insurance or other forms of
governmental insurance or benefits;
(d) Liens for current taxes, assessments or other governmental charges
that are not delinquent or remain payable without any penalty;
(e) Liens incurred by the Borrower or any of its Subsidiaries after the
date hereof in connection with the acquisition of an asset and created
contemporaneously with such acquisition to secure or provide for all or a
portion of the cost of such acquisition, provided that such a Lien is limited
exclusively to the asset so acquired, does not exceed the purchase price
thereof, and the aggregate purchase price of property subject to such
outstanding Liens does not exceed $1,000,000 at any time;
(f) Liens on personal property physically located at a Nonmaterial
Location;
10
<PAGE> 15
(g) Those existing Liens, if any, set forth in Schedule 1.1 hereof; and
(h) Any other Liens or encumbrances as the Bank may approve in writing
from time to time.
"Person" shall mean an individual, a corporation, a partnership, an
association, a trust, a limited liability company, or any other entity or
organization, including a government or political subdivision or an agency or
instrumentality thereof.
"Plan" shall mean, at any time, an employee pension benefit plan which
is covered by Title IV of ERISA or subject to the minimum funding standards
under Section 412 of the Code and is either (i) maintained by a member of the
Controlled Group for employees of any member of the Controlled Group, or (ii)
maintained pursuant to a collective bargaining agreement or any other
arrangement under which more than one employer makes contributions and to which
a member of the Controlled Group is then making or accruing an obligation to
make contributions or has within the preceding five plan years made
contributions.
"Prime Rate" shall mean that interest rate so denominated and set by
the Bank from time to time as an interest rate basis for borrowings. The Prime
Rate is but one of several interest rate bases used by the Bank. The Bank lends
at interest rates above and below the Prime Rate. A change in the Prime Rate
shall be effective on the date of such change.
"RDP Receivables" shall mean accounts receivable of the Borrower or any
Subsidiary representing amounts due the Borrower or such Subsidiary in respect
of fees for placement of publications, periodicals, magazines and similar items
in a particular display location. Such receivables are sometimes referred to by
Borrower as "retail display placement receivables."
"Real Estate" shall mean all real property owned, leased or operated by
Borrower or any of its Subsidiaries.
"Receivables Report" shall mean a report in form and substance
satisfactory to the Bank, certified by the chief financial officer or other
authorized officer of the Borrower, regarding the accounts and accounts
receivable of the Borrower.
"Reportable Event" shall mean a reportable event as defined in Section
4043(c) of ERISA.
"Restricted Payment" shall mean (a) any dividend or other distribution,
direct or indirect, on account of any shares of any class of stock of Borrower
or any Subsidiary (other than those payable or distributable solely to the
Borrower or a Subsidiary) now or hereafter outstanding, except a dividend
payable solely in shares of a class of stock to the holders of that class; (b)
any redemption, conversion, exchange, retirement or similar payment, purchase or
other acquisition for value, direct or indirect, of any shares of any class of
stock of Borrower or any of its Subsidiaries (other than those payable or
distributable solely to the Borrower or a Subsidiary) now or hereafter
outstanding; and (c) any payment made to retire, or to obtain the surrender of,
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<PAGE> 16
any outstanding warrants, options or other rights to acquire shares of any class
of stock of Borrower or any Subsidiary now or hereafter outstanding (other than
those payable or distributable solely to the Borrower or a Subsidiary).
"Revolving Credit Note" shall mean the promissory note of the Borrower,
dated the date hereof, in the form of Exhibit B attached hereto, executed and
delivered by the Borrower to the Bank pursuant to Article II hereof, evidencing
the obligation of the Borrower to repay the Revolving loans, together with any
amendments, modifications and supplements thereto, any replacements, statements,
renewals and extensions thereof, and any substitutes therefor, in whole or in
part.
"Revolving Line of Credit" shall mean the revolving line of credit made
available by the Bank to the Borrower pursuant to Article II hereof.
"Revolving Loan Termination Date" shall mean the earliest of (i)
December 31, 2002, (ii) the date of termination by Bank of its obligation to
make Revolving Loans after the occurrence of an Event of Default; (iii) such
date of termination of Bank's obligation to make Revolving Loans as is mutually
agreed upon by the Bank and the Borrower; (iv) the date of termination of the
Revolving Line of Credit pursuant to Section 2.7 hereof; and (v) the date after
all Obligations have been paid in full and the Bank is no longer obligated to
make Revolving Loans hereunder.
"Revolving Loans" shall mean the Loans made by the Bank to the Borrower
under the Revolving Line of Credit.
"Solvent" shall mean as to any Person on any particular date, that such
Person (i) does not have unreasonably small capital to carry on its business as
now conducted and as presently proposed to be conducted, (ii) is able to pay its
debts as they become due in the ordinary course of business and (iii) has assets
with a present fair saleable value greater than their total stated liabilities
and identified contingent liabilities, including any amounts necessary to
satisfy preferential rights of shareholders.
"Source Group" shall mean Borrower and its Subsidiaries, considered
collectively.
"Sources for Coverage" shall mean EBITDA minus: (a) any dividends or
like distributions paid by the Borrower, (b) taxes based upon or measured by net
income, and (c) to the extent not previously deducted from net income, unfunded
cash expenditures for capital assets.
"Subsidiary" shall mean, as to any Person, (i) any corporation more
than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person and/or one or
more Subsidiaries of such Person and (ii) any partnership, association joint
venture, limited liability company, or other
12
<PAGE> 17
entity in which such Person and/or one or more Subsidiaries of such Person has
more than a 50% equity interest at the time. Unless the context indicates
otherwise, all references herein to Subsidiaries are references to Subsidiaries
of the Borrower.
"Tangible Net Worth" shall mean the amount by which total assets of the
Borrower and its Subsidiaries on a consolidated basis exceed total liabilities
of the Borrower and its Subsidiaries on a consolidated basis as determined in
accordance with GAAP, less: (a) accounts receivable from Affiliates (net of any
accounts payable to Affiliates), (b) any surplus resulting from any write up of
assets, (c) goodwill, including any amounts, however designated, representing
the excess of the purchase price paid for assets or stock acquired over the book
value assigned thereto (excluding, however, any goodwill that the Bank may in
its sole discretion agree in writing need not be deducted in determining
Tangible Net Worth), (d) patents, trademarks, service marks, trade names and
copyrights, (e) other intangible assets (including customer lists), (f)
investments in nonmarketable securities or affiliated companies, (g)
organization costs, (h) non-compete agreements, (i) capitalized development
costs, and (j) deferred financing costs.
"Total Liabilities" shall mean all Indebtedness and liabilities of the
Borrower and its Subsidiaries, contingent or otherwise, which in accordance with
GAAP are required to be classified upon the balance sheet of Borrower or any
Subsidiary as liabilities, determined on a consolidated basis.
"Wachovia Debt" shall mean all indebtedness and obligations of the
Borrower and each of its Subsidiaries to Wachovia Bank, N.A., or any of its
Affiliates, including obligations for principal, accrued interest and all fees,
expenses and charges (including any prepayment and breakage fees, expenses and
charges) but excluding any indebtedness and obligations in respect of the Myco
Letter of Credit Reimbursement Obligation.
"Y2K Plan" has the meaning set forth in Section 5.17.
"Year 2000 Compliant and Ready" shall mean that the hardware and
software systems of Borrower and its Subsidiaries will (i) process accurately
date information involving any and all dates before, during and/or after January
1, 2000, including accepting input, providing output and performing date
calculations in whole or in part; (ii) operate without interruption due to an
inability to process date data before, during and/or after January 1, 2000;
(iii) respond to and process two digit year input without creating any ambiguity
as to the century; and (iv) store and provide date input information without
creating any ambiguity as to the century.
Section 1.2 Accounting Terms. Any accounting terms used in this
Agreement that are not specifically defined shall have the meanings customarily
given them in accordance with GAAP.
Section 1.3 Singular/Plural. Unless the context otherwise requires,
words in the singular include the plural and words in the plural include the
singular.
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Section 1.4 Other Terms. All other terms contained in this Agreement
shall, when the context so indicates, have the meanings provided for by the
Uniform Commercial Code of the State of North Carolina, as in effect from time
to time, to the extent the same are used or defined therein.
ARTICLE II
REVOLVING LOANS
Section 2.1 Revolving Line of Credit. (a) The Bank hereby establishes,
on the terms and conditions of this Agreement. and in reliance upon the
representations and warranties made hereunder, a revolving line of credit in
favor of the Borrower in the aggregate principal amount of up to Fifty Million
Dollars ($50,000,000.00) (the "Revolving Line of Credit") and agrees to make and
remake one or more Revolving Loans to the Borrower, upon the terms and
conditions set forth in this Article II, from time to time on any Business Day
during the period from the date hereof through the Revolving Loan Termination
Date. The Borrower may borrow, repay and reborrow any amount of the Revolving
Line of Credit, provided that the aggregate principal amount outstanding at any
one time under the Revolving Line of Credit may not exceed the lesser of (i) the
Borrowing Base or (ii) $50,000,000. The Revolving Loans shall be evidenced by
the Revolving Credit Note and the amount of principal owing on the Revolving
Credit Note at any given time shall be the aggregate amount of all advances made
under the Revolving Line of Credit, less all payments of principal theretofore
paid by the Borrower. Notwithstanding the foregoing, the Bank shall have no
obligation to lend funds at any time when a Default or Event of Default exists,
and the Bank may terminate the Revolving Line of Credit upon an Event of Default
in accordance with Article IX hereof.
(b) As used herein, the term "Borrowing Base" shall mean at any time
the amount, as determined with reference to the Borrowing Base Certificate most
recently delivered by the Borrower to the Bank, unless such Borrowing Base
Certificate is rejected by the Bank as not being prepared in accordance with
Section 2.1(c) of this Agreement, equal to:
(i) Eighty-five percent (85%) of Eligible Accounts Receivable
outstanding not more than ninety (90) days or, in the case of RDP
Receivables, not more than one hundred eighty (180) days, from invoice
date ("Tier I Receivables"), plus
(ii) Seventy percent (70%) of Eligible Accounts Receivable
outstanding more than ninety (90) days or, in the case of RDP
Receivables, more than one hundred eighty (180) days, but less than
three hundred sixty-five days (365) days from invoice date ("Tier II
Receivables"), plus
(iii) Fifty percent (50%) of Net Fixed Assets, minus
(iv) A reserve against the Borrowing Base in an amount equal
to one hundred percent (100%) of any letter of credit or other
guarantee or obligation which the Bank may in its discretion agree to
issue at the request of Borrower in support of the Myco
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Letter of Credit Reimbursement Obligation (and for which the Bank may
charge its usual and customary fees) or in replacement of the Myco
Letter of Credit (for which the Bank's letter of credit fee will not
exceed seventy-five (75) basis points on the face amount of such letter
of credit). Borrower and the Bank acknowledge and agree that if Bank
shall make any payment on or in respect of the Myco Letter of Credit
Reimbursement Obligation or in respect of any letter of credit issued
by the Bank in replacement of the Myco Letter of Credit, or if any
amount shall become due by Borrower to the Bank pursuant to the terms
of any agreement between Borrower and the Bank with respect to issuance
of a standby letter of credit evidencing or supporting the Myco Letter
of Credit Reimbursement Obligation, Borrower shall be unconditionally
obligated to pay or reimburse the Bank on demand therefor, and any such
payment by Bank or reimbursement obligation shall be deemed a Revolving
Loan or, at Bank's election, advanced and charged as a Revolving Loan,
in each case under the Revolving Line of Credit.
(c) Within fifteen (15) Business Days after the end of each Fiscal
Quarter, the Borrower shall deliver to the Bank a Borrowing Base Certificate in
a form acceptable to the Bank setting forth the Calculation of the Borrowing
Base and the aggregate amount of Revolving Loans outstanding as of the end of
such Fiscal Quarter. The Borrower covenants that each Borrowing Base Certificate
will be prepared in good faith by the Borrower using the Borrower's best
estimate of the information called for therein based on past experience and
using consistent calculation methods.
(d) The Borrower hereby irrevocably authorizes the Bank to disburse the
proceeds of each Revolving Loan under this Agreement (i) in accordance with the
terms of any written instructions from the Borrower, (ii) in accordance with
telephone instructions from any of the Borrower's officers or other persons in
each case designated from time to time in writing by the Borrower, (iii) to pay
itself interest, fees, costs and expenses payable hereunder, or (iv) to the
Borrower's controlled disbursement or depository accounts with the Bank in an
amount equal to the sum necessary to cover checks or other items of payment
drawn by the Borrower upon such account and presented for payment, but in no
event shall the Bank be obligated to make Revolving Loans hereunder in amounts
necessary to cover any such checks or other items of payment presented to the
extent that the Borrower is not otherwise entitled to receive Revolving Loans in
such amounts from the Bank pursuant to the terms hereof.
(e) Each request for a Revolving Loan (including, without limitation,
any checks drawn upon any controlled disbursement or depository account of the
Borrower with the Bank) and each Revolving Loan made by the Bank for the benefit
of the Borrower shall constitute a new certification by the Borrower as of the
date of such request or Revolving Loan (i) that the representations and
warranties of the Borrower contained in Article V remain true and correct as of
such date, except to the extent any such representation or warranty relates
solely to a prior date, and (ii) that, with respect to and after giving effect
to such Revolving Loan, no Default or Event of Default has occurred and is
continuing as of such date.
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Section 2.2 Term. The term of the Revolving Line of Credit will be from
the date hereof to and including the Revolving Loan Termination Date, unless
terminated sooner in accordance with the terms and conditions of this Agreement.
Section 2.3 Repayment. The Borrower shall repay the Revolving Credit
Note:
(a) In full, on the Revolving Loan Termination Date;
(b) In full, upon the occurrence of any Event of Default and
acceleration of the Obligations by the Bank pursuant to Article IX hereof; and
(c) In part, immediately, in the event that the total principal amount
outstanding at any time under the Revolving Credit Note exceeds the maximum
amount permitted under Section 2.1, in the amount of such excess.
Section 2.4 Use of Proceeds. The proceeds of the Revolving Loans shall
be used by the Borrower solely (i) to pay the Wachovia Debt in full on the
Closing Date, (ii) to provide working capital for the Borrower and its
Subsidiaries, (iii) to provide funding for Acquisitions by Borrower and its
Subsidiaries, including amounts due in respect of Borrower's Acquisition of Huck
Store Fixture Company, (iv) to fund amounts payable by Borrower in respect of
the Myco Letter of Credit Reimbursement Obligation, or to reimburse the Bank,
upon its demand, for any amounts paid by the Bank in respect of the Myco Letter
of Credit Reimbursement Obligation or pursuant to any letter of credit issued by
the Bank in replacement for the Myco Letter of Credit, and (vi) to pay fees and
expenses in connection with the transactions contemplated by this Agreement.
Section 2.5 Guaranty Agreement. The Revolving Line of Credit and all
Obligations of Borrower to the Bank shall be jointly and severally guaranteed by
each of the Subsidiaries of Borrower (other than those Inactive Subsidiaries
listed on Schedule 5.1 hereto), whether now or hereafter existing, pursuant to
the terms and conditions of the Guaranty Agreement.
Section 2.6 Non-Use Fee. Borrower agrees to pay to Bank a quarterly
unused facility fee in an amount equal to (a) one-quarter of one percent (1/4 of
1%) per annum on the difference between (i) $25,000,000, and (ii) the average
principal amount outstanding under the Revolving Line of Credit during the
applicable quarter (if less than $25,000,000), plus (b) one-eighth of one
percent (of 1%) per annum of the difference between $50,000,000 and the
greater of (i) $25,000,000, or (ii) the average principal amount outstanding
under the Revolving Line of Credit for the applicable quarter. Such unused
facility fee shall be payable in arrears (a) for the preceding calendar quarter,
on the first day of the calendar month next following such calendar quarter end,
commencing April 1, 2000, and (b) on the Revolving Loan Termination Date. All
computations of the unused facility fee shall be made by the Bank on the basis
of a three hundred sixty (360) day year, and for the actual number of days
occurring in the period for which such fee is payable.
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Section 2.7 Termination of Facility. Borrower shall have the right
at any time, upon thirty (30) days' prior written notice to Bank, to terminate
voluntarily the Revolving Line of Credit (in whole but not in part) without
premium or penalty other than payment of the termination fee provided for in
Section 2.8 hereof. Immediately upon such termination, Borrower's right to
receive Revolving Loans pursuant to the Revolving Line of Credit will terminate,
Borrower's obligation to pay the non-use fee provided for in Section 2.6 shall
terminate, and notwithstanding anything to the contrary contained herein or in
the Revolving Credit Note, the entire outstanding principal balance of the
Revolving Loans, together with accrued but unpaid interest thereon, shall be
immediately due and payable in full. On the date of such termination, Borrower
shall pay to Bank in immediately available funds all of the Obligations,
including any accrued but unpaid non-use fee due pursuant to Section 2.6 and the
termination fee provided for in Section 2.8.
Section 2.8 Termination Fee. In the event that, prior to the first
anniversary of the Closing Date, Borrower terminates the Revolving Line of
Credit pursuant to Section 2.7 hereof, the Borrower shall pay to the Bank a
prepayment fee in an amount equal to one percent (1%) of the maximum principal
amount of the Revolving Line of Credit. After the first anniversary of the
Closing Date, if the Borrower shall terminate the Revolving Line of Credit
pursuant to Section 2.7 hereof, and if, in connection therewith, the Revolving
Line of Credit shall be paid with the proceeds of financing provided by a bank
or other financial institution other than the Bank or its Affiliates, Borrower
shall pay to Bank a prepayment fee in an amount equal to one percent (1%) of the
maximum principal amount of the Revolving Line of Credit. The termination fee
provided for in this Section shall be due and payable to Bank in immediately
available funds concurrently with the termination of the Revolving Line of
Credit. In the event that the Bank terminates the Revolving Line of Credit
pursuant to Section 9.2(a) of this Agreement as the result of the occurrence of
any Event of Default arising out of any willful action (or inaction) taken (or
not taken) by or on behalf of the Borrower with the intention and for the
purpose of avoiding payment of the termination fee provided for herein, such
termination fee shall nevertheless be due and payable by Borrower to the Bank,
to the extent permitted by law, as if the Borrower had elected to terminate the
Revolving Line of Credit pursuant to Section 2.7 hereof.
Section 2.9 Commitment Fee. The Borrower shall pay to the Bank
at Closing a nonrefundable commitment fee in the amount of $50,000.
ARTICLE III
INTEREST ON THE REVOLVING LOANS
Section 3.1 Interest. (a) The Borrower covenants and agrees to
continue to pay to the Bank interest on the unpaid principal amount of the
Revolving Loans at a floating rate per annum equal to the LIBOR Rate plus the
Applicable Margin.
(b) Interest on the Loans shall be due and payable, in arrears, on
the last Business Day of each calendar month. Notwithstanding the foregoing, all
interest accrued on the Loans shall
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be due and payable on each date when all or any amount of the unpaid principal
balance of the Loans shall be due (whether by maturity, optional or mandatory
prepayment, acceleration or otherwise).
(c) The Bank shall send to the Borrower statements of amounts due
hereunder, which statements shall be considered correct and conclusively binding
(absent manifest error) on the Borrower thirty (30) days after the Borrower
receives such statements unless the Borrower shall have objected in writing to
such statements within such period. Any failure of the Bank to send such
statements shall not relieve the Borrower from its obligation to pay promptly
all sums when and as due hereunder.
Section 3.2 Computation. Interest shall be computed on the basis
of a 360-day year and the actual number of days elapsed.
Section 3.3 Maximum Interest Rate. Nothing contained in this
Agreement or in the Notes shall be deemed to establish or require the payment of
interest to the Bank at a rate in excess of the maximum rate permitted by
governing law. In the event that the rate of interest required to be paid under
this Agreement or the Note exceeds the maximum rate permitted by governing law,
the rate of interest required to be paid hereunder and under the Note shall be
automatically reduced to the maximum rate permitted by governing law and any
amounts collected in excess of the permissible amount shall be deemed a
prepayment of principal on the Note.
Section 3.4 Default Rate; Post-Petition Interest. Notwithstanding
any other provision of this Agreement, upon and during the continuance of any
Event of Default, at the option of the Bank without any required notice to the
Borrower, the outstanding principal amount of the Loans, and to the full extent
permitted by law, all interest accrued on the Loans, shall bear interest at the
Default Rate, and such default interest shall be payable on demand. To the full
extent permitted by applicable law, interest shall continue to accrue on the
Notes after the filing by or against the Borrower of any petition seeking any
relief in bankruptcy or under any act or law pertaining to insolvency or debtor
relief, whether state, federal or foreign.
Section 3.5 Payment. All payments (including prepayments) by
the Borrower on account of principal and interest on the Loans shall be made in
immediately available funds to the Bank at its offices at 101 West Friendly
Avenue, Greensboro, North Carolina 27401, prior to 2:00 p.m., Greensboro, North
Carolina time on the date payment is due, or at such other place as is
designated in writing by the Bank. If any payment of principal or interest falls
due on a day that is not a Business Day, then such due date shall be extended to
the next succeeding Business Day, and interest shall continue to accrue on the
outstanding principal and be payable for such period of extension.
Section 3.6 Taxes. Any and all payments by the Borrower hereunder
or under any of the Credit Documents shall be made, in accordance with the terms
hereof and thereof, free and clear of and without deduction for any and all
present or future taxes, levies, imports, deductions, charges or withholdings,
and all liabilities with respect thereto, excluding taxes measured by net
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income and franchise taxes imposed on the Bank, by the jurisdiction under the
laws of which the Bank is organized or any political subdivision thereof (all
such non-excluded taxes, levies, imports, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be
required by law to deduct any Taxes from or in respect of any sum payable
hereunder to the Bank, (i) the sum payable shall be increased as may be
necessary so that after making all required deductions (including deductions
applicable to additional sums payable under this Section), the Bank receives an
amount equal to the sum it would have received had no such deductions been made,
(ii) the Borrower shall make the deduction, (iii) the Borrower shall pay the
full amount deducted to the relevant taxing authority or other authority in
accordance with applicable law, and (iv) the Borrower shall deliver to the Bank
evidence of such payment to the relevant taxation authority or other authority.
The Borrower agrees to indemnify the Bank for the full amount of Taxes paid by
the Bank and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such taxes were correctly or
legally asserted. This indemnification shall be made within thirty (30) days
from the date the Bank makes written demand therefor. Without prejudice to the
survival of any other agreement of the Borrower hereunder, the agreements and
obligations of the Borrower contained in this Section shall survive the payment
in full of the principal and interest hereunder.
ARTICLE IV
CLOSING; CONDITIONS OF CLOSING AND BORROWING
Section 4.1 Closing. The closing of the transaction provided for in
this Agreement (the "Closing") shall take place on the Closing Date, beginning
at 10:00 a.m., at the offices of the Schell Bray Aycock Abel & Livingston
P.L.L.C., 230 North Elm Street, Suite 1500, Greensboro, North Carolina, or at
such other time and place as the parties hereto shall mutually agree. The
parties agree that the Loans shall be made in North Carolina and that the Credit
Documents were prepared and negotiated in North Carolina.
Section 4.2 Conditions of Loans and Advances. The obligation of the
Bank to close this financing or to make the Loans is subject to: (a) the
accuracy and correctness of the representations and warranties of the Borrower
contained herein and in the other Credit Documents and in any certificate
delivered pursuant to this Agreement or the other Credit Documents; (b) the
performance by Borrower of its agreements contained in and in the other Credit
Documents; and (c) the satisfaction of the following conditions:
(a) Executed Documents. This Agreement, the Revolving Credit Note and
the Guaranty Agreement shall have been duly authorized, executed and delivered
by the Borrower and the Guarantors, as appropriate, and shall be in full force
and effect.
(b) Certificate of the Borrower. The Bank shall have received a
certificate dated as of the Closing Date from the Chairman and Chief Executive
Officer of the Borrower, in form and substance satisfactory to the Bank, to the
effect that all representations and warranties of the Borrower contained in this
Agreement and the other Credit Documents are true, correct and complete; that
the Borrower is not in violation of any of the covenants contained in this
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Agreement and the other Credit Documents; that, giving effect to the
transactions contemplated by this Agreement, no Event of Default nor any event
or condition that with notice, lapse of time, or both would constitute such an
Event of Default, has occurred and is continuing; and that the Borrower has
satisfied each of the closing conditions.
(c) Certificate of Secretary of Borrower and Guarantors. The Bank
shall have received a certificate dated as of the Closing Date from the
Secretary of the Borrower and each of the Guarantors certifying with respect to
each such corporation: (i) that attached thereto is a true and complete copy of
the articles or certificate of incorporation and all amendments thereto of such
corporation, certified as of a recent date by the appropriate Governmental
Authority in its jurisdiction of incorporation, and that such organizational
documents have not been amended since such date; (ii) that attached thereto is a
true and complete copy of the bylaws of such corporation as in effect on the
date thereof; (iii) that attached thereto is a true and complete copy of
resolutions adopted by the Board of Directors of such corporation, authorizing,
in the case of Borrower, the borrowings contemplated hereunder and the
execution, delivery and performance of this Agreement and the other Credit
Documents and, in the case of the Guarantors, the execution, delivery and
performance of the Guaranty Agreement; and (iv) as to the incumbency and
genuineness of the signature of each officer of such corporation executing this
Agreement, the Note, the Guaranty Agreement or any of the other Credit
Documents.
(d) Real Estate Reports; Negative Pledges. The Bank shall have
received title opinions in favor of the Bank, or other evidence satisfactory to
the Bank in its discretion, confirming that, after payment in full of the
Wachovia Debt, none of the Real Estate shall be encumbered by any Lien securing
Indebtedness for Money Borrowed or by any other Lien, other than Permitted
Liens. The Borrower shall have recorded or caused to be recorded with respect to
its owned Real Estate such instruments of negative pledge as the Bank may
require to evidence the obligation of Borrower and its Subsidiaries to maintain
their respective Real Estate free and clear of any Lien other than Permitted
Liens.
(e) UCC Searches. The Bank shall have received UCC search reports, or
other evidence satisfactory to the Bank in its discretion, confirming that,
after payment in full of the Wachovia Debt and release of UCC financing
statements in connection therewith, there will be no UCC financing statements of
record against Borrower or any of its Subsidiaries in any jurisdiction
evidencing any Lien other than Permitted Liens.
(f) Payment of Wachovia Debt. The Bank shall have received a payoff
letter from Wachovia Bank, National Association ("Wachovia"), or other evidence
satisfactory to the Bank confirming the amount of the Wachovia Debt as of the
Closing Date and further confirming that, after payment in full of the Wachovia
Debt on the Closing Date, all Liens against the assets of Borrower or any
Subsidiary securing the Wachovia Debt will be canceled and released and the Bank
shall be unconditionally entitled to receive, for appropriate filing and
recordation, UCC termination statements, canceled deeds of trust and mortgages,
and such other documents and instruments as may be reasonably required by the
Bank, to terminate and evidence of record the cancellation of all Liens of
Wachovia against the assets of Borrower and its Subsidiaries.
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(g) Opinion of Counsel. The Bank shall have received an opinion of
Armstrong Teasdale, LLP, counsel to the Borrower and the Guarantors, in form and
substance reasonably acceptable to the Bank in its discretion.
(h) Certificates of Good Standing. The Bank shall have received
certificates as of a recent date of the good standing of the Borrower and each
of the Guarantors under the laws of each state where the Borrower or such
Guarantor is incorporated or authorized to transact business.
(i) Borrowing Base Report. The Bank shall have receiving a Borrowing
Base Certificate dated as of the Closing Date, prepared as of the end of the
Borrower's most recently ended Fiscal Quarter.
(j) Commitment Fee. The commitment fee provided for in Section 2.9
hereof shall have been paid in full.
(k) No Event of Default. No Event of Default, nor any event or
condition that, with notice or lapse of time would constitute an Event of
Default, shall have occurred and be continuing.
(l) Other Documents. The Borrower shall have delivered to the Bank
such other documents, certificates and opinions as the Bank may reasonably
request.
Section 4.3 Conditions to all Loans and Advances. The obligation of
the Bank to make any Loan hereunder (including any Loans made on the Closing
Date), is subject to the continued validity of all Credit Documents and the
satisfaction of the following conditions:
(a) Each of the representations and warranties made by the Borrower
in Article VI shall be true and correct on and as of the date of such Loan with
the same effect as if made on and as of such date, unless such representation or
warranty relates solely to the Closing Date; and
(b) No Default or Event of Default shall have occurred and be
continuing on the date of such Loan or after giving effect to the Loans to be
made on such date.
Section 4.4 Waiver of Conditions Precedent. If the Bank makes any
Loan hereunder prior to the fulfillment of any of the conditions precedent set
forth in this Article V, the making of such Loan shall constitute only an
extension of time for the fulfillment of such condition and not a waiver
thereof, and the Borrower shall thereafter use its best efforts to fulfill each
such condition within thirty (30) days after the Closing Date.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower hereby represents and warrants to the Bank as follows:
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Section 5.1 Corporate Organization and Power. The Borrower and each
Guarantor (i) is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, (except as set
forth on Schedule 5.1(a)); (ii) is duly qualified or licensed to do business and
is in good standing in every other jurisdiction where the nature of its business
or its properties makes such qualification or licensing necessary (except where
the failure to be so qualified or licensed would not have a Material Adverse
Effect); (iii) has the corporate power and authority to own or lease its
properties and to carry on its business as it is now being conducted; and (iv)
has all governmental licenses, permits, franchises, certificates, inspections,
authorizations, consents and approvals required to carry on its business as it
is now being conducted (except where the failure to have such governmental
authorization would not have a Material Adverse Effect). Schedule 5.1(b) hereto
lists all Subsidiaries of the Borrower (including all Inactive Subsidiaries) and
the jurisdiction of incorporation of Borrower and each active Subsidiary.
Section 5.2 Authority; No Conflict With Other Instruments or Law.
The execution, delivery and performance of this Agreement and the other Credit
Documents and the consummation of the transactions contemplated hereby and
thereby (i) are within the power and authority of the Borrower and the
Guarantors, (ii) have been duly authorized by all necessary action on the part
of the Borrower and the Guarantors, (iii) do not and will not conflict with,
contravene or violate any provision of, or result in a breach of or default
under, or require the waiver (not already obtained) of any provision of or the
consent (not already given) of any Person under the terms of the organizational
documents of the Borrower and the Guarantors, or any indenture, mortgage, deed
of trust, loan or credit agreement or other agreement or instrument to which the
Borrower or any Guarantor is a party or by which the Borrower or any Guarantor
is bound or to which any of their respective properties are subject, (iv) will
not violate, conflict with, give rise to any liability under, or constitute a
default under any applicable law, regulation, order (including, without
limitation, all applicable state and federal securities laws) or any other
requirement of any court, tribunal, arbitrator, or Governmental Authority, and
(v) will not result in the creation, imposition, or acceleration of any
indebtedness or tax or any mortgage, lien, reservation, covenant, restriction,
or other encumbrance of any nature upon, or with respect to, the Borrower or any
Guarantor or any of their respective properties, except as expressly
contemplated herein.
Section 5.3 Due Execution and Delivery. This Agreement and the
other Credit Documents to which Borrower and the Guarantors are parties have
been duly executed and delivered to the Bank on behalf of such parties by
authorized officers of Borrower and the Guarantors.
Section 5.4 Enforceability. This Agreement and the other Credit
Documents constitute the legal, valid and binding obligations of the Borrower
and the Guarantors, enforceable against them in accordance with their terms,
except as enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws, statutes or rules of general application
affecting the enforcement of creditor's rights or general principles of equity.
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Section 5.5 Governmental Approval. The execution, delivery and
performance of this Agreement and the other Credit Documents and the
transactions contemplated hereby and thereby do not require any authorization,
exemption, consent or approval of, notice to, or declaration or filing with, any
Governmental Authority.
Section 5.6 Margin Stock. The Borrower is not engaged principally
or as one of its important activities in the business of extending credit for
the purpose of purchasing or carrying margin stock (within the meaning of
Regulation G, X or U of the Board of Governors of the Federal Reserve System).
The execution, delivery and performance of this Agreement and the use of the
proceeds of the extension of credit hereunder, do not and will not constitute a
violation of said Regulations.
Section 5.7 Investment Company. The Borrower is not an "investment
company" or a company "controlled" by an "investment company", within the
meaning of the Investment Company Act of 1940, as amended.
Section 5.8 Taxes. Except as disclosed in Schedule 5.8 attached
hereto, neither the Borrower nor any Guarantor is delinquent in the payment of
any taxes that have been levied or assessed by any Governmental Authority
against it or assets unless such tax is being contested in good faith and by
proper proceedings and the Borrower or such Guarantor has established and
maintained adequate reserves with respect thereto in accordance with GAAP. The
Borrower and each of its Subsidiaries has timely filed all tax returns that are
required by law to be filed, and has paid all taxes shown on said returns and
all other assessments or fees levied upon it or upon its properties to the
extent that such taxes, assessments or fees have become due, and if not due,
such taxes have been adequately provided for and sufficient reserves therefor
established on its books of account. No material controversy in respect of such
income taxes is pending or, to the knowledge of the Borrower, threatened.
Section 5.9 Litigation. Except as disclosed in Schedule 5.9 hereto,
there is no judgment, injunction or similar order or decree which, and no
action, suit, claim, investigation or proceeding pending or, to the knowledge of
the Borrower, threatened against or affecting any the Borrower or any Guarantor,
before any court, commission, panel, board, bureau, arbitrator or any
Governmental Authority which would have a Material Adverse Effect.
Section 5.10 Compliance with Laws. To the knowledge of the Borrower,
Borrower and each Guarantor is in full compliance with all applicable laws,
statutes and governmental regulations, including all Environmental Laws, unless
noncompliance would not have a Material Adverse Effect.
Section 5.11 ERISA.
(a) The Borrower and each member of the Controlled Group have
fulfilled their obligations under the minimum funding standards of ERISA and the
Code with respect to each Plan. The Borrower and each member of the Controlled
Group are in compliance in all material
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respects with the presently applicable provisions of ERISA and the Code and have
not incurred any liability to the Pension Benefit Guaranty Corporation or a Plan
under Title IV of ERISA.
(b) Neither the Borrower nor any member of the Controlled Group has
incurred any withdrawal liability with respect to any Multiemployer Plan under
Title IV of ERISA, and no such liability is expected to be incurred.
(c) Neither the Borrower nor any member of the Controlled Group has
participated in a prohibited transaction, as defined in Section 406 of ERISA or
Section 4975(c) of the Code, which could subject the Borrower or a member of the
Controlled Group to any material civil penalty under ERISA or material tax under
the Code.
Section 5.12 No Other Debt. Upon consummation of the Closing and
payment in full of the Wachovia Debt, except for the Obligations, neither the
Borrower nor any of its Subsidiaries will have any Indebtedness for Money
Borrowed.
Section 5.13 Real Estate; Material Locations. All Real Estate owned
by the Borrower or any of its Subsidiaries is listed in Schedule 5.13 hereto.
All Material Locations of the Borrower and its Subsidiaries are also listed in
Schedule 5.13 hereto.
Section 5.14 Financial Statements; No Material Adverse Change. The
Financial Statements contain no material misstatement or omission and fairly
present the financial position, assets and liabilities of the Borrower and its
Subsidiaries for the periods then ended on a consolidated basis. From and after
date of such Financial Statements through the Closing Date, except for the
transactions contemplated under this Agreement, (a) there has been no Material
Adverse Change, nor to the knowledge of the Borrower, is any Material Adverse
Change threatened or reasonably likely to occur, and (b) neither the Borrower
nor any Subsidiary has incurred any obligation or liability that would be
reasonably likely to have a Material Adverse Effect or entered into any material
contracts not specifically contemplated by this Agreement or not in the ordinary
course of business consistent with past practice.
Section 5.15 Full Disclosure. All information heretofore furnished
by the Borrower to the Bank for purposes of or in connection with this Agreement
or any transaction contemplated hereby is, and all such information hereafter
furnished by the Borrower to the Bank will be, true, accurate and complete in
every material respect or based on reasonable estimates on the date as of which
such information is stated or certified. The Borrower has disclosed to the Bank
in writing any and all facts which materially and adversely affect the business,
operations, future prospects or condition, financial or otherwise, of the
Borrower, or the ability of the Borrower to perform its obligations under this
Agreement or any of the Credit Documents to which the Borrower is a party.
Section 5.16 No Default. No Default or Event of Default under this
Agreement has occurred and is continuing.
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Section 5.17 Year 2000 Compliance. The Borrower and its Subsidiaries
have developed a comprehensive plan (the "Y2K Plan") designed to ensure that
their respective software and hardware systems which, if not Year 2000 Compliant
and Ready could have a material adverse impact on the business operations of the
Borrower and its Subsidiaries will be Year 2000 Compliant and Ready.
As of the date hereof (except for the areas noted below), Borrower and
the Subsidiaries have completed Y2K testing under the Plan and all Y2K problems
identified by the testing or otherwise known to Borrower or Subsidiaries have,
to the best of Borrower's and its Subsidiaries' knowledge, been corrected;
provided, however, that the following exceptions are hereby noted, none of which
is expected to have a Material Adverse Effect:
(a) Remediation work is still underway at Borrower's Display Rack
and Store Fixture Manufacturing Subsidiary and Borrower
presently expects this remediation to be complete by year-end.
(b) Source-MYCO, Inc.'s inventory and raw materials control
software is not Y2K compliant and is being replaced with a new
purchase order system which is expect to be installed and
functional by year-end.
(c) Brand Manufacturing, Inc. utilizes a Novell network which is
not Y2K compliant and Borrower intends to correct the problem
by upgrading software which Borrower expect to be complete by
year-end.
ARTICLE VI
AFFIRMATIVE COVENANTS
Until the Bank's obligation to make Revolving Loans has terminated and
all of the Obligations have been paid in full, the Borrower covenants and agrees
that it will, unless the Bank otherwise consents in writing:
Section 6.1 Financial and Business Information. Deliver or cause
to be delivered to the Bank:
(a) As soon as practicable and in any event within forty-five (45)
days after the close of each Fiscal Quarter of the Borrower, beginning with the
current Fiscal Quarter, a consolidated and consolidating balance sheet of the
Borrower and its Subsidiaries as of the close of such Fiscal Quarter, and
consolidated and consolidating statements of income, retained earnings and cash
flows for the Borrower and its Subsidiaries, all in reasonable detail setting
forth in comparative form the corresponding figures for the preceding Fiscal
Year, subject only to normal audit and normal year-end adjustments, and
certified by the Borrower's President or Chief Financial Officer to be true and
accurate;
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(b) As soon as practicable and in any event within one hundred fifty
(150) days after the close of each Fiscal Year of the Borrower, beginning with
the close of the current Fiscal Year, an audited consolidated and consolidating
balance sheet of the Borrower and its Subsidiaries as of the close of such
Fiscal Year and audited consolidated and consolidating statements of income,
retained earnings and cash flows for the Borrower and its Subsidiaries for the
Fiscal Year then ended, including the notes to each, all in reasonable detail
setting forth in comparative form the corresponding figures for the preceding
Fiscal Year, prepared by an independent certified public accountant satisfactory
to the Bank, in accordance with GAAP applied on a basis consistent with that of
the preceding Fiscal Year or containing disclosure of the effect on the
financial position or results of operation of any change in the application of
accounting principles and practices during the year, and accompanied by a report
thereon by such certified public accountant which is unqualified as to the scope
of the audit performed and as to the "going concern" status of the Borrower and
without any exception not acceptable to the Bank;
(c) Concurrently with the delivery of the financial statements
described in subsection (b) above, a certificate addressed to the Bank from the
independent certified public accountant that in making its compilation of the
financial statements of the Borrower, it obtained no knowledge of the occurrence
or existence of any Default or Event of Default under this Agreement, or
specifying the nature and period of existence of any such Default or Event of
Default; provided, however, that such accountant shall not be liable to anyone
by reason of its failure to obtain knowledge of any such Default or Event of
Default that would not be disclosed in the course of compilation conducted in
accordance with generally accepted auditing standards;
(d) Concurrently with the delivery of the financial statements
described in subsections (a) and (b) above, a certificate from the Borrower's
President or Chief Financial Officer certifying to the Bank that to the best of
his knowledge, after review of this Agreement and other appropriate inquiry, the
Borrower has kept, observed, performed and fulfilled in all respects each and
every covenant, obligation and agreement binding upon the Borrower contained in
this Agreement and the Credit Documents (and with respect to the financial
covenants in Article VIII, a calculation of those covenants in reasonable
detail), and that no Default or Event of Default under this Agreement, has
occurred or specifying any such Default or Event of Default and what action the
Borrower and/or Guarantors propose to take with respect thereto;
(e) Promptly upon request by the Bank, a copy of (i) all regular or
special reports or effective registration statements that Borrower or any
Subsidiary shall file with the Securities and Exchange Commission (or any
successor thereto) or any securities exchange, (ii) any proxy statement
distributed by the Borrower or any Subsidiary to its shareholders, bondholders
or the financial community in general, and (iii) any management letter or other
report submitted to the Borrower or any Subsidiary by independent accountants in
connection with any annual, interim or special audit of the Borrower or any
Subsidiary;
(f) At least ten (10) Business Days prior to consummation of any
Acquisition involving an Acquisition Cost in excess of $1,000,000, written
notice of intent to consummate such transaction, together with a general
description of the proposed terms and conditions thereof, including supporting
financial information, and together with a certification by the
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President or Chief Financial Officer of the Borrower to the effect that (i) upon
consummation of such Acquisition and after giving effect thereto, no Default or
Event of Default shall arise or exist under this Agreement as a result thereof,
and (ii) such Acquisition, to the best knowledge of such officer, will not cause
to occur any breach or violation of the financial covenants contained in Article
VIII hereof;
(g) Upon any officer of the Borrower obtaining knowledge of any
Default or Event of Default hereunder or under any other obligation of the
Borrower or any Subsidiary to the Bank, or any event, development or occurrence
which could reasonably be expected to have a Material Adverse Effect, prompt
notification by such officer or another authorized representative of the
Borrower of the nature thereof, the period of existence thereof, and what action
the Borrower or such Subsidiary proposes to take with respect thereto;
(h) Within five (5) Business Days after the Borrower becomes aware of
any deviations from the Y2K Plan which would cause compliance with the Plan to
be delayed or not achieved, a statement of the chief executive officer, chief
financial officer, or chief technology officer of the Borrower setting forth the
details thereof and the action which the Borrower and its Subsidiaries are
taking or propose to take with respect thereto;
(i) Promptly upon the receipt thereof, a copy of any third party
assessments of the Y2K Plan of Borrower and its Subsidiaries, together with any
recommendations made by such third party with respect to Year 2000 compliance;
and
(j) Within a reasonable time, upon the Bank's request, such other
information about the property, financial condition, operations and proposed
Acquisitions of the Borrower or any Subsidiary as the Bank may from time to time
request.
Section 6.2 Notice of Certain Events. Promptly give notice in
writing to the Bank of:
(a) The commencement of, or any material determination in, any
action, suit or proceeding with any third party or any material proceeding
before any Governmental Authority affecting the Borrower or any Subsidiary and
involving an amount in excess of $500,000;
(b) Any judgment, attachment, levy, execution or other similar
process instituted against the Borrower or any Subsidiary or any of their
respective assets involving an amount in excess of $250,000;
(c) Any dispute which may exist between Borrower and any Subsidiary
and any Governmental Authority or any threatened action by any Governmental
Authority to acquire or condemn any of the properties of Borrower or any
Subsidiary where the amount involved is in excess of $500,000;
(d) If and when any member of the Controlled Group (i) gives or is
required to give notice to the Pension Benefit Guaranty Corporation of any
Reportable Event with respect to any Plan which might constitute grounds for a
termination of such Plan under Title IV of ERISA, or
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knows that the plan administrator of any Plan has given or is required to give
notice of any such Reportable Event; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA; or (iii) receives notice from the
Pension Benefit Guaranty Corporation under Title IV of ERISA of an intent to
ten-terminate or appoint a trustee to administer any Plan, and provide the Bank
with a copy of such notice; and
(e) Any Default or Event of Default.
Each notice pursuant to this Section 6.2 shall be accompanied by a
statement of an officer of the Borrower setting forth details with reasonable
particularity of the occurrence referred to therein and stating what action the
Borrower is taking and proposes to take with respect thereto.
Section 6.3 Existence. Maintain and preserve in full force in
effect and cause each Subsidiary to maintain and preserve in full force and
effect its existence, rights and franchises.
Section 6.4 Maintenance of Properties. Maintain and keep and cause
each Subsidiary to maintain and keep its property in good working order and
condition (normal wear and tear excepted) and repair (except to the extent that
any such property is obsolete or is being replaced).
Section 6.5 Compliance with Law. Comply and cause each Subsidiary
to comply in all respects with all applicable laws, ordinances, rules,
regulations and requirements of any Governmental Authority (including, without
limitation, all Environmental Laws), unless noncompliance would not have a
Material Adverse Effect.
Section 6.6 Compliance with ERISA.
(a) The Borrower will, and will cause each of its Subsidiaries and
each member of the Controlled Group to, comply with ERISA and the Code and the
regulations and requirements of the Pension Benefit Guaranty Corporation, except
where the necessity of such compliance is being contested in good faith through
appropriate proceedings.
(b) The Borrower and each member of the Controlled Group will make
timely payment of contributions required to meet the minimum funding standards
set forth in ERISA and the Code with respect to any Plan, and will not take any
action or fail to take action the result of which action or inaction could be a
material liability for the Borrower or a member of the Controlled Group to the
Pension Benefit Guaranty Corporation or a Multiemployer Plan. Neither the
Borrower nor a member of the Controlled Group will participate in a prohibited
transaction, as defined in Section 406 of ERISA or Section 4975(c) of the Code,
which could subject the Borrower or a member of the Controlled Group to any
material civil penalty under ERISA or material tax under the Code.
Section 6.7 Payment of Indebtedness. Pay and cause each Subsidiary
to pay all Indebtedness for Borrowed Money when due, and all other obligations
in accordance with customary trade practices, and comply with all acts, rules,
regulations and orders of any
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legislative, administrative or judicial body or official applicable to its
property or to the operation of its business.
Section 6.8 Payment of Taxes. Pay and discharge and cause each
Subsidiary to pay and discharge all taxes, assessments and other governmental
charges or levies imposed upon it or any of its property prior to the date on
which interest or penalties would attach thereto; provided, however, that no
Obligor shall be required to pay any such tax, assessment or governmental charge
or levy, the payment of which is being contested in good faith and by
appropriate proceedings, if such Obligor has established and maintained adequate
reserves with respect thereto satisfactory to the Bank.
Section 6.9 Maintenance of Insurance. Maintain and pay and cause
each Subsidiary to maintain and pay for insurance upon its property, wherever
located, covering casualty, hazard, public liability, product liability,
business interruption, boiler, fidelity and such other risks and in such amounts
and with such insurance companies as shall be reasonably satisfactory to the
Bank. The Borrower also agrees to maintain and pay and cause each Subsidiary to
maintain and pay for insurance in such amounts, with such companies and in such
form as shall be reasonably satisfactory to the Bank, insuring the Borrower and
its Subsidiaries against any claims, suits, losses or damages suffered by any
Person on any property owned or leased by the Borrower or its Subsidiaries, and
against such other casualties and contingencies as is customary in the
businesses in which Borrower and the Subsidiaries are engaged.
Section 6.10 Maintenance of Books and Records; Inspection. Maintain
and cause each Subsidiary to maintain adequate books, accounts and records and
prepare all financial statements required under this Agreement in accordance
with GAAP, and in compliance with the regulations of any governmental
regulatory body having jurisdiction over it. The Borrower shall permit and cause
each Subsidiary to permit any employee or representative of the Bank to visit
and inspect any of its properties, to examine and audit its books of account,
records, reports and other papers, to make copies and extracts therefrom, and to
discuss its affairs, finances and accounts with its officers and, upon prior
notice to the Borrower or such Subsidiary and subject to mutually satisfactory
arrangements between Borrower and Bank with regard to any additional fees to be
incurred, its independent public accountants (and by this provision the
Borrower, for itself and its Subsidiaries, authorizes said accountants to
discuss their finances and affairs with the Bank), at such reasonable times and
as often as may be reasonably requested. After expiration of a period of one (1)
year from the date of this Agreement, Borrower agrees to pay or reimburse Bank,
upon its demand, for the reasonable expenses incurred by Bank, not to exceed
$5,000 per year, of field examinations by the Bank's personnel of Borrower's
trading assets; provided, however, that this provision shall not limit or
otherwise affect Bank's right to conduct such examinations at any time at Bank's
expense.
Section 6.11 Name Change. The Borrower shall notify the Bank at
least thirty (30) days prior to the effective date of any change of Borrower's
or any Subsidiary's name, and prior to such effective date the Borrower and such
Subsidiary, as the case may be, shall have executed such necessary and
instruments as the Bank shall reasonably require in connection with this
Agreement and the Credit Documents on account of such name change.
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Section 6.12 New Material Locations. If Borrower or any of its
Subsidiaries shall acquire or establish a new Material Location subsequent to
the date of this Agreement, Borrower shall promptly, and in any event within
thirty (30) days after such location is acquired or established, notify the Bank
thereof and provide to Bank, promptly upon its request, such additional
information regarding such new Material Location as the Bank may reasonably
require.
Section 6.13 New Subsidiaries. Simultaneously with the acquisition
or creation of any Subsidiary after the date of this Agreement, or if any
Inactive Subsidiary shall no longer qualify as such because of the nature and
extent of its business and assets, Borrower shall cause to be delivered to the
Bank a Guaranty Agreement executed by such Subsidiary substantially in the form
of Exhibit A attached hereto or as otherwise acceptable to the Bank in its
discretion, together with, if requested by the Bank, an opinion of legal counsel
to the Subsidiary reasonably satisfactory to the Bank (which opinion may include
assumptions and qualifications of similar effect to those contained in the
opinion of counsel delivered pursuant to Section 4.2(g) hereof) to the effect
that (a) such Subsidiary is duly organized, validly existing and in good
standing in the jurisdiction of its formation, has the requisite power and
authority to own its properties and conduct its business as then owned and then
conducted and to execute deliver and perform the Guaranty Agreement, and (b) the
execution, delivery and performance of the Guaranty Agreement by such Subsidiary
has been duly authorized by all requisite corporate or other required action,
and has been duly executed and delivered and constitutes the valid and binding
agreement of such Subsidiary, enforceable against such Subsidiary in accordance
with its terms, subject to the effect of applicable bankruptcy, moratorium,
insolvency, reorganization or other similar laws affecting the enforceability of
creditors' rights generally and to the effect of general principles of equity
(whether considered in a proceeding at law or in equity).
Section 6.14 After-Acquired Real Estate. If Borrower or any of its
Subsidiaries acquires any Real Estate after the Closing Date, Borrower will (and
will cause its Subsidiaries to) promptly upon such acquisition, and in any event
within thirty (30) days thereafter, cause to be recorded in the real estate
records of the applicable jurisdiction such instrument of negative pledge as the
Bank may require to confirm the obligation of Borrower and its Subsidiaries to
maintain their respective Real Estate free and clear of any Lien other than
Permitted Liens. Promptly upon any such acquisition of additional Real Estate,
and in any event within thirty (30) days thereafter, Borrower will also cause to
be furnished to Bank a title opinion in favor of Bank (if available), or other
evidence satisfactory to Bank in its discretion, confirming that such Real
Estate is subject to no Liens other than Permitted Liens.
Section 6.15 Further Assurances. The Borrower shall make, execute,
endorse, acknowledge and deliver to the Bank any amendments, restatements,
modifications or supplements hereto and any other agreements, instruments or
documents, and take any and all such other actions, as may from time to time be
reasonably requested by the Bank to effect, confirm or further assure or protect
and preserve the interests, rights and remedies of the Bank under this Agreement
and the other Credit Documents.
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ARTICLE VII
NEGATIVE COVENANTS
Until the Bank's obligation to make Revolving Loans has terminated and
all of the Obligations have been paid in full, the Borrower covenants and agrees
that it will not, nor will it permit any Subsidiary to, without the written
consent of the Bank:
Section 7.1 Transfer of Assets. Conduct, permit or suffer, or agree
to conduct or permit, or acquiesce in, any sale, lease, assignment or other
transfer or disposition of any assets other than (i) the sale in the ordinary
course of business of inventory, merchandise, goods and other personal property
held by Borrower and its Subsidiaries for such sale, (ii) other sales or
transfers of assets in Permitted Asset Dispositions, and (iii) payments by
Borrower and its Subsidiaries for goods and services in the ordinary course of
business and not in violation of any covenant contained herein; provided,
however, that this Section 7.1 shall not be deemed violated by any involuntary
damage to or destruction of any properties or assets of the Borrower or any
Subsidiary.
Section 7.2 Merger or Consolidation. Consolidate with or merge into
any other Person, or permit any other Person to merge into it, in a transaction
in which Borrower or its Subsidiary, as the case may be, is not the surviving
entity, or consummate any other merger or consolidation unless (a) at the time
of such merger or consolidation and immediately after giving effect thereto,
there shall exist no Default or Event of Default under this Agreement, including
any Event of Default on account of a Change in Control, and (b) the President or
a Vice President of Borrower shall have delivered to the Bank, prior to
consummation of such transaction, a certificate to the effect set forth in the
foregoing clause (a); provided, however, that so long as no Default or Event of
Default shall exist hereunder at the time of such transaction or immediately
after giving effect thereto, any Subsidiary of the Borrower may merge or
transfer all or substantially all of its assets into or consolidate with the
Borrower or any other Subsidiary; provided further that, effective upon
consummation of any merger or consolidation described in this Section, any
resulting or surviving entity shall execute and deliver such agreements and
other documents, including, if requested by the Bank, a guaranty substantially
in the form of the Guaranty Agreement, and take such other action as the Bank
may require to evidence or confirm its express assumption of the obligations and
liabilities of its predecessor entities under this Agreement and the other
Credit Documents.
Section 7.3 Acquisitions. Complete or consummate any Acquisition,
unless the Bank shall have been given the notice and certification in respect
thereof as required by Section 6.1(f) hereof or if, at the time thereof or
immediately after giving effect thereto, there shall exist any Default or Event
of Default under this Agreement.
Section 7.4 Liens. Grant, suffer or permit any Lien on or security
interest in any of its properties or assets, except for (i) liens in favor of
Bank, and (ii) Permitted Liens, or fail to pay promptly when due all lawful
claims, whether for labor, materials or otherwise, where the failure to pay the
same could have a Material Adverse Effect.
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Section 7.5 Investments. Purchase, own, invest in or otherwise
acquire, directly or indirectly, any stock or other securities, or make or
permit to exist any interest whatsoever in any other Person or permit to exist
any loans or advances to any Person, except that Borrower and its Subsidiaries
may make or maintain:
(a) investments in securities of any other Person acquired in an
acquisition consummated in compliance with this Agreement;
(b) investments in direct obligations of, or obligations the timely
payment of principal and interest on which are fully and unconditionally
guaranteed by, the United States of America or any agency thereof;
(c) investments in interest-bearing demand or time deposits or
certificates of deposit issued by the Bank;
(d) investments existing as of the date hereof and set forth on
Schedule 7.5 hereto;
(e) accounts receivable arising in trade credit granted in the
ordinary course of business;
(f) investments in Subsidiaries; and
(g) loans or advances between the Borrower and the Subsidiaries in
the ordinary course of business.
Section 7.6 Restricted Payments. Make any Restricted Payment or
apply or set apart any assets of Borrower or any Subsidiary therefor or agree to
do any of the foregoing.
Section 7.7 Indebtedness. Incur, create, assume or permit to exist
any Indebtedness, howsoever evidenced, except:
(a) Indebtedness owing to the Bank in connection with this Agreement,
the Note or any other Credit Document;
(b) the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;
(c) purchase money Indebtedness incurred in the ordinary course of
business and not in violation of any covenant or other term or provision of this
Agreement;
(d) obligations under Capital Leases incurred in the ordinary course
of business and not in violation of any covenant or other term or provision of
this Agreement;
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(e) unsecured intracompany Indebtedness for loans and advances made
by the Borrower or any Subsidiary to the Borrower or any Subsidiary;
(f) additional unsecured Indebtedness for Money Borrowed not
otherwise covered by clauses (a) through (e) above, provided that the aggregate
outstanding principal amount of all such other Indebtedness permitted under this
clause (f) shall in no event exceed $1,000,000 at any time; and
(g) Indebtedness existing as of the Closing Date and set forth in
Schedule 7.7(g) hereto.
Section 7.8 Related Party Transactions. Except as otherwise
expressly permitted by this Agreement, and except for routine advances for
travel expenses in the ordinary course of business, directly or indirectly, make
any loan or advance to, or purchase, assume or guarantee any note, to or from
any of its directors, officers, employees or Affiliates, or to or from any
member of the immediate family of any of its directors, officers, employees or
Affiliates, or contract and operations to any Affiliate, or enter into, or be a
party, any transaction with any Affiliate of the Borrower or any of its
Subsidiaries, except for transactions in the ordinary course of and pursuant to
the reasonable requirements of the business of the Borrower and its Subsidiaries
and upon fair and reasonable terms no less favorable to the Borrower (or any
Subsidiary) than would be obtained in a comparable arm's-length transaction with
a Person not an Affiliate.
Section 7.9 Character of Business. Change the general character of
business as conducted by Borrower and its Subsidiaries at the date hereof, or
engage in any type of business not reasonably related to the business of
Borrower and its Subsidiaries as presently conducted, or make any material
change in Borrower's business objectives.
Section 7.10 Management Change. Make any substantial change in its
present executive or management personnel.
Section 7.11 Environmental Compliance. The Borrower shall ensure
that the Real Estate of Borrower and its Subsidiaries and their respective
businesses and operations at all times complies with the Environmental Laws
(provided, however, that this covenant shall not be deemed violated by an
unintentional violation that could not reasonably be expected to have a Material
Adverse Effect). The Borrower will not permit any Hazardous Material to be
brought onto any of the property owned, leased or obligated by Borrower or its
Subsidiaries (unless such Hazardous Material is used in the normal course of
business, maintenance and repairs of Borrower or such Subsidiary and is handled
in compliance with applicable Environmental Laws). If any Hazardous Material is
brought or found thereon or therein, except as may be permitted above (and then
only in compliance with all applicable Environmental Laws), the Borrower, at its
expense, shall immediately remove it, with proper offsite disposal, or, if the
Hazardous Material is in the soil or groundwater, perform in a diligent matter
any environmental response, investigation, removal, corrective and remedial
actions required under applicable Environmental Laws. The Borrower shall
promptly, after any officer of the Borrower learns or obtains
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knowledge of the occurrence thereof, give written notice to the Bank of receipt
of any written notice of personal injury, property damage, violation, claim or
noncompliance, or order or request for information, from any Governmental
Authority or other third party with respect to any Environmental Law or
Hazardous Material, and shall promptly remedy or cause to be remedied any breach
of any Environmental Law by Borrower or any of its Subsidiaries; provided,
however, nothing in this section shall be construed to prevent Borrower or its
Subsidiaries from contesting, negotiating, litigating, appealing, settling or
otherwise resolving any claim or allegation made by a Government Authority or
third party of a personal injury, property damage, violation, claim of
noncompliance, order or request for information with respect to any
Environmental Law or Hazardous Material. Borrower or its Subsidiaries shall not
be considered in Default under this section so long as Borrower or its
Subsidiaries are contesting the claim or allegation of the Government Authority
or third party or are complying with the terms and conditions of any compliance
schedule, order, settlement or other agreement to resolve any disputed claim or
allegation. Following reasonable notice, the Bank shall have the right to enter
upon the property owned, leased or operated by Borrower or its Subsidiaries, or
any part thereof (through its employees and/or agents), to verify compliance by
Borrower with the terms of this Agreement and to conduct such environmental
assessments and audits as Bank shall deem advisable to facilitate such
verification; provided, however, that THE BORROWER HEREBY ACKNOWLEDGES THAT FOR
SO LONG AS THE BANK HAS NOT FORECLOSED AND TAKEN TITLE TO, AND POSSESSION AND
CONTROL OF THE REAL PROPERTY, AND TAKEN OVER CONTROL OF WASTE HANDLING
PRACTICES, ALL HAZARDOUSWASTE HANDLING PRACTICES AND ENVIRONMENTAL PRACTICES AN
PROCEDURES ARE THE SOLE RESPONSIBILITY OF THE BORROWER AND ITS SUBSIDIARIES AND
THE BORROWER AND ITS SUBSIDIARIES HAVE FULL DECISION-MAKING POWER WITH RESPECT
THERETO. THE BORROWER FURTHER ACKNOWLEDGES THAT THE BANK IS NOT AN ENVIRONMENTAL
CONSULTANT, ENGINEER, INVESTIGATOR OR INSPECTOR OF ANY TYPE WHATSOEVER. NO ACT
(OR DECISION NOT TO ACT) OF THE BANK RELATED TO THIS AGREEMENT OR ANY LOAN
DOCUMENT SHALL GIVE RISE TO ANY OBLIGATION OR LIABILITY ON THE PART OF THE BANK
WITH RESPECT TO ENVIRONMENTAL MATTERS UNLESS SUCH ACTION IS AFTER THE BANK HAS
FORECLOSED ON AND TAKEN POSSESSION AND CONTROL OF THE SUBJECT PROPERTY AND SUCH
ACTION PROXIMATELY RESULTS IN SUCH CONTAMINATION. IN NO EVENT SHALL ANY
INFORMATION OBTAINED FROM THE BANK PURSUANT TO THIS AGREEMENT OR ANY LOAN
DOCUMENT CONCERNING THE ENVIRONMENTAL CONDITION OF THE REAL PROPERTY BE
CONSIDERED BY THE BORROWER OR ANY OF ITS SUBSIDIARIES (OR ANY OTHER RECIPIENT OF
SAID INFORMATION) AS CONSTITUTING LEGAL OR ENVIRONMENTAL CONSULTING,
ENGINEERING, INVESTIGATING OR INSPECTING ADVICE, AND NEITHER THE BORROWER NOR
ANY OF ITS SUBSIDIARIES (NOR ANY OTHER RECIPIENT OF SAID INFORMATION) SHALL RELY
ON SAID INFORMATION. THE RESPONSIBILITY FOR COMPLIANCE WITH LAWS AND REGULATIONS
RESTS SOLELY WITH THE BORROWER AND ITS SUBSIDIARIES FOR SO LONG AS THE BANK HAS
NOT FORECLOSED AND TAKEN TITLE TO, AND POSSESSION AND CONTROL OF THE REAL
PROPERTY, AND TAKEN OVER CONTROL OF WASTE HANDLING PRACTICES.
34
<PAGE> 39
The Bank shall have the right to require annually an examination by an
outside specialist of all files involving the Borrower's environmental matters
maintained by state and federal regulatory agencies. The Borrower agrees to pay
the reasonable costs of such examination and to cooperate fully with the Bank in
connection therewith. The Bank agrees not to initiate any such examination
without prior consultation with the Borrower.
Section 7.12 Other Ventures. Become a partner, joint venturer,
member or manager in any partnership, joint venture or limited liability
company, except pursuant to a Permitted Acquisition.
Section 7.13 Dissolution, etc. Wind up, liquidate or dissolve
(voluntarily or involuntarily) or commence or suffer any proceeding seeking any
such winding up, liquidation or dissolution, except in connection with a merger
or consolidation permitted pursuant to Section 7.2.
Section 7.14 Fiscal Year. Change its Fiscal Year.
35
<PAGE> 40
Section 7.15 Limitation on Negative Pledge Clauses. Enter into,
directly or indirectly, any agreement with any Person that prohibits or limits
the ability of Borrower or any Subsidiary to create, incur, assume or suffer to
exist any Lien in favor of Bank upon any of the property, assets or revenues of
Borrower or any of its Subsidiaries, whether now owned or hereafter
acquired.
ARTICLE VIII
FINANCIAL COVENANTS
Until all of the Obligations have been paid in full, the Borrower
covenants and agrees that it will, unless the Bank otherwise consents in
writing:
Section 8.1 Financial Condition. Maintain the financial condition
of the Borrower and its Subsidiaries as follows, determined on a consolidated
basis in accordance with GAAP applied on a consistent basis throughout the
period involved:
(a) Debt to Tangible Net Worth. Maintain a ratio of Total Liabilities
to Tangible Net Worth, determined as of the end of each Fiscal Quarter, of not
greater than 1.50 to 1.0.
(b) Cash Flow Coverage Ratio. Maintain a ratio of Sources for
Coverage to Current Maturities, determined as of the end of each Fiscal Quarter
for the then most recently completed period of four (4) consecutive Fiscal
Quarters, of not less than 1.25 to 1.0.
(c) Funded Debt to EBITDA. Maintain a Funded Debt to EBITDA Ratio,
determined as of the end of each Fiscal Quarter, of not greater than 2.25 to
1.0.
(d) Minimum EBITDA. Maintain, as of the end of each Fiscal Quarter
for the then most recently completed period of four (4) consecutive Fiscal
Quarters, EBITDA of not less than $15,000,000.
ARTICLE IX
EVENTS OF DEFAULT; REMEDIES
Section 9.1 Events of Default. The occurrence of any one or more
of the following events all constitute an Event of Default hereunder:
(a) The Borrower shall fail to pay when due any amount payable under
this Agreement, the Note or any other Credit Document;
(b) The Borrower shall fail to observe or perform any covenant,
restriction or agreement contained in Sections 6.1, 6.2 and 6.3 of this
Agreement for ten (10) days after receipt of written notice of such failure from
the Bank, or the Borrower shall fail to observe or perform any covenant,
restriction or agreement contained in Article VII or Article VIII of this
Agreement;
36
<PAGE> 41
(c) The Borrower or any Subsidiary shall fail to observe or perform
any other covenant, restriction or agreement contained in this Agreement and not
described in Section 9.1(a) and (b) of this Agreement for thirty (30) days after
receipt of written notice of such failure from the Bank or, if a Default is not
reasonably capable of being cured within such thirty (30) days, the Borrower or
any Subsidiary does not within such thirty (30) days commence such act or acts
as shall be necessary to remedy such Default and complete such act or acts with
diligence and continuity;
(d) Any representation, warranty, certification or statement made or
deemed made by the Borrower in Article V of this Agreement, in any Credit
Document or in any certificate, financial statement or other document delivered
pursuant to this Agreement or any Credit Document shall prove to have been
incorrect in any material respect when made or deemed made;
(e) An event of default or any event that, with the passage of time
or giving of notice, or both, would constitute an event of default under the
Guaranty Agreement or any other Credit Document, including any Guaranty
Agreement executed and delivered to Bank subsequent to the date hereof;
(f) An event of default or any event that, with the passage of time
or giving of notice, or both, would constitute an event of default under any
agreement between the Bank and the Borrower and any of the Subsidiaries.
(g) The Borrower or any Subsidiary (i) files a petition for relief
under the Bankruptcy Code or any other insolvency law or seeking to adjudicate
it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation,
reorganization, arrangement, adjustment or composition of it or its debts under
any law relating to bankruptcy, insolvency or reorganization or relief of
debtors or falls to file an answer or other pleading denying the material
allegations of any such proceeding filed against it, (ii) takes any action to
authorize or effect any of the foregoing actions, (iii) generally fails to pay,
or admits in writing its inability to pay, its debts as such debts become due;
(iv) shall apply for, seek or consent to, or acquiesce in, the appointment of a
custodian, receiver, trustee, examiner, liquidator or similar official for it or
for any material portion of its assets; (v) benefits from or is subject to the
entry of an order for relief under any bankruptcy or insolvency law; or (vi)
makes an assignment for the benefit of creditors;
(h) Failure of the Borrower or any Subsidiary, within sixty (60) days
after the commencement of any proceeding against it seeking any reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under any present or future statute, law or regulation, to have such
proceeding dismissed, or to have all orders or proceedings thereunder affecting
the operations or the business of such the Borrower or any Subsidiary stayed, or
failure of the Borrower or any Subsidiary, within sixty (60) days after the
appointment, without its consent or acquiescence, of any custodian, receiver,
trustee, examiner, liquidator or similar official for it or for any material
portion of its assets, to have such appointment vacated;
37
<PAGE> 42
(i) The Borrower or any Subsidiary ceases to be Solvent, or ceases
to conduct its business substantially as now conducted or is enjoined,
restrained or in any way prevented by court order from conducting all or any
material part of its business affairs;
(j) The entry of one or more judgments or orders for the payment of
money in excess of $100,000 in the aggregate against the Borrower or any
Subsidiary, and such judgments or order (s) shall continue satisfied and
unstayed for a period of thirty (30) days;
(k) The issuance of a writ of execution, attachment or similar
process against the Borrower or any Subsidiary, or any assets of the Borrower or
any Subsidiary, involving an amount in excess of $250,000, which shall not be
dismissed, stayed, discharged or bonded within thirty (30) days after the
Borrower acquires knowledge thereof,
(l) The Borrower or any member of the Controlled Group shall fail to
pay when due any material amount which it shall have become liable to pay to the
Pension Benefit Guaranty Corporation or to a Plan under Title IV of ERISA; or
the Pension Benefit Guaranty Corporation shall institute proceedings under Title
IV of ERISA to terminate or to cause a trustee to be appointed to administer any
such Plan or Plans or a proceeding shall be instituted by a fiduciary of any
such Plan or Plans to enforce Section 515 or 4219(c)(5) of ERISA and such
proceeding shall not have been dismissed within 30 days thereafter; or a
condition shall exist by reason of which the Pension Benefit Guaranty
Corporation would be entitled to obtain a decree adjudicating that any such Plan
or Plans must be terminated;
(m) The occurrence of a Change in Control; or
(n) The occurrence of any Material Adverse Change, or of any event,
condition, or state of facts which could reasonably be expected to result in a
Material Adverse Effect.
Section 9.2 Remedies. Upon the occurrence and during the
continuance of any Event of Default:
(a) Termination of Revolving Line of Credit; Acceleration of
Indebtedness. The Bank may, in its sole discretion, (i) terminate its obligation
to make Revolving Loans under the Revolving Line of Credit; (ii) declare all
Obligations to be immediately due and payable, and upon such declaration the
same shall become and be immediately due and payable, without presentment,
protest or other notice of any kind, all of which are hereby waived by the
Borrower, and (iii) pursue all remedies available to it by contract, at law or
in equity.
(b) Right of Setoff. The Bank may, and is hereby authorized by the
Borrower, at any time and from time to time, to the fullest extent permitted by
applicable laws, without advance notice to the Borrower (any such notice being
expressly waived by the Borrower) to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
any other indebtedness at any time owing by the Bank or any of its affiliates to
or for the credit or the account of the Borrower or any of its Subsidiaries
against any or all of the Obligations of the Borrower under this Agreement or
the other Credit Documents now or
38
<PAGE> 43
hereafter existing, whether or not such obligations have matured. The Bank
agrees promptly to notify the Borrower after any such set-off or application;
provided, however, that the failure to give such notice shall not affect the
validity of such setoff and application.
(c) Rights and Remedies Cumulative; Non-Waiver; etc. The enumeration
of the Bank's rights and remedies set forth in this Agreement is not intended to
be exhaustive and the exercise by the Bank of any right or remedy shall not
preclude the exercise of any other rights or remedies, all of which shall be
cumulative, and shall be in addition to any other right or remedy given
hereunder, under the other Credit Documents or under any other agreement between
the Borrower and the Bank or that may now or hereafter exist in law or in equity
or by suit or otherwise. No delay or failure to take action on the part of the
Bank in exercising any right, power or privilege shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right, power or
privilege preclude other or further exercise thereof or the exercise of any
other right, power or privilege or shall be construed to be a waiver of any
Event of Default. No course of dealing between the Borrower and its Subsidiaries
and the Bank or their agents or employees shall be effective to change, modify
or discharge any provision of this Agreement or any of the other Credit
Documents or to constitute a waiver of any Event of Default.
ARTICLE X
MISCELLANEOUS
Section 10.1 Expenses. The Borrower agrees to pay on demand all
reasonable expenses of the Bank incurred in connection with the preparation,
execution, delivery, performance and enforcement of this Agreement and the other
Credit Documents, and all other instruments and documents required hereby or
thereby, including the reasonable fees and out-of-pocket expenses of counsel to
the Bank (based upon counsel's customary charges and not upon any statutory
presumption based on a percentage of the indebtedness involved), and the cost of
any field audits or reports, appraisals, insurance costs and recording fees.
Borrower's obligation for payment of attorneys' fees and field examination costs
in connection with the negotiation and preparation of the Credit Documents and
the initial closing of the transactions provided for herein shall not exceed
$25,000, plus the reasonable costs and expenses incurred by counsel to the Bank.
Section 10.2 Waiver, Amendments, Etc. Neither any provision of this
Agreement, nor the performance thereof, may be waived, amended, or otherwise
modified, except by the prior written consent of the parties given in accordance
with Section 10.3 hereof.
Section 10.3 Address for Notices, Etc. Any notice, request, demand,
consent, Borrower's Certificate, Borrowing Base Report, direction, or other
communication shall be in writing, and shall be deemed delivered and received
only (i) when personally received or received by facsimile reproduction by an
authorized person for each party, or (ii) three days after the date when placed
in the United States Mail sent by registered or certified mail, return receipt
requested, postage prepaid, delivery restricted to addressee, addressed as
follows:
39
<PAGE> 44
<TABLE>
<S> <C>
If to the Bank: If to the Borrower:
Bank of America, N.A. The Source Information Management
Attention: Commercial Banking Company
101 West Friendly Avenue 11644 Lilburn Park Road
Greensboro, North Carolina 27401 St. Louis, Missouri 62146
Post Office Box 21848 Telecopier No.: (314) 995-9022
Greensboro, North Carolina 27420 Attention: Mr. S. Leslie Flegel
Telecopier No. (336) 805-3019
with a copy to: with a copy to:
Schell Bray Aycock Abel & Livingston Armstrong Teasdale LLP
L.L.P. One Metropolitan Square, Suite 2600
230 North Elm Street, Suite 1500 St. Louis, Missouri 63102-2740
Greensboro, North Carolina 27401 Telecopier No.: (314) 621-5065
Post Office Box 21847 Attention: John Gillis, Esq.
Greensboro, North Carolina 27420
Telecopier No. (336) 370-8830
Attention: Thomas C. Watkins, Esq.
</TABLE>
The addresses and persons for attention shown above may be changed from time to
time by a Borrower's Certificate, in the case of the Borrower, or by a notice in
the case of the Bank, in such case in the form required by, and delivered to the
other party in accordance with this Section 10.3 as in effect prior to such
change.
Section 10.4 Enforcement and Waiver. The Bank shall have the right
at all times to enforce the provisions of this Agreement and the Credit
Documents in strict accordance with the terms hereof and thereof,
notwithstanding any conduct or custom on the part of the Bank in refraining from
so doing at any time or times. The failure of the Bank at any time or times to
enforce its rights under such provisions, strictly in accordance with the same,
shall not be construed as having created a custom in any way or manner contrary
to specific provisions of this Loan Agreement or as having in any way or manner
modified or waived the same. Except as otherwise stated in this Agreement, the
covenants in Articles VI and VII hereof shall apply to each Subsidiary as if it
were the Borrower.
Section 10.5 Survival of Agreements. All agreements, representations
and warranties contained in any of the Loan Documents or made in writing by or
on behalf of the Borrower in connection with the transactions contemplated
thereby shall survive the execution and delivery of this Agreement and the other
Loan Documents. No termination of this Agreement shall in any way affect or
impair the powers, obligations, duties, rights and liabilities of the parties
hereto in any way with respect to (a) any transaction or event occurring before
such termination or
40
<PAGE> 45
cancellation, or (b) any of the Borrower's undertakings, agreements, covenants,
warranties and representations contained in the Loan Documents.
Section 10.6 Assignment and Participation.
(a) The Borrower may not sell, assign or transfer this Agreement, the
other Loan Documents, or any part thereof. The Borrower consents to the Bank's
participation, sale, assignment, delegation, transfer or other disposition at
any time hereafter of the Loans, this Agreement or the other Loan Documents, or
of any portion hereof or thereof.
(b) The Bank may assign to banks or other Persons ("Assignees") all
or a portion of its rights and obligations under this Agreement and the other
Loan Documents (including, without limitation, all or a portion of the
outstanding Loans and its obligations to extend credit under Section 2.1 hereof)
and may act as agent for any or all such Assignees; provided, however, that, in
connection with any such assignment, the Bank shall act as administrative agent
for all such Assignees, and the Bank, in any such event, shall retain not less
than a fifty percent (50%) interest in all outstanding Loans and in the
obligation hereunder to extend credit under Section 2.1 hereof. Upon any
assignment and written notice to the Borrower, unless otherwise agreed between
the Bank and the particular Assignee, (i) the Assignee thereunder shall be
deemed a party hereto and, to the extent that rights and obligations (including
any portion of any Loans or obligations to extend credit under Section 2.1
hereof) hereunder have been assigned to it, shall have the rights and
obligations of the Bank hereunder with respect thereto and, upon notice to the
Borrower, shall have the right to receive copies of all documents and notices
required to be sent by the Borrower to the Bank hereunder, and (ii) the Bank
shall, to the extent that rights and obligations hereunder have been assigned by
it, relinquish its rights and be released from its obligations under this
Agreement (and, in the case of an assignment covering all or the remaining
portion of the Bank's rights and obligations under this Loan Agreement, the Bank
shall cease to be a party hereto, provided that the Assignee or Assignees have
assumed all of the Bank's obligations under this Loan Agreement and the other
Loan Documents). However, no assignment by the Bank shall release or otherwise
affect the obligations of the Bank with respect to any breach by the Bank of
this Loan Agreement occurring prior to such assignment.
(c) The Bank, in its sole discretion, may allow other Persons to
participate with the Bank in its Loans hereunder, pursuant to a participation
agreement in a form acceptable to the bank (a "Participation Agreement"). The
Participant shall not have any rights under this Agreement or any of the other
Loan Documents (the Participant's rights against the Bank in respect of such
participation to be those set forth in the Participation Agreement) and all
amounts payable by the Borrower hereunder shall be determined as if the Bank had
not sold such participation. In the event that the Bank includes other
Participants herein at any time hereafter, the Borrower will execute any
necessary documents to effectuate the rights of the Participants and to
delineate the rights, powers and obligations of the Bank, as the Bank may
reasonably require.
(d) The Bank may, in connection with any assignment or participation
or proposed assignment or participation pursuant to this Section 10.6, disclose
to the Assignee or Participant
41
<PAGE> 46
or proposed Assignee or Participant any information relating to the Borrower
furnished to the Bank by the Borrower, including the Financial Statements.
Further, in connection with any such assignment or participation, the Borrower
agrees to furnish to the Bank such additional financial or other information
regarding the Borrower as the Bank may reasonably request.
Section 10.7 Governing Law. THIS AGREEMENT HAS BEEN EXECUTED,
DELIVERED AND ACCEPTED IN, AND SHALL BE DEEMED TO HAVE BEEN MADE IN, GREENSBORO,
NORTH CAROLINA, AND SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE
PARTIES HERETO DETERMINED, IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO
CONFLICTS OF LAW PROVISIONS) OF NORTH CAROLINA.
Section 10.8 Arbitration. Any controversy or claim between or among
the Bank and the Borrower including but not limited to those arising out of or
relating to this Agreement or the other Loan Documents, including any claim
based on or arising from an alleged tort, shall be determined by binding
arbitration in accordance with the Federal Arbitration Act (or if not
applicable, the applicable state law), the rules of practice and procedure for
the arbitration of commercial disputes of Judicial Arbitration and Mediation
Services, Inc. (J.A.M.S.) as then in effect and the "special rules" set forth
below. In the event of any inconsistency, the special rules shall control.
Judgment upon any arbitration award may be entered in any court having
jurisdiction. Any arbitration under this Agreement may, at the request of any
party or as directed by the arbitrator, be joined or consolidated with any
arbitration between Bank and any Guarantor. The Bank or the Borrower may bring
an action, including a summary or expedited proceeding, to compel arbitration of
any controversy or claim to which this Agreement applies in any court having
jurisdiction over such action.
The arbitration shall be conducted in Greensboro, North Carolina and
administered by J.A.M.S. If J.A.M.S. is unable or legally precluded from
administering the arbitration, then the American Arbitration Association will
serve. All arbitration hearings will be commenced within 90 days of the demand
for arbitration; further, the arbitrator shall only, upon a showing of cause, be
permitted to extend the commencement of such hearing for an additional 60 days.
Nothing in this Agreement shall be deemed to (a) limit the
applicability of any otherwise applicable statutes of limitation or repose and
any waivers contained in this Agreement; or (b) be a waiver by the Bank of the
protection afforded to it by 12 U.S.C. ss.91 or any substantially equivalent
state law; or (c) limit the right of the Bank (i) to exercise self help remedies
such as (but not limited to) setoff, or (ii) to foreclosure against any real or
personal property collateral, or (iii) to obtain from a court provisional or
ancillary remedies such as (but not limited to) injunctive relief, writ of
possession or the appointment of a receiver. The Bank may exercise such
self-help rights, foreclose upon such property, or obtain such provisional or
ancillary remedies before, during or after the pendency of any arbitration
proceeding brought pursuant to this Agreement. Neither the exercise or self-help
remedies nor the institution or maintenance of an action for foreclosure or
provisional or ancillary remedies shall constitute a waiver of the right of any
party, including the claimant in such action, to arbitrate the merits of the
controversy or claim occasioning resort to such remedies.
42
<PAGE> 47
Section 10.9 Waivers by the Borrower. Except as otherwise provided
in this Agreement, the Borrower waives to the fullest extent permitted by law
(a) presentment, demand, protest, and notice of protest; (b) notice prior to
taking possession or control of the Collateral or any bond or security which
might be required by any court prior to allowing the Bank to exercise any of the
Bank's remedies; and (c) the benefit of all valuation, appraisement and
exemption laws.
Section 10.10 Severability. To the extent any provision of this
agreement is prohibited by or invalid under applicable law, such provision shall
be ineffective, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
Section 10.11 Entire Agreement. This Agreement and the other
documents, certificates and instruments referred to herein constitute the entire
agreement between the parties and supersede any prior agreements concerning the
subject matter hereof.
Section 10.12 Binding Effect. All of the terms of this Agreement and
the other Loan Documents, as the same may from time to time be amended, shall be
binding upon, inure to the benefit of, and be enforceable by the respective
successors and permitted assigns of the Borrower and the Bank.
Section 10.13 Definitional Provisions. Unless otherwise stated
therein, all terms defined in this Agreement shall have the meanings stated
herein when used in any of the Credit Documents or any certificate or other
document made or delivered pursuant hereto. As used herein and in any of the
Credit Documents, and any certificate or other document made or delivered
pursuant hereto, accounting terms relating to the Borrower not defined in this
Agreement and accounting terms partly defined in this Agreement, to the extent
not defined, shall have the respective meanings given to them under GAAP. The
words "hereof", "herein" and "hereunder" and words of similar import when used
in this Agreement shall refer to this Credit Agreement as a whole and not to any
particular provision of this Agreement, and section, subsection, schedule and
exhibit references are to this Agreement unless otherwise specified. The
captions to the various sections and subsections of this Agreement have been
inserted for convenience only and shall not limit or affect any of the terms
hereof.
Section 10.14 Conflict of Terms. Except as otherwise provided in this
Agreement or the other Loan Documents, if any provision contained in this
Agreement is in conflict with, or inconsistent with, any provision of the other
Loan Documents, the provision contained in this Agreement shall control.
43
<PAGE> 48
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
<TABLE>
<CAPTION>
THE SOURCE INFORMATION
MANAGEMENT COMPANY
<S> <C>
By:
--------------------------
Title: Chairman and Chief Executive Officer
--------------------------
BANK OF AMERICA, N.A.
By: Paul
--------------------------
Title: Senior Vice President
--------------------------
</TABLE>
44
<PAGE> 1
Exhibit 21.1
Subsidiaries of the Company
<TABLE>
<CAPTION>
State of
Name of Subsidiary Incorporation
- ------------------ -------------
<S> <C>
Source-Yeager Industries, Inc. Delaware
Source-US Marketing Services, Inc. Delaware
Brand Corporation New York
TCE Corporation Delaware
Vail Companies Delaware
Source-MYCO, Inc. Delaware
Source-Chestnut Display Systems, Inc. Delaware
Source-Canada Corp. Canada
Aaron Wire & Metal Products, Ltd. Canada
Source-Huck Store Fixture Company Delaware
Huck Store Fixture Company of North Carolina North Carolina
</TABLE>
<PAGE> 1
Exhibit 23.1
Consent of Independent Certified Public Accountants
The Source Information Management Company
St. Louis, Missouri
We hereby consent to the incorporation by reference in the Registration
Statement Form S-8 (No. 333-16039) of The Source Information Management Company
(the Company) of our reports dated April 14, 2000, relating to the consolidated
financial statements and schedule of the Company appearing in the Company's
Annual Report on Form 10-K as of and for the year ended January 31, 2000.
/s/BDO Seidman, LLP
St. Louis, Missouri
April 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Balance
Sheet at January 31, 2000 and the Statement of Income for the Year Ended January
31, 2000 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 1,737,578
<SECURITIES> 0
<RECEIVABLES> 64,835,978
<ALLOWANCES> 1,122,734
<INVENTORY> 9,994,342
<CURRENT-ASSETS> 78,016,203
<PP&E> 26,466,438
<DEPRECIATION> 4,670,708
<TOTAL-ASSETS> 156,758,716
<CURRENT-LIABILITIES> 16,560,028
<BONDS> 0
0
0
<COMMON> 173,450
<OTHER-SE> 107,727,575
<TOTAL-LIABILITY-AND-EQUITY> 156,612,940
<SALES> 82,487,960
<TOTAL-REVENUES> 82,487,960
<CGS> 48,869,271
<TOTAL-COSTS> 14,880,239
<OTHER-EXPENSES> 151,555
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,032,876
<INCOME-PRETAX> 17,667,784
<INCOME-TAX> 7,557,000
<INCOME-CONTINUING> 10,110,784
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,110,784
<EPS-BASIC> .66
<EPS-DILUTED> .60
</TABLE>
