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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:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ----------------------
Securities registered under Section 12(g) of the Act: COMMON STOCK $0.01 PAR
VALUE
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Check if 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
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.
LOCATION DESCRIPTION SIZE SQ. FT. OWNED/LEASED
---------------- ------------------- ------------ -------------
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
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:
For Against Withheld Non-Vote
--- ------- -------- ---------
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:
For Withheld
---------- --------
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.
Fiscal 1999 High Low
- ----------- ---- ---
First Quarter $6.75 $5.13
Second Quarter $8.00 $5.75
Third Quarter $6.88 $5.00
Fourth Quarter $12.38 $5.75
Fiscal 2000 High Low
- ----------- ---- ---
First Quarter $14.00 $9.75
Second Quarter $17.38 $10.75
Third Quarter $15.88 $11.00
Fourth Quarter $17.13 $10.44
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
Fiscal Year Ended January 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ------------ ------------ ------------ --------------
(in thousands, except for per share data)
STATEMENT OF OPERATIONS INFORMATION:
Service revenues $ 8,121 $ 7,298 $ 11,804 $ 14,229 $ 18,249
Product sales - - - 6,871 64,239
--------- --------- --------- ---------- -----------
Total revenues 8,121 7,298 11,804 21,100 82,488
--------- --------- --------- ---------- -----------
Cost of service revenues 4,409 5,064 5,861 6,659 9,305
Cost of goods sold - - - 4,609 39,564
--------- --------- --------- ---------- -----------
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
--------- --------- --------- ---------- -----------
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
At January 31,
-------------------------------------------
1996 1997 1998 1999 2000
------ ------- ------- ------- --------
(in thousands)
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
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
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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
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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
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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:
Fiscal Year Ended January 31,
-----------------------------
2000 1999 1998
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%
==== ==== ======
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
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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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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.
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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
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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.
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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:
Name Age Position
- ---- --- --------
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
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:
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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
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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
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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.
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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
LONG-TERM
COMPENSATION
SECURITIES
NAME OF PRINCIPAL FISCAL UNDERLYING ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION(1)($)
- -------------------- ----- ---------- ---------- ------------- ------------------
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
- ----------
(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 $0, respectively.
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OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- ------------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Number of % of Total Assumed Annual Rates of
Securities Options Stock Price Appreciation
Underlying Granted to Exercise or for Option Term
Options Employees in Base Price Expiration -----------------------------------------
Name Granted # Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ----------------------- -------------- --------------- -------------- -------------- ------------------- ---------------------
S. 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
- ----------------------- -------------- --------------- -------------- -------------- ------------------- ---------------------
(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.
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. 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
- --------------------------- ------------------------ ------------------------ ------------------------ ------------------------
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
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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
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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:
Beneficial Ownership(1)
Name and Address
of Beneficial Owner Number of Shares Percent
- ------------------- ---------------- -------
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
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27
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)
- ------------------------
*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.
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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."
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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.
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30
INDEX TO FINANCIAL STATEMENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENT OF THE SOURCE INFORMATION MANAGEMENT COMPANY PAGE
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
F-1
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
32
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
January 31, 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
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
=============================================================================================================================
See accompanying notes to consolidated financial statements.
F-3
33
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED BALANCE SHEETS
January 31, 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
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
=============================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
34
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended January 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
35
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
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
- ------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
36
THE SOURCE INFORMATION MANAGEMENT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================
See accompanying notes to consolidated financial statements.
F-7
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
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
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
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
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:
January 31, 2000 1999
---------------------------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------------------------
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
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
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
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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):
Year Ended January 31, 2000 1999
------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------
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
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THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. LONG-TERM DEBT AND REVOLVING CREDIT FACILITY
Long-term debt consists of:
January 31, 2000 1999
-------------------------------------------------------------------------------------------------
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
=================================================================================================
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
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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:
Year Ended January 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------
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
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THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
January 31, 2000 1999
-----------------------------------------------------------------------------------------------------
Deferred Tax Assets
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
-----------------------------------------------------------------------------------------------------
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
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THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Year Ended January 31, 2000 1999 1998
--------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------------
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:
Capital Operating
Year Ending January 31, Leases leases
-----------------------------------------------------------------------------------------------------
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
=========================================================================
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
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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
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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
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THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Year Ended January 31, 2000 1999 1998
--------------------------------------------------------------------------------------------------------
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
========================================================================================================
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
52
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Weighted
Range of Average
Number of Exercise Exercise
Options Prices Price
----------------------------------------------
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
----------------------------------------------
The following table summarizes information about the stock options outstanding
at January 31, 2000:
F-23
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THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Remaining
Number Contractual Options
Exercise Price Outstanding Life (Months) Exercisable
--------------------------------------------------------------------------------------
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
===================================================================================
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
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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:
Year Ended January 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------
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:
Year Ended January 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------
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%
------------------------------------------------------------------------------------------------------
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
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THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Year Ended January 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------
Interest $ 999,000 $ 357,000 $ 700,000
Income Taxes $5,653,000 $ 2,222,000 $ 1,081,000
======================================================================================================
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:
Year Ended January 31,
2000 1999 1998
-------------------------------------------------------
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
----------------------------------------------------------
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
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:
Carrying Fair
January 31, 2000 value value
--------------------------------------------------------------------------------
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
---------------------------------------------------------------------------------
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
57
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Display Rack &
Store Fixture
Services Manufacturing Consolidated
----------------------------------------------------
Year Ended January 31, 2000
---------------------------------------------------
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
===================================================
During fiscal year ended January 31, 1998, the Company only operated one
segment.
F-28
58
THE SOURCE INFORMATION MANAGEMENT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
17. QUARTERLY INFORMATION (Unaudited) (in thousands, except per share data)
Quarter ended
April 30 July 31 October 31 January 31
-------------------------------------------------------------------
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
--------------------------------------------------------------------------------------------------
F-29
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
60
May 1, 2000 /S/ GEORGE W. OFF
-----------------
George W. Off
Director
May 1, 2000 /S/ KENNETH F. TEASDALE
-----------------------
Kenneth F. Teasdale
Director
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
62
The Source Information Management Company
Valuation and Qualifying Accounts Schedule
January 31, 2000
- -----------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------
(1) Additions due to acquisitions
S-2
63
EXHIBIT
NUMBER DESCRIPTION
--------- --------------------------------------------------------------------------------------
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
3.3 Amendment to Articles of Incorporation(2)
3.4 Amendments to Bylaws(2)
3.5 Amendment to Articles of Incorporation(3)
3.6 Amendment to Articles of Incorporation(4)
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*
- ----------
* 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)
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