UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10475
MEDIA SOURCE, INC.
Incorporated - Delaware I.R.S. Identification No. 34-1297143
5720 Avery Rd., Dublin, Ohio 43016
Registrant's Telephone Number (614) 793-8749
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 ___.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of latest practicable date: 328,200 common shares outstanding,
each $0.01 par value, as of June 30, 1999.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ..............$ 828,140 $ 701,172 $ 1,714,982 $ 1,189,380
Costs of Goods Sold ... 344,463 300,553 710,516 524,893
----------- ----------- ----------- -----------
Gross Profit .......... 483,677 400,619 1,004,466 664,487
Operating Expenses:
Selling, general
and
administrative 526,498 452,667 1,054,398 786,495
Depreciation and
amortization .. 36,986 42,816 73,971 84,707
----------- ----------- ----------- -----------
Income (loss) from
operations .......... (79,807) (94,864) (123,903) (206,715)
Other Expense:
Interest, net ... (56,877) (132,908) (102,288) (215,059)
Other 48,672 48,672
---------- ----------- ----------- -----------
Income(loss) from continuing
operations before (88,012) (227,772) (177,519) (421,774)
income taxes
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Income(loss) from
continuing operations (88,012) (227,772) (177,519) (421,774)
Gain(loss) from
discontinued operations 57,756 (3,251,281) 138,270 (4,052,985)
----------- ----------- ----------- -----------
NET INCOME (LOSS) .....$ (30,256) $(3,479,053) $ (39,249) $(4,474,759)
=========== =========== =========== ===========
Earnings per common share*
Income(loss) from
continuing
operations $ (0.27) $ (0.69) $ (0.54) $ (1.29)
Income(loss) from
discontinued
operations .... .18 (9.91) .42 (12.34)
----------- ----------- ----------- -----------
Net income(loss) $ (0.09) $ (10.60) $ (0.12) $ (13.63)
=========== =========== =========== ===========
Weighted average number of common share
Outstanding 328,200 328,200 328,200 328,200
=========== =========== =========== ===========
*All per share data has been adjusted to reflect a one-for-twenty
reverse stock split effective March 9,1999
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash ........................................ $ 756,449 $ 998,432
Accounts receivable, net of allowance
for doubtful accounts of $94,000
and $94,000 respectively . ......... 528,428 867,333
Inventory ................................... 1,238,264 1,271,336
Prepaid expenses ............................ 199,479 167,485
----------- -----------
Total current assets ................... 2,722,620 3,304,586
----------- -----------
Property and Equipment:
Buildings .................................. -- --
Equipment ................................... 659,299 656,642
----------- -----------
659,299 656,642
Less accumulated depreciation ............. (570,720) (536,888)
----------- -----------
Total property and equipment ........... 88,579 119,754
----------- -----------
Other Assets:
Assets held for disposal (net) .............. 1,237,473 1,253,335
Cost in excess of net assets acquired,
net of accumulated amortization of
$1,031,103 and $1,007,000, respectively 1,691,006 1,715,109
Other ........................................ 19,176 86,860
----------- -----------
Total other assets ...................... 2,947,655 3,055,304
----------- -----------
TOTAL ASSETS ...................................... $ 5,758,854 $ 6,479,644
=========== ===========
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................... $ 354,339 $ 678,108
Accrued liabilities ....................... 390,642 333,514
Accrued tax liabilities ................... 574,062 506,745
Deferred revenue .......................... 1,084,077 1,568,892
Current portion of long-term debt
obligations .......................... 115,612 109,780
------------ ------------
Total current liabilities ............ 2,518,732 3,197,039
------------ ------------
Long-term debt and capital lease obligations ... 1,997,612 2,056,914
------------ ------------
Total liabilities .................... 4,516,344 5,253,953
------------ ------------
Stockholders' Equity:
Preferred stock: $.01 par value; authorized
300,000 shares; none issued and outstanding
Common stock: $.01 par value; authorized
500,000 shares; issued 343,137 shares... 3,431 3,431
Capital in excess of stated value ......... 21,974,029 21,974,029
Notes receivable from stock sales ......... (902,373) (902,373)
Accumulated deficit ....................... (19,591,454) (19,608,273)
------------ ------------
1,483,633 1,466,814
Less 14,936 shares of common stock in
treasury, at cost . ................ (241,123) (241,123)
------------ ------------
Total stockholders' equity ........... 1,242,510 1,225,691
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ..... $ 5,758,854 $ 6,479,644
============ ============
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
<S> <C> <C>
Cash Flow used in Operations:
Net income(loss) from continuing operations .... $ (177,519) $ (421,774)
Reconciliation to net cash flow used in continuing
operations:
Depreciation and amortization ............. 73,971 84,707
Loss on sale of distribution channel ................ 2,250,263
Change in working capital items of continuing
operations:
Accounts receivable .................. 423,366 384,167
Inventory ........... ................ 33,072 68,375
Prepaid expenses and other assets .... 35,516 74,416
Accounts payable and accrued liabilities .. (58,123) (311,625)
Deferred revenue .......................... (484,815) (297,032)
------------ ------------
Net cash provided by (used in)
continuing operations ....... (154,532) 1,831,497
Net cash provided by (used in)
discontinued operations ..... (181,325) (3,857,632)
------------ ------------
Net cash provided by (used in)
operations .................. (335,857) (2,026,135)
Cash Flow provided by (used in) Investing Activities:
Proceeds from sale of property and equipment .............. 16,887
Proceeds from disposition of distribution channel ......... 10,500,000
Payments for purchases of property and equipment .. (2,656) (11,036)
------------ ------------
Net cash flow provided by (used in)
investing activities ........ (2,656) 10,505,851
Cash Flow provided by (used in) Financing Activities:
Proceeds from settlement of note receivable ..... 150,000
Proceeds from debt obligation ............................. 19,490,057
Proceeds from subordinated debt issued .................... 3,000,000
Proceeds from CASCO Note .................................. 3,500,000
Payments on debt and lease obligations .......... (53,470) (29,913,576)
Payments on subordinated debt issued ...................... (2,725,000)
------------ ------------
Net cash flow provided by (used in)
financing activities ........ 96,530 (6,648,519)
Increase (decrease) in cash .................... (241,983) 1,831,197
Cash, beginning of year ........................ 998,432 412,060
------------ ------------
Cash, end of period ............................ $ 756,449 $ 2,243,257
============ ============
See accompanying notes
</TABLE>
<PAGE>
MEDIA SOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements have not
been audited, but reflect all adjustments which, in the opinion of management,
are necessary for a fair presentation of financial position, results of
operations and cash flows. All adjustments are of a normal and recurring nature,
except for those related to the discontinued operations of the Company's book
fair business.
Media Source, Inc. (the "Company"), through Media Tech Library
Services, Inc., its wholly-owned subsidiary, operates Junior Library Guild, a
subscription service that distributes first print, award winning children's'
books. The Company has its own editorial division that reviews books in the
manuscript stage and makes selections for nine reading levels. The Company
markets most of its products directly to schools and public libraries.
The interim consolidated condensed financial statements and notes
thereto are presented as permitted by the Securities and Exchange Commission and
do not contain certain information included in the Company's annual financial
statements and notes thereto. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the Company's
audited financial statements and notes thereto for the fiscal year ended
December 31, 1998.
Note 2. Debt Obligations
At quarter ended June 30, 1999, the Company had a $200,000 subordinated
note payable bearing interest at the lender's prime rate plus 1%, due July 31,
2001, $850,000 in subordinated note payables bearing interest of 12% quarterly,
due August 1, 2000 and a $250,000 subordinated note payable bearing interest of
10% quarterly, due in 2005.
Note 3. Supplemental Cash Flow Information
Cash payments during the six months ended June 30, 1999 and 1998,
included interest of $118,000 and $595,000, respectively, and income taxes of $0
and $340,000, respectively.
Note 4. Income Taxes
There was no income tax provision for the six months ended June 30,
1999, due to the Company's net operating loss position and the full valuation of
any resulting deferred tax benefit. Estimated income tax rates based on
annualized income were taken into consideration.
<PAGE>
Note 5. Earnings Per Share
The following table represents the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
<S> <C> <C>
Basic and Diluted Earnings Per Share:
Weighted average number of common shares
outstanding .................................... 328,200 328,200
----------- -----------
Income/(loss) from continuing operations ......... $ (177,519) $ (421,774)
Gain(loss) from discontinued operations .......... 138,270 (4,052,985)
----------- -----------
Net income(loss) available to common
stockholders ................................... $ (39,249) $(4,474,759)
=========== ===========
Income(loss) per common share:
Income/(loss) from continuing operations .... $ (0.54) $ (1.29)
Gain(loss) from discontinued operations ..... .42 (12.34)
----------- -----------
Net income(loss) per share ....................... $ (0.12) $ (13.63)
=========== ===========
</TABLE>
At June 30, 1999, options and warrants were not In-the-Money and
therefore are not included in the computation of dilutive EPS. At June 30, 1998,
options and warrants were outstanding during the periods but were not included
in the computation of dilutive EPS because the potential common stock would be
antidilutive.
Note 6. Assets Held For Disposal
Assets held for disposition at June 30, 1999 consist of a warehouse,
office facility and real estate in Worthington, Ohio currently being used by the
Junior Library Guild subsidiary on a temporary basis.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain statements contained in this Form 10-Q under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding matters that are not historical facts are "forward looking statements"
(as such term is defined in the Private Securities Litigation Reform Act of
1995) and because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Those statements include remarks regarding the
intent, belief, or current expectations of the Company, its directors, or its
officers with respect to, among other things: (i) the Company's ability to raise
additional capital; (ii) future operating cash flows; (iii) trends affecting the
Company's financial condition or results of operations, and (iv) seeking a
waiver of the senior and subordinated debt covenants. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected, anticipated or expected in the
forward-looking statements as a result of various factors, many of which, such
as the Company's ability to raise additional capital, are beyond the control of
the Company. The accompanying information contained in this Form 10-Q,
including, without limitation, the information set forth under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", identifies important factors that could cause such differences.
Second Quarter 1999 Compared with Second Quarter 1998
Revenues from continuing operations for the three months ended June 30,
1999, approximated $828,000 compared to approximately $701,000 for the three
months ended June 30, 1998, an increase of 18% or approximately $127,000. The
increase in revenues is principally attributable to an increase of approximately
$92,000 in 1999 from the implementation of an additional market strategy.
Cost of goods sold was approximately $344,000 for the three months
ended June 30, 1999, compared to approximately $301,000 for the three months
ended June 30, 1998, an increase of 14% or approximately $43,000. As a
percentage of revenues, cost of goods sold was 42% during the second quarter of
1999, compared to 43% for the same period in 1998. The decrease in costs of
goods sold as a percentage of revenues was due to a change in the product mix
that continued during the second quarter ended June 30, 1999.
Selling, general, and administrative expense was approximately $526,000
for the three months ended June 30, 1999, compared to approximately $453,000 for
the three months ended June 30, 1998, an increase of 16% or approximately
$73,000. The increase in selling, general and administrative expenses for the
three months ended June 30, 1999 is principally attributed to the reallocation
of certain expenses that were previously incurred by discontinued operations
that are now being incurred by continuing operations.
Depreciation and amortization expense was approximately $37,000 for the
three months ended June 30, 1999, compared to $43,000 for the three months ended
June 30, 1998, a decrease of 14% or approximately $6,000.
Interest expense was approximately $57,000 for the three months ended
June 30, 1999, compared to $133,000 for the three months ended June 30, 1998, an
decrease of 57% or $76,000. The average outstanding debt for the three months
ended June 30, 1999, approximated $2.1 million compared to $9.0 million for the
three months ended June 30, 1998. Additionally, the average interest rate for
the three months ended June 30, 1999, approximated 10.2% compared to
approximately 10.4% for the three months ended June 30, 1998.
There was no income tax provision for the three months ended June 30,
1999, due to the Company's net operating loss position and the full valuation of
any resulting deferred tax benefit. Estimated income tax rates based on
annualized income were taken into consideration.
<PAGE>
The second quarter ended June 30, 1999 resulted in an loss from
continuing operations of $88,000 compared to an loss from continuing operations
of $228,000 in the second quarter ended June 30, 1998. The decreased loss, a 61%
improvement, over 1998 was due to a combination of higher revenues and lower
expenses as a percentage of revenue during 1999.
The second quarter ended June 30, 1999 resulted in a net loss of
$30,000 versus a net loss of $3,479,000 in the second quarter ended June 30,
1998. Included in the net losses for 1999 and 1998, respectively, are a gain
from discontinued operations of $58,000 and a loss from discontinued operations
of $3,251,000. Current quarter basic and diluted loss per share was $.09 versus
a loss per share of $10.60 in the comparable quarter last year. The weighted
average common and common equivalent shares for the second quarters 1998 and
1999 were 328,200.
Six Months Ended June 30, 1999 Compared with Six Months Ended June 30, 1998
Revenues from continuing operations for the six months ended June 30,
1999, approximated $1,715,000 compared to approximately $1,189,000 for the six
months ended June 30, 1998, an increase of 44% or approximately $526,000. The
increase in revenues is principally attributable to a reduction in 1998 of
approximately $300,000 due to a change in marketing strategy and an increase of
approximately $192,000 in 1999 from the implementation of an additional market
strategy.
Cost of goods sold was approximately $711,000 for the six months ended
June 30, 1999, compared to approximately $525,000 for the six months ended June
30, 1998, an increase of 35% or approximately $186,000. As a percentage of
revenues, cost of goods sold was 41% for the six months ended June 30, 1999,
compared to 44% for the six months ended June 30, 1998. The decrease in costs of
goods sold as a percentage of revenues was due to a change in the product mix
that occurred during the six months ended June 30, 1999.
Selling, general, and administrative expense was approximately
$1,054,000 for the six months ended June 30, 1999, compared to approximately
$786,000 for the six months ended June 30, 1998, an increase of 34% or
approximately $268,000. The increase in selling, general and administrative
expenses in 1999 is principally attributed to the reallocation of certain
expenses that were previously incurred by discontinued operations that are now
being incurred by continuing operations.
Depreciation and amortization expense was approximately $74,000 for the
six months ended June 30, 1999, compared to $85,000 for the six months ended
June 30, 1998, a decrease of 13% or approximately $11,000.
Interest expense was approximately $102,000 for the six months ended
June 30, 1999, compared to $215,000 for the six months ended June 30, 1998, an
decrease of 53% or $113,000. The average outstanding debt for the six months
ended June 30, 1999, approximated $2.1 million compared to $10.4 million for the
six months ended June 30, 1998. Additionally, the average interest rate for the
six months ended June 30, 1999 approximated 10.2% compared to approximately
10.5% for the six months ended June 30, 1998.
There was no income tax provision for the six months ended June 30,
1999, due to the Company's net operating loss position and the full valuation of
any resulting deferred tax benefit. Estimated income tax rates based on
annualized income were taken into consideration.
The six months ended June 30, 1999 resulted in an loss from continuing
operations of $178,000 compared to an loss from continuing operations of
$422,000 for the six months ended June 30, 1998. The decreased loss, a 58%
improvement, over 1998 was due to a combination of higher revenues and lower
expenses as a percentage of revenue during 1999.
<PAGE>
The six months ended June 30, 1999, resulted in net loss of $39,000
versus a net loss of $4,475,000 for the six months ended June 30, 1998. Included
in the net losses for 1999 and 1998, respectively, are a gain from discontinued
operations of $138,000 and a loss from discontinued operations of $4,053,000.
Basic and diluted loss per share decreased from $13.63 for the six months ended
June 30, 1998 to a net loss per share of $.12 for the six months ended June 30,
1999. The weighted average common and common equivalent shares for the six
months ended June 30, 1998 and 1999 were 328,200.
Liquidity and Capital Resources
The Company had a net decrease in cash for the six months ended June
30, 1999, of $242,000, compared to a net increase for the comparable period in
the prior year of $1,832,000. Cash on hand was $756,000 and $2,243,000 at June
30, 1999 and 1998, respectively.
For the six months ended June 30, 1999, continuing operations used
$155,000 in cash as compared to providing $1.8 million the six months ended June
30, 1998. Primary decreases in cash flow from operations in 1999 were from a
$58,000 reduction in accounts payable and accrued liabilities and a $485,000
reduction in deferred revenue. Primary increases in cash flow from operations
were a $423,000 reduction in accounts receivable, a $33,000 reduction in
inventory, and a $36,000 reduction in prepaid expenses and other assets. Primary
increases in cash flow from operations for 1998 included a $384,000 reduction in
accounts receivable, a $68,000 reduction in inventory, and a $74,000 reduction
in prepaid expenses and other assets. Primary decreases in cash flow from
operations were from a $312,000 reduction in accounts payable and accrued
liabilities and a $297,000 reduction in deferred revenue.
Cash used in investing activities was $3,000 for the six months ended
June 30,1999, representing payments for capital expenditures compared to $11,000
for the six months ended June 30,1998. The Company does not expect any material
expenditures for property and equipment during the next twelve months. Cash from
investing activities was $10.5 million for the six months ended June 30, 1998
representing sale of the Company's book fair business.
For the six months ended June 30,1999, net cash provided by financing
activities was $97,000. These compares to net cash used by financing activities
of $6.6 million for the six months ended June 30, 1998. Financing activities in
1999 included $150,000 in proceeds from the settlement of notes receivable.
Financing activities in 1998 consisted primarily of borrowings and paydowns on
the revolving line of credit.
Seasonality
The children's literature business correlates closely to the school
year. As a result, the sales force is reduced during mid-June through mid-August
and again around the Christmas season. As a subscription service, however,
revenue is not seasonal and shipments of inventory continue throughout the year.
Cash receipts decline during the summer months but do not cease, as public
libraries remain open.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description of Document
27 Financial Data Schedule
(filed only electronically with the SEC)
(b) Reports on Form 8-K filed during the quarter ended June 30, 1999:
None.
Footnotes:
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, File Number 0-10475, filed in
Washington, D.C.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Media Source, Inc.
(Registrant)
Dated: August 11, 1999 By: /s/Donald R. Hollenack
-------------------- --------------------------
Donald R. Hollenack
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<CASH> 756,449
<SECURITIES> 0
<RECEIVABLES> 622,428
<ALLOWANCES> 94,000
<INVENTORY> 1,238,264
<CURRENT-ASSETS> 2,722,620
<PP&E> 659,299
<DEPRECIATION> 570,720
<TOTAL-ASSETS> 5,758,854
<CURRENT-LIABILITIES> 2,518,732
<BONDS> 1,997,612
0
0
<COMMON> 3,431
<OTHER-SE> 1,239,079
<TOTAL-LIABILITY-AND-EQUITY> 5,758,854
<SALES> 1,714,982
<TOTAL-REVENUES> 1,714,982
<CGS> 710,516
<TOTAL-COSTS> 710,516
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,288
<INCOME-PRETAX> (177,519)
<INCOME-TAX> 0
<INCOME-CONTINUING> (177,519)
<DISCONTINUED> 138,270
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,249)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
