<PAGE> 1
UNITED STATES
SECURITIES AND EXHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one) [X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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.
(FORMERLY KNOWN AS PAGES, INC.)
(Exact Name of Registrant as specified in its charter)
DELAWARE 34-1297143
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5720 AVERY ROAD, DUBLIN, OHIO 43016
(Address of principal executive offices)
Registrant's telephone number: (614) 793-8749
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value per Share
(Title of Class)
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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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. [X]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of March 15, 1999, was $387,907 (computed by
reference to the last sale price of such stock as reported on the OTC Bulletin
Board).
The number of Common Shares, each with $0.01 par value, of the registrant
outstanding as of March 15, 1999, was 328,200 (this number reflects the
one-for-twenty reverse stock split effective March 9,1999 and is subject to
rounding ).
Exhibit index on page 51
Page 1 of 54 Pages
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PART I
ITEM 1. BUSINESS
- -----------------
GENERAL DEVELOPMENT OF BUSINESS
Media Source, Inc. (the "Company", formerly known as Pages, Inc.), was
formed as an Ohio corporation in 1980, and on October 14, 1994, it
reincorporated under the laws of the State of Delaware. The operations of the
Company are principally through its wholly-owned subsidiary, MT Library
Services, Inc. ("MTLS" formerly known as Pages Library Services, Inc.), a
Florida corporation and its affiliates. One of these affiliates, Junior Library
Guild ("JLG"), which the Company acquired in 1994, distributes children's
literature throughout the United States, primarily through subscription
services. The Company's United Kingdom subsidiary, Great British Book Fairs,
Limited, was sold and its Canadian distribution channel, Great Owl Book Fairs,
Inc., closed in March, 1996. A spin-off of CASCO INTERNATIONAL, INC., ("CASCO"),
formerly a wholly-owned subsidiary of the Company, was completed on December 31,
1996. The sale of certain business assets of Pages Book Fairs, Inc. ("PBF"),
also a wholly owned subsidiary of the Company, was completed on June 25, 1998.
The financial statements contained herein do not reflect the ongoing revenues
and operations of PBF; which were material to the Company in the past.
The Company held a Special Stockholder's Meeting on February 18, 1999 to
vote on two items; a name change and a reverse stock split. The proposed name
change for the Company, Media Tech, Inc., was approved but subsequently found to
be in use by another corporation. Thereafter, the Company legally changed its
name from Pages, Inc. to Media Source, Inc. and changed the symbol for its
common stock to "MESH" on the OTC Bulletin Board administered by the National
Association of Securities Dealers, Inc. During the Special Stockholder's
Meeting, the stockholders of the Company also approved a one-for-twenty reverse
stock split. Stockholders of record as of March 9, 1999 owning less than twenty
shares were deemed to own a fractional new share interest and the Company will
pay, in cash, the fair value of all of the fractional new share interests owned,
following the reverse split, based on the trading price of the common stock
immediately after the reverse split.
NARRATIVE DESCRIPTION OF BUSINESS
MARKET OVERVIEW. The Company markets its children's literature primarily
through JLG book subscriptions directly to librarians at public libraries and
both private and public school libraries. The Company's primary focus group is
kindergarten through grade 12. The U.S. student enrollment is over 38 million.
There are over 16,000 public libraries and over 75,000 school libraries in the
United States.
LIBRARY SALES. The Company markets directly to public and private school
libraries and public libraries through MTLS. JLG, which was founded in 1929,
offers high quality, award-winning children's literature in nine reading levels
through a 12-month subscription program. The JLG name is a valued trademark and
identity in the children's library market. A JLG subscription provides libraries
with some of the highest quality current children's literature in first edition
hardcover books at up to 50% off of publishers' cover prices. The National
Library Services ("NLS") division, now discontinued, marketed high quality,
hardcover books at prices up to 60% off of publishers' cover prices.
MARKETING AND CUSTOMER SERVICE. Currently, the Company markets its book
subscriptions and children's literature through approximately 4 trained
telephone sales representatives located in its Tampa, Florida office. The
telephone sales representatives undergo extensive training, monitoring, and
supervision
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to ensure quality control and consistency. The Company's computer system allows
telephone sales representatives to sequence solicitations according to account
profitability.
In primary and secondary schools, decisions relating to book
subscriptions and literature are usually made by school librarians, media
specialists, or reading specialists. Surveys conducted by the Company indicate
that product quality, quantity, and customer service are the three most
important factors considered by librarians in selecting a book subscription
company. The Company has established an on-line system which can be accessed by
each of its telemarketers and customer service representatives to retrieve
messages and special requests from customers. Additionally, the Company
maintains a customer service department with a national toll-free number. The
customer service department incorporates information derived from customers,
enabling the Company to measure the effectiveness of its marketing programs and
monitor the performance of its services.
The Company currently offers 108 new book titles per year in its
subscription service. In addition, customers are able to purchase up to 200 book
titles previously offered at a reduced price. The Company's editorial
department, located in New York, New York, selects book titles from more than
1,000 manuscripts and other sources submitted by children's book publishers each
year based upon such factors as literary quality, educational value and sales
potential. The Company has a history of selecting a wide variety of
award-winning, favorably reviewed titles by critically acclaimed authors.
PUBLISHING. The Company published and marketed reasonably priced
leisure-based children's printed literature and media products. The Company's
books generally had a retail price ranging from $0.99 to $19.99, depending
largely on whether the books were soft or hardcover. Most of the books sold were
softcover having a retail price of less than $5.95. In 1998, approximately 70%
of the titles offered were purchased from other publishers or were reprints
licensed from other publishers. The remaining titles offered were proprietary
titles produced and published by the Company's Pages Publishing Group division
under its Willowisp Press (R), Hamburger Press (R), Worthington Press (R), and
Riverbank Press(R) imprints. In 1998, the Company's book fairs included over 110
fiction and non-fiction books and related products published under its
proprietary imprints. Approximately 850 proprietary titles of the Company
consistently ranked at the top of the best selling books at the book fairs. In
1998, 50% of the top-selling 50 books through the Company's book fair
distribution channel were proprietary titles. All of the Company's proprietary
books were manufactured by independent printers, which were generally selected
on the basis of price and quality. The Company had no agreements or contractual
arrangements with any printer other than purchase order commitments issued in
the normal course of business. The Company believed that it was not dependent on
any one printer. The Company's Pages Publishing Group division may resume the
printing of its' proprietary titles at some point in the future.
PAGES BOOK FAIRS. The principal distribution channel for the Company's
children's literature, June 1998 and prior, was through its school book fairs.
The Company was marketing its book fairs under its "Pages Book Fairs, the
Original School Book Fair Company" trade name. The Company sold more than 6
million children's books and related items in 1998 through its book fairs. Based
on information obtained through the conduct of its business, the Company
believed that it operated the second largest school book fair business in the
United States prior to its sale in June 1998. The Company continues to sell
remaining PBF inventory and believes that it will continue to do so in the
foreseeable future.
A typical book fair was generally one week in duration, conducted at a
central location on school premises, and sponsored as a fund-raising event by
parent groups, librarians, or media specialists. A school typically conducted
one or two book fairs during the school year. Book fairs gave students the
opportunity to browse and purchase quality, reasonably priced, leisure-based
paperback books, hardcover books, and
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related products such as posters, pencils, erasers, and bookmarks. PBF provided
to the schools, child-friendly display cases that were fully stocked with books
and related products. The sponsor conducted the book fair, retained a percentage
of the sales receipts, and remitted the balance to PBF. The amount of this net
sale, after the sponsor's profit, was recorded by PBF as revenue.
DISTRIBUTION. Approximately 95% of the Company's elementary and middle
school book fairs were "case fairs," in which fully stocked book cases were
delivered to and retrieved from the schools by the Company's independent
distributors. The balance of the Company's book fairs were "direct-marketed
fairs," in which the books and merchandise were delivered and retrieved through
the mail. Direct-marketed fairs were utilized for elementary and middle schools
located in sparsely populated areas with a small number of schools where a case
fair would not be cost-effective and for pre-schools because fewer titles were
offered. Books and related merchandise for case fairs were distributed by the
Company to its distributors from its warehouse in Worthington, Ohio. Books and
merchandise for direct-marketed fairs were distributed directly to the schools
from the Company's warehouse.
As of December 31, 1998, the Company terminated 8 company and 67
independent distributors located in territories throughout the United States.
The Company's independent distributors were independent contractors who were
compensated by the Company on a commission basis. All distributors were
responsible for the custody and care of an inventory of the Company's products
and for delivery, setup, resupply during the fair, and retrieval of the products
after book fairs. The Company believed its distribution structure was superior
to others in the book fair business because of the ability of the independent
distributor to provide superior, personalized service at all hours of the day or
night.
GROWTH OPPORTUNITIES. In 1998, the Company's 25,000 JLG subscriptions
were enjoyed by approximately 12 million students and teachers. This access
affords the Company an opportunity to increase sales of its products directly to
teachers and librarians. The Company believes that its existing subscription
sales organization and its marketing system are capable of absorbing additional
volume and can be utilized to increase its share of the existing school library
and public library markets. Currently, the Company has a customer base of
approximately 6,500 which comprises approximately 7% of the entire school
library and public library market nationwide. The Company plans to establish a
sales force in Ohio and increase its sales force in Florida over the next
several years to increase its revenue potential.
EMPLOYEES
As of March, 1999, the Company employed a total of approximately 16
permanent and 4 seasonal persons in the United States. The number of employees
fluctuated during 1998 from a high of 165 to a low of 20 due to the cyclical
nature of the Company's business. With the sale of the Company's book fair
business segment, approximately 140 employees were reduced from the workforce.
None of the Company's employees are represented by a labor union. The Company
considers its relationship with its employees to be excellent.
TRADEMARKS, COPYRIGHTS, AND LICENSES
The Company owns or licenses the rights to the principal trademarks used
in its business. The Company's principal trademarks are registered and the
Company considers protection of such trademarks to be important to its business.
U.S. trademarks expire ten years after they are granted, but are renewable. It
is the Company's policy to renew all of its trademarks for active business
lines. The Company is not aware of any other pending claims of infringement or
challenges to the Company's right to use its trademarks.
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COMPETITION
The distribution of children's leisure-based literature, in general, is
a highly competitive business. However, the structure of JLG, the product and
level of customer service that it provides are unique and the Company knows of
no direct competitors.
SEASONALITY AND WORKING CAPITAL
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.
YEAR 2000
The Year 2000 problem arises from the fact that, due to early
limitations on memory and disk storage, many computer programs indicate the year
by only two digits, rather than four. This limitation can cause problems that
perform arithmetic operations, comparisons or sorting of data fields to yield
incorrect results when working outside the year range of 1900-1999. This could
cause computer applications to fail or to create erroneous results unless
corrective measures are taken. Incomplete or untimely resolution of the Year
2000 issue could have a material impact on the Company's business, operations or
financial condition in the future. The Company has been assessing the impact
that the Year 2000 issue will have on its computer systems, including both
hardware and software. In response to these assessments, which are ongoing, the
Company spent approximately $7,000 and has completed accounting and
telemarketing software conversions to Year 2000 compliant software systems. The
Company has found no other systems that it uses to have date-related
deficiencies. The Company is also surveying its bank, customers and critical
vendors to determine the status of their Year 2000 compliance programs.
Based upon current available information, the Company believes that the
Year 2000 compliance is substantially completed. Assuming that project plans can
be implemented as planned, the Company believes future costs related to becoming
Year 2000 compliant, which will be expensed as incurred, will not have a
material adverse impact on the Company's business, operations or financial
condition.
SUBSEQUENT EVENTS
The Company held a Special Stockholder's Meeting on February 18, 1999 to
vote on two items; a name change and a reverse stock split. The proposed name
change for the Company, Media Tech, Inc., was approved but subsequently found to
be in use by another corporation. Thereafter, the Company legally changed its
name from Pages, Inc. to Media Source, Inc. and changed the symbol for its
common stock to "MESH" on the OTC Bulletin Board administered by the National
Association of Securities Dealers, Inc. During the Special Shareholder's
Meeting, the stockholders of the Company also approved a one-for-twenty reverse
stock split. Stockholders of record as of March 9, 1999 owning less than twenty
shares were deemed to own a fractional new share interest and the Company will
pay, in cash, the fair value of all of the fractional new share interests owned,
following the reverse split, based on the trading price of the common stock
immediately after the reverse split.
In March 1999, Keith A. Hadley, the Chief Financial Officer and
Treasurer of the Company announced his resignation.
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ITEM 2. PROPERTIES
- -------------------
The principal facilities of the Company are as follows:
<TABLE>
<CAPTION>
OWNED/
LOCATION USE SIZE LEASED EXPIRATION
- -------- --- ---- ------ ----------
<S> <C> <C> <C> <C>
Worthington, Ohio *Office and Warehouse 61,530 sq. ft. Owned
Dublin, Ohio Office and Warehouse 4,700 sq. ft. Leased M/M
New York, New York Office 750 sq. ft. Leased 5/99
Tampa, Florida Office 1,780 sq. ft. Leased 8/99
</TABLE>
*The facilities are being used on a temporary basis by JLG.
These facilities are all located in appropriately designed buildings, which are
kept in good repair.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
INTERNAL REVENUE SERVICE ASSESSMENT
During the Spring of 1993, the Company was advised that the Internal
Revenue Service ("IRS") might assess additional income taxes in connection with
the examination of the tax returns of PBF and its affiliates for the fiscal
years ending July 31, 1988, 1989, 1990, and 1991. In June, 1993, the Company
recorded a $2 million adjustment to its purchase price allocation of PBF assets,
which increased the cost in excess of assets acquired (i.e. - goodwill), and
recorded a corresponding increase in accrued tax liabilities and related costs.
In October, 1995, the Company received four Notices of Deficiency from
the IRS relating to this examination. The Notices of Deficiency assessed
additional income taxes of approximately $4.7 million and penalties of
approximately $1.3 million, plus interest. The asserted deficiencies were
attributable primarily to a restructuring of PBF and related entities that
occurred on August 1, 1988 (before PBF was acquired by the Company), in which,
along with other events, certain assets were transferred between related
companies. The IRS had challenged, among other things, the values assigned to
those assets by the parties to the transaction, contending that the assets were
undervalued and that PBF recognized a substantial taxable gain in the
transaction. In January 1996, the Company filed petitions with the Tax Court
disputing the IRS valuation of the assets transferred, and other points in the
IRS assessment.
On October 28, 1996, the Company entered into a settlement with the IRS
regarding the four Notices of Deficiencies and was assessed additional taxes for
the fiscal years 1988, 1989, 1990, and 1991. The settlement included income
taxes of $750,000, plus interest of approximately $750,000, for a total of
approximately $1.5 million. The Company negotiated a payment plan with the IRS
that spread the payments, including interest, over twelve months starting in
March, 1997. At December 31, 1997, the balance due was approximately $300,000
and was paid in full by second quarter 1998.
On December 27, 1996, the Company filed an action in U.S. District Court
for the Northern District of Ohio against Arthur Andersen & Co. LLP seeking in
excess of $16 million in damages. The complaint is a result of the final outcome
of the IRS assessment described above and representations made by Arthur
Andersen & Co. during the Company's purchase of PBF in 1992. On September 16,
1998, the Company settled its litigation for $450,000 and incurred attorney's
fees and expenses of $160,000. Additionally, the
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Company is subject to litigation by expert witnesses used in this suit against
its former auditors. Management believes it is probable that the Company will
have to pay some judgment but the amount is not believed to be determinable by
the Company.
ILLINOIS DEPARTMENT OF REVENUE SALES TAX ASSESSMENT
The Company is currently involved in litigation regarding sales tax for
PBF. The Company has retained legal counsel and anticipates settlement of this
matter during 1999. Management believes that the outcome of these legal
proceedings may result in an unfavorable judgment and has recorded a liability
of approximately $500,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
PART II
ITEM 5. MARKET PRICE FOR THE COMPANY'S COMMON STOCK AND RELATED
- ----------------------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The Common Stock is traded on the OTC Bulletin Board under the symbol
"MESH." The following table sets forth for the periods indicated the high and
low sale prices for shares of the Common Stock, as reported on the OTC Bulletin
Board.
<TABLE>
<CAPTION>
Trade Price
-----------------------
High* Low*
----- ----
<S> <C> <C>
Calendar Year Ended December, 1998
Fourth Quarter 3 3/4 3 3/4
Third Quarter 6 1/4 5
Second Quarter 25 23 3/4
First Quarter 32 1/2 30
Calendar Year Ended December, 1997
Fourth Quarter 52 1/2 30
Third Quarter 57 1/2 27 1/2
Second Quarter 42 1/2 27 1/2
First Quarter 65 35
</TABLE>
*Based on March 9, 1999 one-for-twenty reverse stock split.
As of March 9, 1999, the Company had approximately 609 holders of record
of its Common Stock.
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The Company has not paid dividends since December 27, 1985. The Company
anticipates that for the foreseeable future it will retain any earnings in order
to finance the expansion and development of its business, and no cash dividends
will be paid on its common stock.
Effective February 23, 1998, Nasdaq implemented new listing standards.
One of these requirements is that all companies have net tangible assets (total
assets, excluding goodwill, minus total liabilities) of at least $4 million. As
of December 31, 1997, the Company had net tangible assets of $760,700. The
Company was notified by The Nasdaq Stock Market, Inc. that the Common Stock was
scheduled for delisting at the close of business on March 16, 1998, unless the
Company requested a temporary exception to the new requirements by sending a
hearing request prior to the close of business on March 13, 1998.
The Company mailed a hearing request on March 9, 1998, and requested an
expedited written hearing, the effect of which was to stay the delisting. On
March 26, 1998, the Company delivered a written submission supporting its
argument in favor of an exception and requesting a period of 120 days to
implement a plan to increase its net assets. The plan included a strategic
expense reduction initiative underway by management, the offer by the Company of
convertible preferred stock, discussions the Company was currently having with
manufacturers of various products with respect to purchasing their products for
resale in the Company's book fairs but paying the purchase price with Common
Stock rather than cash, and an exchange of the Company's convertible preferred
stock for convertible preferred stock issued by another company.
On July 24, 1998, the Company was notified that an exception to the
delisting of common stock was refused and delisting was effective with the close
of business on July 28, 1998. The Securities of the Company were immediately
eligible to trade on the OTC Bulletin Board, where they currently trade.
The Bulletin Board prices represent inter-dealer quotations, without
adjustment for retail mark-up, markdown or commissions and may not represent
actual transactions
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<TABLE>
1998 Sales of Unregistered Securities
- -------------------------------------
<CAPTION>
Offering Price/ Registration Terms of Conversion
Date Title Amount* Name of Purchaser Nature of Transaction * Exemption Claimed or Exercise*
---- ----- ------- ----------------- ----------------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
1/23/98 Warrant 19,575 sh Provident Bank 10 year warrant exercisable at Securities Act of 1933 10 year warrant
$45.00 in consideration for Section 4(2) Exemption exercisable at $45.00
$3.0 million subordinated note
1/23/98 Warrant 4,210 sh First Taconic 5 year warrant exercisable at Securities Act of 1933 5 year warrant
Securities $23.75 in consideration for Section 4(2) Exemption exercisable at $23.75
subordinated financing
4/1/98 Options 5,000 sh S. Robert Davis 5 year option excercisable at Securities Act of 1933 5 year option
Chairman of Media $45.20 per share Section 4(2) Exemption excercisable at $45.20
Source, Inc. per share
(Accredited
Investor)
4/1/98 Options 5,000 sh William L. Clarke 5 year option excercisable at Securities Act of 1933 5 year option
Former Senior Vice $45.20 per share Section 4(2) Exemption excercisable at $45.20
President of Media per share
Source, Inc.
(Accredited
Investor)
</TABLE>
*Based on March 9, 1999 one-for-twenty reverse stock split.
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ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
All per share data has been adjusted to reflect the one-for-twenty reverse stock
split.
<TABLE>
<CAPTION>
(In thousands, except per share data)
YEAR ENDED DECEMBER 31
---------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues $ 2,646 $ 3,390 $ 4,611 $ 4,015 $2,990
Costs and expenses 3,179 3,771 5,815 4,581 3,051
Valuation adjustment - note receivable -- 1,500 -- -- --
------- ------- ------- ------- ------
Loss from continuing operations
before income taxes (533) (1,881) (1,204) (566) (61)
(Provision) benefit for income taxes -- -- -- -- --
------- ------- ------- ------- ------
Loss from continuing operations (533) (1,881) (1,204) (566) (61)
Discontinued operations
Loss from operations (2,866) (3,500) (1,517) (8,004) (411)
Gain(Loss) on disposal (577) -- 3,255 (650) --
Cumulative effect of change in accounting
principles -- -- 995 -- --
------- ------- ------- ------- ------
Net income (loss) $(3,976) $(5,381) $ 1,529 $(9,220) $ (472)
======= ======= ======= ======= ======
PER SHARE DATA:
BASIC AND DILUTED:
Loss from continuing operations $ (1.63) $ (5.97) $ (4.34) $ (2.29) $(0.31)
Discontinued operations, net of cumulative effect
of accounting change of $3.58 in 1996 (10.49) (11.10) 9.85 (35.04) (2.02)
------- ------- ------- ------- ------
Net income (loss) available to common
Stockholders $(12.12) $(17.07) $ 5.51 $(37.33) $(2.33)
======= ======= ======= ======= ======
Cash dividends per common share -- -- -- -- --
Weighted average common shares 328 315 278 247 203
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
AT DECEMBER 31
----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Working capital $ 106 $ 289 $ 3,935 $15,719 $13,527
Total assets 6,480 28,083 41,320 54,849 68,005
Long-term obligations 2,057 2,174 4,265 19,360 8,927
Stockholders' equity 1,226 5,202 12,876 10,674 19,593
</TABLE>
NOTE 1: The tax provision was an allowance against previously recorded deferred
tax assets.
NOTE 2: The prior years have been restated to reflect discontinued operations.
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PERFORMANCE CHART
The following chart compares the yearly change in the Company's total
return (which reflect the restatement of results due to discontinued operations)
to its Stockholders as compared to total return of the Center for Research in
Securities Prices Total Return Index for the NASDAQ Stock Market (U.S.) and the
Standard and Poors Publishing Group for the five-year period from December 31,
1993 to December 31, 1998. Total stockholder return for the Company, as well as
for the Indexes, was determined by adding (a) the cumulative amount of dividends
for a given year (assuming dividend reinvestment), and (b) the difference
between the share price at the beginning and at the end of the year, the sum of
which is then divided by the share price at the beginning of the year.
<TABLE>
INDEXED RETURNS
YEARS ENDED
<CAPTION>
Base period
Company/Index 12/31/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
- ------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Media Source, Inc. 0.8 14.0 30.2 15.1 41.9 100
Standard & Poor 192.1 163.8 113.0 114.5 92.5 100
Publishing 500
Nasdaq Composite 282.3 202.2 166.2 135.4 96.8 100
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS
- -------------
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other statements contained elsewhere in this Form 10-K 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 appear in a number of places in this Form 10-K and 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)
ability of the Company to absorb additional volume; (iv) the Company's growth
strategy; (v) the Company's opportunity to increase sales of its products and
its market share; and (vi) trends affecting the Company's financial condition or
results of operations. 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-K, including, without limitation, the
information set forth under the headings "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and "Business," identifies
important factors that could cause such differences.
YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues for the year ended December 31, 1998, approximated $2.6
million, compared to approximately $3.4 million for the year ended December 31,
1997, a decrease of 22% or approximately $800,000. The decrease in revenues was
principally attributable to the addition of one monthly subscription shipment in
1997 and a decrease of one monthly subscription shipment in 1998.
Cost of goods sold was approximately $1.2 million for the year ended
December 31, 1998, compared to approximately $1.5 million for the year ended
December 31, 1997, a decrease of 22% or approximately $300,000. The decrease in
cost of goods sold was due to the reduction in revenues discussed above. Cost of
goods sold as a percentage of revenues remained at 44% for 1998 and 1997.
Selling, general, and administrative expense was approximately $2.0
million for the year ended December 31, 1998, compared to approximately $2.3
million for the year ended December 31, 1997, a decrease of 15% or approximately
$300,000. The decrease in selling, general, and administrative expense was
attributable to the June, 1998 reduction in the workforce of the Company.
Interest expense was approximately $310,000 for the year ended December
31, 1998, compared to interest income of $210,000 for the year ended December
31, 1997, an increase of 248% or approximately $520,000. Interest expense for
1997 included approximately $350,000 of interest income earned on the $5.0
million note receivable from a former subsidiary, CASCO INTERNATIONAL, INC. The
average outstanding debt in 1998 approximated $3.1 million compared to $1.5
million for 1997. Additionally, the average interest rate for 1998 approximated
11.24%, compared to approximately 10.25% for 1997.
12
<PAGE> 13
Depreciation and amortization expense was approximately $167,000 for the
year ended December 31, 1998, compared to $148,000 for the year ended December
31, 1997, an increase of 13% or approximately $19,000.
There was no income tax provision for 1998 due to the Company's net
operating loss position and the full valuation of any resulting deferred tax
benefit.
The loss from continuing operations for 1998 was approximately $500,000,
compared to approximately $1.9 million in 1997. The decrease in loss from
continuing operations was due to lawsuit settlement proceeds of $450,000 in 1998
as compared to a $1.5 million loss for valuation adjustment on the CASCO
INTERNATIONAL, INC. note receivable which was recognized in 1997.
1998 resulted in a net loss of approximately $4.0 million versus a net
loss of approximately $5.4 million in 1997. Included in the 1998 net loss was
approximately $2.9 million from discontinued operations of the book fair
business segment and approximately $577,000 from the sale of PBF business
assets. PBF incurred a $3.5 million loss on discontinued operations in 1997.
Earnings per share increased to a net loss of $12.12 per share for 1998, versus
a net loss per share of $17.07 in 1997. The weighted average common and common
equivalent shares for 1998 increased to 328,200 from 315,300 in 1997.
YEAR ENDED DECEMBER 31, 1997, COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues for the year ended December 31, 1997, approximated $3.4 million
compared to approximately $4.6 million for the year ended December 31, 1996, a
decrease of 27% or approximately $1.2 million. The decrease in revenues was
principally attributable to the discontinuance of NLS in 1997.
Cost of goods sold was approximately $1.5 million for the year ended
December 31, 1997, compared to approximately $1.7 million for the year ended
December 31, 1996, a decrease of 10% or approximately $200,000. Cost of goods
sold as a percentage of revenues was 44% for 1997, compared to 36% for 1996. The
increase in cost of goods sold as a percentage of revenues was due to additional
reading levels for JLG in 1998.
Selling, general, and administrative expense approximated $2.3 million
for the year ended December 31, 1997, compared to approximately $3.9 million for
the year ended December 31, 1996, a decrease of 39% or $1.6 million. The
decrease was mainly attributable to the reduction of expenses from the
discontinuance of NLS in 1997.
Interest income was approximately $210,000 for the year ended December
31, 1997, compared to approximately $80,000 of interest expense for the year
ended December 31, 1996 a decrease of 361% or approximately $290,000. Interest
expense for 1997 included approximately $350,000 of interest income earned on
the $5.0 million note receivable from CASCO INTERNATIONAL, INC. The average
outstanding debt in 1997 approximated $1.5 million, compared to $1.1 million for
1996. The average interest rate for 1997 approximated 10.25%, compared to
approximately 9.5% for 1996.
Depreciation and amortization expense was approximately $148,000 for the
year ended December 31, 1997, compared to $224,000 for the year ended December
31, 1996, a decrease of 34% or approximately $76,000.
13
<PAGE> 14
There was no income tax provision for 1997 due to the Company's net
operating loss position and the full valuation of any resulting deferred tax
benefit.
The loss from continuing operations for 1997 was approximately $1.9
million, compared to an operating loss from continuing operations of
approximately $1.2 million for 1996. The increased loss for 1997 was primarily
attributed to the reduction in gross profit associated with the additional
reading levels in JLG, the discontinuance of NLS, and a $1.5 million valuation
adjustment on the CASCO INTERNATIONAL, INC. note receivable.
1997 resulted in a net loss of approximately $5.4 million, versus net
income of approximately $1.5 million in 1996. Included in the 1996 net income
was a $1.7 million gain from discontinued operations ($3.3 million gain recorded
on the sale of the Great British Book Fairs, Limited and $1.6 million loss on
the discontinuance of PBF) as compared to $3.5 million loss from discontinued
operations in 1997. Also included in the 1996 net income was approximately
$900,000 of income from the discontinued operations of the Company's former
subsidiary, CASCO INTERNATIONAL, INC. Earnings per share decreased to a net loss
of $17.07 per share for 1997, versus a net income per share of $5.51 in 1996.
The weighted average common and common equivalent shares for 1997 increased to
315,300 from 277,550 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a net increase in cash for the year ended December 31,
1998, of $586,000. Cash provided by investing activities funded the net cash
used in operating and financing activities during the year ended December 31,
1998. Cash on hand was $998,000 at December 31, 1998, compared to $412,000 at
December 31, 1997.
For the year ended December 31, 1998, continuing operations provided
$1.2 million and net cash used in operations was $2.3 million as compared to
$840,000 provided by continuing operations and $2.7 million of net cash used for
operations for the year ended December 31, 1997. Included in operating cash
outlays for both 1998 and 1997 was $3.5 million related to discontinued book
fair operations. Included in operating cash outlays in 1997 was $375,000 and
$1.2 million, relating to the settlements of the previously disclosed litigation
with Gruner + Jahr and the Internal Revenue Service, respectively. The decrease
in cash used in operations in 1998 versus 1997 resulted primarily from sale of
book fair business from operations (approximately $8.0 million ).
Cash provided by investing activities was $10.6 million for the year
ended December 31, 1998, representing the sale of the Company's book fair
business assets. In the year ended December 31, 1997, cash used in investing
activities was $265,000, primarily representing the purchase of fixed assets.
For the year ended December 31, 1998, net cash used in financing
activities was $7.7 million. This compares to net cash provided by financing
activities of $3.0 million for the year ended December 31, 1997. In 1998,
proceeds from the sale of the Company's book fair business were used to repay
debt obligations. Financing activities in 1997 consisted primarily of net
borrowings of approximately $1.4 million on the Company's line of credit and
time note, approximately $600,000 of stock issued for inventory purchases and
consulting services, and approximately $1.0 million raised though private
placement of subordinated debt.
The Company's primary source of liquidity has been its existing credit
facilities. At December 31, 1997, the Company had an $11.5 million revolving
credit facility ($1.4 million unused at December 31, 1997) bearing interest at
the lender's prime rate plus 1%, due June 30, 1998, and a $1.0 million time note
(none unused at December 31, 1997) bearing interest at the lender's prime rate
plus 2%, due February 28,
14
<PAGE> 15
1998. The Company agreed to an early repayment of a $5.0 million note receivable
from CASCO INTERNATIONAL, INC., at a discounted amount of $3.5 million. The $3.5
million in proceeds was used to pay down the Company's existing line of credit
and payoff the $1.0 million time note. A revolving credit facility was
simultaneously executed, replacing all prior revolving credit facilities, for
$8.0 million due on January 1, 2000. On January 21, 1998, the Company borrowed
from Provident Bank $3.0 million through a subordinated debt agreement, with
warrants, bearing interest at 12.5 % and due January 21, 2004. On June 25, 1998,
proceeds from the sale of the Company's book fair business were used to satisfy
the subordinated debt held by Provident Bank and to pay $7.8 million toward the
outstanding balance due on its primary secured debt to The Huntington National
Bank. At December 31, 1998, the only bank debt of the Company was a $200,000
note payable to the Huntington National Bank bearing interest at the lender's
prime rate plus 1%, due July 31, 2001.
The Company does not anticipate any material expenditures for property
and equipment during the next twelve months.
As previously reported on Form 8-K filed July 10, 1998, and in the
Discontinued Operations footnote to the attached financial statements, on June
25, 1998, the Company sold its book fair business for $10.5 million. $1.0
million of the amount received was placed in escrow pending delivery of certain
book inventories and book cases held at over 70 locations throughout the United
States. In August, 1998, total funds in escrow were released after finalization
of inventory and case collection and valuation.
At December 31, 1998, PBF had trade payables of $376,000, in addition
to, sales tax liabilities and lease obligations, of which nearly all were past
normal terms. Since the book value of the assets of PBF are minimal and it has
substantial liabilities, the Company is currently seeking professional advice as
to what legal manner it should pursue in order to resolve or discharge these
payables.
During 1998, the Company was not in compliance with its senior and
subordinated debt covenants related to its tangible capital base, but has not
received a notice of default from its lenders. This condition has been
alleviated by the payoff of the subordinated debt and the substantial reduction
in the senior debt to The Huntington National Bank.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
- ---------------------------------------------------------------------
The Company's exposure to market risk through derivative financial
instruments and other financial instruments, such as investments in short-term
marketable securities, is not material. A portion of the long-term debt of the
Company has a variable interest rate and could be adversely affected by an
increase in interest rates.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------------------------------------------------------------------
See Index to Consolidated Financial Statements and Financial Statement
Schedule.
15
<PAGE> 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
The Company filed a report on Form 8-K dated July 17, 1997, under item 4
announcing the dismissal of Deloitte & Touche, LLP as its principal independent
accountant.
The Company filed a report on Form 8-K dated December 23, 1997, under
item 4 announcing the appointment of new independent accountants, Hausser +
Taylor, LLP.
The Company requested that the auditors of record for the year ended
December 31, 1996, Deloitte and Touche, LLP, review and issue a representation
letter to the current auditors of record, Hausser & Taylor, LLP, based on the
restatement of the 1996 audit report originally prepared by Deloitte & Touche,
LLP. The letter is required due to the restatement of the 1996 audit report to
properly reflect the disposition of the book fair business in June, 1998 as
discontinued operations. Deloitte & Touche, LLP refused to provide such a
letter.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- --------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
DIRECTOR OR EXECUTIVE
NAME AGE POSITION (1) OFFICER SINCE
---- --- -------- -------------
<S> <C> <C> <C>
S. Robert Davis 60 Chairman of the Board, President, 1990
Assistant Secretary, and Director
Randall J. Asmo 34 Executive Vice President and Director 1992
Juan F. Sotos, M.D. 71 Director 1992
Robert J. Tierney 51 Director 1992
Keith A. Hadley 36 Chief Financial Officer and Treasurer 1998
</TABLE>
(1) All positions are those held with the Company, except as otherwise
indicated.
Executive officers are elected by the Board of Directors and serve until their
successors are duly elected and qualify, subject to earlier removal by the
shareholders. Directors are elected at the annual meeting of shareholders to
serve for one year and until their respective successors are duly elected and
qualify, or until their earlier resignation, removal from office, or death. The
remaining directors may fill any vacancy in the Board of Directors for an
unexpired term.
16
<PAGE> 17
BUSINESS EXPERIENCE OF DIRECTORS AND EXECUTIVE OFFICERS
S. ROBERT DAVIS was elected a director and Chairman of the Board in
1990, and Assistant Secretary in 1992. Prior to his election to the Board of
Directors, he served as Assistant to the President from 1988 to 1990, on a
part-time basis. Additionally, during the past five years, Mr. Davis has
operated several private businesses involving the developing, sale and/or
leasing of real estate but devotes substantially all of his business time to the
Company. Mr. Davis is also the Chairman and a director of CASCO INTERNATIONAL,
INC., a company with a class of securities registered pursuant to section 12 of
the Securities Exchange Act of 1934.
RANDALL J. ASMO was elected Vice President in 1992 and a director in
1997. In 1998, Mr. Asmo was elected Secretary and Executive Vice President.
Prior to that time, he served as Assistant to the President from 1990 to 1992.
Additionally, since 1987, Mr. Asmo has served as Vice President of Mid-States
Development Corp., a privately-held real estate development and leasing company,
as Vice President of American Home Building Corp., a privately-held real estate
development company, and as an officer of several other small business
enterprises.
JUAN F. SOTOS, M.D. was elected as a director in 1992. Dr. Sotos has
been a Professor of Pediatrics at The Ohio State University College of Medicine
since 1962 and also serves as Chief of Endocrinology and Metabolism at
Children's Hospital in Columbus, Ohio.
ROBERT J. TIERNEY was elected as a director in 1992. Dr. Tierney
currently serves as the Acting Chairperson of the Ohio State University
Department of Education Theory and Practice. Dr. Tierney is also active in
education research and has served as a professor at The Ohio State University
since 1984.
KEITH A. HADLEY was elected Chief Financial Officer and Treasurer in
1998. Previously, Mr. Hadley served as Compliance Manager at Crown NorthCorp,
Inc., a publicly traded real estate asset management company, Audit and
Corporate Tax Manager at Lexford Residential Trust, a REIT, and in several
capacities in public accounting firms. Mr. Hadley resigned from the Company in
March, 1999.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires executive
officers and directors, and persons who beneficially own more than 10% of the
Company's Common Stock, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission ("SEC") and the
National Association of Securities Dealers, Inc. Executive officers, directors
and greater than 10% beneficial owners are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file. Based
solely on a review of the copies of such forms furnished to the Company and
written representations from the executive officers and directors, the Company
believes that all Section 16(a) filing requirements applicable to its executive
officers, directors, and greater than 10% beneficial owners were complied with.
17
<PAGE> 18
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Each director who is not an officer of the Company receives a fee of
$1,100 for attendance at each Board meeting, a fee of $550 for attendance at
each telephonic Board meeting, and a fee of $500 for attendance at each meeting
of a Board committee of which he is a member. Directors who are also officers of
the Company receive no additional compensation for their services as directors.
The following table shows, for the fiscal years ended December 31, 1998,
1997, and 1996, the cash compensation paid by the Company and its subsidiaries,
as well as certain other compensation paid or accrued for those years, to the
Company's President and each of its four other most highly paid executive
officers whose total salary and bonus exceeded $100,000 (the "Named Executive
Officers"), and the principal capacity in which they served:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
--------------------------------------------------------------------------
SECURITIES
UNDERLYING
NAME AND OTHER ANNUAL OPTIONS/WARRANTS/
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION SAR'S(#)(1)(2)
- ------------------ ---- ------ ----- ------------ --------
<S> <C> <C> <C> <C> <C>
S. Robert Davis, 1998 $185,000(6) $0 $0 0
Chairman and President 1997 $192,115 $0 $0 9,663
1996 $167,704 $0 $138,086(3) 12,204
William L. Clarke (4) 1998 $ 79,046 $0 $ 270(5) 0
Senior Vice President 1997 $145,140 $0 $ 541(5) 1,458
1996 $ 88,346 $0 $ 166(5) 7,593
</TABLE>
(1) Stock options previously granted to the Named Executive Officers, by their
terms, automatically adjust to reflect certain changes in the outstanding Common
Shares of the Company, including stock dividends.
(2) Stock Appreciation Rights were awarded under the executive incentive
compensation plan dated October 8, 1996. Effective April 1, 1997, the Stock
Appreciation Rights program was canceled and these shares rescinded, (S. Robert
Davis, 12,204 shares and William L. Clarke, 7,593 shares).
(3) Represents the difference between the fair market value of the Common Shares
received and the stock option exercise price on the date of exercise.
(4) Mr. Clarke was elected Senior Vice President of the Company in May, 1996.
Mr. Clarke's position was eliminated in June, 1998.
(5) Represents life insurance premiums paid for term life insurance provided as
part of the health insurance plan provided to employees of PBF generally.
(6) Mr. Davis was paid $54,423 in salary through May 7, 1998. From that date
through June, 1999, Mr. Davis has elected to defer his annual salary of
$185,000. In June, 1999, Mr. Davis may elect to continue to defer his salary or
be paid in cash or stock.
No Executive Officers have employment agreements with the Company.
18
<PAGE> 19
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Juan F. Sotos, M.D. and Robert J. Tierney served as the Executive
Compensation Committee during the last fiscal year. Neither Dr. Tierney nor Dr.
Sotos serve or have served as an officer or employee of the Company or any of
its subsidiaries. Neither of such persons serves on the Board of Directors of
any other public company.
EXECUTIVE COMPENSATION COMMITTEE'S REPORT ON EXECUTIVE COMPENSATION
The Executive Compensation Committee (the "Committee") has designed its
executive compensation policies to provide incentives to its executives to focus
on both current and long-term Company goals, with an overriding emphasis on the
ultimate objective of enhancing stockholder value. The Committee has followed an
executive compensation program, comprised of cash and equity-based incentives,
which recognizes individual achievement and encourages executive loyalty and
initiative. The Committee considers equity ownership to be an important factor
in providing executives with a closer orientation to the Company and its
stockholders. Accordingly, the Committee encourages equity ownership to its
executives through the grant of options to purchase Common Stock. Similarly, the
Committee believes the Company's Employee Stock Purchase Plan encourages
employees to build a meaningful stake in the Company, further aligning their
interests with those of the stockholders.
The Company believes that providing attractive compensation
opportunities is necessary to assist the Company in attracting and retaining
competent and experienced executives. Base salaries for the Company's
executives, and the executives employed by the Company's subsidiaries, have
historically been established on a case-by-case basis by the Board of Directors,
based upon current market practices and the executive's level of responsibility,
prior experience, breadth of knowledge, and salary requirements. Since its
appointment in March 1993, the Committee has carried forward those policies. The
base salaries of executive officers have historically been reviewed annually by
the Board of Directors and are now reviewed annually by the Committee.
Adjustments to such base salaries have been made considering: (a) historical
compensation levels; (b) the overall competitive environment for executives; and
(c) the level of compensation necessary to attract and retain executive talent.
Stock options historically have been awarded upon hiring, promotion, or based
upon merit considerations. As the value of a stock option is directly related to
the market price of the Company's Common Stock, the Board of Directors believes
the grant of stock options to executives encourages executives to take a view
towards the long-term performance of the Company. Other benefits offered to
executives are generally the same as those offered to the Company's other
employees.
The Committee utilizes the same policies and considerations enumerated
above with respect to compensation decisions regarding the Chairman of the Board
and President, S. Robert Davis. Mr. Davis' 1998 base salary was determined
primarily by reference to historical compensation, scope of responsibility, and
the Company's desire to retain his services. The Committee believes its
compensation policies with respect to its executive officers promote the
interests of the Company and its stockholders through current motivation of the
executive officers coupled with an emphasis on the Company's long-term success.
Executive Compensation Committee
Juan F. Sotos, M.D.
Robert J. Tierney
19
<PAGE> 20
OPTION/WARRANT GRANTS IN LAST FISCAL YEAR TO NAMED EXECUTIVE OFFICERS
All options that were granted during 1998 were also canceled during
1998.
AGGREGATED OPTIONS EXERCISED IN 1998 AND FISCAL YEAR-END OPTION/WARRANT VALUES
The following table provides certain information with respect to options
exercised in fiscal 1998 by the Named Executive Officers and the value of such
officers' unexercised options/warrants at December 31, 1998.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY (1) OPTIONS/WARRANTS
ACQUIRED OPTIONS /WARRANTS AT YEAR END(#) AT YEAR END($) (2)
ON VALUE -------------------------------- ------------------
NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
S. Robert Davis None N/A 9,663 0 $0 0
</TABLE>
(1) "In-the-Money" options are options whose base (or exercise) price was less
than the market price of Common Stock at December 31, 1998.
(2) Assuming a stock price of $2.00 per share (as adjusted for one-for-twenty
reverse stock split), which was the closing price of a share of Common Stock
reported for the OTC Bulletin Board on December 31, 1998.
20
<PAGE> 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The following table sets forth, to the best of the Company's knowledge,
certain information as of March 9, 1999, with respect to the beneficial
ownership of shares of the Company's common stock by each person known to the
Company to be the beneficial owner of more than 5% of the Company's outstanding
common stock, by each director, by the President, and each of the Named
Executive Officers serving as of December 31, 1998, and by all directors and
executive officers of the Company as a group. All information in the following
table has been adjusted to reflect the one-for-twenty reverse stock split.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP (1) OF CLASS(2)
- ---------------- --------------------------- -----------
<S> <C> <C>
S. Robert Davis 112,768(3) 32.82%
5720 Avery Road
Dublin, Ohio 43016
Charles R. Davis 25,311 7.37%
2124 Pine Valley Club Drive
Charlotte, North Carolina 28277
Randall J. Asmo 4,945(4) 1.44%
5720 Avery Road
Dublin, Ohio 43016
Juan F. Sotos, M.D. 3,468(5) 1.01%
4400 Squirrel Bend
Columbus, Ohio 43220
Robert J. Tierney 716(6) 0.21%
4805 Olentangy Blvd.
Columbus, Ohio 43214
------- -----
All executive officers and
directors as a group (4 persons) 121,897(7) 35.48%
------- -----
</TABLE>
(1) Represents sole voting and investment power unless otherwise indicated.
(2) Based on 328,200 shares of common stock outstanding as of March 15, 1999,
plus, as to each person listed, that portion of the 34,188 unissued shares of
common stock subject to outstanding options and warrants which may be exercised
by such person within the next 60 days, and as to all executive officers and
directors as a group, unissued shares of common stock as to which the members of
such group have the right to acquire beneficial ownership upon the exercise of
stock options/warrants within the next 60 days.
(3) Includes 1,255 shares owned by Mr. Davis' wife as to which Mr. Davis
disclaims beneficial ownership and includes 9,663 unissued Common Shares as to
which Mr. Davis has the right to acquire beneficial ownership upon the exercise
of stock options and warrants within the next 60 days.
21
<PAGE> 22
(4) Includes 4,539 unissued Common Shares as to which Mr. Asmo has the right to
acquire beneficial ownership upon the exercise of stock options within the next
60 days.
(5) Includes 578 unissued common shares as to which Dr. Sotos, a Director of the
Company, has the right to acquire beneficial ownership upon the exercise of
stock options within the next 60 days.
(6) Includes 578 unissued common shares as to which Dr. Tierney, a Director of
the Company, has the right to acquire beneficial ownership upon the exercise of
stock options within the next 60 days.
(7) The number of shares of common stock beneficially owned by all executive
officers and directors as a group includes 15,358 unissued shares of common
stock as to which they have the right to acquire beneficial ownership upon the
exercise of stock options and warrants within the next 60 days, and 1,255 shares
of common stock owned by Mrs. S. Robert Davis as to which Mr. Davis disclaims
any beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
In July, 1997, the Company entered into a 12 percent subordinated
convertible debt agreement for $500,000 with S. Robert Davis, Chairman of Media
Source, Inc. After one year from the debt's issue date, up to 85 percent of the
face value of the debt is convertible at $37.50 per share into common stock of
Media Source, Inc.
In August 1997, the Company issued a $130,000 13.5 percent subordinated
note to Charles R. Davis, son of S. Robert Davis and a 7.4 percent owner of
Media Source, Inc. This note was originally due February 22, 1998, and was
extended and paid in full on June 30, 1998.
In September, 1997, in exchange for personally guaranteeing the
Company's $1.0 million time note, S. Robert Davis, Chairman, received a three
year warrant for 50,000 shares of common stock, exercisable at $45.00 per share.
In December, 1997, the Company recognized a valuation loss of $1.5
million on the CASCO INTERNATIONAL, INC. ("CASCO") $5.0 million note receivable.
In January, 1998, an early repayment of $3.5 million was made by CASCO to Media
Source, Inc. S. Robert Davis is the Chairman of Media Source, Inc. and of CASCO,
owning 11.9 percent of CASCO's common stock. Charles R. Davis is the son of S.
Robert Davis and the President of CASCO. Charles Davis owns 8 percent of Media
Source, Inc.'s common stock.
In 1998, several investors provided the Company $850,000 in subordinated
notes payable with interest paid quarterly at 12 percent due August 1, 2000, of
which 85 percent of the face value inconvertible into common stock after one
year from purchase. S. Robert Davis, Chairman of the Company, provided $500,000
of the total.
In May 1998, S. Robert Davis deferred compensation through June 1999 and
also deferred certain rental payments for corporate offices in Dublin, Ohio from
July 1998 forward.
Also in 1998, S. Robert Davis personally guaranteed to The Huntington
National Bank, a $200,000 subordinated note payable for Media Source, Inc.
22
<PAGE> 23
On June 25, 1998, the Company negotiated the sale of its book fair
company assets to Scholastic. Certain requirements and stipulations were
mandated by Scholastic in order for them to enter into the purchase contract.
The requirements of S. Robert Davis, Board Chairman, were as follows:
1. That S. Robert Davis personally guarantee, to Scholastic, $6,400,000 of
inventory located in approximately 70 distributor warehouses and the Company's
warehouse in Columbus, Ohio. Davis did provide said guarantee to Scholastic.
2. That S. Robert Davis personally guarantee, to Scholastic, the delivery of
11,000 cases used in the marketing of books in its business. For each case not
delivered of the 11,000 cases, the Company was required to pay $350.00. The
maximum exposure under this portion of the agreement to Mr. Davis was $3,850,000
if the Company was unable to deliver any of the cases. Davis did provide said
guarantee to Scholastic.
3. That S. Robert Davis, Charles R. Davis and Randall J. Asmo sign non-compete
agreements for the next five years to Scholastic.
23
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) 1. Financial Statements:
See Index to Consolidated Financial Statements and Financial Statement
Schedule following "Signatures."
2. Exhibits:
See the Exhibit Index.
(b) Reports on Form 8-K filed by Media Source, Inc. during the quarter ended
December 31, 1998.
The Company filed a report on Form 8-K dated July 14, 1998, under item
7. The Company announced that pro forma financial information will be
filed as soon as practicable, but not later than 60 days after the date
of this report.
The Company filed a report on Form 8-K dated July 29, 1998, under item
5. The Company announced that it has been informed by Nasdaq that its
securities will be delisted from The Nasdaq Stock Market effective with
the close of business July 28, 1998.
The Company filed a report on Form 8-K dated January 13, 1999, under
item 5. The Company announced that a Special Stockholders Meeting will
be held on February 18, 1999 to vote on a proposal to approve (1) a
one-for-twenty reverse stock split and (2) the Company's name change
from Pages, Inc. to Media Tech, Inc.
(d) Financial Statement Schedule
See Index to Consolidated Financial Statements and Financial Statement
Schedule following "Signatures."
24
<PAGE> 25
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, Media Source, Inc. has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Media Source, Inc.
(Registrant)
Dated: March 26, 1999 By: /s/
---------------------------------
S. Robert Davis
Chairman of the Board, President,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of Media
Source, Inc. and in the capacities and on the date indicated.
Dated: March 26, 1999 By: /s/
---------------------------------
S. Robert Davis
Chairman of the Board, President,
and Director
(Principal executive officer)
Dated: March 26, 1999 By: /s/
---------------------------------
Keith A. Hadley
Chief Financial Officer and Treasurer
(Principal financial and accounting
officer)
Dated: March 26, 1999 By: /s/
---------------------------------
Randall J. Asmo
Director
Dated: March 26, 1999 By: /s/
---------------------------------
Juan F. Sotos, M.D.
Director
Dated: March 26, 1999 By: /s/
---------------------------------
Robert J. Tierney
Director
25
<PAGE> 26
MEDIA SOURCE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
----
Independent Auditors' Reports 27
Consolidated statements of operations 28
Consolidated balance sheets 29, 30
Consolidated statements of cash flows 31
Consolidated statements of stockholders' equity 32
Notes to the consolidated financial statements 33 - 49
Schedule II--Valuation and qualifying accounts 50
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.
26
<PAGE> 27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Media Source, Inc.
Columbus, Ohio
We have audited the accompanying consolidated balance sheets of Media Source,
Inc. (formerly Pages, Inc.) and subsidiaries (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of operations, cash flows
and stockholders' equity for the years then ended. Our audits also include the
information in the consolidated financial statement schedule for the years ended
December 31, 1998 and 1997, listed in the index at Item 14(d). These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on the consolidated financial statements and consolidated
financial statement schedule based on our audits. The consolidated financial
statements and consolidated financial statement schedule of the Company as of
December 31, 1996, were audited by other auditors whose report dated March 21,
1997, expressed an unqualified opinion on those statements.
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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
two years then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the consolidated financial statement schedule
for the years ended December 31, 1998 and 1997, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
/s/ Hausser + Taylor, LLP
Columbus, Ohio
February 5, 1999
27
<PAGE> 28
<TABLE>
MEDIA SOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Years ended December 31
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues $ 2,646,160 $ 3,390,539 $ 4,611,393
Costs of goods sold 1,163,210 1,487,026 1,655,872
----------- ----------- -----------
Gross profit 1,482,950 1,903,513 2,955,521
Operating expenses:
Selling, general and administrative 1,989,422 2,345,278 3,856,042
Depreciation and amortization 167,369 148,342 223,671
----------- ----------- -----------
Income (loss) from operations (673,841) (590,107) (1,124,192)
Other expense (income):
Interest, net 309,078 (208,671) 79,917
Valuation adjustment - note receivable -- 1,500,000 --
Gain on settlement of lawsuit (450,000) -- --
----------- ----------- -----------
Income (loss) from continuing operations
before income taxes (532,919) (1,881,436) (1,204,109)
Provision for income taxes -- -- --
----------- ----------- -----------
Income (loss) from continuing operations (532,919) (1,881,436) (1,204,109)
Loss from discontinued operations (2,866,344) (3,499,866) (1,517,194)
Gain(loss) on disposal (577,230) -- 3,255,337
Cumulative effect of change in
accounting principle -- -- 994,664
----------- ----------- -----------
NET INCOME(LOSS) $(3,976,493) $(5,381,302) $ 1,528,698
=========== =========== ===========
Earnings per common share*:
Income (loss) from continuing operations $ (1.63) $ (5.97) $ (4.34)
Net income (loss) $ (12.12) $ (17.07) $ 5.51
=========== =========== ===========
Weighted average number of common
shares outstanding 328,200 315,300 277,550
=========== =========== ===========
</TABLE>
*All per share data has been adjusted to reflect the one-for-twenty reverse
stock split.
The accompanying notes are an integral
part of the consolidated financial statements.
28
<PAGE> 29
<TABLE>
MEDIA SOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31
-----------
ASSETS 1998 1997
---- ----
<S> <C> <C>
Current Assets:
Cash $ 998,432 $ 412,060
Accounts receivable, net of allowance for doubtful
accounts of $94,000 and $356,000, respectively 867,333 2,662,140
Inventory 1,271,336 12,991,795
Prepaid expenses 167,485 1,429,726
Note receivable from CASCO INTERNATIONAL, INC -- 3,500,000
---------- -----------
Total current assets 3,304,586 20,995,721
---------- -----------
Property and equipment:
Buildings -- 1,070,201
Equipment 656,642 1,988,863
---------- -----------
656,642 3,059,064
Less accumulated depreciation (536,888) (1,100,657)
---------- -----------
119,754 1,958,407
Land -- 420,000
---------- -----------
Total property and equipment, net 119,754 2,378,407
---------- -----------
Other assets:
Assets held for disposal (net) 1,253,335 --
Cost in excess of net assets acquired, net of
accumulated amortization of $1,007,000 and
$899,000, respectively 1,715,109 4,441,484
Other 86,860 267,654
---------- -----------
3,055,304 4,709,138
---------- -----------
TOTAL ASSETS $6,479,644 $28,083,266
========== ===========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
29
<PAGE> 30
<TABLE>
MEDIA SOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
---- ----
<S> <C> <C>
Current Liabilities:
Accounts payable $ 678,108 $ 6,173,483
Short-term debt obligations -- 11,082,227
Accrued liabilities 333,514 880,693
Accrued tax liabilities 506,745 1,103,501
Deferred revenue 1,568,892 1,265,366
Current portion of long-term debt obligations 109,780 126,488
Current portion of capital lease obligations -- 74,872
------------ ------------
Total current liabilities 3,197,039 20,706,630
------------ ------------
Long-term debt and capital lease obligations 2,056,914 2,174,452
------------ ------------
Total liabilities 5,253,953 22,881,082
------------ ------------
Commitments and contingencies
Stockholders' Equity
Preferred shares: $.01 par value; authorized
300,000 shares; none issued and outstanding
Common shares: $.01 par value; authorized
20,000,000 shares; issued 343,137 shares and
324,864 shares, respectively 68,627 68,627
Capital in excess of stated value 21,908,833 21,908,833
Notes receivable from stock sales (902,373) (902,373)
Accumulated deficit (19,608,273) (15,631,780)
------------ ------------
1,466,814 5,443,307
Less 14,936 shares of common stock in treasury, at cost (241,123) (241,123)
------------ ------------
Total stockholders' equity 1,225,691 5,202,184
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,479,644 $ 28,083,266
============ ============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
30
<PAGE> 31
<TABLE>
MEDIA SOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years ended December 31
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash Flow used in Operations:
Loss from continuing operations $ (532,919) $ (1,881,436) $ (1,204,109)
------------ ------------ ------------
Reconciliation to net cash flow used in continuing
Operations:
Depreciation and amortization 167,369 148,342 223,671
Valuation adjustment - note receivable -- 1,500,000 --
(Gain) Loss on sale of distribution channel 577,230 -- (3,255,337)
Changes in working capital items of continuing
operations:
Accounts receivable 9,415 227,636 462,499
Inventory 318,958 (239,024) (97,137)
Prepaid expenses and other assets (51,491) 143,851 (714,448)
Accounts payable and accrued liabilities 385,322 793,320 (1,532,425)
Deferred revenue 303,526 149,363 (174,885)
------------ ------------ ------------
Net cash provided by (used in) continuing operations 1,177,410 842,052 (6,292,171)
------------ ------------ ------------
Net cash provided by (used in) discontinued operations (3,443,574) (3,499,866) 2,732,807
------------ ------------ ------------
Net cash provided by (used in) operations (2,266,164) (2,657,814) (3,559,364)
------------ ------------ ------------
Cash Flow provided by (used In) Investing Activities:
Payments for purchases of property and equipment (34,658) (265,209) (308,243)
Proceeds from sale of property and equipment 103,936 -- --
Proceeds from disposition of distribution channel 10,500,000 -- 11,287,500
------------ ------------ ------------
Net cash flow provided by (used in) investing activities 10,569,278 (265,209) 10,979,257
------------ ------------ ------------
Cash Flow provided by (used In) Financing Activities:
Proceeds from issuance of stock -- 597,217 298,698
Proceeds from debt and lease obligations 19,695,895 25,922,362 31,129,222
Proceeds from CASCO note 3,500,000 -- --
Proceeds from subordinated debt issued -- 980,000 --
Payments on debt and lease obligations (30,912,637) (24,482,407) (39,062,757)
------------ ------------ ------------
Net cash flow provided by (used in) financing activities (7,716,742) 3,017,172 (7,634,837)
------------ ------------ ------------
Increase (decrease) in cash 586,372 94,149 (214,944)
Cash, beginning of year 412,060 317,911 532,855
------------ ------------ ------------
Cash, end of year $ 998,432 $ 412,060 $ 317,911
============ ============ ============
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
31
<PAGE> 32
<TABLE>
MEDIA SOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
----------------------------------------------------
<CAPTION>
Capital In Notes Receivable Foreign
Common Excess of from Currency Accumulated Treasury
Shares* Stock Par Value Stock Sales Translation Deficit Stock Total
------- ----- --------- ----------- ----------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 273,728 $54,746 $22,760,194 -- $(374,654) $(11,525,564) $(241,123) $10,673,599
Year ended December 31, 1996:
Exercise of stock options 51,136 10,227 1,191,594 (903,123) 298,698
Foreign currency translation 374,654 374,654
Net income 1,528,698 1,528,698
------- ------- ----------- --------- --------- ------------ --------- -----------
Balance December 31, 1996 324,864 64,973 23,951,788 (903,123) -- (9,996,866) (241,123) 12,875,649
Year ended December 31, 1997:
Spin-off of CASCO
INTERNATIONAL, INC. (2,635,768) (253,612) (2,889,380)
Proceeds from in-kind inventory
purchases, services, and
private placements 18,273 3,654 592,813 750 597,217
Net loss (5,381,302) (5,381,302)
------- ------- ----------- --------- --------- ------------ --------- -----------
Balance December 31, 1997 343,137 68,627 21,908,833 (902,373) -- (15,631,780) (241,123) 5,202,184
Year ended December 31, 1998:
Net loss (3,976,493) (3,976,493)
------- ------- ----------- --------- --------- ------------ --------- -----------
Balance December 31, 1998 343,137 $68,627 $21,908,833 $(902,373) $ -- $(19,608,273) $(241,123) $ 1,225,691
======= ======= =========== ========= ========= ============ ========= ===========
</TABLE>
*Adjusted for one-for-twenty reverse stock split.
The accompanying notes are an integral
part of the consolidated financial statements.
32
<PAGE> 33
MEDIA SOURCE, INC. AND SUBSIDIARIES
-----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of Media
Source, Inc. ("the Company" formerly known as Pages, Inc.) and its wholly-owned
subsidiaries after elimination of all material intercompany accounts and
transactions. The Company's children's literature subscription service is
operated through its MT Library Services, Inc. ("MTLS" formerly known as Pages
Library Services, Inc.) subsidiary, Junior Library Guild ("JLG"). The Company's
discontinued children's literature business segment was operated principally
through Pages Book Fairs, Inc. and related entities ("PBF") and the Company's
discontinued incentive/recognition awards business segment was operated through
CASCO INTERNATIONAL, INC., ("CASCO," formerly known as C.A. Short Company,
Inc.).
USE OF MANAGEMENT ESTIMATES
- ---------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. The reported amounts of revenues and expenses during the reporting
period may be affected by the estimates and assumptions management is required
to make. Actual results could differ from those estimates.
REVENUE RECOGNITION
- -------------------
Revenues from the sale of children's literature are recognized upon
shipment and delivery of the related merchandise. The Company provides for
estimated returns from the sale of children's literature when those products are
shipped.
ACCOUNTS RECEIVABLE
- -------------------
The Company mainly sells its products to public and private school
libraries and public libraries across the United States. The accounts receivable
are well diversified and are expected to be repaid in the normal course of
business.
INVENTORY
- ---------
Inventory consists of finished goods which are comprised of books.
Inventory is valued at the lower of cost or market using the first-in, first-out
(FIFO) method. External production costs (which include costs for design, art,
editorial services, and color separations in the publishing of finished goods
inventory) are expensed as inventory is shipped.
PREPAID EXPENSES
- ----------------
Prepaid expenses at December 31, 1998 and 1997, include approximately
$167,000 and $1,000,000, respectively, of prepaid selling costs that include
employee costs and incentive payments to distributors and salespeople for the
scheduling of future sales events and sales of book subscriptions. Such costs
are directly attributable to obtaining specific future commitments to hold a
selling event or start a
33
<PAGE> 34
subscription and are expensed in the year the related sales occur. Prepaid
expenses are significantly lower in 1998 due to the discontinuance of the book
fair business segment and represent costs associated with sales of book
subscriptions only.
BUILDINGS AND EQUIPMENT
- -----------------------
Buildings and equipment are recorded at cost and depreciated over their
estimated useful life on the straight-line method. Estimated useful lives range
from three to thirty-one years. Major repairs and improvements are capitalized;
minor repairs are expensed as incurred. Depreciation expense for the years ended
December 31, 1998, 1997, and 1996, totaled approximately $264,000, $447,000, and
$491,000, respectively. The 1998 depreciation reflects the disposal of the book
fair business assets in June.
Assets held for disposition at December 31, 1998 consist of a
warehouse, office facility and real estate in Worthington, Ohio currently being
used by JLG on a temporary basis. Accumulated depreciation for this property was
approximately $801,000 and $727,000 at December 31, 1998 and 1997, respectively.
COST IN EXCESS OF NET ASSETS ACQUIRED AND OTHER ASSETS
- ------------------------------------------------------
The majority of cost in excess of net assets acquired is amortized on a
straight-line basis over 40 years. Management periodically evaluates its
accounting for cost in excess of net assets acquired by considering such factors
as historical performance, current operating results, and future operating
income. At each balance sheet date, the Company evaluates the reasonableness of
goodwill based upon expectations of nondiscounted cash flows from operations and
eventual disposition for each subsidiary having a material goodwill balance. At
June 1998, Goodwill of approximately $2.6 million relating to the discontinued
book fair segment was written off. Based upon its most recent analysis, the
Company believes that no material impairment of goodwill exists at December 31,
1998. Based on this periodic review, management believes that the carrying value
of cost in excess of net assets acquired is reasonable and the amortization
period is appropriate. Amortization expense on cost in excess of net assets
acquired for the years ended December 31, 1998, 1997, and 1996 totaled
approximately $108,000, $254,000, and $132,000, respectively.
Other assets include payments for covenants not to compete, cash
surrender value of life insurance and deferred loan costs. The covenants not to
compete and deferred loan costs are amortized using the straight-line method
over the terms of the related contracts. Amortization expense totaled
approximately $6,500, $61,000, and $78,000, for the years ended December 31,
1998, 1997, and 1996, respectively. The decrease in 1998 was attributable to the
sale of the book fair business, customer lists and the write off of non-compete
agreements in June.
LONG-LIVED ASSETS
- -----------------
In 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." The Statement establishes
accounting standards for the impairment of long-lived assets, including assets
held for disposition, certain identifiable intangibles, and goodwill related to
those assets. There was no material effect on the financial statements from the
adoption because the Company's prior impairment recognition practice was
consistent with the major provisions of the Statement. Under provisions of the
Statement, impairment losses are recognized when expected future cash flows are
less than the assets' carrying value. Management has reviewed long-lived assets,
assets held for disposal and intangible assets including goodwill and determined
that impairment adjustments were not deemed to be necessary at December 31,
1998, 1997 or 1996.
34
<PAGE> 35
DEFERRED REVENUE
- ----------------
Deferred revenue represents customer prepayments for goods and services
that the Company will deliver in the future. Upon delivery of such goods and
services, deferred revenues are recognized as revenues.
PER SHARE DATA
- --------------
Per share amounts are computed in accordance with SFAS No. 128,
"Earnings Per Share", which requires companies to present basic earnings per
share and diluted earnings per share. Basic earnings per share are computed by
dividing net income/(loss) by the weighted average number of shares of common
stock outstanding during the year. Diluted earnings per share are computed by
dividing net income/(loss) by the weighted average number of shares of common
stock outstanding and dilutive options and warrants outstanding during the year.
All per share data has been adjusted to reflect the one-for-twenty reverse stock
split.
STOCK-BASED COMPENSATION
- ------------------------
The Company has stock option plans which reserve shares of common stock
for issuance to executives, key employees and directors. The Company has adopted
the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized for the
stock option plans. Management believes it is also probable that the options
will never be exercised, therefore SFAS No. 123 would have no impact to the
financial statements of the Company.
CONCENTRATION OF CREDIT RISK
- ----------------------------
The Company's cash balances, which are in excess of federally insured
levels, are maintained at large regional financial institutions. The Company
continually monitors its balances to minimize the risk of loss for these
balances.
The Company grants credit to customers throughout the country. No one
customer accounts for any significant percentage of sales or receivables.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
SFAS No. 107, "Disclosure about the Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments. During 1997, the Company acquired a $5.0 million note receivable
from CASCO in connection with the spin-off of this wholly-owned subsidiary. The
note was to be repaid over a five-year period. The Company agreed to early
repayment of the note at a $1.5 million discount in January 1998. Accordingly,
at December 31, 1997, the Company recognized the $1.5 million valuation
adjustment since the fair value of the note was established shortly thereafter.
The fair value of cash and long-term debt approximate the carrying
amounts as of December 31, 1998. The fair value of the Company's long-term debt
was estimated based on current rates for debt with similar remaining maturities.
35
<PAGE> 36
RECLASSIFICATIONS
- -----------------
Certain reclassifications to the 1997 and 1996 consolidated financial
statements have been made to conform to the current year's presentation.
2. STOCK OPTIONS, WARRANTS AND STOCK APPRECIATION RIGHTS
-----------------------------------------------------
At December 31, 1998, 12,033 common shares of the Company were reserved
for issuance under the incentive stock option plan, 7,656 shares were reserved
under non-statutory stock options, and 14,499 shares were reserved under
outstanding warrants. Information for the stock options and warrants is
summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Incentive Stock Option Plan
- ---------------------------
Outstanding, beginning of year 25,950 18,037 2,906
Adjusted shares due to spin-off of
CASCO INTERNATIONAL, INC 0 2,844 0
Granted 0 11,399 22,975
Canceled (13,917) (6,330) (3,014)
Exercised 0 0 (4,830)
------- ------- -------
Outstanding, end of year 12,033 25,950 18,037
======= ======= =======
Exercise price range of options outstanding $27.60 to $46.40 $27.60 to $188.00 $35.00 to $217.60
Exercise price range of options exercised
during the year -- -- $37.50 to $53.80
Non-Statutory Stock Options
- ---------------------------
Outstanding, beginning of year 11,675 7,907 102,250
Adjusted shares due to spin-off of
CASCO INTERNATIONAL, INC. 0 1,247 0
Granted 10,000 6,500 1,000
Canceled (14,019) (3,979) (49,038)
Exercised 0 0 (46,305)
------- ------- -------
Outstanding, end of year 7,656 11,675 7,907
======= ======= =======
Exercise price range of options outstanding $35.00 to $50.00 $35.00 to $124.40 $42.50 to $144.00
Exercise price range of options exercised
during the year -- -- $16.00 to $24.00
Warrants
- --------
Outstanding, beginning of year 10,289 250 0
Adjusted shares due to spin-off of
CASCO INTERNATIONAL, INC. 0 39 0
Granted 23,785 10,000 250
Canceled (19,575) 0 0
Exercised 0 0 0
------- ------- -------
Outstanding, end of year 14,499 10,289 250
======= ======= =======
Exercise price range of warrants outstanding $23.75 to $45.00 $34.60 to $40.00 $40.00
Exercise price range of warrants exercised
during the year -- -- --
</TABLE>
36
<PAGE> 37
The Incentive Stock Options are exercisable at the fair market value on
the date of grant, and were granted from shares available for issuance from the
Company's 1993 Incentive Stock Option Plan. The options outstanding at December
31, 1998 are all presently exercisable and expire six years from grant date at
various dates through July 2003. All options are 100% vested.
The non-statutory options are priced at the fair market value on the
date of grant. All of the non-statutory options outstanding at December 31,
1998, are exercisable and expire at various dates through November 2002.
Warrants to purchase 10,289 shares of Media Source, Inc. common stock
were issued in connection with the Company's ability to raise additional
capital. The warrants are priced at either the market value of the common stock
at date of the agreement to issue the warrants or at market, or 1/8 above the
market value of the common stock at date of issuance of the warrant. All but one
of the warrants is exercisable and expire various dates through December, 2002.
The Stock Appreciation Rights issued November 1, 1996 were canceled
April 1, 1997. The expense and related liability of $431,287, recorded in 1996,
was reversed in 1997.
A summary of options and warrants outstanding at December 31, 1998, is
as follows:
<TABLE>
<CAPTION>
Proceeds
Date Granted or Shares Shares Exercise Company
Issued Reserved Exercisable Price Upon Exercise
------ -------- ----------- ----- -------------
<S> <C> <C> <C>
Incentive Stock Options:
September 29, 1995 181 181 $46.40 $ 8,399
November 13, 1995 434 434 44.40 19,270
May 8, 1996 1,041 1,041 41.20 42,889
July 24, 1996 1,157 1,157 30.20 34,941
March 14, 1997 1,150 1,150 43.00 49,450
July 14, 1997 8,070 8,070 27.60 222,732
------ ------ ----------
12,033 12,033 377,681
------ ------ ----------
Non-Statutory Stock Options:
November 1, 1996 1,156 1,156 36.80 42,541
August 8, 1997 3,250 3,250 35.00 113,750
August 8, 1997 3,250 3,250 50.00 162,500
------ ------ ----------
7,656 7,656 318,791
------ ------ ----------
Warrants:
August 14, 1996 289 289 34.60 9,999
August 27, 1997 5,000 5,000 40.00 200,000
September 2, 1997 2,500 2,500 45.00 112,500
December 24, 1997 2,500 2,500 37.50 93,750
January 23, 1998 4,210 4,210 23.75 99,988
------ ------ ----------
14,499 14,499 516,237
------ ------ ----------
Total Options and Warrants 34,188 34,188 $1,212,709
====== ====== ==========
</TABLE>
37
<PAGE> 38
3. NOTES RECEIVABLE FROM STOCK SALES
---------------------------------
In the Third and Fourth Quarters of 1996, certain officers and
employees exercised stock options for notes. These notes are full recourse
promissory notes bearing interest at 7 percent. The principal sum is due in
September 1999. The interest is payable only in the event and only to the extent
that the fair market value of the shares of common stock at the close of
business in September 1999 exceeds the exercise price. No provision has been
made in the 1998, 1997 or 1996 financial statements for such interest.
4. DEBT OBLIGATIONS
----------------
Debt obligations consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Line of credit with interest at prime plus 1 percent;
interest payable monthly, maturing on June 30, 1998,
collateralized by substantially all assets of the Company
($1,417,773 unused at December 31, 1997) -- $10,082,227
Subordinated note payable with interest payable
quarterly at 8.5 percent, due July 31, 2001 -
personally guaranteed by S. Robert Davis, Chairman of
Media Source, Inc. $ 200,000 --
Time note with interest at prime plus 2 percent; due
February 28, 1998 -- 1,000,000
Mortgage payable with interest at prime plus 1 1/4
percent; principal and interest payable in monthly
installments of $11,280, maturing on March 1, 2008,
collateralized by office and warehouse facility 499,911 581,217
Second mortgage note payable with interest at 12.825
percent; principal and interest payable in monthly
installments of $5,313, maturing on November 1, 2008,
collateralized by office and warehouse facility 366,783 384,852
Subordinated notes payable with interest payable
quarterly at 12 percent, due August 1, 2000, 85 percent
of face value of notes convertible into common stock
after one year from purchase at conversion prices of
$37.50 - $55.00. $500,000 of the notes payable are to
S. Robert Davis, Chairman of Media Source, Inc. 850,000 850,000
Subordinated note payable with interest payable
quarterly at 10 percent, due in 2005 250,000 250,000
Subordinated note payable to Charles R. Davis, son of
S. Robert Davis, Chairman of Media Source, Inc. with
interest payable quarterly at 13.5 percent, due June
30, 1998 -- 130,000
Promissory note payable with interest at 10 percent,
payable in Five annual installments through April 29,
1998 -- 27,539
---------- -----------
Total debt obligations 2,166,694 13,305,835
Less short-term obligations $ 109,780 11,338,715
---------- -----------
Total long-term obligations $2,056,914 $ 1,967,120
========== ===========
</TABLE>
38
<PAGE> 39
The prime interest rate at December 31, 1998 and 1997 was 73/4% and 8 1/2%,
respectively. Future maturities on debt as of December 31, 1998 and during the
next five years and thereafter are as follows:
<TABLE>
<S> <C>
1999 $ 109,780
2000 971,755
2001 335,045
2002 149,797
2003 115,180
Thereafter 485,137
----------
$2,166,694
==========
</TABLE>
In 1997, the maximum line amount on the line of credit was calculated,
in part, based on the Company's eligible borrowing base that includes inventory
and other eligible accounts. The facility contained certain restrictive
provisions including, among others, maintaining a minimum tangible net worth,
limitation on dividends paid on common stock to $100,000 annually and certain
other restrictions on actions which required lender pre-approval.
On January 21, 1998, the Company also entered into two new credit
agreements. The Company obtained $3.0 million in subordinated debt financing
bearing interest at 12.5 percent payable monthly, due in 2004. Warrants to
purchase shares of the Company's common stock were issued in connection with
this subordinated debt financing. Additionally, an $8.0 million line of credit
was obtained from the Company's primary lender, replacing all prior lines of
credit, with interest at prime plus 1 percent payable monthly, due in 2000 and
collateralized by substantially all assets of the Company. Proceeds from the
sale of the book fair business assets in June 1998 were used to satisfy both of
these credit agreements and establish a subordinated note payable of $200,000.
The Company was in default on the covenants on this note at December 31, 1998
but received a waiver from the lender.
5. LEASE OBLIGATIONS
-----------------
The Company has substantially reduced its lease obligations in 1998.
Operating leases are principally for office and warehouse facilities and
vehicles. There are no capital leases as of December 31, 1998, capital lease
obligations as of December 31, 1997 were approximately $77,000. Rent expense
under operating leases amounted to $450,000, $790,000, and $1,070,000 for the
years ended December 31, 1998, 1997, and 1996, respectively. Future minimum
lease payments under leases are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, Operating
------------ ---------
<S> <C>
1999 $26,723
Thereafter 0
-------
$26,723
=======
</TABLE>
39
<PAGE> 40
6. INCOME TAXES
------------
The Company utilizes SFAS No. 109 "Accounting for Income Taxes." Under
SFAS 109, the liability method is used in accounting for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes, and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Under SFAS No. 109, if on the basis of available evidence, it is more
likely than not that all or a portion of the deferred tax asset will not be
realized, the asset must be reduced by a valuation allowance. Based on available
evidence, a valuation allowance has been established for an amount of the asset
that more likely than not, will not be recognized.
Temporary differences between income for financial reporting purposes
and tax reporting purposes relate primarily to accounting methods for doubtful
accounts, inventory costs, accrued and prepaid expenses and reserves, and
depreciation and amortization expense.
For the years ended 1998, 1997, and 1996 there was no provision (benefit) for
income taxes.
A reconciliation of income taxes based upon the application of the federal
statutory tax rate is as follows:
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Provision (benefit) for taxes at statutory rate $(1,148,800) $(1,910,300) $ 542,700
United Kingdom operations -- -- (437,500)
Goodwill amortization (13,000) 67,000 (88,500)
Interest -- -- (227,400)
Establishment of valuation allowance 1,434,800 1,964,300 367,700
Stock options exercised and stock appreciation rights -- (153,500) (99,400)
Other (273,000) 32,500 (57,600)
----------- ----------- ---------
Total provision (benefit) for income taxes $ -- $ -- $ --
=========== =========== =========
</TABLE>
40
<PAGE> 41
The components of net deferred tax assets as of December 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Provision for doubtful accounts $ 57,000 $ 193,000
Inventory costs capitalized for tax purposes 31,000 321,000
Inventory Reserve 85,000 --
Accruals and reserves to be expensed
as paid for tax purposes 179,000 243,000
Other 27,000 23,000
Net operating loss carryforwards 8,917,000 6,536,000
Investment tax credit carryforwards 122,000 122,000
----------- -----------
9,418,000 7,438,000
Less valuation allowance (9,213,000) (6,880,200)
----------- -----------
Deferred tax asset, net of valuation allowance 205,000 557,800
----------- -----------
Liabilities:
Costs deducted as paid for
tax purposes (59,000) (410,800)
Excess of tax over financial accounting
depreciation and amortization (146,000) (147,000)
----------- -----------
(205,000) (557,800)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
At December 31, 1998, operating loss carryforwards of approximately
$25.3 million are available to offset future taxable income and will expire
during the years 1999 through 2011.
7. CHILDREN'S LITERATURE ACQUISITIONS AND DISPOSALS
------------------------------------------------
During 1995, the Company acquired several small operations involved in
the publishing and distribution of children's literature. These acquisitions
were accounted for using the purchase method of accounting. The aggregate cost
of there acquisitions approximated $779,000 in cash and was allocated to the net
assets acquired based upon their face values. Cost assigned to cost in excess of
net assets acquired approximated $471,000 in 1995.
During 1995, the Company disposed of or phased out the operations of
several acquisitions made in 1993 and 1994 and curtailed the distribution of
early childhood product through the mail to pre-schools and daycare centers.
Combined revenues, included in the accompanying consolidated financial
statements, of these operations for 1995, approximated $2.3 million. The
combined costs and expenses associated with these operations including the loss
on disposition or phase out included in cost of goods sold and selling, general,
and administrative expense in the accompanying consolidated financial statements
for 1995, approximated $2.7 million.
41
<PAGE> 42
On March 6, 1996, the Company sold to Scholastic Limited, a United
Kingdom subsidiary of Scholastic, Inc. and its affiliates ("Scholastic") all the
capital stock of Great British Book Fairs, Limited ("Limited"), the Company's
United Kingdom subsidiary for approximately $4.8 million cash. Additionally, as
part of the transaction, (i) Scholastic paid in full (1) the outstanding balance
of $2.1 million due by Limited to Lloyds Bank and (2) an intercompany payable
due from Limited to the Company in the amount of $2.3 million, and (ii) the
Company signed a Non-Competition Agreement pursuant to which, in return for the
payment of $1.5 million in cash, the Company agreed for a five-year period not
to compete with the book fair business of Scholastic and its affiliates in the
following countries: Canada, the United Kingdom, Ireland, Germany, Italy,
Greece, Eastern Europe, including without limitation, the Commonwealth of
Independent States, Turkey, the countries of the Middle East, and Africa.
On March 6, 1996, the Company closed its distribution channel, Great
Owl Book Fairs, Inc., in Canada and on March 13, 1996, the Company sold a
portion of its inventory in Canada to Scholastic Canada, Ltd., a corporation
organized under the laws of Canada for $575,000 cash.
The net proceeds of the above-described transactions of $8.95 million
after the repayment of the Lloyds Bank debt and estimated transaction costs were
used to reduce the Company's domestic bank indebtedness. Included in the
accompanying 1996 financial statements is a $3.2 million gain on the
transaction.
Effective on the close of business on June 25, 1998, the Company sold
certain of its assets relating to the book fair business, operated by Pages Book
Fairs, Inc., its wholly-owned subsidiary, for $10.5 million. These assets
included inventory, display cases, and customer lists. The Company has
discontinued its book fair business and the accompanying financial statements
reflect the results from the book fair business as discontinued operations. The
comparative statements have been reclassified to reflect the discontinued
operations.
The sale of the book fair assets during the second quarter of 1998
resulted in a net loss of approximately $577,000 which includes the write-off of
goodwill of approximately $2.6 million and the costs related to the sales of the
book fair business of approximately $371,000.
8. DISCONTINUED OPERATIONS
-----------------------
Effective on the close of business on December 31, 1996, the Company
completed a tax-free spin- off of the common stock of the Company's wholly-owned
subsidiary CASCO INTERNATIONAL, INC. (CASCO) through a distribution to the
stockholders of one and one-half shares of CASCO common stock for every ten
shares of Media Source, Inc. common stock outstanding on the record date.
Effective January 1, 1997, CASCO issued a subordinated debenture to the Company
in the principal amount of $5.0 million bearing interest at 7% per annum payable
quarterly, with principal payments of $100,000 each due at the end of the first
four years, and a final payment of $4,600,000 due at the end of the fifth year.
This note was repaid at a $1.5 million discount in January 1998.
42
<PAGE> 43
Operating results for CASCO are included in the discontinued operations
line of the financial statements. For 1996, revenues for CASCO were $22.0
million and net income was $911,000. Included in the 1996 CASCO income is the
cumulative effect of an accounting change adopted by CASCO as of January 1,
1996. CASCO changed its method of accounting for the recognition of revenues
relating to advance deposits. Previously, CASCO recognized such deferred revenue
at the conclusion of the respective safety award programs. Effective with the
change, revenues are recognized over the course of the programs based on CASCO's
historical and expected redemption percentages. The corresponding deferred
commission costs (included in prepaid expenses on the accompanying financial
statements) have also been recognized in association with this change in the
same direct proportion as the revenue recognition. The effect of this accounting
change in 1996 was to decrease the loss before cumulative effect of change in
accounting principle by $209,190, net of associated commission expense of
$32,704. The cumulative effect of the accounting change of $995,000 has not been
tax effected based on the absence of any applicable tax to the Company on a
consolidated basis. The proforma income (loss) amounts for CASCO assuming the
new accounting method is applied retroactively is $(83,181) in 1996.
Operating results for PBF are also included in the discontinued
operations line of the financial statements. Revenues for PBF were $11.7 million
for 1998, $24.4 million for 1997, and $25.2 million for 1996. Net income
(losses) were ($3.3) million for 1998, ($3.6) million for 1997 and $1.6 million
for 1996. Included in the 1998 net loss was a loss on the sale of PBF of
$577,000 and included in the 1996 net income was a gain on the sale of the
Company's United Kingdom subsidiary of $3.2 million.
The components of net assets for the PBF discontinued operations
included in the consolidated balance sheets at December 31, 1998 follow:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Cash $ 62,236
Accounts receivable, net 234,671
Other assets 9,246
Accounts payable (383,814)
Accrued liabilities (610,116)
Long-term debt obligations (450,000)
</TABLE>
43
<PAGE> 44
9. SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION
-------------------------------------------------
Cash paid for interest during the years ended December 31, 1998, 1997,
and 1996, aggregated approximately $757,000, $1,275,000, and $1,151,000 and cash
paid for taxes was approximately $341,000, $1,190,000, and $18,100,
respectively.
During the years ended December 31, 1998, 1997 and 1996, the Company
acquired approximately $0, $82,000 and $75,000, respectively, in equipment
through capital financing leases.
During 1997, the Company acquired a $5.0 million note receivable from
CASCO in connection with the spin-off of this wholly-owned subsidiary effective
on the close of business on December 31, 1996. Interest at 7% was paid quarterly
to the Company. This note was repaid early to the Company at a $1.5 million
discount in January 1998.
Also in 1997, the Company issued $420,000 in Common Stock (at $35.00
per share) to a printing vendor in exchange for inventory. $47,700 in Common
Stock (at $31.80 per share) and two 3 year options for 3,250 shares each,
exercisable at $35.00 and $50.00, respectively, were issued in exchange for
public relations services.
44
<PAGE> 45
10. INTERIM FINANCIAL INFORMATION (UNAUDITED):
------------------------------------------
All per share data has been adjusted to reflect the one-for-twenty reverse stock
split.
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1998
--------------------------------------------------------------
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
March 31 June 30 Sept. 30 Dec. 31
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 488,208 $ 701,172 $ 726,836 $ 729,944
Gross Profit 263,868 400,619 420,322 398,141
Income (loss) from continuing operations
before income taxes (194,002) (227,772) 271,931(2) (383,076)
Income (loss) from discontinued operations (801,704) (2,782,399)(1) (157,401) 297,930
Net income (loss) available to common stockholders $(995,706) $(3,010,171) $ 114,529 $ (85,145)
========= =========== ========= =========
Income/(loss) per common share:
Discontinued operations $ (2.44) $ (8.48) $ (0.48) $ 0.91
Net income (loss) $ (3.03) (9.17) 0.35 (0.26)
========= =========== ========= =========
Weighted average common shares 328,200 328,200 328,200 328,200
========= =========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1997
---------------------------------------------------------------
Quarter Quarter Quarter Quarter
Ended Ended Ended Ended
March 31 June 30 Sept. 30 Dec. 31
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 773,521 $ 807,765 $ 762,672 $1,046,581
Gross Profit 498,690 450,099 439,125 515,599
Income (loss) from continuing operations
before income taxes 27,966 (275,348) 56,894 (1,690,948)(3)
Income (loss) from discontinued operations (267,592) (569,929) (1,824,114) (838,231)
Net income (loss) available to common Stockholders (239,626) $ (845,277) $(1,767,220) $(2,529,179)
========= =========== =========== ===========
Income/(loss) per common share:
Discontinued operations $ (0.86) $ (1.84) $ (5.74) $ (2.59)
Net income (loss) $ (0.77) $ (2.73) $ (5.56) $ (7.82)
========= =========== =========== ===========
Weighted average common shares 309,950 309,700 318,000 323,500
========= =========== =========== ===========
</TABLE>
Per share calculations are based on the average number of shares and potential
common stock outstanding for each quarter using the treasury stock method. Thus,
the sum of the quarters may not necessarily be equal to the full year's earnings
per share amounts.
(1) Includes loss on sale of the Company's Pages Book Fairs subsidiary of
$577,000 (See Note 7).
(2) Includes gain on settlement of lawsuit of $450,000. (See Note 11).
(3) Includes valuation adjustment on note receivable of $1.5 million
(See Note 9).
45
<PAGE> 46
11. COMMITMENTS AND CONTINGENCIES
-----------------------------
INTERNAL REVENUE SERVICE ASSESSMENT
During the Spring of 1993, the Company was advised that the Internal
Revenue Service ("IRS") might assess additional income taxes in connection with
the examination of the tax returns of PBF and its affiliates for the fiscal
years ending July 31, 1988, 1989, 1990, and 1991. In June, 1993, the Company
recorded a $2 million adjustment to its purchase price allocation of PBF assets,
which increased the cost in excess of assets acquired (i.e. - goodwill), and
recorded a corresponding increase in accrued tax liabilities and related costs.
In October 1995, the Company received four Notices of Deficiency from
the IRS relating to this examination. The Notices of Deficiency assessed
additional income taxes of approximately $4.7 million and penalties of
approximately $1.3 million, plus interest. The asserted deficiencies were
attributable primarily to a restructuring of PBF and related entities that
occurred on August 1, 1988, in which, along with other events, certain assets
were transferred between related companies. The IRS had challenged, among other
things, the values assigned to those assets by the parties to the transaction,
contending that the assets were undervalued and that PBF recognized a
substantial taxable gain in the transaction. In January 1996, the Company filed
petitions with the Tax Court disputing the IRS valuation of the assets
transferred, and other points in the IRS assessment.
On October 28, 1996, the Company entered into a settlement with the IRS
regarding the four Notices of Deficiency received assessing additional taxes for
the fiscal years 1988, 1989, 1990, and 1991. The settlement included income
taxes of $750,000, plus interest of approximately $750,000, for a total of
approximately $1.5 million. The Company had negotiated a payment plan with the
IRS that spread the payments including interest over twelve months starting in
March 1997. At December 31, 1997, the balance due approximated $300,000 and was
paid in full by second quarter 1998.
On December 27, 1996, the Company filed an action in U.S. District Court
for the Northern District of Ohio against Arthur Andersen & Co. LLP seeking in
excess of $16 million in damages. The complaint was a result of the final
outcome of the IRS assessment and representations made by Arthur Andersen & Co.
during Media Source, Inc.'s purchase of School Book Fairs, Inc. at May 19, 1992.
On September 16, 1998, the Company settled its litigation for $450,000 and
incurred attorney's fees and expenses of $160,000. Additionally, the Company is
subject to litigation by expert witnesses used in its suit against its former
auditors for which it is probable that the Company will have to pay some
judgment but the amount is not believed to be determinable by the Company.
ILLINOIS DEPARTMENT OF REVENUE SALES TAX ASSESSMENT
Additionally, the Company is the subject of a state sales tax audit and
litigation for one of its subsidiaries. Management believes the outcome of this
audit and legal proceedings may result in an unfavorable judgment and has
reserved approximately $500,000.
46
<PAGE> 47
12. RETIREMENT PLAN
---------------
In 1991, the Company established a defined contribution plan pursuant
to Section 401(k) of the Internal Revenue Code, covering all eligible employees.
Employees become eligible upon reaching age 21 and completing a year of service.
The Company's contributions into the Plan are discretionary. There were no
Company contributions in years 1998, 1997 or 1996.
13. BUSINESS CONTINUATION
---------------------
As shown in the consolidated financial statements, the Company incurred
a loss of approximately $4.0 million in 1998 compared to a loss of approximately
$5.4 million in 1997. Of these losses, approximately $1.1 million and $1.9
million were attributable to continuing operations of the Company for 1998 and
1997, respectively. In addition, accounts payable decreased to $678,108 in 1998
compared to $6,173,483 in 1997, and working capital decreased by $181,000 in
1998.
As discussed in Notes 7 and 8, management has taken measures to promote
the future profitability of the Company including the sale of several
unprofitable business lines. The Company intends to expand its JLG sales force
over the next several years, as the existing sales staff has thus far only been
able to cover approximately 30% of the potential library subscribers. Management
believes that with the increased sales staff and expanded sales territory
coverage that new subscriber revenues will increase.
The Company is aggressively pursuing ramping up sales via the Internet.
Management believes that this will increase sales to existing subscribers and
also attract new subscribers at a minimal cost to the Company.
Management believes the implementation of these actions will enable the
Company to continue its business, survive and operate in the near term.
47
<PAGE> 48
14. EARNINGS PER SHARE
------------------
The following table represents the computation of basic and diluted
earnings per share. All per share data has been adjusted to reflect the
one-for-twenty reverse stock split.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Weighted average number of common shares Outstanding 328,200 315,300 277,550
----------- ----------- -----------
Income/(loss) from continuing operations $ (532,919) $(1,881,436) $(1,204,109)
Discontinued operations before cumulative effect of
accounting change (3,443,574) (3,499,866) 1,738,143
Cumulative effect of accounting change -- -- 994,664
----------- ----------- -----------
Net income/(loss) available to common Stockholders $(3,976,493) $(5,381,302) $ 1,528,698
=========== =========== ===========
INCOME/(LOSS) PER COMMON SHARE:
Income/(loss) from continuing operations $ (1.63) $ (5.97) $ (4.34)
Discontinued operations before cumulative
effect of change in accounting principle (10.49) (11.10) 6.27
Cumulative effect of accounting change -- -- 3.58
----------- ----------- -----------
Basic earnings/(loss) per share $ (12.12) $ (17.07) $ 5.51
=========== =========== ===========
DILUTED EARNINGS PER SHARE:
Weighted average number of common shares
Outstanding - basic 328,200 315,300 277,550
EFFECT OF DILUTIVE SECURITIES:
Add dilutive stock options -- -- 38,550
Deduct shares that could be repurchased
from the Proceeds of the dilutive options -- -- (23,250)
----------- ----------- -----------
Diluted potential common shares 328,200 315,300 292,850
=========== =========== ===========
INCOME/(LOSS) PER COMMON SHARE:
Income/(loss) from continuing operations $ (532,919) $(1,881,436) $(1,204,109)
Effect of dilutive securities -- -- --
----------- ----------- -----------
Income/(loss) from operations available to Stockholders (532,919) (1,881,436) (1,204,109)
Discontinued operations before cumulative effect of
Accounting change (3,443,574) (3,499,866) 1,738,143
Cumulative effect of accounting change -- -- 994,664
----------- ----------- -----------
Net income/(loss) available to common
Stockholders and assumed conversions $(3,976,493) $(5,381,302) $ 1,528,698
=========== =========== ===========
DILUTED EARNINGS/(LOSS) PER COMMON SHARE:
Income/(loss) from continuing operations $ (1.63) $ (5.97) $ (4.11)
Discontinued operations before cumulative effect of
Change in accounting principle (10.49) (11.10) 5.93
Cumulative effect of change in accounting principle -- -- 3.40
----------- ----------- -----------
Diluted earnings/(loss) per share $ (12.12) $ (17.07) $ 5.22
=========== =========== ===========
</TABLE>
48
<PAGE> 49
At December 31, 1998 and 1997, options and warrants were outstanding
but were not included in the computation of dilutive EPS because the potential
common stock would be antidilutive. See Note 2 for a summary of options and
warrants issued and the exercise prices.
At December 31, 1996, additional options and warrants were outstanding
during the year but were not included in the computation of dilutive EPS because
the options' and warrants' exercise price was greater that the average market
price of the common stock.
15. STOCK SPLITS
------------
On March 9, 1999, the Company effected a one-for-twenty reverse stock
split. Shareholders of record as of March 9, 1999 received one share of common
stock for every twenty shares they owned. Share and per share data for all
periods presented herein have been adjusted to give effect to the split.
49
<PAGE> 50
<TABLE>
MEDIA SOURCE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 1998, 1997, and 1996
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E COL. F
- ---------------------------------------------------------------------------------------------------------------
ADDITIONS ADDITIONS
BALANCE CHARGED CHARGED BALANCE
AT BEGINNING TO COSTS TO OTHER AT END
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998:
Allowance for doubtful accounts $ 356,000 $ 64,000 $20,000(c) $ 346,000(a) $ 94,000
========== ========== ========== ========= ==========
Allowance for valuation on
deferred tax assets $6,880,200 $1,434,800(b) $ 898,000(d) $9,213,000
========== ========== ========= ==========
1997:
Allowance for doubtful accounts $ 316,000 $ 51,000 $ 11,000(a) $ 356,000
========== ========== ========= ==========
Allowance for valuation on
deferred tax assets $5,170,000 $1,964,300(b) $(254,100)(d) $6,880,200
========== ========== ========= ==========
1996:
Allowance for doubtful accounts $ 457,000 $ 141,000(a) $ 316,000
========== ========= ==========
Allowance for valuation on
deferred tax assets $4,802,300 $ 367,700(b) $5,170,000
========== ========== ==========
</TABLE>
(a) Doubtful accounts written off against reserve.
(b) Change in valuation allowance relating to change in assessment as to
future realizability of deferred tax asset.
(c) Amounts charged through discontinued operations.
(d) Amounts related to discontinued operations.
50
<PAGE> 51
EXHIBIT INDEX
MEDIA SOURCE, INC. FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
(a) 1. Financial Statements. See Index to Consolidated Financial Statements
and Financial Schedule on page 26.
2. Financial Statement Schedule. See Index to Consolidated Financial
Statements and Financial Statement Schedule on page 26.
3. Exhibits. The following exhibits are required to be filed as part of
this report:
Exhibit No. Description
- ----------- -----------
3(a)(1) Certificate of Incorporation dated October 5, 1994.
3(b)(1) Bylaws of the Company.
3(c)(2) Agreement of merger.
4(a) Warrant dated August 29, 1997, between the Company and The
Huntington National Bank.
4(b) Warrant dated September 2, 1997, between the Company and S.
Robert Davis.
4(c) Warrant dated December 24, 1997, between the Company and John W.
McKitrick.
10(a)(3) Lease dated January 1, 1993, for St. Petersburg, Florida, Office
and Warehouse.
10(b) Lease Amendment dated December 10, 1997, for St. Petersburg,
Florida, office and warehouse.
10(c)(4) Unconditional Guaranty of Lease Effective January 1, 1993, for
Lease of St. Petersburg, Florida, Office and Warehouse.
10(d)(3) Non-Statutory Stock Option Agreement dated May 19, 1992, between
the Company and Randall J. Asmo.
10(e)(3) Non-Statutory Stock Option Agreement dated June 3, 1992, between
the Company and S. +Robert Davis.
10(f)(6) Non-Statutory Stock Option Agreement dated November 1, 1996,
between the Company and Dr. Juan F. Sotos.
10(g)(6) Non-Statutory Stock Option Agreement dated November 1, 1996,
between the Company and Robert J. Tierney.
10(h)(3) Media Source, Inc. 1993 Incentive Stock Option Plan.
51
<PAGE> 52
10(i)(5) Non-Competition Agreement dated as of March 6, 1996.
10(j)(7) Second Amended and Restated Loan Agreement dated December 31,
1996, between the Company and the Huntington National Bank.
10(k)(7) First Amendment to Second Amended and Restated Loan Agreement
dated June 30, 1997, between the Company and The Huntington
National Bank.
10(l)(7) Time Note dated August 29, 1997, between the Company and The
Huntington National Bank.
10(m) Second Amendment to Second Amended and Restated Revolving Note
Dated January 21, 1998, between the Company and The Huntington
National Bank.
10(n) Credit Agreement by and between Media Source, Inc. and the
Provident Bank dated January 21, 1998.
10(o)(6) Promissory Note from S. Robert Davis for exercise of stock
options dated September 26, 1996.
10(p)(6) Promissory Note from Charles R. Davis for exercise of stock
options dated September 26, 1996.
10(q)(6) Promissory Note from employees for exercise of stock options
dated December, 1996.
10(r)(7) 13 1/2% Subordinated Note Due February 22, 1998, Dated August 21,
1997, between the Company and Charles R. Davis.
10(s)(7) Note Purchase Agreement and 12% Convertible Subordinated Note Due
2000, No. 4 between the Company and S. Robert Davis.
10(t) Lease dated August 20, 1998 for Tampa, Florida office.
10(u) Subordinated Note Payable dated September 28, 1998 between the
Company and Huntington National Bank
10(v)(8) Asset Purchase Agreement dated June 25, 1998 between the Company
and Scholastic, Inc.
10(w) Extension and Modification to lease date June 27, 1996 for New
York, New York office.
10(x) 10% Subordinated Note Due 2005, Dated June 6, 1996, between the
Company and Standard Printing Company.
10(y) Cognovit Promissory Note from Dan Welsh for purchase of Spoken
Arts dated November 6, 1995
21 Subsidiaries of Media Source, Inc.
27 Financial Data Schedule (filed only electronically).
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- -------------------
(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.
(2) Incorporated by reference to the Company's Proxy Statement dated August 4,
1994, File Number 0-10475, Filed in Washington, D.C.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992, File Number 0-10475, filed in
Washington, D.C.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993, File Number 0-10475, filed in
Washington, D.C.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, File Number 0-10475, filed in
Washington, D.C.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996, File Number 0-10475, filed in
Washington, D.C.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1997, File Number 0-10475, filed in Washington,
D.C.
(8) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998, File Number 0-10475, filed in Washington, D.C.
53
<PAGE> 1
Exhibit 10(t)
THE MOBILECOMM BUILDING
OFFICE LEASE AGREEMENT
THIS LEASE made and entered into as of this 20th day of August, 1998, by and
between WRE, INC. c/o W. ALAN WOODFORD, AGENT, ("Landlord") and JUNIOR LIBRARY
GUILD, a Florida Corporation ("Tenant").
Landlord and Tenant, for and in consideration of the keeping by the parties of
their respective obligations hereinafter contained, as well as for other good
and valuable considerations in hand paid simultaneously with the execution and
delivery of this Lease, receipt whereof is hereby acknowledged, agree as
follows:
1. DEMISED PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord the real property, office space, Suite(s) 400, more particularly
described in Exhibit "A" attached hereto ("Premises"), together with use of the
Building common areas shared with other tenants of the Building, with a street
address of 1915 N. Dale Mabry Highway, Tampa, Florida 33607 ("Building").
2. LANDLORD'S WORK. Landlord, at Landlord's sole cost and expense, will perform
or cause to be performed in the Premises the following: replace or repair any
stained or missing ceiling tiles ("Landlord's Work"). Tenant otherwise accepts
the Premises in "as is" condition.
3. TENANT'S WORK. Tenant, at its sole cost and expense, shall deliver to
Landlord detailed plans and specifications for any additional alterations and
modifications to the interior of the suite proposed by Tenant ("Tenant's Work").
Tenant shall obtain Landlord's prior written approval of such plans and
specifications prior to commencing any of Tenant's Work, and Landlord agrees
that such written consent shall not unreasonably be withheld. Tenant's Work
shall be completed in a good, first class, and workmanlike manner and in full
accordance with the requirements and regulations of all governmental authorities
having jurisdiction.
4. TERM.
(a) The initial Term of this Lease shall be for a period of six (6) months,
commencing on August 24, 1998, ("Commencement Date") and expiring on February
23, 1999, unless sooner terminated in accordance with the provisions of this
Lease.
(b) Unless sixty (60) days prior written notice is given by one party to
the other this initial Term shall automatically renew for an additional six (6)
month term (the "Renewal Period") at a rate of One Thousand Nine Hundred Twenty
Eight and 33/100 Dollars ($1,928.33) per month plus applicable sales tax.
<PAGE> 2
(c) Tenant shall have access to the Premises prior to the Lease
term at its sole risk for the purposes of telephone installation and
storage of personalty.
5. RENT AND RENT ADJUSTMENT. Tenant hereby covenants and agrees that it shall
pay to Landlord in advance, without setoff or deduction (except as expressly
permitted hereinafter) and without demand, rental for the use of the Premises
("Rent"), as follows:
(a) Beginning base Rent to be set at Twenty Two Thousand Two Hundred Fifty
and 00/100 Dollars ($22,250.00) per annum plus applicable sales tax, for the
rental use of offices, common areas and based on a rentable area of
approximately 1,780 square feet. Rent shall be due and payable in advance in
monthly installments, starting at occupancy or Lease Commencement, August 24,
1998, whichever is sooner, at One Thousand Eight Hundred Fifty Four and 17/100
Dollars ($1,854.17) per month, (hereinafter referred to as "Base Rent"), plus
applicable sales tax, and due and payable on the first day of each and every
successive calendar month thereafter during the Term.
(b) If neither party serves sixty (60) days prior written notice as
provided for in Paragraph 4(b), Base Rent for the Renewal Period will be One
Thousand Nine Hundred Twenty Eight and 33/100 Dollars ($1,928.33) per month plus
applicable state tax, for the rental use of offices, common areas and based on a
rentable area of approximately 1,780 square feet. Rent shall be due and payable
in advance in monthly installments, and due and payable on the first day of each
and every successive calendar month thereafter during the Term.
(c) Tenant further agrees to pay to Landlord all sales excise, and use
taxes imposed by law on Rent, additional rental, and other charges or services
due from Tenant to Landlord under this lease, said taxes to be remitted together
with Rent, additional rental charges, or services to which they pertain. To the
extent such taxes have been timely paid by Tenant as provided herein, Landlord
agrees that it shall indemnify Tenant from any and all liability arising from
the failure of Landlord to timely remit such taxes to the taxing authority.
(c) Tenant shall pay Rent, in advance, in lawful currency of the United
States of America, to Landlord by delivering or mailing it to the Landlord's
notice address, or to such other address or in such other manner as the Landlord
from time to time specifies to Tenant by written notice to the Tenant. All
rental payments shall be made payable to W. ALAN WOODFORD, AS AGENT. If the
Tenant pays by mail, Tenant agrees to mail Rent in advance so that it will
reasonably be received by Landlord on or before the rental due date. In addition
to any other remedies available to Landlord, Tenant shall pay a late charge of
twenty-five dollars ($25.00) per day for each day that Rent shall not be paid
after the fifth (5th) day following the due date, and said late charge shall be
deemed additional Rent.
(d) Tenant shall further pay as an adjustment to the Base Rent hereunder an
amount equal to Tenant's Proportionate Share (the ratio that the rentable area
of the Premises bears to the total rentable area of the Building) of the excess
from time to time of actual Operating Expenses paid by Landlord for any calendar
year over the Operating Expenses paid for the Base Year 1998. Operating Expenses
means all direct and indirect costs and expenses in each calendar year of
operating, maintaining, insuring, managing and owning the Building and the real
property in its immediate proximity, real estate taxes and assessments of the
Building, plus the Building's alloted share from time to time of the Operating
Expenses from the exterior common areas. Operating Expenses shall not
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<PAGE> 3
include the cost of capital improvements, depreciation, interest, lease
commisssions and principal payments on mortgage and other non-operating debts of
Landlord. Operating Expenses shall, however, include the amortization of capital
improvements which are primarily for the purpose of reducing Operating Expenses,
or which are required by governmental authority. For each calendar year after
the base year, Landlord may assess an adjustment by furnishing in reasonable
detail the Operating Expenses or particular expense in excess for the prior
calendar year. Within thirty (30) days following receipt by Tenant of said rent
adjustment, Tenant shall pay its proportionate share of the excess over the base
year Operating Expense amount for the prior calendar year. If this Lease
terminates before the end of a calendar year, payment will be based on the
percentage of the year in which the Tenant occupied the Premises.
6. SECURITY DEPOSIT.
(a) Tenant has deposited with the execution of this Lease agreement One
Thousand Eight Hundred Fifty Four and 00/100 Dollars ($1,854.00) with the
Landlord as security for the full and faithful performance by the Tenant of all
of the terms, covenants and conditions of this Lease upon the Tenant's part to
be performed. Security Deposit shall increase, at the option of Landlord (with
notice to Tenant), in direct proportion to expanded rental space or Base Rent.
(b) Tenant agrees that Security Deposit shall not be regarded as trust
funds and Landlord may commingle said sum with other monies of Landlord and that
Landlord shall be entitled to retain all interest, if any, earned thereon. In
the event of a bona fide sale, subject to this Lease, the Landlord shall
transfer the security deposit to the purchaser for the benefit of the Tenant,
and shall be considered released from all liability for the return of the
security. Tenant agrees to look to the new Landlord solely for the return of
such deposit. Upon Tenant's default under any term or provision of this Lease,
Landlord may apply the same in liquidation of Landlord's damages; and Landlord
shall not thereby waive any right or remedy available to Landlord under this
Lease or by law with respect to such default.
7. ALTERATIONS/IMPROVEMENTS AND KEYS. Except for the Tenant's Work, Tenant
agrees to make no alterations, additions, or improvements to the Premises
without Landlord's prior consent, which consent may be withheld or denied at
Landlord's sole and absolute discretion; and all such additions, alterations,
and improvements shall be at Tenant's sole cost and expense, unless herein
otherwise expressly provided. Notwithstanding the foregoing, Tenant shall have
the right to change and re-key locks, and modify, replace or alter fire and
security alarms at no cost to Landlord. All such additions, alterations, and
improvements, regardless of whether the same are installed prior or subsequent
to the Commencement Date of this Lease shall be and remain the property of
Landlord. Upon the termination of this Lease in any manner whatsoever Landlord,
at its sole option, may require Tenant, at Tenant's expense, to remove any or
all of such additions, alterations, or improvements and restore the Premises to
the same condition as exists at Lease Commencement. Tenant shall return all keys
or the cost thereof, including changing the locks shall be deducted from the
security deposit.
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<PAGE> 4
8. REPAIRS.
(a) Tenant accepts the Premises in an "as-is" condition, as of the date of
this Lease. Landlord shall, at Landlord's sole cost and expense, maintain in
good condition, order, and repair, the Building including common areas, doors
and glass surfaces, the foundation, roof, loading-bearing walls, elevators,
exterior fencing, the plumbing system, heating, air-conditioning, ventilating,
electrical, lighting, and sprinkling equipment, and in the Premises: electrical
devices and lighting fixtures, systems and facilities located in or serving the
Premises; provided, however, Tenant shall reimburse Landlord upon demand for all
maintenance or repairs necessitated by the negligent, intentional, or wrongful
act of Tenant, its agents, employees, or invitees.
(b) If directed by proper authority, Landlord shall provide alterations,
repairs or improvements to the Building necessitated by the American with
Disabilities Act of 1990 (ADA) and any regulations thereunder, including any
similar zoning requirements, ordinances, statues, regulations or building codes,
whether now in effect of hereafter enacted.
(c) Tenant, at Tenant's sole cost and expense, shall maintain in good,
clean and sanitary condition, order, and repair, free from accumulations of
trash or rubbish throughout the Term of this Lease, the Premises including, but
not limited to, all doors, walls, ceilings, floors, carpeting, windows, glass
surfaces, and draperies. If any maintenance required by this Paragraph, Landlord
may perform same on Tenant's behalf, and Tenant shall reimburse Landlord, upon
demand, for all costs and expenses incurred together with interest thereon at
the highest rate permitted by law until paid. Reasonable wear and tear are
excepted from the provisions of this Paragraph.
9. ASSIGNMENT AND SUBLETTING. Tenant shall not assign this Lease, nor sublet the
Premises, or any part thereof nor use the same, or any part hereof, nor permit
the same, or any part stipulated, nor make any alterations herein, and all
additions thereto, without the prior written consent of Landlord, which consent
shall not be unreasonably withheld. Landlord has the right to assign this Lease,
and any such assignment by Landlord shall confer upon assignee all the rights,
powers and obligations that Landlord has hereunder
10. PERSONAL PROPERTY. All personal property placed or moved in the Premises
above described shall be at the risk of Tenant or owner thereof, and Landlord
shall not be liable for any damage to said personal property, or to the Tenant
arising from the bursting or leaking or water pipes, or from any act of
negligence or any co-leases or occupants of the Building or any other person
whomsoever.
11. USE AND COMPLIANCE WITH LAWS.
(a) Tenant hereby covenants and agrees to use all of the Premises for the
purpose of office space, and shall not use the Premises for any other use or
purpose whatsoever without Landlord's prior written consent. Except with respect
to the clean-up of any "Hazardous Materials" existing in, on or about the
Premises prior to the Commencement Date, Tenant shall, throughout the Term of
this Lease, and at no expense whatsoever to the Landlord, promptly execute and
comply with all laws, ordinances, orders, rules,
4
<PAGE> 5
regulations, and requirements of all federal, state, county, and municipal
governments, and appropriate departments, commissions, boards, and offices
thereof, including all rules, orders and regulations of the Southeastern
Underwriters Association for the prevention of fires, foreseen and unforeseen,
ordinary as well as extraordinary, and whether or not the same shall presently
be within the contemplation of the parties hereto or shall involve any changes
of governmental policy or require structural or extraordinary repairs,
alterations, or additions and irrespective of the cost thereof, that may be
applicable to Tenant's business operations on the Premises.
(b) Tenant covenants and agrees not to suffer, permit, or maintain other
than "Hazardous Materials" existing on the Premises as of the Commencement Date,
nor to introduce in, on or about any portion of the Premises, any asbestos,
polychlorinated biphenyls, petroleum products or any other hazardous or toxic
materials, wastes and substances which are defined, determined or identified as
such in any federal, state, or local laws, rules or regulations (whether now
existing or hereinafter enacted or promulgated) or any judicial or
administrative orders or judgments or any other materials which may be deemed
hazardous or toxic if infiltrated in high concentrations into the land or ground
water underlying the Premises. Any such asbestos, polychlorinated byphenyls,
substances are herein collectively called "Hazardous Materials".
(c) Tenant further covenants and agrees to indemnify, protect and save
Landlord harmless against and from any and all damages, losses, liabilities,
obligations, penalties, claims, litigation, demands, defenses, judgments, suits,
proceedings, costs, disbursements or expenses of any kind or of any nature
whatsoever including without limitation attorneys' and experts' fees and
disbursements which may at any time be imposed upon, incurred by or asserted or
awarded against Landlord and arising from or out of any Hazardous Materials on,
in, under or affecting all or any portion of the Premises, introduced by, or on
behalf of, Tenant including, without limitation, (i) the costs of removal of any
and all Hazardous Materials from all or any portion of the Premises, (ii)
additional costs required to take necessary precautions to protect against the
release of Hazardous Materials on, in, under or affecting the Premises, into the
air, any body of water, any other public domain or any surrounding areas, and
(iii) any costs incurred to comply, in applicable laws, orders, judgments and
regulations with respect to Hazardous Materials.
12. CASUALTY. The term "casualty" means fire, hurricane, flood, tornado, rain,
wind, sinkhole, or other act of God, riot, civil commotion, or other acts of a
public enemy; and theft, vandalism, or any other criminal or tortuous acts of
third parties. In the event the Premises shall be destroyed or damaged by fire
or other casualty during the Term of this lease so as to be untenantable, the
following options shall be available:
(a) If the Premises can be repaired within fourteen (14) days after the
casualty, then Landlord shall restore the Premises (exclusive of Tenant's Work,
Tenant's fixtures, equipment, signs, tenant improvements, and any items
installed in or affixed to the Premises) by repairs or reconstruction at
Landlord's expense, in which event Rent shall continue.
(b) If the Premises can not be repaired within fourteen (14) days after the
casualty, Tenant or Landlord may elect to cancel this Lease as of the time of
the casualty by notice to
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<PAGE> 6
the other within three (3) days of the casualty. If there is no notice, Tenant
shall be relieved from Rent accruing until the Premises are tenantable, and the
Lease will remain in effect.
13. UTILITIES AND EXPENSES. Tenant hereby covenants to pay, discharge, defend,
indemnify, and hold Landlord harmless of and from the following costs, expenses,
and obligations as the same become due:
(a) All required telephone service, pest control services, janitorial
service and trash removal service;
(b) Utilities including electricity, in excess of that normally furnished
to other tenants and to the Premises during the Term of this Lease. Tenant shall
pay ten dollars ($10.00) per hour as additional rent for the use of extra air
conditioning (HVAC) hours beyond the normal business/operating hours for the
Building.
(c) All charges for labor, services, and materials used in connection with
any improvements or repairs to the Premises which are undertaken by Tenant.
(d) All sales and excise taxes imposed by law on the Rent, additional
rental, and other charges and services due to Landlord from Tenant hereunder.
(e) All ad valorem taxes assessed, imposed, or levied by law upon or
against all fixtures and personal property of regardless of whether such taxes
are extraordinary or ordinary or foreseen or unforeseen, prior to the time the
same become delinquent. Notwithstanding the foregoing, it is understood that
Tenant shall have no obligation to pay for any ad valorem real estate taxes or
assessments assessed, imposed or levied upon or against the Premises.
(f) Upon Tenant's default in payment or performance of any cost, expense,
or obligation imposed upon Tenant by the terms of this Lease or by law,
Landlord, upon fifteen (15) days prior written notice to Tenant of such default,
may pay, perform and discharge the same, together with all interest and
penalties thereon, without prejudice to Landlord's rights and remedies as
reserved herein or provided by law, and the same, together with interest thereon
at the rate of eighteen percent (18%) per annum until paid, shall be due and
payable to Landlord upon demand. All expenses Landlord incurs because of
Tenant's default under any of the terms or conditions of this Lease, including
attorney's fees, shall be deemed additional rental; and Landlord shall have all
rights and remedies with respect to such additional rental provided herein for
nonpayment of Rent.
14. LIENS PROHIBITED. Tenant shall not permit any liens to attach to any
interest in the Premises for labor, services, or materials furnished thereto
pursuant to a contract with Tenant; and, in the event such liens do attach,
Tenant shall cause the same to be canceled and discharged of record, by bond or
otherwise, within thirty (30) days after the filing date of such lien, and shall
also defend and pay damages and attorney fees, if any, on behalf of the other,
for any action, suit or proceeding which may by brought thereon for the
enforcement of such lien. Upon the failure by Tenant to do so, Landlord may,
after expiration of said thirty (30) day period, transfer such lien to a bond
posted by Landlord pursuant to the provision of Chapter 713, Florida Statutes,
and recover from Tenant all costs of such bond. Landlord hereby notifies all
persons and entities that any liens claimed by any party as the result of
improving the Premises pursuant to a contract with Tenant, or with any person
other than Landlord, shall extent to, and only to, the right, title and interest
in and to the Premises, if any, of the person contracting for such improvements.
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This paragraph shall be construed so as to prohibit, in accordance with the
provision of Chapter 713, Florida Statutes, the interest of Landlord in the
Premises being subject to any lien for any improvements made by Tenant or any
other person on the Premises.
15. DEFAULT. As used in the provisions of this Lease, each of the following
events shall constitute, and is hereinafter referred to as, an "Event of
Default":
(a) If the Tenant fails, (i) to pay Rent or any other sum which it is
obligated to pay to Landlord or to any third party pursuant to any provisions of
this Lease, within three (3) days after the same is due, or (ii) to perform any
of its other obligations under the provisions of this Lease within ten (10) days
after the Landlord gives written notice of such default, (or, if the default is
one that requires more than ten (10) days to correct, Tenant shall have a
reasonable time to correct it if Tenant diligently prosecutes such correction to
completion); or
(b) If the Tenant, (i) applies for or consents to the appointment of a
receiver, trustee or liquidator of the Tenant or of all or a substantial part of
its assets, (ii) files a voluntary petition in bankruptcy or admits in writing
its inability to pay its debts as they come due, (iii) makes an assignment for
the benefit of its creditors, (iv) files a petition or an answer seeking a
reorganization or any arrangement with creditors, or seeks to take advantage of
any insolvency law, (v) performs any other act of bankruptcy, or (vi) files an
answer admitting the material allegations of a petition filed against the Tenant
in any bankruptcy, reorganization or insolvency proceeding; or
(c) If (i) an order, judgment or decree is entered by any court or
competent jurisdiction adjudicating the Tenant a bankrupt or an insolvent,
approving a petition seeking such a reorganization, or appointing a receiver,
trustee or liquidator of the Tenant or of all or a substantial part of its
assets, and such action is not canceled, dissolved or discharged within sixty
(60) consecutive days, or (ii) there otherwise commences as to the Tenant or any
of its assets proceeding under any bankruptcy, reorganization, arrangement,
insolvency, readjustment, receivership or similar law, and it such order,
judgment, decree or proceeding continues unstayed for more than sixty (60)
consecutive days after any stay thereof expires; or
(d) If Tenant fails to continuously occupy the Premises or conduct business
operations thereon for a period of more than thirty (30) days for any reason
(other than for a financial reason) beyond Tenant's control.
16. LANDLORD'S REMEDIES. Upon an Event of Default, Landlord may exercise any one
or all of the following options:
(a) Terminate Tenant's right to possession under this Lease and re-enter
and take possession of the Premises and relet or attempt to relet the Premises
on behalf of Tenant, at any such rent and under such terms and conditions as
Landlord may best obtain under the circumstances for the purpose of reducing
Tenant's liability; and Landlord shall not be deemed to have thereby accepted a
surrender of the Premises, and Tenant shall remain liable for all Rent and
additional rental due under this Lease and for all damages suffered by Landlord
because of Tenant's breach of any of the covenants of this Lease, including
brokerage commissions, and expenses to prepare the Premises for a new tenant. At
any time during such repossession or reletting, Landlord may, by delivering
written notice to
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Tenant, elect to exercise its option under the following subparagraph to accept
a surrender of the Premises, terminate and cancel this Lease, and retake
possession and occupancy of the Premises on behalf of Landlord. Nothing
contained in this subparagraph shall be construed as imposing any enforceable
duty upon Landlord to relet the Premises or otherwise mitigate or minimize
Landlord's damages by virtue of Tenant's default.
(b) Declare this Lease to be terminated, and re-enter upon and take
possession of the Premises without notice to Tenant, whereupon the Term hereby
granted and all right, title and interest of Tenant in the Premises shall
terminate. Such termination shall be without prejudice to Landlord's right to
collect from Tenant any Rent or additional rental that has accrued prior to such
termination, together with all damages suffered by Landlord because of Tenant's
breach of any covenant contained in this Lease.
(c) Declare the entire remaining unpaid Rent for the Term of this Lease
then in effect to be immediately due and payable, and, at Landlord's option,
take immediate action to recover and collect the same by any available
procedure.
(d) Pursue any combination of such remedies and/or any other right or
remedy available to the Landlord on account of such Event of Default under this
Lease and/or at law or in equity. The remedies provided in this paragraph shall
be cumulative to those provided elsewhere herein or by law.
17. TENANT'S BANKRUPTCY. In addition to Landlord's remedies under Paragraph 16,
above, in the event Landlord is unable to terminate this Lease in accordance
with Paragraph 16 (b) above because such termination is not allowed under the
Bankruptcy Code (hereinafter defined), upon the filing of a petition by or
against Tenant under the Bankruptcy Code, Tenant, as debtor and as debtor in
possession, and any trustee who may be appointed, agree:
(a) to perform promptly every obligation of Tenant under this Lease until
this Lease is either rejected or assumed by order of a United States Bankruptcy
Court or other United States Court of competent jurisdiction; or deemed rejected
by operation of Law, pursuant to 11 U.S.C. Statute 365 (c) (4);
(b) to pay monthly in advance on the first day of each month as reasonable
Compensation for use and occupancy of the Premises an amount equal to the
greater of the monthly installment of the Base Annual Rental or Rent and all
additional rent;
(c) to reject or assume this Lease within sixty (60) days of the filing of
such petition under Chapter 7 of the Bankruptcy Code or within thirty (30) days
of the filing of a petition under any other Chapter;
(d) to give Landlord at least forty-five (45) days prior written notice of
any proceeding relating to any assumption of this Lease;
(e) to give Landlord at least thirty (30) days prior written notice of any
abandonment of the Premises, any such abandonment to be deemed conclusively a
rejection of this Lease;
(f) to be deemed conclusively to have rejected this Lease in the event of
the failure to comply with any of the above;
(g) to have consented to the entry of an order by an appropriate United
States Bankruptcy Court providing all of the above, waiving notice and hearing
of the entry of same; and
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Notwithstanding anything in this Lease to the contrary, all amounts payable
by Tenant to or on behalf of Landlord hereunder, whether or not expressly
denominated as Rent, shall constitute "rent" for the purposes of Section
520(b)(7) of the Bankruptcy Code, including, without limitation, reasonable
attorneys' fees incurred by Landlord by reason of Tenant's bankruptcy. Nothing
contained in this Paragraph shall be deemed in any manner to limit Landlord's
rights and remedies under the Bankruptcy Code, as presently existing or as may
hereafter be amended. In the event that the Bankruptcy Code is interpreted or
amended during the tern of this Lease to so permit, or is superseded by an act
of an Event of Default under this Lease:
(a) if tenant is adjudicated insolvent by the United States Bankruptcy
Code, or
(b) if a petition is filed by or against Tenant under the Bankruptcy Code
and such petition is not vacated within thirty (30) days. In either of such
events, this Lease and all rights of Tenant hereunder shall automatically
terminate with the same force and effect as is the date of either such event
were the date stated herein for the expiration of the Term, and Tenant shall
vacate and surrender the Premises, but shall remain liable as herein provided.
Landlord reserves any and all rights and remedies provided herein or at law.
Tenant's "bankruptcy" means, (i) the application by Tenant or any guarantor
of Tenant or its or their consent to the appointment as a receiver, trustee or
liquidator of Tenant or any guarantor of Tenant or a substantial part of its or
their assets, (ii) the filing of a voluntary petition in bankruptcy or the
admissions in writing by Tenant or any guarantor of Tenant of its inability to
pay its debts as they become due, (iii) the making by Tenant or any guarantor of
Tenant of an assignment for the benefit of its creditors, (iv) the filing of a
petition or an answer seeking a reorganization or any arrangement with its
creditors or an attempt to take advantage of any insolvency law, (v) the filing
of an answer admitting the material allegations of a petition filed against
Tenant or any insolvency allegations of a petition filed against Tenant or any
guarantor of Tenant in any bankruptcy, reorganization or insolvency proceeding,
(vi) the entering of an order, judgment or decree by any court of competent
jurisdiction adjudicating Tenant or any guarantor of Tenant a bankrupt or an
insolvent, approving a petition seeking such a reorganization, or appointing a
receiver, trustee or liquidator of Tenant or any guarantor of Tenant or of all
or a substantial part of its or their assets, or (vii) the commencing of any
proceeding under any bankruptcy, reorganization, arrangement, insolvency,
readjustment, receivership or similar law, and the continuation of such order,
judgment, decree of proceeding unstayed for any period of sixty (60) consecutive
days after the expiration of any stay thereof. Neither Tenant's interest in this
Lease, nor any estate created hereby in Tenant nor any receiver or assignee for
the benefit or creditors or otherwise by operation of law except as may
specifically be provided by the Bankruptcy Code, Title 11 U.S.C. (the
"Bankruptcy Code").
18. SECURITY INTEREST. Tenant hereby grants Landlord a security interest all
equipment, trade fixtures, personal property and improvements installed in,
affixed to, or kept on the Premises as security for Tenant's full and complete
performance of tenant's obligations hereunder. Upon Tenant's default in any
obligation hereunder, Tenant hereby
9
<PAGE> 10
expressly agrees that Landlord may exercise, with respect to such trade
fixtures, equipment, and improvements, and all rights Landlord may have at the
time of such default as a secured party under Chapter 670, Florida Statutes. If
Tenant is not in default under the terms hereof, all trade fixtures and
equipment owned by the Tenant, may be removed by Tenant at any time during the
term, or upon the expiration thereof. Tenant agrees to repair any damages to the
Building occasioned by the removing of such trade fixtures.
19. COSTS OF ENFORCEMENT. In the event that Landlord shall bring an action to
recover any sum due hereunder or for any breach hereunder and shall obtain a
judgment in its favor, Landlord shall be entitled to recover all costs and
expenses incurred, including reasonable attorneys' fees through all proceedings,
trials and appeals.
20. ENTRY. Tenant agrees to permit Landlord and Landlord's agents entry to the
Premises:
(a) At any time during the Term of this Lease upon reasonable notice to
Tenant and at times reasonably convenient to Tenant for the purpose of:
inspecting the Premises; preventing waste thereto; making such repairs or
performing such maintenance as contemplated by Paragraph 8; showing the Premises
to prospective tenants; or discharging any duty imposed upon Landlord by this
Lease or bylaw.
(b) Within thirty (30) days prior to the termination of this Lease, upon
reasonable notice, and at times reasonably convenient to Tenant, for the purpose
of showing the Premises to prospective tenants, provided such entry does not
unreasonably disturb or interrupt Tenant's business operations.
21. LIABILITY. Tenant hereby agrees that Landlord shall not be liable to Tenant
for any damages or injuries to the property of Tenant or to the persons or
property of Tenant's officers, agents, employees, or invitees, or any other
person, occasioned by or due to alleged or real defects in the Premises, and
Tenant agrees that it will hold Landlord harmless against any liability arising
out of, any injury to or death of any person or damage to any person or damage
to any property, occurring anywhere upon the Premises, other than injuries to or
death of any person or damage to any property proximately caused by negligent or
intend tortuous act or omission of the Landlord or its agents, officers,
employees or invitees. Without limitation of the generality of the foregoing,
Tenant agrees that at its own cost and expense, Tenant will procure and maintain
in force throughout the Term of this Lease, for the benefit of Tenant, and which
shows Landlord and Landlord's mortgagees as additional insured, as their
respective interests shall appear, a policy or policies of public liability
insurance, in form and coverage satisfactory to Landlord, written by an
insurance company authorized to engage in the business of general liability
insurance in the State of Florida (if required by law), with a Best's rating of
A or better, protecting Landlord, Landlord's mortgagee and Tenant against any
and all claims for injury to persons or property occurring in, upon, or about
the Premises, and each and every part thereof. Such public liability policy or
policies shall have a combined single limit for personal injury and property
damage of not less than One Million Dollars
10
<PAGE> 11
($1,000,000.00) with respect to injuries, death, or damagers in any one
occurrence. Tenant shall promptly pay when due and all insurance premiums in
connection with any policy or policies of insurance and shall deliver
appropriate a certificate of such insurance to Landlord. Should Tenant fail to
furnish evidence of such insurance as provided for in this Lease, Landlord may,
in addition to exercising any of its other rights because of Tenant's default,
obtain such insurance and the premiums of such insurance shall be deemed to be
additional rental to be paid to Landlord by Tenant on demand, together with
interest thereon at the rate of eighteen percent (18%) per annum. All such
policies shall require thirty (30) days written notice to Landlord prior to any
cancellation or modification thereof.
22. NOTICES. Any notice or demand required under this Lease or by law shall be
in writing and shall be delivered by hand or deemed to have been delivered when
mailed either by overnight courier delivery service or by registered or
certified mail, return receipt requested, and addressed to:
Landlord: W. Alan Woodford, Agent
334 Golfview Drive,
Pittsburgh, PA 15241-3308; and
Tenant: Junior Library Guild
1915 N. Dale Mabry Hwy., Ste. 400
Tampa, FL 33607
Attn: Mr. Randall J. Asmo
23. CONDEMNATION. If the whole or any portion of the Premises is condemned for
any public use or purpose by any legally constituted authority with the result
that the same are no longer reasonably suitable for Tenant's continued use
thereof, then Tenant shall have the option of canceling this Lease, and Rent
shall be accounted for between Landlord and Tenant as of this date of taking. In
the event of such cancellation, Landlord shall be entitled to all compensation
to be paid by condemning authority, except that Tenant may pursue any claim
Tenant may have for business interruption or moving expenses. Tenant agrees to
execute such instruments of assignments as may be reasonably required by
Landlord in any proceedings for the recovery of such damages if requested by
Landlord, and to turn to Landlord any damages that may be recovered in such
proceedings.
24. SURRENDER/HOLDING OVER. Upon the expiration or earlier termination of this
Lease, Tenant shall surrender the Premises to Landlord in good order and
condition, except for ordinary wear and tear and except for the results of any
taking or damage or destruction not caused by Tenant. Tenant shall remove from
the Premises on or prior to such expiration or earlier termination all of its
property (including signage) situated thereon and shall repair any damage caused
by such removal. Property not so removed shall become the property of Landlord
and Landlord may assess a fee for its removal or disposal. If Tenant holds over
without the Landlord's written consent after the expiration or other termination
of this Lease, or if Tenant continues to occupy the Premises after termination
of Tenant's right of possession pursuant to any provision of this Lease, Tenant
11
<PAGE> 12
shall throughout the entire holdover period pay rent equal to twice the Base
Rent and additional Base Rent which would have been applicable had the Term of
this Lease continued through the period of such holding over by Tenant. Landlord
and Tenant maintain the right to terminate this month to month tenancy with
thirty (30) days written notification to the other party. No possession by
Tenant after the expiration of the Term of this Lease shall be construed to
extend the Term of this Lease unless Landlord has consented to such possession
in writing.
25. ESTOPPELL CERTIFICATE. Either party shall, without charge, at any reasonable
time and from time to time hereafter, within ten (10) days after written request
of the other, certify by written instrument, duly executed and acknowledged, for
any mortgages or purchaser, or proposed mortgagee or proposed purchaser, or any
other person specified in such request:
(a) that this Lease is unmodified and in full force and effect, or if there
has been any modification, that the same is in full force and effect as so
modified, and identifying any such modifications;
(b) whether or not there are any existing defaults with respect to the
terms of this Lease known by the party executing said instrument with respect to
the other party, and if any such defaults are known, specifying the same and
part of such other party;
(c) the dates through which Rent and all other charges hereunder have been
paid;
(d) the commencement and expiration dates of the term of this Lease; and,
(e) as to any other matter as may reasonably be so requested. Any such
certificate may be relied upon by the party requesting it and any other person
to whom the same may be exhibited or delivered and the contents of such
certificate shall be binding on the party executing same. Tenant agrees to
subordinate this Lease upon request of Landlord without charge or delay.
26. RADON. Pursuant to Section 404.056, Florida Statutes (1990), notification is
hereby given to Tenant as follows:
"RADON GAS: Radon is a naturally occurring radioactive gas, that, when it
has accumulated in a building in sufficient quantities, may present health risks
to persons who are exposed to it over time. Levels of radon that exceed federal
and state guidelines have been found in buildings in Florida. Additional
information regarding radon and radon testing may be obtained from your county
public health unit."
27. TIME. It is understood and agreed between the parties hereto that time is of
the essence of during the term of this contract/Lease.
28. BROKERAGE. Tenant acknowledges that Lincoln Property Company of Florida,
Inc. ("Landlord's Agent") represents the Landlord and Binswanger ("Tenant's
Agent") represents the Tenant with regard to this Lease agreement and a real
estate commission will be paid by Landlord pursuant to the terms and conditions
of a listing agreement between Landlord and Landlord's Agent. Except as
indicated above, Tenant warrants that it is not represented by a broker, and
accordingly, has no expectation that a commission be
12
<PAGE> 13
paid on its behalf. In such event, Tenant agrees to indemify Landlord from all
claims from a third party broker.
29. RIGHTS. The rights of the Landlord under the foregoing shall be cumulative,
and failure on the part of the Landlord to exercise promptly any rights given
hereunder shall not operate to forfeit any of the said rights.
30. COMPLIANCE. Tenant shall comply with all governmental rules, codes, and
regulations governing the construction, maintenance and location of signs, and
shall promptly remove all of its signs upon termination of this Lease to the
satisfaction of Landlord and at no cost to Landlord.
31. EXTENSION/RELOCATION. Tenant and Landlord agree to enter into good faith
negotiations to extend the Term of this Lease at least sixty (60) days prior to
the expiration of the Term. Tenant and Landlord further agree that Landlord may
move Tenant into comparable space, as determined in the sole discretion of
Landlord, as a right to relocate Tenant upon thirty (30) days notice. At
Tenant's option, Tenant may terminate this lease upon receipt of Landlord's
notice of its intent to relocate Tenant by providing Landlord with thirty (30)
days written notice of its intent to terminate. Landlord and tenant agree to
equally split the costs involved in any relocation within the building during
the initial term.
32 CONFIDENTIALITY. All terms of this lease, most specifically Paragraph 5: Rent
and Rent Adjustment, shall remain in confidence between Tenant and Landlord.
33. TOTALITY. Except for "Building Rules and Regulations" which Landlord may
issue from time to time to be made part of this Lease, this Lease may not be
amended, modified, or terminated, nor may any obligation hereunder be waived
orally, and no such amendment, modification, termination, or waiver shall be
effective for any purpose unless it is in writing, signed by the party against
whom enforcement thereof is sought. It is, however, expressly stated that Tenant
and any invitees shall not smoke in the Building. Tenant and its employees and
agents further shall not park in areas reserved for others or designated for
customer parking on the ground floor closest to the Building.
34. SEVERABILITY. If any provision of this Lease or any application thereof
shall be invalid or unenforceable, the remainder of this Lease and any other
applications of such provision shall not be affected thereby. This Lease and any
provision thereof cannot be recorded unless Landlord so chooses.
35. SUCCESSORS. This Lease shall be binding upon and insure to the benefit of,
and be enforceable by, the respective successors and assigns of the parties
hereto.
36. GOVERNANCE. This Lease shall be governed by, and construed in accordance
with, the laws of the State of Florida.
13
<PAGE> 14
37. PARTIES. Landlord and Tenant shall not be considered or deemed to be joint
venturers or partners, and neither shall have the power to bind or obligate the
other as set forth herein.
38. TERMS. All terms used in this Lease, regardless of the number or gender in
which they are used, shall be deemed and construed to include any other number,
singular or plural, and by other gender, masculine, feminine or neuter, as the
context or sense of this Lease or any section, subsection or clause herein may
require as if such terms had been fully and property written in such number or
gender.
IN WITNESS WHEREOF, the parties hereto have hereunto executed this
instrument for the purpose herein expressed, the day and year above written.
SIGNED, SEALED AND DELIVERED IN THE PRESENCE OF:
TENANT:
JUNIOR LIBRARY GUILD
/s/ illegible /s/ Randall J. Asmo Co-Chairman
- --------------------------------- -----------------------------------
Witness Name: Randall J. Asmo
Its: Co-Chairman
/s/ illegible
- ---------------------------------
Witness
LANDLORD:
- --------------------------------- ---------------------------------
Witness W. Alan Woodford, Agent
- ---------------------------------
Witness
14
<PAGE> 15
THE 1915 NORTH DALE MABRY BUILDING
FLOOR PLAN - FOURTH FLOOR
[MAP FLOOR PLAN]
<PAGE> 1
Exhibit 10(u)
PAYMENT OF THE OBLIGATIONS EVIDENCED BY THIS NOTE
IS SUBJECT TO THE SUBORDINATION PROVISIONS CONTAINED HEREIN
THE HUNTINGTON NATIONAL BANK
COMMERCIAL LOAN NOTE
Business Purpose
================================================================================
City Office ___________________ Division ________ Branch _____________[ ]Secured
Account No. ______________________ Note No. ______________________ [X] Unsecured
Account Name Pages, Inc., Pages Book Fairs, Inc. and Pages Library Services,
-------------------------------------------------------------------
Inc.
----
[X] Corporations [ ] Partnerships [ ] Individuals/Proprietorships
[ ]Other________________________________________________________________________
================================================================================
$200,000.00 Columbus, Ohio __________, 1998
FOR VALUE RECEIVED, the undersigned, jointly and severally, promise to pay
to the order of THE HUNTINGTON NATIONAL BANK (hereinafter called the "Bank,"
which term shall include any holder hereof), at such place as the Bank may
designate or, in the absence of such designation, at any of the Bank's offices,
the sum of Two Hundred Thousand Dollars ($200,000.00) (hereinafter called the
"Principal Sum"), together with interest as hereinafter provided. The
undersigned promise to pay the Principal Sum and the interest thereon at the
time and in the manner hereinafter provided in this note (this "Note").
INTEREST
- --------
Interest will accrue on the unpaid balance of the Principal Sum until paid
at the rate of eight percent (8 1/2%) per annum.
Upon the occurrence of an "Event of Default" pursuant to the Loan
Agreement, interest will accrue on the unpaid balance of the Principal Sum and
unpaid interest, if any, until paid at the rate of twelve percent (12 1/2%) per
annum.
All interest shall be calculated on the basis of a 360 day year for the
actual number of days the Principal Sum or any part thereof remains unpaid.
<PAGE> 2
MANNER OF PAYMENT
- -----------------
The Principal Sum shall be payable on July 31,2001, and accrued interest
shall be due and payable quarterly beginning on January 1, 1999, and continuing
on the 1st day of each April, July, October and January thereafter, and at
maturity, whether by demand, acceleration or otherwise.
LATE CHARGE
- -----------
Any installment or other payment not made within 10 days of the date such
payment or installment is due shall be subject to a late charge equal to 5% of
the amount of the installment or payment.
SUBORDINATION
- -------------
(a) The indebtedness evidenced by this Note (the "Subordinated
Indebtedness") is hereby made subordinate and junior in right of payment, in the
manner and to the extent provided herein, to the prior payment in full of all
Senior Indebtedness of the undersigned. The term "Senior Indebtedness" means any
and all indebtedness for borrowed money in an aggregate amount not exceeding
$500,000.00 at any time that is now or hereafter owing by the undersigned to any
one entity, not affiliated with the undersigned, that (i) is designated by the
undersigned (in a written notice provided to the Bank within one year after the
date of this Note) as the Senior Creditor for purposes hereof, and (ii) is
reasonably acceptable to the Bank (such entity hereinafter referred to as the
"Senior Creditor").
(b) In the event of any insolvency or bankruptcy proceedings, or any
receivership, liquidation, reorganization, sale or transfer of any material
asset or interest in the undersigned, or other similar proceedings or
transactions in connection therewith, relative to the undersigned, to their
respective creditors, or to their respective properties, or in the event of any
proceedings for voluntary liquidation, dissolution or other winding up of the
undersigned, whether or not involving insolvency or bankruptcy, then Senior
Creditor shall be entitled to receive payment in full of all principal of and
premium, if any, interest, and fees on the Senior Indebtedness including,
without limitation, interest or fees accruing subsequent to the filing of a
petition in any such insolvency or bankruptcy proceeding, notwithstanding any
law, rule or regulation that would otherwise limit Senior Creditor's right to
receive such post-petition interest or fees, before the Bank is entitled to
receive any payment otherwise due under this Note, and Senior Creditor shall be
entitled to receive for application in payment thereof any payment,
distribution, or dividend of any kind or character, whether in cash or property
or securities, which may be payable or deliverable in any such proceedings in
respect of the indebtedness evidenced by this Note, except securities which are
subordinate and junior in right of payment to the payment of all the Senior
Indebtedness then outstanding.
-2-
<PAGE> 3
(c) No action which Senior Creditor, or the undersigned with the consent of
Senior Creditor, may take or refrain from taking with respect to any Senior
Indebtedness, or any note or notes evidencing the same, or any collateral
therefor, including a waiver or release thereof, or any agreement or agreements
(including guaranties) in connection therewith, shall affect the subordination
of the Subordinated Indebtedness to the payment of the Senior Indebtedness, as
set forth herein. Without limitation, such subordination shall in no way be
affected or impaired by, and by acceptance of this Note the Bank hereby
irrevocably consents to: (i) any amendment, restatement, alteration, extension,
renewal, waiver, indulgence or other modification of the documents evidencing
the Senior Indebtedness; (ii) any settlement or compromise in connection with
the Senior Indebtedness; (iii) any substitution, exchange, release or other
disposition of all or any part of the Senior Indebtedness; (d) any failure,
delay, neglect, act or omission by the Senior Creditor to act in connection with
the Senior Indebtedness; or (v) any advances for the purpose of performing or
curing any term or covenant contained in the documents or agreements evidencing
the Senior Indebtedness with respect to which the undersigned shall be or would
otherwise be in default; all of the foregoing notwithstanding any defect in the
genuineness, validity, regularity or enforceability of the documents or
agreements evidencing the Senior Indebtedness or any other circumstances,
whether or not referred to herein, that might otherwise constitute a legal or
equitable discharge or a defense of the Bank.
NEGATIVE COVENANTS
- ------------------
Each of the undersigned (hereinafter sometimes referred to individually as
a "Company" and collectively as the "Companies") covenants that until the
obligations evidenced by this Note shall be fully and indefeasibly paid in full
in cash:
(a) SALE OF ASSETS: MERGER; SUBSIDIARIES; TRADENAMES. Such Company will
not, except in the ordinary course of business, sell, lease, transfer or
otherwise dispose of, any of its assets, except that such Company may sell or
otherwise dispose of its inventory in the ordinary course of its business. Such
Company will not, without the prior written consent of the Bank (which consent
shall not be unreasonably withheld) and without the execution of such documents
deemed necessary by the Bank, and will not permit any of its affiliates to,
consolidate with, merge into, or make investments in any other entity, or permit
any other entity to consolidate with or merge into it. Without the prior written
consent of the Bank, Pages, Inc. (the "Parent") shall not acquire all or
substantially all of the assets or business of any other company, person or
entity make investments in any other company, person or entity, or transfer any
assets to any other company, person or entity. With respect to any acquisition
of, or investment in, all or substantially all of the assets or business of any
other company, person or entity for which the written consent of the Bank is
provided, the Parent shall execute and deliver to the Bank such documents deemed
necessary by the Bank. In addition, Pages Book Fairs, Inc. and Pages Library
Services, Inc. shall not acquire all or substantially all of the assets or
business of any other company, person or entity or make investments in any other
company, person or entity. Such Company has no subsidiaries except that Pages
Book Fairs, Inc. and RABC, Inc. are wholly-owned subsidiaries of the Parent.
Each Company conducts business only in the name of such
-3-
<PAGE> 4
Company. Such Company will not create or acquire any subsidiaries without the
prior written consent of the Bank, which consent will not be withheld
unreasonably.
(b) NEGATIVE PLEDGE. Such Company will not cause or permit or agree or
consent to cause or permit in the future (upon the happening of a contingency or
otherwise), any of its real or personal property, whether now owned or hereafter
acquired, to become subject to a lien or encumbrance, except; (i) liens in
connection with deposits required by workers' compensation, unemployment
insurance, social security and other like laws; (ii) taxes, assessments,
reservations, exceptions, encroachments, easements, rights of way, covenants,
conditions, restrictions, leases and other similar title exceptions or
encumbrances affecting real property, PROVIDED they do not in the aggregate
materially detract from the value of said property or materially interfere with
its use in the ordinary conduct of business; (iii) inchoate liens arising under
ERISA to secure the contingent liability of such Company; and (iv) liens
securing the Senior Indebtedness. In addition, such Company has not agreed and
will not agree (upon the happening of a contingency or otherwise) to enter into
an agreement or grant a "negative pledge" or other covenant similar to this
paragraph in favor of any other lender, creditor or third party.
(c) OTHER BORROWINGS AND CONTINGENT LIABILITIES. Except for the
Subordinated Indebtedness and the Senior Indebtedness, such Company will not,
(a) create or incur any extensions of credit or indebtedness, including without
limitation any indebtedness for borrowed money or advances or through the
execution of capitalized lease agreements or (b) guarantee, indorse or otherwise
become surety for or upon the obligations of others, except by indorsement of
negotiable instruments for deposit or collection in the ordinary course of
business.
(d) TRANSACTIONS WITH AFFILIATES. None of the Companies shall directly or
indirectly enter into or permit to exist any transactions (including, without
limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service) with any of its affiliates, shareholders, directors or
any affiliates of the same, on terms that are less favorable to such Company
than those which might be obtained at the time from persons or entities who are
not affiliated with the Company or its shareholders.
AFFIRMATIVE COVENANTS
- ---------------------
(a) FINANCIAL INFORMATION AND REPORTING. The Parent shall deliver the
following to the Bank on a consolidated and consolidating basis:
(i) within 45 days after the end of each quarter, financial
statements, including a balance sheet and statements of income and surplus,
and a statement of cash flows of the Companies, on a combined and
consolidated basis, certified by the president or chief financial officer
of the Parent (a "Financial Officer") as fairly representing the Companies'
financial condition as of the end of such period;
-4-
<PAGE> 5
(ii) within 45 days after the end of each quarter, statements signed
by a Financial Officer certifying the compliance of each of the Companies
with the terms of this Note and the calculation of the Debt Service
Coverage Ratio;
(iii) within 90 days after the end of each fiscal year, audited
unqualified financial statements with consolidating schedules, prepared in
accordance with generally accepted accounting principles consistently
applied and certified by independent public accountants satisfactory to the
Bank, containing a balance sheet, statements of income and surplus,
statements of cash flows and reconciliation of capital accounts, along with
any management letters written by such accountants;
(iv) immediately upon the filing or release, as the case may be,
copies of any Securities and Exchange Commission or State Securities Law
disclosures, filings, documents or any press releases; and
(v) at the request of the Bank, such other information as the Bank may
from time to time reasonably require.
(b) DEBT SERVICE COVERAGE RATIO. The Companies, on a combined and
consolidated basis, shall maintain at all times a ratio (the "Debt Service
Coverage Ratio") of (a) EBITDA to (b) Debt Service of not less than 1.25 to
1.00. The Debt Service Coverage Ratio of the Companies shall be determined as of
the last day of each fiscal quarter, beginning December 31, 1998, for the twelve
month period ending on such date (or, if fewer than twelve months have occurred
since June 30, 1998, for the period from June 30, 1998 to such date).
"EBITDA" means for any period for the Companies, on a combined and
consolidated basis, (i) the sum of the amounts for such period of (A)
Consolidated Net Income, PLUS (B) Consolidated Interest Expense, PLUS (C)
charges for federal, state, local and foreign income taxes, PLUS (D)
depreciation, amortization expense and non-cash charges which were deducted in
determining Consolidated Net Income, MINUS the sum of the amounts for such
period of (X) other non-operating income not already excluded from the
determination of Consolidated Net Income, PLUS (Y) to the extent not deducted
from Consolidated Interest Expense, any net payments received during such period
under interest rate contracts and any interest income received in respect of its
cash investments.
"Consolidated Net Income" means for any period the net income (or deficit)
after taxes of the Companies for such period, on a combined and consolidated
basis, which in accordance with GAAP would be included as net income on the
statements of income of the Companies for such period.
"Consolidated Interest Expense" means, for any period, as determined in
conformity with GAAP, total interest expense of the Companies, on a combined and
consolidated basis, whether paid or accrued or due and payable (without
duplication), including without limitation the interest component of capital
lease obligations for such period, all bank fees, commissions, discounts and
other fees and charges owed with respect to letters of credit, and net costs
under interest rate contracts.
-5-
<PAGE> 6
"Debt Service" shall mean with respect to any period, the sum of (a)
Consolidated Interest Expense, PLUS (b) scheduled principal payments on term
obligations and capital leases of the Companies for such period.
DEFAULT
- -------
Upon the occurrence of any of the following events:
(a) the failure of any of the undersigned to make any payment of
interest or of the Principal Sum on or before the date such payment is due;
(b) any of the undersigned fails to perform or observe any covenant
contained in this Note;
(c) a final judgment or judgments for the payment of money aggregating
in excess of $100,000.00 is or are outstanding against any one of the
undersigned and any such judgment or judgments have not been discharged in
full or stayed;
(d) the occurrence of any event which allows the acceleration of the
maturity of any indebtedness in excess of $100,000.00, if any, of any one
of the undersigned to the Bank, any of the Bank's affiliates, or any other
person, corporation or entity under any indenture, agreement or
undertaking;
(e) the death or dissolution of any of the undersigned, or any
indorser, surety, or guarantor, or the failure of any indorser, surety or
guarantor to perform any obligation to the Bank;
(f) the undersigned or any one of them shall become insolvent or
bankrupt, or make an assignment for the benefit of creditors or consent to
the appointment of a trustee, receiver or liquidator;
(g) bankruptcy, reorganization, arrangement, insolvency, liquidation
or receivership proceedings are instituted by or against the undersigned
(or any one of them) under federal or state law;
(h) any warranty, representation or other statement by or on behalf of
any one of the undersigned contained in this Note or in any instrument
furnished in compliance with or in reference to this Note is false or
misleading in any material respect, or any one of the undersigned fails to
perform or observe any covenant contained in any mortgage, security
agreement or other agreement in favor of the Bank; or
-6-
<PAGE> 7
(i) the Bank for any reason in good faith deems itself insecure
with respect to the obligations evidenced hereby,
then the Bank may, at its option, without notice or demand, accelerate the
maturity of the obligations evidenced hereby, which obligations shall become
immediately due and payable. In the event the Bank shall institute any action
for the enforcement or collection of the obligations evidenced hereby, the
undersigned agree to pay all costs and expenses of such action, including
reasonable attorneys' fees, to the extent permitted by law.
GENERAL PROVISIONS
- ------------------
Each of the parties executing this Note, and any indorser, surety, or
guarantor, hereby jointly and severally waive presentment, notice of
dishonor, protest, notice of protest, and diligence in bringing suit
against any party hereto, waive the defenses of impairment of collateral
for the obligation evidenced hereby, impairment of a person against whom
the Bank has any right of recourse, and any defenses of any accommodation
maker and consent that without discharging any of them, the time of payment
and any other provision of this promissory note may be extended or modified
an unlimited number of times before or after maturity without notice to the
undersigned. Each of the undersigned jointly and severally agrees that it
will pay the obligations evidenced hereby, irrespective of any action or
lack of action on the Bank's part in connection with the acquisition,
perfection, possession, enforcement, disposition, or modification of all
the obligations evidenced hereby or any and all security therefor, and no
omission or delay on the Bank's part in exercising any right against, or
taking any action to collect from or pursue the Bank's remedies against any
party hereto will release, discharge, or modify the duties of the
undersigned, or any of them, to make payments hereunder. Each of the
undersigned agrees that the Bank, without notice to or further consent from
the undersigned, may release or modify any collateral, security, document
or other guaranties now held or hereafter acquired, or substitute other
collateral, security or other guaranties, and no such action will release,
discharge or modify the duties of the undersigned, or any of them,
hereunder. Each of the undersigned agrees that the Bank will not be
required to pursue or exhaust any of its rights or remedies against the
undersigned, or any of them, or any guarantors of the obligations evidenced
hereby with respect to the payment of any said obligations, or to pursue,
exhaust or preserve any of the Bank's rights or remedies with respect to
any collateral, security or other guaranties given to secure said
obligations. Each of the undersigned waives any claim or other right which
it might now have or hereafter acquire against any other person or entity
that is primarily or contingently liable on the obligations that arise from
the existence or performance of each of the obligations of the undersigned
under this Note, including, without limitation, any right of subrogation,
reimbursement, exoneration, contribution, indemnification, or any right to
participate in any claim or remedy of the Bank or any collateral security
which the Bank now has or hereafter acquires, whether such claim, remedy or
right arises in equity, under contract or statute, at common law, or
otherwise.
-7-
<PAGE> 8
The obligations evidenced hereby may from time to time be evidenced by
another note or notes given in substitution, renewal or extension hereof. Any
security interest or mortgage which secures the obligations evidenced hereby
shall remain in full force and effect notwithstanding any such substitution,
renewal, or extension.
The captions used herein are for references only and shall not be deemed a
part of this Note. If any of the terms or provisions of this Note shall be
deemed unenforceable, the enforceability of the remaining terms and provisions
shall not be affected. This Note shall be governed by and construed in
accordance with the law of the State of Ohio.
WAIVER OF RIGHT TO TRIAL BY JURY
- --------------------------------
EACH OF THE UNDERSIGNED HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY
OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING UNDER THIS NOTE OR
ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION
HEREWITH, OR (2) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE UNDERSIGNED OR THE BANK, OR ANY OF THEM, WITH RESPECT TO THIS
NOTE OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE; AND EACH OF THE UNDERSIGNED HEREBY AGREES AND CONSENTS THAT
ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT
TRIAL WITHOUT A JURY, AND THAT THE UNDERSIGNED, OR ANY OF THEM, OR THE BANK MAY
FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF EACH OF THE UNDERSIGNED TO THE WAIVER OF THE RIGHT OF
THE UNDERSIGNED TO TRIAL BY JURY.
WARRANT OF ATTORNEY
- -------------------
Each of the undersigned authorizes any attorney at law to appear in any
Court of Record in the State of Ohio or in any state or territory of the United
States after the above indebtedness becomes due, whether by acceleration or
otherwise, to waive the issuing and service of process, and to confess judgment
against any one or more of the undersigned in favor of the Bank for the amount
then appearing due together with costs of suit, and thereupon to waive all
errors and all rights of appeal and stays of execution. No such judgment or
judgments against less than all of the undersigned shall be a bar to a
subsequent judgment or judgments against any one or more of the undersigned
against whom judgment has not been obtained hereon, this being a joint and
several warrant of attorney to confess judgment.
-8-
<PAGE> 9
Borrower; Borrower;
Pages Book Fairs, Inc. Pages Library Services, Inc.
By: /s/ illegible By: /s/ illegible
------------------------------ ------------------------------
Its: Chairman Its: Chairman
----------------------------- -----------------------------
================================================================================
WARNING--BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT TRIAL.
IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU WITHOUT YOUR
PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT FROM YOU
REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR RETURNED
GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT, OR ANY
OTHER CAUSE.
================================================================================
Borrower:
PAGES, INC.
By: /s/ illegible
------------------------------
Its: Chairman
-----------------------------
-9-
<PAGE> 1
Exhibit 10(w)
LEASE EXTENSION AND MODIFICATION AGREEMENT
--------------------------------------------
AGREEMENT, made between THE MINSTER, ELDERS AND DEACONS OF THE REFORMED
PROTESTANT DUTCH CHURCH OF THE CITY OF NEW YORK, a corporation organized under
the Royal Charter of 1696 and existing by virtue of the Laws of the State of New
York with its principal office at 45 John Street in the Borough of Manhattan,
City, Country and State of New York, hereinafter designated as the Landlord, and
PAGES, INC., a corporation organized under the Laws of the State of Delaware and
having its principal offices at 29 John Street in the Borough of Manhattan,
City, County, and State of New York, hereinafter designated as the Tenant.
WITNESSETH:
For and in consideration of the sum of TEN ($10.00) DOLLARS each to the
other in hand paid, it is mutually understood and agreed by and between the
parties hereto that the lease dated August 29, 1994, and extended on March 6,
1995 between THE MINISTER, ELDERS AND DEACONS OF THE REFORMED PROTESTANT DUTCH
CHURCH OF THE CITY OF NEW YORK as Landlord, and PAGES INC., as Tenant, for the
space known as ROOM 1602 in the building known as 29 JOHN STREET in the Borough
of Manhattan, City of New York, is hereby modified to the following extent:
EFFECTIVE AS OF JULY 1, 1996:
-----------------------------
1. The demised premises known as Room 1602 shall be extended to include
additional space known as Room 1601.
2. Landlord and Tenant hereby covenant and agree to extend the term of
the aforesaid lease to May 31, 1999.
3. The new base rent shall become One Thousand Seven Hundred Fifty-Three
($1,753.00) Dollars per month, $21,036.00 per year.
4. The security deposit of Two Thousand Two Hundred Seventy ($2,270.00)
Dollars shall be increased by Four Hundred Sixty-Four ($464.00)
Dollars for a total of Two Thousand Seven Hundred Thirty-Four
($2,734.00) Dollars. Tenant will pay Landlord an additional security
deposit of $464.00.
5. The electric charge has been increased to $294.75 per month.
6. The "Base Year" to calculate the "Real Estate Tax Adjustment" will
become the tax year July 1, 1996- June 30, 1997. The percentage of the
Real Estate Taxes shall become 1.9%, effective as of each July but in
no event sooner than July 1, 1997 there shall be made a real estate
tax adjustment of the annual rental rate payable hereunder.
7. The "Base Year" to calculate the "Cost of Living Adjustment" will
become 1996. Effective as of each January but not before January 1,
1997, there shall be made a Cost of Living adjustment of the annual
rental rate payable hereunder.
8. Landlord agrees to do the following work in Room 1601.
1. Install interior door similar to existing doors currently in Room
1602.
<PAGE> 2
2. Build closet to be used for storage and coats.
3. Paint the premises.
4. Install carpet in the premises.
5. Replace damaged and missing ceiling tiles.
6. Install radiator with cover.
7. Repair existing A/C to be in proper working condition. Move A/C
to top of window with plexiglass panel.
This agreement shall be attached to and form a part of the above mentioned
lease and, except as herein above modified, said lease and the provisions
thereof shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have signed and sealed this
agreement this 27 DAY OF JUNE 1996.
THE MINISTER, ELDERS AND DEACONS
OF THE REFORMED PROTESTANT DUTCH
Witness: CHURCH OF THE CITY OF NEW YORK
/s/ illegible BY: /s/ Kenneth L. Schaffer
- --------------------------------- ------------------------------------
Kenneth L. Schaffer, Treasurer
PAGES, INC.
/s/ illegible BY: /s/ Randall J. Asmo Vice President
- --------------------------------- ------------------------------------
Randall J. Asmo
[SEAL]
<PAGE> 1
Exhibit 10(x)
NOTE PURCHASE AGREEMENT
This Note Purchase Agreement is made as of the 20th day of June, 1996, by
and between Pages, Inc., a Delaware corporation (the "Company") and the person
or persons who execute the signature page hereto (the "Buyer").
1. PURCHASE OF SECURITIES. Subject to the terms and conditions of this
Agreement, the Buyer, intending to be legally bound, hereby irrevocably agrees
to purchase from the Company that principal amount of 10% subordinated notes due
December 31, 2005 (the "Notes") that is indicated on the signature page
attached hereto. Unless otherwise provided for in Schedule 1 attached hereto,
payment of the Notes is delivered to the Company simultaneously with the
execution hereof by Buyer and is in the form of a check drawn on the account of
Buyer or wire transfer to the Company. The Notes are accompanied by warrants
("Warrants") exercisable at any time up until 5:00 P.M., Eastern Time, on the
date five years after the date hereof to purchase twenty Shares of Company
common stock, $.01 par value, ("Common Stock") for each $1,000 in principal
amount of Notes purchased, exercisable at $2.75 per share and upon the exercise
schedule described in the Company's Private Placement Memorandum dated April 23,
1996, as amended or supplemented (the "Memorandum").
2. ISSUANCE OF NOTES. The Company shall deliver to the Buyer an original
Note and Warrant within a reasonable time after payment for the Notes is
received by the Company.
3. INVESTOR NOTICES. The Buyer acknowledges that:
(a) Neither the Notes nor the Warrants have been approved or
disapproved by the Securities and Exchange Commission or any state securities
commissioner, and neither the Securities and Exchange Commission nor any state
securities commissioner has passed upon the accuracy or adequacy of the
Memorandum.
(b) No person other than the Chairman of the Board and the President
of the Company is authorized to give any information or to make any
representation regarding the Company and its future prospects, and any
information or representation made by other than the Chairman of the Board or
the President of the Company must not be relied upon.
(c) The offer of Notes and Warrants may be withdrawn by the Company at
any time prior to the acceptance by the Company of this Note Purchase Agreement
in writing. In connection with the offering and sale of the Notes and Warrants,
the Company reserves the right, in its sole discretion, to reject any
subscription.
(d) This Note Purchase Agreement is submitted in connection with the
private placement of the Notes and Warrants and does not constitute an offer or
solicitation by or to anyone in any jurisdiction in which such an offer or
solicitation is not authorized.
<PAGE> 2
(e) The Company has agreed to provide to the Buyer and any of the
representatives of the Buyer the opportunity to inspect additional documents and
to inquire of, and to receive answers from, it or any person acting on its
behalf concerning the Company and the Notes. The Buyer may also obtain any
additional information from the Company, to the extent it possesses such
information or can acquire it without unreasonable effort or expense, necessary
to verify the accuracy of the information provided to the Buyer with this Note
Purchase Agreement. Any requests for information or to examine any documents
should be directed to S. Robert Davis at Pages, Inc., 801 94th Avenue North, St.
Petersburg, Florida, 33702, (813) 578-3300.
4. REPRESENTATIONS AND WARRANTIES. The Buyer hereby acknowledges,
represents, and warrants to, and agrees with, the Company as follows:
(a) The Buyer has received and reviewed the Memorandum.
(b) No oral or written representations have been made or oral or
written information furnished to the Buyer or his advisor(s) in connection with
the offering of the Notes and Warrants which were in any way inconsistent with
the information provided to the Buyer.
(c) The Buyer is not subscribing for the Notes and Warrants as a
result of or subsequent to any advertisement, article, notice, or other
communication published in any newspaper, magazine, or similar media or
broadcast over television or radio, or presented at any seminar or meeting to
which the Buyer was invited by means of any advertisement, article, notice, or
other communication published in any newspaper, magazine, or similar media or
broadcast over television or radio.
(d) The Buyer has adequate means of providing for the Buyer's current
needs and contingencies, is able to bear the economic risks of an investment in
the Notes and Warrants for an indefinite period of time and has no need for
liquidity in such investment.
(e) The Buyer has such knowledge and experience in financial and
business matters so as to enable the Buyer to utilize the information made
available to the Buyer about the Company in order to evaluate the merits and
risks of an investment in the Notes and Warrants and to make an informed
investment decision with respect thereto.
(f) The Buyer is acquiring the Notes and Warrants solely for the
Buyer's own account as principal, for investment purposes only and not with a
view to the resale or distribution thereof, in whole or in part, and no other
person has a direct or indirect beneficial interest in such Notes and Warrants.
(g) The Buyer will not sell or otherwise transfer the Notes and
Warrants without Registration under the Securities Act of 1933, as amended (the
"Act"), and applicable state securities laws or an exemption therefrom, and
fully understands and agrees that the Buyer must bear the economic risk of his
purchase for an indefinite period of time because the Notes and Warrants have
not been Registered under the Act or under the securities laws of any state and,
therefore, cannot be resold unless they are subsequently Registered under the
Act and under the
2
<PAGE> 3
applicable securities laws of such states or unless an exemption from such
Registration is available or, as to the Warrants, the Warrants and the Shares of
Common Stock underlying the Warrants are Registered. The Company will affix a
legend in substantially the following form to the Notes, the Warrants and the
Certificates evidencing the Shares of Common Stock issued pursuant to the
exercise of Warrants (except to the extent Registered under the Act):
The securities represented by this Certificate have not been Registered
under the Securities Act of 1933, as amended, and may not be sold, pledged,
apothecated, donated, or otherwise transferred, whether or not for
consideration, unless either the securities have been Registered under such
Act or an exemption from such Registration requirement is available. If the
securities are to be sold or transferred pursuant to an exemption from the
Registration requirement, the Company may require a written opinion of
counsel, in form and content satisfactory to the Company, to the effect
that Registration is not required or that such transfer will not violate
such Act or applicable state securities laws.
(h) The Buyer understands that, except as provided for herein, the Company
will be under no obligation to Register the Notes and Warrants (or the Shares of
Common Stock underlying the Warrants) on behalf of the Buyer or to assist the
Buyer in complying with any exemption from Registration under the Act or under
the securities laws of any state for resales of the Notes, Warrants, and shares
of Common Stock underlying the Warrants. The Buyer understands that except with
respect to securities Registered as provided for herein, the Company will issue
stock transfer instructions to its transfer agent with respect to such
securities.
(i) The Buyer understand(s) that no federal or state agency has passed upon
the Notes and Warrants or made any finding or determination as to the fairness
of this investment
(j) The Buyer is a bona fide resident of or, if an entity, maintains its
principal place of business in the State of Ohio and no contact with the Buyer
with respect to the offer or sale of the Notes and Warrants was made except in
the State(s) of Ohio.
(k) The Buyer is an "accredited investor" under Regulation D of the
Securities and Exchange Commission because (check the applicable box(es)):
[_] The undersigned is a bank (as defined in Section 3(a)(2) of the
Act) or any savings and loan association or other institution as
defined in Section 3(a)(5)(A) of the Act, whether acting in its
individual or fiduciary capacity; a broker or dealer registered
pursuant to Section 15 of the Securities Exchange Act of 1934; an
insurance company (as defined in Section 2(13) of the Act); an
investment company registered under the Investment Company Act of
1940 or a business development company as defined in Section
2(a)(48) of that Act; a Small Business Investment Company
licensed by the
3
<PAGE> 4
U.S. Small Business Administration under Section 301(c) or (d) of
the Small Business Investment Act of 1958; a plan established and
maintained by a state, its political subdivisions, or an agency
or instrumentality of a state or its political subdivisions for
the benefit of its employees with total assets in excess of
$5,000,000; an employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974 if the investment
decision is made by a plan fiduciary, as defined in Section 3(21)
of such Act, which is either a bank, savings and loan
association, insurance company, or registered investment adviser,
or an employee benefit plan with total assets in excess of
$5,000,000, or a self-directed plan with investment decisions
made solely by persons that are accredited investors.
[_] The undersigned is a private business development company as
defined in Section 202(a)(22) of the Investment Advisers Act of
1940.
[_] The undersigned is an organization described in Section 501(c)(3)
of the Internal Revenue Code, a corporation, a Massachusetts or
similar business trust, or a partnership, not formed for the
specific purpose of acquiring the Notes and Warrants, with total
assets in excess of $5,000,000.
[_] The undersigned is a natural person whose individual net worth,
or joint net worth with my spouse, at the time of purchase
exceeds $1,000,000.
[_] The undersigned is a natural person with an individual income (1)
in excess of $200,000 or joint income with my spouse in excess of
$300,000 in each of calendar years 1994 and 1995 and has a
reasonable expectation of reaching the same income level in
calendar year 1996.
[_] The undersigned is a trust, not formed for the specific purpose
of acquiring the Notes and Warrants, with total assets in excess
of
- -----------------
(1) For purposes of this Note Purchase Agreement, "individual income" means
"adjusted gross income" as reported for federal income tax purposes, less any
income attributable to a spouse or to property owned by a spouse, increased by
the following amounts (but not including any amounts attributable to a spouse or
to property owned by a spouse): (i) the amount of any interest income received
which is tax-exempt under Section 103 of the Internal Revenue Code of 1986 as
amended (the "Code"); (ii) the amount of losses claimed as a limited partner in
a limited partnership (as reported on Schedule E of Form 1040); (iii) any
deduction claimed for depletion under Section 611 et seq. of the Code; and (iv)
any amount by which income from long-term capital gains has been reduced in
arriving at adjusted gross income pursuant to the provisions of Section 1202 of
the Internal Revenue Code of 1986, as amended.
4
<PAGE> 5
$5,000,000 and whose purchase is directed by a person who
either alone or with his purchaser representative(s) has
such knowledge and experience in financial and business
matters that he is capable of evaluating the merits and
risks of the prospective investment.
[X] undersigned is an entity in which all of the equity owners
are accredited investors.
(l) The foregoing representations, warranties, and agreements shall be
true and correct in all respects on and as of the date of the issuance of the
Notes and Warrants to the Buyer as if made on and as of such date and shall
survive such date.
(m) If the Buyer is a corporation, partnership, trust, or other
entity, it is authorized and qualified to purchase the Notes and Warrants and
the person signing this Note Purchase Agreement on behalf of such entity has
been duly authorized by such entity to do so.
(n) If the Buyer is purchasing Notes and Warrants subscribed for
hereby in a representative or fiduciary capacity, the representations and
warranties contained herein and in any other written statement or document
delivered to the Company in connection herewith shall be deemed to have been
made on behalf of the person or persons for whom such Notes and Warrants are
being purchased.
5. INDEMNIFICATION. The Buyer agrees to indemnify and hold harmless the
Company and its officers, directors, and affiliates against any and all loss,
liability, claim, damage, and expense whatsoever (including, but not limited to,
any and all expenses, including attorney's fees, reasonably incurred in
investigating, preparing, or defending against any litigation commenced or
threatened or any claim whatsoever) arising out of or based upon any false
representations or warranty or breach or failure by the Buyer to comply with any
covenant or agreement made by the Buyer herein.
6. IRREVOCABILITY; BINDING EFFECT. Subject to applicable state securities
laws, the undersigned hereby acknowledges and agrees that the subscription
hereunder is irrevocable, that the undersigned is not entitled to cancel,
terminate, or revoke this Note Purchase Agreement or any agreements of the
undersigned thereunder, and that this Note Purchase Agreement and such other
agreements shall survive the death or disability of the undersigned and shall be
binding upon and inure to the benefit of the parties and their heirs, executors,
administrators, successors, legal representatives, and assigns.
7. REGISTRATION RIGHTS.
(a) For purposes of this paragraph 7:
(i) The term "Register," "Registered," and "Registration" refer
to a Registration effected by preparing and filing with the Securities and
Exchange Commission (the
5
<PAGE> 6
"Commission") a registration statement or similar document in compliance with
the Act, and the declaration or ordering of effectiveness of such registration
statement or document;
(ii) The term "Registrable Securities" means the Warrants and the
shares of Common Stock underlying the Warrants and any Common Stock issued as a
dividend or other distribution with respect to or in exchange for or in
replacement of the Common Stock issued or issuable upon exercise of the
Warrants.
(iii) The term "Majority Holders" means those persons who own Warrants
which, if exercised, would entitle them to receive shares of Common Stock in an
amount greater than 50% of the shares of Common Stock underlying all Warrants
then outstanding. The shares of Common Stock owned by persons who have exercised
Warrants shall, for purposes of this subparagraph, be treated as shares
underlying Warrants.
(b) Whenever the Company proposes to Register any of its Common Stock under
the Act for a public offering of Common Stock (but not convertible debt
securities) for cash, the Company shall give the Buyer written notice of its
intent to do so. Upon the written request of the Buyer delivered to the Company
within 10 business days after receipt of such notice, the Company shall use its
best efforts to cause to be included in such Registration all of the Registrable
Securities owned by the Buyer which the Buyer requests to be Registered;
provided (i) the Buyer agrees to sell the shares of Common Stock underlying the
Buyer's Warrants in the same manner and on the same terms and conditions as the
other Common Stock which the Company proposes to Register, (ii) the proposed
managing underwriter (which shall be selected by the Company in its sole
discretion) does not advise the Company that in its opinion the inclusion of the
Buyer's shares (and the shares of Common Stock held by others ["Other Buyers"]
who purchased their Notes pursuant to the offering described in the Memorandum,
and who have given written request to have their Registrable Securities included
in the registration statement) is likely to effect adversely the success of the
offering by the Company or the price it would receive, in which case the rights
of the Buyer shall be as provided in Paragraph 7(e), below, (iii) the Buyer
shall be entitled to include in such Registration not more than one-half of its
Registrable Securities if the Registration is reasonably expected to become
effective after the expiration of the time period which, under Rule 144(d),
would permit public resales of the Registrable Securities, (iv) the Buyer shall
not be entitled to include in such Registration any Registrable Securities which
are freely tradable under Rule 144(k), and (v) the registration right under this
paragraph 7(b) expires as to all Registrable Securities December 31, 2000, after
which the Buyer shall have no right to have any Registrable Securities
Registered.
(c) In connection with any offering involving any underwriting of shares of
Common Stock being issued by the Company, the Company shall not be required
under Paragraph 7(b) to include any of the Buyer's Registrable Securities
therein unless the Buyer accepts and agrees to the terms of the underwriting as
agreed upon between the Company and the underwriters selected by it, and then
only in such quantity as will not, in the opinion of the underwriters,
jeopardize the success of the offering by the Company. If the total number of
shares of Common Stock which the Buyer and all Other Buyers request to be
included in any offering exceeds the number of such Notes which the underwriters
believe compatible with the
6
<PAGE> 7
success of the offering, the Company shall only be required to include in the
offering so many of the shares of Common Stock of the Buyer and the Other Buyers
as the underwriters believe will not jeopardize the success of the offering. The
shares so included shall be apportioned pro rata among the Buyer and the Other
Buyers according to the total number of shares requested to be included in such
offering by the Buyer and the Other Buyers, or in such proportions as shall be
mutually agreed to by the Buyer and the Other Buyers, provided that no such
reduction shall be made with respect to any securities offered by the Company
for its own account
(d) As long as the Company has given any notice required by Paragraph
7(b), the Buyer shall not have the right to take any action to restrain, enjoin,
or otherwise delay any Registration as the result of any controversy which might
arise with respect to the interpretation or implementation of this Paragraph 7.
(e) (i) Commencing on October 3, 1996, if the Company shall receive a
written request (specifying that it is being made pursuant to this paragraph
7(e)) from the Majority Holders that the Company file a registration statement
under the Act, covering the Registration of the Registrable Securities, then the
Company shall, within ten (10) days after the receipt thereof, give written
notice of such request to all Buyers and shall, subject to the limitations
contained in subparagraphs (e)(ii) and (e)(iii) below, effect as soon as
practicable, the Registration under the Act of all Registrable Securities which
the Buyer and the Other Buyers request to be Registered within twenty (20) days
after the mailing of such notice by the Company in accordance with subparagraph
8(h). Provided, however (A) in the event that Buyer does not request that its
Registrable Securities be included in such Registration, the buyer shall be
deemed to have waived all Registration rights under this paragraph 7, (B) the
Buyer shall be entitled in such Registration not more than one-half of its
Registrable Securities if the Registration is reasonably expected to become
effective after the expiration of the time period which, under Rule 144(d),
would permit public resales of the Registrable Securities, (C) the Buyer shall
not be entitled to include in such Registration any Registrable Securities which
are freely tradable under Rule 144(k), and (D) the Registration right under this
paragraph 7(e) expires as to all Registrable Securities on December 31, 2000,
after which the Buyer shall have no right to have any Registrable Securities
registered.
(ii) Notwithstanding the foregoing, (A) the Company shall not be
obligated to effect a Registration pursuant to this paragraph 7(e) during the
period starting with the date sixty (60) days prior to the Company's estimated
date of filing of, and ending three (3) months following the effective date, of
a registration statement pertaining to an underwritten public offering of
securities for the account of the Company, provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective and that the Company's estimate of the date of
filing such registration statement is made in good faith; and (B) if the Company
shall furnish to Buyer and the other buyers a certificate signed by the
President of the Company stating that in the good faith judgment of the Board
of Directors it would be detrimental to the Company or its shareholders for a
registration statement to be filed in the near future, then the Company's
obligation to use its best efforts to file a registration statement shall be
deferred for a period during which such filing would be detrimental, provided
that this period will not exceed nine (9) months.
7
<PAGE> 8
(iii) The Company shall be obligated to effect no more than one
Registration pursuant to this subparagraph 7(e).
(f) Whenever required under this paragraph 7 to effect the
Registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:
(i) Prepare and file with the Commission a registration statement with
respect to such Registrable Securities and use its reasonable best efforts to
case such registration statement to become effective, and, upon the request of
the Majority Holders, keep such registration statement effective for not less
than ninety (90) days or such earlier date as all securities offered are sold.
(ii) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement.
(iii) Furnish to the selling Buyers such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them.
(iv) Use its best efforts to Register and qualify the securities
covered by such registration statement under such selling Buyers securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
selling Buyers, provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdiction.
(g) It shall be a condition precedent to the obligations of the Company to
take any action pursuant to this paragraph 7 that the selling Buyers shall
furnish to the Company such information regarding themselves, the Registrable
Securities held by them, and the intended method of disposition of such
securities as shall be required to effect the Registration of their Registrable
Securities.
(h) All expenses (other than underwriting discounts and commissions)
incurred in connection with Registrations pursuant to subparagraph 7(e),
including (without limitation) all Registration, filing and qualification fees,
printers' and accounting fees, and fees and disbursements of counsel for the
Company, shall be borne by the company; provided, however, that the Company
shall not be required to pay the cost of any special audits required for a
Registration effected pursuant to subparagraph 7(e) hereof, or any expenses of
any Registration proceeding begun pursuant to subparagraph 7(e) if the
Registration request is subsequently withdrawn at the request of the Majority
Holders, unless the Majority Holders agree to forfeit a right to demand
Registration pursuant to subparagraph 7 (e) (in which event such right shall be
deemed to be forfeited by all Buyers). In the absence of such an agreement to
forfeit, the Buyers
8
<PAGE> 9
requesting withdrawal of the Registration request shall bear all such expenses
pro rata on the basis of the Registrable Securities to have been Registered by
such Buyers. Notwithstanding the foregoing, however, if at the time of such
withdrawal, the Buyers have learned of a material adverse change in the
condition, business, or prospects of the Company from that known to the Buyers
at the time of their request, then the Buyers shall not be required to pay any
of such expenses and shall retain their rights pursuant to subparagraph 7(e).
(i) The Company shall bear and pay all costs of and incidental to any
Registration, filing or qualification of Registrable Securities with respect to
the Registration pursuant to subparagraph 7(b) for each Buyer, including all
Registration, filing, and qualification fees, printers' and accounting fees
relating or apportionable thereof except that Buyers shall pay all legal fees
and disbursements of their counsel, if any, and the Buyers will bear and pay
their pro rata portion of any underwriting discounts and commissions.
(j) In connection with any Registration of the Registrable Securities, the
Buyer shall provide to the Company such information as may be reasonably
required by the Company to prepare and file such registration statement in
accordance with applicable provisions of the Act and the Rules and Regulations
thereunder. The Buyer shall furnish such information in writing within five
business days after written request by the Company. The Company shall have sole
control of the preparation, filing, amendment, and supplementation of any
registration statement to be filed on behalf of the Buyer.
(k) In the event that any of the Warrants shall at any time be transferred
of record by the Buyer, the rights herein conferred shall not extend to any such
transferee.
(l) In the event of (i) the Registration of any Registrable Securities
under the Act pursuant to the provisions of this Agreement and to the extent
permitted by applicable law, the Company agrees to indemnify and hold harmless
the Buyer, and each other person, if any, who controls the Buyer within the
meaning of the Act, from and against any and all losses, claims, damages, or
liabilities (or actions in respect thereof) which arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in any registration statement under which such Registrable Securities were
Registered under the Act or any prospectus contained therein, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Buyer, and each such controlling person, for
any legal or any other expenses reasonably incurred by the Buyer, or controlling
person in connection with investigating or defending any such loss, claim,
damage, liability, or action provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage, or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement or
such prospectus in reliance upon, and in conformity with, information furnished
to the Company by the Buyer or such controlling person, specifically for use in
preparation thereof; (ii) the Registration of any Registrable Securities under
the Act pursuant to the provisions of this Agreement and to the extent permitted
by applicable law, the Buyer, and each other person, if any, who controls the
Buyer within the meaning of the Act, agrees to indemnify and hold harmless the
Company, each
9
<PAGE> 10
person who controls the Company within the meaning of the Act, and each officer
and director of the Company from and against any losses, claims, damages, or
liabilities, joint or several, to which the Company, such controlling person, or
any such officer or director may become subject under the Act or otherwise,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any registration statement under
which such Registrable Securities were Registered under the Act or any
prospectus contained therein, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, which untrue
statement or alleged untrue statement or omission or alleged omission was made
therein in reliance upon, and in conformity with, information furnished to the
Company by the Buyer or such controlling person specifically for use in
connection with the preparation thereof; and will reimburse the Company, each
such controlling person and each such officer or director for any legal or any
other expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability, or action; (iii) the
Registration of any Registrable Securities under the Act pursuant to the
provisions of this Agreement, promptly after receipt by an indemnified party of
notice of the commencement of any action or the assertion of a claim which may
be subject to indemnification hereunder, such indemnified party will, if a claim
in respect thereof is to be made against an indemnifying party, give written
notice to such indemnifying party of the commencement or assertion thereof, but
the omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than pursuant to
the provisions of this paragraph 7(l). In case any such action is brought or
such assertion made against any indemnified party, and it notifies any
indemnifying party of such commencement or assertion made against any
indemnified party, the indemnifying party will be entitled to participate in
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, and to assume the defense thereof, with counsel satisfactory
to such indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party for any legal or
other expenses subsequently incurred by such indemnified party in connection
with the defense thereof, other than the reasonable cost of investigation.
8. MISCELLANEOUS.
(a) Neither this Note Purchase Agreement nor any provisions hereof
shall be waived, modified, discharged, or terminated except by an instrument in
writing signed by the party against whom any such waiver, modification,
discharge, or termination is sought.
(b) This Note Purchase Agreement contains the entire agreement of the
parties with respect to the subject matter hereof and there are no
representations, covenants, or other agreements except as stated or referred to
herein or in contemporaneously signed written agreements.
(c) Each provision of this Note Purchase Agreement is intended to be
severable from every other provision, and the invalidity or illegality of any
portion hereof shall not affect the validity or legality of the remainder
hereof.
10
<PAGE> 11
(d) This Note Purchase Agreement is not transferable or assignable by the
undersigned.
(e) This Note Purchase Agreement shall be governed by and construed in
accordance with the laws of the State of Florida as applied to residents of that
state executing contracts wholly to be performed in that state.
(f) Each party hereto agrees to submit to the personal jurisdiction and
venue of the state and federal courts in the State of Florida, in the judicial
circuit including Pinellas County, for resolution of all disputes and causes of
action arising out of this Agreement, and each party hereby waives all questions
of personal jurisdiction and venue of such courts, including, without
limitation, the claim or defense therein that such courts constitute an
inconvenient forum.
(g) If any legal proceeding is brought to enforce this Agreement or any
provision of it or because of any default in any representation, warranty,
covenant, indemnity, or provision of it, the successful or prevailing party
shall be paid all costs and expenses, including reasonable attorneys' fees
through all proceedings, trials, or appeals.
(h) All notices or other communications provided for herein to be given or
sent to a party by the other party shall be deemed validly given or sent if in
writing and mailed, postage prepaid, by Registered or certified United States
mail, addressed to the parties at their addresses hereinbelow set forth. Either
party may give notice to the other party at any time, by the method specified
above, of a change in the address at which, or the person to whom, notice is to
be addressed.
11
<PAGE> 12
SIGNATURE PAGE TO NOTE PURCHASE AGREEMENT
Principal Amount of Notes Purchased: $250,000
STANDARD PRINTING Company of Canton
By: Terry J. Nolan,President
------------------------------
Signature of Authorized Person
/s/ Terry J. Nolan, Pres.
----------------------------------
Print Name and Title
Standard Printing
PO Box 9276
Canton, Ohio 44711
Attn: Terry Nolan
ACCEPTED BY
PAGES, INC.
By: /s/ illegible
-------------------------------
As President
Address: Pages, Inc.
5720 Avery Road
Dublin, Ohio 43016
<PAGE> 13
SCHEDULE 1
TO
NOTE PURCHASE AGREEMENT
Buyer is regularly engaged in the printing business and has, in the past,
provided printing services and printed materials to the Company in the regular
course of business. Instead of paying for the Notes in cash, Buyer shall pay for
the Notes by allowing the Company a $250,000 credit against the delivery to the
Company certain printed goods upon purchase order of the Comnpany (the "Goods").
The balance of the price of the Goods shall be paid by the Company in cash.
Upon receipt and acceptance of the Goods, the Company shall issue and deliver to
Buyer a Note in the principal amount of $250,000, with interest on such Note to
accrue from the date 10 days after the Company's receipt and acceptance of the
Goods, and accompanied by a Warrant in accordance with paragraph 1 of the Note
Purchase Agreement. All Goods shall be of good and merchantable quality and in
accordance with the purchase order and specifications of the Company.
Description of Goods:
<TABLE>
<CAPTION>
TITLE QUANTITY AGGREGATE PRICE
- --------------------------------------------------------------------
<S> <C> <C>
Baby Animals 36.5M $13,173
Cute Critters `97 Calendar 40M $21,430
Fantastic Fish `97 Calendar 40M $11,169
Large 15x20 Posters 400M $94,677
A Look Around Rain Forests 36.5M $19,463
Midi Books (4 Titles) 30M each of 4 $24,240
Mommy, I Need Your Help 20M $ 8,320
Monster Wheels Fun with Stickers 35M $17,350
No Time Like Snowtime 30M $13,920
Patchez and the Soccer Surprise 30M $15,098
Patchez at the Circus 22M $12,878
Patchez Reads About Endangered Animals 33.5M $16,939
Stunt Flying with Paper Airplanes 40M $12,040
--------
TOTAL $280,697
</TABLE>
<PAGE> 1
Exhibit 10(y)
$175,000 Columbus, Ohio
November 6, 1995
EXHIBIT "B"
COGNOVIT PROMISSORY NOTE
------------------------
FOR VALUE RECEIVED, we, DANIEL M. WELSH, an individual residing in New
York, and THURSDAY PRODUCTIONS, INC. (collectively hereinafter referred to as
the "Undersigned"), jointly and severally promise to pay to SCHOOL BOOK FAIRS,
INC. (hereinafter the "Holder"), the principal sum of One Hundred Seventy-Five
and 00/100 Dollars ($175,000.00), together with interest at the rate of eight
percent (8%) per annum payable as follows:
Commencing on February 1, 1996 and on the first day of each May, August,
November, and February thereafter until February 1, 1999, the Undersigned shall
pay to Holder any and all accrued interest on the principal amount. Commencing
on May 1, 1999 and on the first day of each May, August, November, and February
thereafter until February 1, 2001, the Undersigned shall pay to the Holder
Twenty Three Thousand Eight Hundred Eighty-Nine and 22/100 Dollars ($23,889.22),
of equal installments of principal and interest.
The Undersigned shall have the right to prepay all or any part of the
principal at any time without penalty. Any such prepayment will be credited
first against the next installment of principal due hereunder (unless a default
has occurred, in which event prepayments shall first be credited against
interest then due).
In the event of non-payment of any installment of principal or interest
hereunder, when due, the entire balance of principal then remaining unpaid, with
accrued interest thereon, shall at once become due and payable at the option of
the holder hereof, without notice or demand. All outstanding principal and
accrued interest then remaining unpaid shall bear interest at a rate of eighteen
percent (18%) per annum.
The Undersigned and any sureties, endorsers or guarantors hereby
irrevocably authorize any attorney at law to appear in any court of record in
any county in the State of Ohio, or elsewhere, where any of the Undersigned
reside, signed this Note, or can be found, after the obligation evidenced
hereby, or any part thereof, becomes due and is unpaid, and waive the issuance
and service of process and confess judgment against any or all of the
Undersigned in favor of the Holder of this Note for the amount then appearing
due, together with the costs of suit, and thereupon to release all errors and
waive all right of appeal and stay of execution, but no judgment or judgments
against fewer than all of the Undersigned shall be a bar to any subsequent
judgment against those of the Undersigned against whom judgment has not been
taken.
The Undersigned and any sureties, endorsers or guarantors hereby waive
presentment for payment, demand, protest, notice of nonpayment or dishonor and
any and all other
<PAGE> 2
notices and demands whatsoever, and all defenses on the ground of an extension
of time for payment which may be granted, even though the period of extension
may be indefinite, and any inaction by, or failure to assert any legal right
available to, the Holder of this Note.
IN WITNESS WHEREOF, the Undersigned have set their hand to this Note as of
the 6th day of November, 1995.
WARNING -- BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE. [Sec. 2323.13 O.R.C.]
THURSDAY PRODUCTIONS, INC.
By: /s/ Daniel M Welsh /s/ Daniel M. Welsh
------------------------------ ---------------------------------
Daniel M. Welsh
Its: President
-----------------------------
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF
MEDIA SOURCE, INC.
<TABLE>
<CAPTION>
State of Percent of Stock
Name of Subsidiary Incorporation Owned by Registrant
- ------------------ ------------- -------------------
<S> <C> <C>
PAGES BOOK FAIRS, INC. Florida 100%
MT LIBRARY SERVICES, INC. Florida 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000354564
<NAME> MEDIA SOURCE
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 998,432
<SECURITIES> 0
<RECEIVABLES> 961,333
<ALLOWANCES> 94,000
<INVENTORY> 1,271,336
<CURRENT-ASSETS> 3,304,586
<PP&E> 656,642
<DEPRECIATION> 536,888
<TOTAL-ASSETS> 6,479,644
<CURRENT-LIABILITIES> 3,197,039
<BONDS> 2,056,914
0
0
<COMMON> 68,627
<OTHER-SE> 1,157,064
<TOTAL-LIABILITY-AND-EQUITY> 6,479,644
<SALES> 1,482,950
<TOTAL-REVENUES> 2,646,160
<CGS> 1,163,210
<TOTAL-COSTS> 1,989,422
<OTHER-EXPENSES> (282,631)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 309,078
<INCOME-PRETAX> (532,919)
<INCOME-TAX> 0
<INCOME-CONTINUING> (532,919)
<DISCONTINUED> (2,866,344)
<EXTRAORDINARY> (577,230)
<CHANGES> 0
<NET-INCOME> (3,976,493)
<EPS-PRIMARY> (12.12)
<EPS-DILUTED> (12.12)
</TABLE>
