<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10475
MEDIA SOURCE, INC.
INCORPORATED - DELAWARE I.R.S. IDENTIFICATION NO. 34-1297143
5720 AVERY RD., DUBLIN, OHIO 43016
Registrant's Telephone Number (614) 793-8749
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days YES X NO .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of latest practicable date: 328,200 common shares outstanding,
each $0.01 par value, as of March 31, 1999.
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------
1999 1998
---- ----
<S> <C> <C>
Revenues $886,842 $ 488,208
Costs of goods sold 366,053 224,340
-------- ---------
Gross profit 520,789 263,868
Operating expenses:
Selling, general and administrative 527,900 333,828
Depreciation and amortization 36,985 41,891
-------- ---------
Income (loss) from operations (44,096) (111,851)
Other expense:
Interest, net (45,411) (82,151)
-------- ---------
Income(loss) from continuing operations
before income taxes (89,507) (194,002)
Provision for income taxes -- --
-------- ---------
Income(loss) from continuing operations (89,507) (194,002)
Gain(loss) from discontinued operations 80,514 (801,704)
NET INCOME (LOSS) $ (8,993) $(995,706)
======== =========
Earnings per common share*
Income(loss) from continuing operations (0.27) (0.59)
Income(loss) from discontinued operations 0.24 (2.44)
-------- ---------
Net income (loss) $ (0.03) $ (3.03)
======== =========
Weighted average number of common
shares outstanding 328,200 328,200
======== =========
</TABLE>
*All per share data has been adjusted to reflect the one-for-twenty reverse
stock split.
See accompanying notes
2
<PAGE> 3
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Current Assets:
Cash $ 950,663 $ 998,432
Accounts receivable, net of allowance for doubtful
accounts of $65,000 and $94,000, respectively 773,250 867,333
Inventory 1,256,138 1,271,336
Prepaid expenses 173,288 167,485
---------- ----------
Total current assets 3,153,339 3,304,586
---------- ----------
Property and equipment:
Buildings -- --
Equipment 656,642 656,642
---------- ----------
656,642 656,642
Less accumulated depreciation (545,872) (536,888)
---------- ----------
Total property and equipment, net 110,770 119,754
---------- ----------
Other assets:
Assets held for disposal (net) 1,237,473 1,253,335
Cost in excess of net assets acquired, net of accumulated
amortization of $1,019,000 and $1,007,000, respectively 1,703,057 1,715,109
Other 19,261 86,860
---------- ----------
2,959,791 3,055,304
---------- ----------
TOTAL ASSETS $6,223,900 $6,479,644
========== ==========
</TABLE>
See accompanying notes
3
<PAGE> 4
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable $ 442,092 $ 678,108
Accrued liabilities 364,840 333,514
Accrued tax liabilities 537,507 506,745
Deferred revenue 1,459,154 1,568,892
Current portion of long-term debt obligations 119,891 109,780
------------ ------------
Total current liabilities 2,923,484 3.197,039
------------ ------------
Long-term debt and capital lease obligations 2,027,646 2,056,914
------------ ------------
Total liabilities 4,951,130 5,253,953
------------ ------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock: $.01 par value; authorized
300,000 shares; none issued and outstanding
Common stock: $.01 par value; authorized
20,000,000 shares; issued 343,137 shares 3,431 3,431
Capital in excess of stated value 21,974,029 21,974,029
Notes receivable from stock sales (902,373) (902,373)
Accumulated deficit (19,561,194) (19,608,273)
------------ ------------
1,513,893 1,466,814
Less 14,936 shares of common stock in
treasury, at cost (241,123) (241,123)
------------ ------------
Total stockholders' equity 1,272,770 1,225,691
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,223,900 $ 6,479,644
============ ============
</TABLE>
See accompanying notes
4
<PAGE> 5
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Cash Flow From (Used In) Operations:
Net income(loss) from continuing operations $ (89,507) $ (194,002)
--------- ------------
Reconciliation to net cash flow used in continuing operations:
Depreciation and amortization 36,985 41,891
Changes in working capital items of continuing operations:
Accounts receivable (81,917) (847,015)
Inventory 15,198 67,732
Prepaid expenses and other assets 61,711 (16,300)
Accounts payable and accrued liabilities (36,076) (872,351)
Deferred revenue (109,738) 398
--------- ------------
Net cash from (used in) continuing operations (203,344) (1,819,647)
--------- ------------
Net cash from (used in) discontinued operations 80,514 (801,704)
--------- ------------
Net cash from (used in) operations (122,830) (2,621,351)
--------- ------------
Cash Flow Used In Investing Activities:
Payments for purchases of property and equipment -- (2,950)
--------- ------------
Net cash from (used in) investing activities -- (2,950)
--------- ------------
Cash Flow From (Used In) Financing Activities:
Proceeds from settlement of note receivable 150,000
Proceeds from debt obligations 8,201,038
Proceeds from subordinated debt issued -- 3,000,000
Proceeds from CASCO Note -- 3,500,000
Payments on debt and lease obligations (19,157) (12,190,431)
--------- ------------
Net cash from (used in) financing activities 130,843 2,510,607
--------- ------------
Increase(Decrease) in cash 8,013 (113,694)
Cash, beginning of period 936,196 $ 167,389
--------- ------------
Cash, end of period $ 944,209 $ 53,695
========= ============
</TABLE>
See accompanying notes
5
<PAGE> 6
MEDIA SOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have not
been audited, but reflect all adjustments which, in the opinion of management,
are necessary for a fair presentation of financial position, results of
operations and cash flows. All adjustments are of a normal and recurring nature,
except for those related to the discontinued operations of the Company's book
fair business.
Media Source, Inc. (the "Company"), through Media Tech Library
Services, Inc., its wholly-owned subsidiary, operates Junior Library Guild, a
subscription service that distributes first print, award winning childrens'
books. The Company has its own editorial division that reviews books in the
manuscript stage and makes selections for nine reading levels. The Company
markets most of its products directly to schools and public libraries but has
plans to expand into other segments.
The interim consolidated condensed financial statements and notes
thereto are presented as permitted by the Securities and Exchange Commission and
do not contain certain information included in the Company's annual financial
statements and notes thereto. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the Company's
audited financial statements and notes thereto for the fiscal year ended
December 31, 1998.
NOTE 2. DEBT OBLIGATIONS
At quarter ended March 31, 1999, the Company had a $200,000
subordinated note payable bearing interest at the lender's prime rate plus 1%,
due July 31, 2001, $850,000 in subordinated note payables bearing interest of
12% quarterly, due August 1, 2000 and a $250,000 subordinated note payable
bearing interest of 10% quarterly, due in 2005.
NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments during the three months ended March 31, 1999 and 1998,
included interest of $19,000 and $256,000, respectively, and income taxes of $0
and $165,000, respectively.
NOTE 4. INCOME TAXES
There was no income tax provision for the three months ended March 31,
1999, due to the Company's net operating loss position and the full valuation of
any resulting deferred tax benefit. Estimated income tax rates based on
annualized income were taken into consideration.
6
<PAGE> 7
NOTE 5. EARNINGS PER SHARE
The following table represents the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1999 1998
---- ----
<S> <C> <C>
BASIC AND DILUTED EARNINGS PER SHARE:
Weighted average number of common shares outstanding 328,200 328,200
-------- ---------
Income/(loss) from continuing operations $(89,507) $(194,002)
Gain(loss) from discontinued operations 80,514 (801,704)
-------- ---------
Net income(loss) available to common stockholders
$ (8,993) $(995,706)
======== =========
INCOME(LOSS) PER COMMON SHARE:
Income/(loss) from continuing operations $ (0.27) $ (0.59)
Gain(loss) from discontinued operations 0.24 (2.44)
-------- ---------
Net income(loss) per share $ (0.03) (3.03)
======== =========
</TABLE>
At March 31, 1999 and 1998, options and warrants were outstanding
during the periods but were not included in the computation of dilutive EPS
because the potential common stock would be antidilutive.
NOTE 6. ASSETS HELD FOR DISPOSAL
Assets held for disposition at March 31, 1999 consist of a warehouse,
office facility and real estate in Worthington, Ohio currently being used by the
Junior Library Guild subsidiary on a temporary basis.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding matters that are not historical facts are "forward looking statements"
(as such term is defined in the Private Securities Litigation Reform Act of
1995) and because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Those statements include remarks regarding the
intent, belief, or current expectations of the Company, its directors, or its
officers with respect to, among other things: (i) the Company's ability to raise
additional capital; (ii) future operating cash flows; (iii) trends affecting the
Company's financial condition or results of operations, and (iv) seeking a
waiver of the senior and subordinated debt covenants. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected, anticipated or expected in the
forward-looking statements as a result of various factors, many of which, such
as the Company's ability to raise additional capital, are beyond the control of
the Company. The accompanying information contained in this Form 10-Q,
including, without limitation, the information set forth under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", identifies important factors that could cause such differences.
FIRST QUARTER 1999 COMPARED WITH FIRST QUARTER 1998
Revenues for the three months ended March 31, 1999, approximated
$880,000 compared to approximately $480,000 for the three months ended March 31,
1998, an increase of 83% or approximately $400,000. The increase in revenues is
principally attributable to a reduction in 1998 of approximately $300,000 due to
a change in marketing strategy and an increase of approximately $100,000 in 1999
for the sale of additional backlist book titles.
Cost of goods sold was approximately $360,000 for the three months
ended March 31, 1999, compared to approximately $220,000 for the three months
ended March 31, 1998, an increase of 64% or approximately $140,000. The increase
in costs of goods sold is due to an increase in revenues. As a percentage of
revenues, cost of goods sold was 41% during the first quarter of 1999, compared
to 46% for the same period in 1998. The decrease in cost of sold as a percentage
of revenues is due to a change in the product mix that occurred during the three
months ended March 31, 1999.
Selling, general, and administrative expense was approximately $520,000
for the three months ended March 31, 1999, compared to approximately $330,000
for the three months ended March 31, 1998, an increase of 58% or approximately
$190,000. The increase in selling, general, and administrative expenses in 1999
is principally attributable to the reallocation of certain expenses that were
previously incurred by discontinued operations that are now being incurred by
continuing operations.
Depreciation and amortization expense was approximately $37,000 for the
three months ended March 31, 1999, compared to $42,000 for the three months
ended March 31, 1998, a decrease of 12% or approximately $5,000.
Interest expense was approximately $45,000 for the three months ended
March 31, 1999, compared to $82,000 for the three months ended March 31, 1998,
an decrease of 45% or $37,000. The average outstanding debt for the three months
ended March 31, 1999, approximated $2.1 million compared to $11.8 million for
the three months ended March 31, 1998. Additionally, the average interest rate
for the three months ended March 31, 1999, approximated 10.2% compared to
approximately 10.5% for the three months ended March 31, 1998.
There was no income tax provision for the three months ended March 31,
1999, due to the Company's net operating loss position and the full valuation of
any resulting deferred tax benefit. Estimated income tax rates based on
annualized income were taken into consideration.
8
<PAGE> 9
The first quarter ended March 31, 1999, resulted in an operating loss
of $89,000 compared to an operating loss of $194,000 in the first quarter ended
March 31, 1998. The decreased loss over 1998 was due to an increase in revenue
in 1999.
The first quarter ended March 31, 1999, resulted in a net loss of
$9,000 versus a net loss of $996,000 in the first quarter ended March 31, 1998.
Included in the net losses for 1999 and 1998, respectively, is a gain from
discontinued operations of $80,514 and a loss from discontinued operations of
$801,704. Current quarter basic and diluted loss per share was $.03 versus $3.03
in the comparable quarter last year. The weighted average common and common
equivalent shares for the first quarters 1998 and 1999 were 328,200.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a net increase in cash for the three months ended March
31, 1999, of $8,000, compared to a net decrease for the comparable period in the
prior year of $114,000. Cash provided by financing activities funded the net
cash used in operating activities during the three months ended March 31, 1999.
Cash on hand was $940,000 and $54,000 at March 31, 1999 and 1998, respectively.
For the three months ended March 31, 1999, continuing operations used
$200,000 in cash as compared to $1.8 million used during the three months ended
March 31, 1998. Primary increases in cash flow from operations in 1999 were from
a $15,000 reduction in inventory and a $60,000 reduction in prepaids and other
assets. Primary decreases in cash flow from operations were a $80,000 increase
in accounts receivable and a $110,000 reduction in deferred revenue. Primary
decreases for 1998 included a $850,000 increase in accounts receivable and a
$870,000 decrease in accounts payable and accrued liabilities.
Cash used in investing activities was $3,000 for the three months ended
March 31, 1998, representing payments for capital expenditures. The Company had
no asset expenditures in the first quarter of 1999 and does not anticipate any
material expenditures for property and equipment during the next twelve months.
For the three months ended March 31,1999, net cash provided by
financing activities was $130,000. This compares to net cash provided by
financing activities of $2.5 million for the three months ended March 31, 1998.
Financing activities in 1999 included $150,000 in proceeds from the settlement
of notes receivable. Financing activities in 1998 consisted primarily of $3.0
million in subordinated debt, with warrants, borrowed from Provident Bank,
bearing interest at 12.5% and due January 21, 2004. The $3.5 million in proceeds
from the CASCO note receivable was used to pay down the Company's existing line
of credit and payoff a $1.0 million time note. A revolving credit facility was
simultaneously executed, replacing all prior credit facilities, for $8.0
million. At March 31, 1998, the Company had an $8.0 million revolving credit
facility ($732,000 unused at first quarter 1998) bearing interest at the
lender's prime rate plus 1%, due January 1, 2000. This debt was subsequently
paid in full during second quarter 1998.
The Company is not in compliance with its subordinated debt covenants
related to its tangible capital base, but has been granted a permanent waiver
from default for its debt service ratio coverage covenant through July, 2001.
SEASONALITY
The children's literature business correlates closely to the school
year. As a result, the sales force is reduced during mid-June through mid-August
and again around the Christmas season. As a subscription service, however,
revenue is not seasonal and shipments of inventory continue throughout the year.
Cash receipts decline during the summer months but do not cease as public
libraries remain open.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Company is subject to litigation by expert witnesses used in a suit
against its former auditors. Management believes it is probable that the Company
will have to pay some judgement but the amount is not believed to be
determinable to the Company.
ILLINOIS DEPARTMENT OF REVENUE SALES TAX ASSESSMENT
The Company is currently involved in litigation regarding sales tax for
its discontinued operations. The Company has retained legal counsel and
anticipates settlement of this matter in 1999. Management believes that the
outcome of these legal proceedings may result in an unfavorable judgement and
has recorded a liability of approximately $500,000.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Special Meeting of Shareholders held February 13, 1999.
1. Proposal to approve and adopt the Proposed Amendment to the Company's
Articles of Incorporation to effect a one-for-twenty reverse stock split:
Shares Voted FOR: 5,449,227
Shares Voted AGAINST: 166,845
Shares Voted ABSTAIN: 10,266
2. Proposal to approve and adopt the Proposed Amendment to the Company's
Certificate of Incorporation to change the name to the Company to Media
Source, Inc.:
Shares Voted FOR: 5,585,700
Shares Voted AGAINST: 32,587
Shares Voted ABSTAIN: 8,051
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description of Document
------ -----------------------
27 Financial Data Schedule (filed only electronically
with the SEC)
(b) Reports on Form 8-K filed during the quarter ended March 31, 1999:
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 Source, Inc.
10
<PAGE> 11
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Media Source, Inc.
(Registrant)
Dated: May 14, 1999 By: /s/ S. Robert Davis
--------------------------------
S. Robert Davis
Chairman of the Board,
President and Director
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 950,663
<SECURITIES> 0
<RECEIVABLES> 838,250
<ALLOWANCES> 65,000
<INVENTORY> 1,256,138
<CURRENT-ASSETS> 3,153,339
<PP&E> 656,642
<DEPRECIATION> 545,872
<TOTAL-ASSETS> 6,223,900
<CURRENT-LIABILITIES> 2,923,484
<BONDS> 2,027,646
0
0
<COMMON> 3,431
<OTHER-SE> 1,269,339
<TOTAL-LIABILITY-AND-EQUITY> 6,223,900
<SALES> 886,842
<TOTAL-REVENUES> 886,842
<CGS> 366,053
<TOTAL-COSTS> 366,053
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 45,411
<INCOME-PRETAX> (89,507)
<INCOME-TAX> 0
<INCOME-CONTINUING> (89,507)
<DISCONTINUED> 80,514
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,993)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
