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 September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-10475
MEDIA SOURCE, INC.
Incorporated - Delaware I.R.S. Identification No. 34-1297143
5720 Avery Rd., Dublin, Ohio 43016
Registrant's Telephone Number (614) 793-8749
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days YES X NO ___.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of latest practicable date: 328,200 common shares outstanding,
each $0.01 par value, as of September 30, 1999.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept 30, 1999 Sept 30, 1998 Sept 30, 1999 Sept 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues ................ 756,064 $ 726,836 $ 2,471,046 $ 1,916,216
Costs of Goods Sold ..... 281,149 306,515 991,665 831,407
----------- ----------- ----------- -----------
Gross Profit ......... 474,915 420,321 1,479,381 1,084,809
Operating Expenses:
Selling, general and
administrative 327,175 519,561 1,381,573 1,306,056
Depreciation and
amortization .. 36,985 32,681 110,956 117,388
----------- ----------- ----------- -----------
Income (loss) from
operations ...... 110,755 (131,921) (13,148) (338,635)
Other Expense:
Interest, net . (46,443) (46,149) (148,731) (261,208)
Other .............. .....497 450,000 49,169 450,000
----------- ----------- ----------- -----------
Income(loss) from continuing
operations ......... 64,809 271,930 (112,710) (149,843)
before income taxes
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Income(loss)
from continuing
operations ... 64,809 271,930 (112,710) (149,843)
Gain(loss) from
discontinued
operations ...... (65,990) (157,401) 72,280 (3,741,504)
----------- ----------- ----------- -----------
NET INCOME (LOSS) .. $ (1,181) $ 114,529 $ (40,430) $(3,891,348)
=========== =========== =========== ===========
Earnings per common share*
Income(loss) from
continuing
operations . $ 0.20 $ 0.83 $ (0.34) $ (0.46)
Income(loss) from
discontinued
operations (0.20) (0.48) 0.22 (11.40)
----------- ----------- ----------- ------------
Net income(loss) $ (0.00) $ 0.35 $ (0.12) $ (11.86)
=========== =========== =========== ===========
Weighted average number of common share
Outstanding 328,200 328,200 328,200 328,200
=========== =========== =========== ===========
*All per share data has been adjusted to reflect a one-for-twenty
reverse stock split effective March 9,1999
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash ........................................... $ 759,617 $ 998,432
Accounts receivable, net of
allowance for doubtful accounts of $94,000 and
$94,000 respectively ...................... 363,168 867,333
Inventory ...................................... 1,242,506 1,271,336
Prepaid expenses ............................... 200,450 167,485
----------- -----------
Total current assets ...................... 2,565,741 3,304,586
----------- -----------
Property and Equipment:
Buildings ...................................... -- --
Equipment ...................................... 660,651 656,642
----------- -----------
660,651 656,642
Less accumulated depreciation ................ (595,568) (536,888)
----------- -----------
Total property and equipment .............. 65,083 119,754
----------- -----------
Other Assets:
Assets held for disposal (net) ................. 1,237,472 1,253,335
Cost in excess of net assets
acquired, net of accumulated
amortization of $1,043,241 and
$1,007,000, respectively .................... 1,678,954 1,715,109
Other .......................................... 17,620 86,860
----------- -----------
Total other assets ........................ 2,934,046 3,055,304
----------- -----------
TOTAL ASSETS ........................................ $ 5,564,870 $ 6,479,644
=========== ===========
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1999 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable ...................... $ 348,126 $ 678,108
Accrued liabilities ................... 433,721 333,514
Accrued tax liabilities ............... 660,844 506,745
Deferred revenue ...................... 851,485 1,568,892
Current portion of long-term
debt obligations .................... 118,643 109,780
Notes Payables ........................ 350,000
----------- ------------
Total current liabilities ........ 2,762,819 3,197,039
----------- ------------
Long-term debt and capital lease obligations 1,616,790 2,056,914
------------ ------------
Total liabilities ................ 4,379,609 5,253,953
------------ ------------
Stockholders' Equity:
Preferred stock: $.01 par value;
authorized 300,000 shares; none
issued and outstanding
Common stock: $.01 par value;
authorized 500,000 shares;
issued 343,137 shares .............. 3,431 3,431
Capital in excess of stated value ..... 21,974,029 21,974,029
Notes receivable from stock sales ..... (902,373) (902,373)
Accumulated deficit ................... (19,648,703) (19,608,273)
------------ ------------
1,426,383 1,466,814
Less 14,936 shares of common
stock in treasury, at cost ........ (241,123) (241,123)
------------ ------------
Total stockholders' equity ....... 1,185,261 1,225,691
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY . $ 5,564,870 $ 6,479,644
============ ============
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Nine Months
Ended Ended
Sept 30, 1999 Sept 30, 1998
<S> <C> <C>
Cash Flow used in Operations:
Net income(loss) from continuing operations .... $ (112,710) $ (149,843)
Reconciliation to net cash flow used in continuing operations:
Depreciation and amortization ............. 110,956 117,388
Loss on sale of distribution channel ..... ...... 1,515,396
Change in working capital items of continuing operations:
Accounts receivable ......................... 329,165 339,678
Inventory ................................... 29,106 115,493
Prepaid expenses and other assets ........... 35,883 (518,998)
Accounts payable and accrued liabilities .... (7,550) (276,918)
Deferred revenue ............................(717,407) 199,020
------------ ------------
Net cash provided by (used in)
continuing operations ........... (332,557) 1,341,216
Net cash provided by (used in)
discontinued operations ......... 29,011 (4,244,662)
------------ ------------
Net cash provided by (used in)
operations ...................... (303,546) (2,903,446)
Cash Flow provided by (used in)
Investing Activities:
Proceeds from sale of
property and equipment ................... ............. 53,912
Proceeds from disposition
of distribution channel .................... ........... 10,500,000
Payments for purchases of
property and equipment ....................... (4,008) (11,036)
------------ ------------
Net cash flow provided by
(used in) investing activities ... (4,008) 10,542,876
Cash Flow provided by (used in) Financing Activities:
Proceeds from settlement of
note receivable ............................ 150,000
Proceeds from debt obligation ................ ........... 20,171,596
Proceeds from subordinated debt issued ......... ......... 3,000,000
Proceeds from CASCO Note ......................... ....... 3,500,000
Payments on debt and lease obligations ......... (81,261) (31,336,290)
Payments on subordinated debt issued ........... ......... (2,725,000)
------------ ------------
Net cash flow provided by
(used in) financing activities 68,739 (7,389,694)
Increase (decrease) in cash ..................... (238,815) 249,736
Cash, beginning of year ......................... 998,432 412,060
------------ ------------
Cash, end of period .............................. $ 759,617 $ 661,796
============ ============
See accompanying notes
</TABLE>
<PAGE>
MEDIA SOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements have not
been audited, but reflect all adjustments which, in the opinion of management,
are necessary for a fair presentation of financial position, results of
operations and cash flows. All adjustments are of a normal and recurring nature,
except for those related to the discontinued operations of the Company's book
fair business.
Media Source, Inc. (the "Company"), through Media Tech Library
Services, Inc., its wholly-owned subsidiary, operates Junior Library Guild, a
subscription service that distributes first print, award winning children's'
books. The Company has its own editorial division that reviews books in the
manuscript stage and makes selections for nine reading levels. The Company
markets most of its products directly to schools and public libraries.
The interim consolidated condensed financial statements and notes
thereto are presented as permitted by the Securities and Exchange Commission and
do not contain certain information included in the Company's annual financial
statements and notes thereto. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the Company's
audited financial statements and notes thereto for the fiscal year ended
December 31, 1998.
Note 2. Debt Obligations
At quarter ended September 30, 1999, the Company had a $200,000
subordinated note payable bearing interest at the lender's prime rate plus 1%,
due July 31, 2001, $850,000 in subordinated notes 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.
Subsequent to quarter ending September 30, 1999, a $500,000
subordinated note payable was refinanced by the granting of an option to
purchase preferred stock to the Company Chairman, S. Robert Davis. The granting
of this option extends the due date on the $500,000 subordinated note payable to
January 1, 2003. The financials statements at quarter ended September 30, 1999
reflect this subsequent event in which the $500,000 subordinated note payable
was reclassed from short term debt to long term debt.
Note 3. Supplemental Cash Flow Information
Cash payments during the nine months ended September 30, 1999 and 1998,
included interest of $176,000 and $660,000, respectively, and income taxes of $0
and $340,000, respectively.
Note 4. Income Taxes
There was no income tax provision for the nine months ended September
30, 1999, due to the Company's net operating loss position and the full
valuation of any resulting deferred tax benefit. Estimated income tax rates
based on annualized income were taken into consideration.
<PAGE>
Note 5. Earnings Per Share
The following table represents the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
Sept 30, 1999 Sept 30, 1998
<S> <C> <C>
Basic and Diluted Earnings Per Share:
Weighted average number of common shares
outstanding ............................... 328,200 328,200
----------- -----------
Income/(loss) from continuing operations .... $ (112,710) $ (149,843)
Gain(loss) from discontinued operations ..... 72,280 (3,741,504)
----------- -----------
Net income(loss) available to common
stockholders .............................. $ (40,430) $(3,891,348)
=========== ===========
Income(loss) per common share:
Income/(loss) from continuing operations $ (0.34) $ (0.46)
Gain(loss) from discontinued operations 0.22 (11.40)
----------- -----------
Net income(loss) per share .................. $ (0.12) $ (11.86)
=========== ===========
</TABLE>
At September 30, 1999, options and warrants were not In-the-Money and
therefore are not included in the computation of dilutive EPS. At September 30,
1998, options and warrants were outstanding during the periods but were not
included in the computation of dilutive EPS because the potential common stock
would be antidilutive.
Note 6. Assets Held For Disposal
Assets held for disposition at September 30, 1999 consist of a
warehouse, office facility and real estate in Worthington, Ohio currently being
used by the Junior Library Guild subsidiary on a temporary basis.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain statements contained in this Form 10-Q under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding matters that are not historical facts are "forward looking statements"
(as such term is defined in the Private Securities Litigation Reform Act of
1995) and because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Those statements include remarks regarding the
intent, belief, or current expectations of the Company, its directors, or its
officers with respect to, among other things: (i) the Company's ability to raise
additional capital; (ii) future operating cash flows; (iii) trends affecting the
Company's financial condition or results of operations, and (iv) seeking a
waiver of the senior and subordinated debt covenants. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, and that actual results may
differ materially from those projected, anticipated or expected in the
forward-looking statements as a result of various factors, many of which, such
as the Company's ability to raise additional capital, are beyond the control of
the Company. The accompanying information contained in this Form 10-Q,
including, without limitation, the information set forth under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", identifies important factors that could cause such differences.
Third Quarter 1999 Compared with Third Quarter 1998
Revenues from continuing operations for the three months ended
September 30, 1999, approximated $756,000 compared to approximately $727,000 for
the three months ended September 30, 1998, an increase of 4% or approximately
$29,000.
Cost of goods sold was approximately $281,000 for the three months
ended September 30, 1999, compared to approximately $307,000 for the three
months ended September 30, 1998, an decrease of 8% or approximately $26,000. As
a percentage of revenues, cost of goods sold was 37% during the third quarter of
1999, compared to 42% for the same period in 1998. The decrease in costs of
goods sold as a percentage of revenues was due to a change in market strategy as
it relates to the product mix that continued during the third quarter ended
September 30, 1999.
Selling, general, and administrative expense was approximately $328,000
for the three months ended September 30, 1999, compared to approximately
$520,000 for the three months ended September 30, 1998, an decrease of 37% or
approximately $193,000. The decrease in selling, general and administrative
expenses for the three months ended September 30, 1999 is principally attributed
to a reduction of overhead expenses incurred by continuing operations that were
previously incurred by discontinued operations.
Depreciation and amortization expense was approximately $37,000 for the
three months ended September 30, 1999, compared to $33,000 for the three months
ended September 30, 1998, an increase of 12% or approximately $4,000.
Interest expense was approximately $46,000 for the three months ended
September 30, 1999, compared to $46,000 for the three months ended September 30,
1998. The average outstanding debt for the three months ended September 30,
1999, approximated $2.0 million compared to $1.80 million for the three months
ended September 30, 1998. Additionally, the average interest rate for the three
months ended September 30, 1999 approximated 10.2% compared to approximately
10.71% for the three months ended September 30, 1998.
There was no income tax provision for the three months ended September
30, 1999, due to the Company's net operating loss position and the full
valuation of any resulting deferred tax benefit. Estimated income tax rates
based on annualized income were taken into consideration.
<PAGE>
The third quarter ended September 30, 1999 resulted in income from
continuing operations of $65,000 compared to income from continuing operations
of $272,000 in the third quarter ended September 30, 1998. The decrease in
income from continuing operations of $207,000, a 76% reduction compared to 1998,
was principally attributed to 1998 proceeds of $450,000 from a lawsuit
settlement which were offset by increased selling, general and administrative
expenses of $192000.
The third quarter ended September 30, 1999 resulted in a net loss of
$1,000 versus net income of $115,000 in the third quarter ended September 30,
1998. Included in the net loss for 1999 is a loss from discontinued operations
of $66,000 compared to a net loss from discontinued operations of $157,000 in
1998. Current quarter basic and diluted loss per share was $0.00 versus an
income per share of $0.35 in the comparable quarter last year. The weighted
average common and common equivalent shares for the third quarters 1998 and 1999
were 328,200.
Nine Months Ended September 30, 1999 Compared with Nine Months Ended
September 30, 1998
Revenues from continuing operations for the nine months ended September
30, 1999, approximated $2,471,000 compared to approximately $1,916,000 for the
nine months ended September 30, 1998, an increase of 29% or approximately
$555,000. 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 $219,000 in 1999 from the implementation of an
additional market strategy.
Cost of goods sold was approximately $992,000 for the nine months ended
September 30, 1999, compared to approximately $831,000 for the nine months ended
September 30, 1998, an increase of 19% or approximately $161,000. As a
percentage of revenues, cost of goods sold was 40% for the nine months ended
September 30, 1999, compared to 43% for the nine months ended September 30,
1998. The decrease in costs of goods sold as a percentage of revenues was due to
a change in market strategy as it relates to the product mix that occurred
during the nine months ended September 30, 1999.
Selling, general, and administrative expense was approximately
$1,382,000 for the nine months ended September 30, 1999, compared to
approximately $1,306,000 for the nine months ended September 30, 1998, an
increase of 6% or approximately $76,000. The increase in selling, general and
administrative expenses in 1999 is principally attributed to the reallocation of
certain expenses that were previously incurred by discontinued operations that
are now being incurred by continuing operations.
Depreciation and amortization expense was approximately $111,000 for
the nine months ended September 30, 1999, compared to $117,000 for the nine
months ended September 30, 1998, a decrease of 5% or approximately $6,000.
Interest expense was approximately $149,000 for the nine months ended
September 30, 1999, compared to $261,000 for the nine months ended September 30,
1998, an decrease of 43% or $112,000. The average outstanding debt for the nine
months ended September 30, 1999, approximated $2.1 million compared to $3.5
million for the nine months ended September 30, 1998. Additionally, the average
interest rate for the nine months ended September 30, 1999 approximated 10.2%
compared to approximately 11.41% for the nine months ended September 30, 1998.
There was no income tax provision for the nine months ended September
30, 1999, due to the Company's net operating loss position and the full
valuation of any resulting deferred tax benefit. Estimated income tax rates
based on annualized income were taken into consideration.
The nine months ended September 30, 1999 resulted in a loss from
continuing operations of $113,000 compared to a loss from continuing operations
of $150,000 for the nine months ended September 30, 1998. The decreased loss, a
25% improvement, over 1998 was due to a combination of higher revenues and lower
expenses as a percentage of revenue during 1999.
<PAGE>
The nine months ended September 30, 1999, resulted in net loss of
$40,000 versus a net loss of $3,891,000 for the nine months ended September 30,
1998. Included in the net losses for 1999 and 1998, respectively, are a gain
from discontinued operations of $72,000 and a loss from discontinued operations
of $3,742,000. Basic and diluted loss per share decreased from $11.86 for the
nine months ended September 30, 1998 to a net loss per share of $.12 for the
nine months ended September 30, 1999. The weighted average common and common
equivalent shares for the nine months ended September 30, 1998 and 1999 were
328,200.
Liquidity and Capital Resources
The Company had a net decrease in cash for the nine months ended
September 30, 1999, of $239,000, compared to a net increase for the comparable
period in the prior year of $250,000. Cash on hand was $760,000 and $662,000 at
September 30, 1999 and 1998, respectively.
For the nine months ended September 30, 1999, continuing operations
used $333,000 in cash as compared to providing $1.3 million the nine months
ended September 30, 1998. Primary decrease in cash flow from operations in 1999
was a $717,000 reduction in deferred revenue. Primary increase in cash flow from
operations was a $329,000 reduction in accounts receivable. Primary increases in
cash flow from operations for 1998 included a $340,000 reduction in accounts
receivable, a $115,000 reduction in inventory, and a $199,000 increase in
deferred revenue. Primary decreases in cash flow from operations were from a
$519,000 increase in prepaid expenses and other assets and a $277,000 reduction
in accounts payable and accrued liabilities.
Cash used in investing activities was $4,000 for the nine months ended
September 30,1999, representing payments for capital expenditures compared to
$11,000 for the nine months ended September 30,1998. The Company does not expect
any material expenditures for property and equipment during the next twelve
months. Cash from investing activities was $10.5 million for the nine months
ended September 30, 1998 representing sale of the Company's book fair business.
For the nine months ended September 30,1999, net cash provided by
financing activities was $69,000, this compares to net cash used by financing
activities of $7.4 million for the nine months ended September 30, 1998.
Financing activities in 1999 included $150,000 in proceeds from the settlement
of notes receivable. Financing activities in 1998 consisted primarily of
borrowings and paydowns on the revolving line of credit.
Subsequent to quarter ending September 30,1999, an option to purchase
shares of preferred stock was granted to the Company Chairman, S. Robert Davis,
holder of a $500,000 subordinated note payable due August 2000. In exchange for
the granting of this option, the holder of the $500,000 subordinated note
payable agrees to extend the due date until January 1, 2003. The option entitles
S. Robert Davis to purchase from the company 100,000 shares of convertible
preferred stock at the price of $1.97 per share. These preferred shares may be
converted into 175,000 shares of common stock. This option expires on February
1, 2003.
Seasonality
The children's literature business correlates closely to the school
year. As a result, the sales force is reduced during mid-June through mid-August
and again around the Christmas season. As a subscription service, however,
revenue is not seasonal and shipments of inventory continue throughout the year.
Cash receipts decline during the summer months but do not cease, as public
libraries remain open.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
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
None.
ITEM 5: OTHER INFORMATION
In compliance with the Option to Purchase Shares of Preferred
Stock document (exhibit 10(aa)), S. Robert Davis, as holder of
a $500,000 Promissory Note due and payable August 2000, agrees
to extend the due date of the Promissory Note until January 1,
2003.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description of Document
10(z) Deferred Compensation Agreement
10(aa) Option to Purchase Shares of Preferred Stock
10(ab) Exhibit A to Option to Purchase Shares of
Preferred Stock
27 Financial Data Schedule (filed only electronically
with the SEC)
(b) Reports on Form 8-K filed during the quarter
ended September 30, 1999:
None.
Footnotes:
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, File Number 0-10475, filed in
Washington, D.C.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Media Source, Inc.
(Registrant)
Dated: November 15, 1999 By: /s/Donald R. Hollenack
-------------------------
Donald R. Hollenack
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Sep-30-1999
<CASH> 759,617
<SECURITIES> 0
<RECEIVABLES> 457,168
<ALLOWANCES> 94,000
<INVENTORY> 1,242,506
<CURRENT-ASSETS> 2,565,741
<PP&E> 660,651
<DEPRECIATION> 595,568
<TOTAL-ASSETS> 5,564,870
<CURRENT-LIABILITIES> 2,762,819
<BONDS> 1,616,790
0
0
<COMMON> 3,431
<OTHER-SE> 1,181,830
<TOTAL-LIABILITY-AND-EQUITY> 5,564,870
<SALES> 2,471,046
<TOTAL-REVENUES> 2,471,046
<CGS> 991,665
<TOTAL-COSTS> 991,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148,731
<INCOME-PRETAX> (112,710)
<INCOME-TAX> 0
<INCOME-CONTINUING> (112,710)
<DISCONTINUED> 72,280
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,430)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
DEFERRED COMPENSATION AGREEMENT
This Agreement is made this _____ day of January, 1999, by and between
Pages, Inc., a Delaware corporation (herein "Corporation") and S. Robert Davis,
residing at 15350 Amberly Drive, Suite 2014, Tampa, Florida 33647 (herein
"Employee").
WITNESSETH:
WHEREAS, the Corporation has heretofore employed the Employee and the
Employee has heretofore been employed by the Corporation in an executive
capacity; and
WHEREAS, the Corporation desires to arrange for a call on the Employee's
services, knowledge and experience now and in the future; and
WHEREAS, the Employee who is making an annual salary of $185,000 from
the Corporation, but is willing to defer that compensation, which shall accrue
and shall be payable at such time that the Corporation, as determined by the
Board of Directors, has sufficient cash flow upon the terms herein set forth;
NOW THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the parties hereto have agreed and do hereby agree
as follows:
Section 1. Employment.
The Employee agrees, until either the Corporation or the Employee
terminates same, that he will continue in the full-time active employment of the
Corporation and he will serve the Corporation hereunder in an executive
capacity, with such duties and in such positions as the Board of Directors of
the Corporation may at any time or from time to time determine at its
discretion. Employee agrees that he will perform services herein contemplated to
be performed by the Employee, faithfully, diligently and to the best of his
ability. Nothing in this agreement shall be deemed to obligate the Corporation
to employ the Employee for any period of time or for the Employee to be employed
by the Corporation pay period of time, but employment shall continue as mutually
agreed between to Employee and the Corporation.
Section 2. Deferred Compensation.
The Employee has been making an annual salary of $185,000.00 from May
7, 1998, but bas not received any compensation since May 7, 1998. Employee
agrees to defer and accrue his compensation plus interest thereon at 7% per
annum until June 30,1999 or for such longer period as is provided for herein.
Interest shall accrue on one-twelfth of the annual salary commencing at the end
of each month during the deferred period. Employee shall not have the right to
demand payment of said right to deferred compensation during the term of the
deferral. However, this agreement and deferral may be extended and renewed on a
six month basis by agreement of the parties. If this agreement and deferral is
extended and renewed, it shall be for a six month period with the deferred
period ending December 31 or June 30, as the case may be.
At the end of the deferral period, unless this agreement is extended
and renewed, the corporation shall pay the Employee, at the option of the
Corporation, in cash or in restrictive legend stock of the Corporation an amount
equal to his accrued salary or an amount as agreed amongst the parties. If the
Employee elects to take restricted stock as his compensation for a deferred
period, the value of the stock shall be based on the average of the Company's
stock's bid price for the last seven trading days of the particular deferred
period. Each time this Agreement is renewed shall represent a new deferred
period, therefore, it is understood that the value of the stock could be
different for each deferred period.
<PAGE>
The Corporation's obligation to make payments of Deferred Compensation
shall be contingent upon the faithful performance or observance by the Employee
of his obligations.
Section 3. Expense Reimbursement.
The Corporation agrees to reimburse the Employee for expense reasonably
incurred by the Employee on behalf of the Corporation in accordance with
prevailing Corporate practice and policy.
Section 4. Confidential Information.
The Employee shall not, either during or after the term of his
employment by the Corporation hereunder, disclose to any third party (other than
another employee of the Corporation) any confidential information relating to
the business of the Corporation obtained by the Employee while in the employ of
the Corporation, without the consent of the principal executive officer of the
Corporation or its Board of Directors.
Section 5. Competition.
During the term of such employment, and for the period during which he
is receiving payments of Deferred Compensation, the Employee will not directly
or indirectly engage in any business competitive with the business then being
conducted by the Corporation in any area in which such business is then being
conducted.
Section 6. Illness, Incapacity, or Death.
a. In event that the Employee shall, during his active employment
hereunder, become unable to perform the services agreed to be rendered by him by
reason of illness or other incapacity, he shall be entitled to immediate payment
of all deferred compensation, plus interest, as provided for herein, based upon
the time of service to the termination of his employment on account of such
illness or other incapacity.
b. In the event of the death of the Employee during his employment
hereunder, , his legal representative shall be entitled to receive, and the
Corporation shall pay, the fixed compensation, deferred or otherwise, plus
accrued interest, of the Employee as provided herein, up to the last day of the
month in which the death of the Employee shall have occurred.
Section 7. Nonassignability of Deferred Compensation
The Employee shall not have the right to assign, transfer or encumber
(as security or otherwise) any Deferred Compensation payments hereunder and no
right, title or interest therein or thereto shall devolve by operation of law or
otherwise, upon any mortgage, assignee, trustee or liquidator, provided,
however, that nothing herein shall prevent the employee's heirs, administrator
or executor, as the case may be, from succeeding by will or by operation of law
governing the estates of descendants to the Employee's rights of interests in
any Deferred Compensation that shall have been earned by the Employee prior to
his death.
Section 8. Insurance
The Corporation may, but need not, obtain the insurance upon the life
of the Employee, payable to the Corporation, and the Employee agrees to
cooperate with the Corporation in obtaining any such insurance.
<PAGE>
Section 9. Personal Contract
The obligations and duties of the Employee hereunder shall be personal
and not assignable or delegable by him in any matter whatsoever.
Section 10. Binding Effect.
This Agreement shall inure to the benefit of and be binding upon the
Corporation, its successors and assigns, including, but without limitation, any
company which may acquire all or substantially all of the business and assets of
the Corporation or with which the Corporation may be consolidated or merged.
Section 11. Modification of Agreement.
Any modification of this agreement or additional obligations assumed by
either party in connection with this agreement shall be binding only if
evidenced in writing signed by each party or an authorized representative of
each party.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on
the date first above written.
- ------------------------------------- -------------------------------------
- ------------------------------------- -------------------------------------
-------------------------------------
S. Robert Davis, Employee
NEITHER THIS OPTION NOR SHARES OF PREFERRED STOCK TO BE ISSUED UPON
EXERCISE OF THIS OPTION NOR THE SHARES OF COMMON STOCK ISSUED UPON ANY
CONVERSION OF SUCH PREFERRED STOCK ARE REGISTERED UNDER THE SECURITIES ACT OF
1933 FOR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE TRANSFERRED WITHOUT
COMPLIANCE WITH THE ACT AND APPLICABLE STATE SECURITIES LAWS.
MEDIA SOURCE, INC.
OPTION TO PURCHASE SHARES OF PREFERRED STOCK
Background Statements:
I. Media Source, Inc., a Delaware corporation (the "Company")
is indebted to S. Robert Davis (referred to herein, together with any subsequent
holder of the Option, the "Option Holder" or "Holder of the Option") in the
principal amount of $500,000 pursuant to a Promissory Note dated July 16, 1997,
(the "Indebtedness") which Indebtedness is due and payable in August, 2000.
II. The Company desires to restructure a portion of its
short-term debt into long-term debt and has requested that Option Holder extend
the due date of the Indebtedness until January 1, 2003 in return for the grant
of this Option, Option Holder has so agreed, upon the terms and conditions set
forth herein.
--------------------------
THIS OPTION TO PURCHASE SHARES OF PREFERRED STOCK CERTIFIES THAT, for value
received, Option Holder is entitled to subscribe to and purchase from theCompany
an aggregate of One Hundred Thousand (100,000) shares (subject to adjustment as
specified in Section 6 hereof) of fully paid and nonassessable, Series A
Convertible Preferred Stock of the Company (the "Option Stock"), at the price of
$1.97 per share, (such price and such other price as shall result, from time to
time, from the adjustments specified in Section 6 hereof, is referred to herein
as the "Exercise Price"), subject to the provisions and upon the terms and
conditions set forth herein.
<PAGE>
1. Creation of Preferred Stock. Upon the exercise by Option Holder of this
Option in whole or in part, the Company shall forthwith, but in no event later
than ten (10) business days thereafter, cause to be executed and filed with the
Secretary of State in Delaware pursuant to Section 151(g) of the Delaware
General Corporation Law, as amended, a Certificate of Designation in the form
attached hereto as Exhibit "A," which Certificate of Designation has been
approved by the Company's Board of Directors.
2. Increase in Authorized Shares of Common Stock. At the annual meeting of the
stockholders of the Company to be held in 2000, the Company shall recommend,
submit for the approval of the stockholders, and solicit proxies for an increase
in the Company's authorized shares of common stock to that number of shares
which will accommodate the exercise of this Option and the full conversion of
the Preferred Stock into common stock of the Company. From and after the date of
such approval, the Company shall at all times have authorized and reserved for
the purpose of the issuance upon exercise of the purchase rights set forth
herein and the conversion of the Preferred Stock, a sufficient number of shares
of Company common stock to provide for the exercise of this Option and the full
conversion into common stock of the Preferred Stock. If such an increase is not
approved by the Company's stockholders at such meeting, Option Holder may, in
his discretion, declare the due date thereof to be the original due date of
August 1, 2000.
3. Conditions to Exercise.
The purchase right represented by this Option is exercisable,
in whole or in part, as to the Option Stock at any time, and from time to time,
on or before 5:00 p.m. Eastern Time on February 1, 2003. This Option shall
expire and shall not be exercisable after 5:00 p.m., Eastern Time on February 1,
2003.
4. Method of Exercise, Payment; Issuance of New Option.
Subject to Section 1 hereof, the purchase right represented by
this Option may be exercised at any time, and from time to time, by the
surrender of this Option (with the Notice of Exercise form attached hereto duly
executed) at the principal office of the Company and by the payment to the
Company, by check in an amount equal to the then applicable Exercise Price per
share multiplied by the number of shares of the Option Stock then being
purchased. In the event of any exercise of the rights represented by this
Option, a certificate for the shares of the Option Stock so purchased shall be
delivered to the Option Holder within a reasonable time, but not later than ten
(10) business days after exercise. A Option shall be deemed to have been
exercised immediately prior to the close of business on the date of its
surrender for exercise as provided above, and the person entitled to receive the
shares of the Option Stock issuable upon such exercise shall be treated for all
purposes as the holder of such shares of record as of the close of business on
such date. Unless this Option has been fully exercised or has expired, a new
Option representing the number of shares with respect to which this Option shall
not then have been exercised shall also be issued to the Option Holder within
such reasonable time, but not later than ten (10) business days after exercise.
<PAGE>
5. Stock Fully Paid; Reservation of Shares.
All Option Stock which may be issued upon the exercise of the
rights represented by this Option will, upon issuance, be fully paid and
nonassessable, and free from all taxes, liens and charges with respect to the
issue thereof.
6. Adjustment of Purchase Price and Number of Shares.
The number and kind of securities purchasable upon the
exercise of this Option and the Exercise Price shall be subject to adjustment,
from time to time, upon the happening of the following events:
6.1. Reclassification, Consolidation or Merger. If any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or merger
of the Company with another corporation, or the sale of all or substantially all
of its assets to another corporation shall be effected, the successor
corporation (if other than the Company) resulting from such consolidation or
merger or the corporation purchasing such assets shall, unless it has assumed
the obligations of the Company generally as a matter of law, assume by written
instrument executed and mailed or delivered to the registered holder thereof at
the last address of such holder appearing on the books of the Company, this
Option, and lawful and adequate provision shall be made whereby the holder
hereof shall thereafter have the right to purchase and receive in lieu of the
shares of the Preferred Stock of the Company immediately theretofore purchasable
and receivable upon the exercise of the rights represented hereby, such shares
of stock or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of such Preferred Stock equal to the number
of shares of such Preferred Stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby had such
reorganization, reclassification, consolidation, merger or sale not taken place,
and in any such case appropriate provision shall be made with respect to the
rights and interests of the Holder of this Option (including an amendment to the
Certificate of Designation) to the end that the provision hereof (including
without limitation provisions for adjustment of the Option purchase price and of
the number of shares purchasable and receivable upon the exercise of this Option
and adjustment of the conversion feature set forth in the Certificate of
Designation) shall thereafter be applicable, as nearly as may be, in relation to
any shares of stock, securities or assets thereafter deliverable upon the
exercise hereof.
<PAGE>
6.2. Subdivision or Combination of Shares. If the Company at any time while this
Option remains outstanding and unexpired shall subdivide or combine its common
stock, the Exercise Price shall be proportionately decreased in the case of a
subdivision or increased in the case of a combination and the conversion feature
set forth in the Certificate of Designation shall be amended so that the number
of shares of Common Stock issuable upon conversion shall be as if such
subdivision or combination had taken place after the issuance of the Preferred
Stock.
6.3. Stock Dividends. If the Company at any time while this Option is
outstanding and unexpired shall pay a dividend, or make any other distribution
to its stockholders (except any distribution specifically provided for in the
foregoing Section 6.1 or 6.2) payable in common stock, then the Exercise Price
shall be adjusted, from and after the date of determination of stockholders
entitled to receive such dividend or distribution, to that price determined by
multiplying the Exercise Price in effect immediately prior to such date of
determination by a fraction (i) the numerator of which shall be the total number
of shares of common stock outstanding immediately prior to such dividend or
distribution, and (ii) the denominator of which shall be the total number of
shares of Preferred Stock outstanding immediately after such dividend or
distribution.
6.4. Adjustment of Number of Shares. Upon each adjustment in the Exercise Price
as a result of the events set forth in Section 6.2 or 6.3 above, the number of
shares of Option Stock purchasable hereunder shall be adjusted, to the nearest
whole share, to the product obtained by multiplying the number of shares of
common stock into which the Preferred Stock, if outstanding, would be
convertible immediately prior to such adjustment in the Exercise Price by a
fraction, the numerator of which shall be the Exercise Price immediately prior
to such adjustment and the denominator of which shall be the Exercise Price
immediately thereafter and the conversion feature set forth in the Certificate
of Designation shall be amended so that the number of shares of common stock
issuable upon conversion shall be as if such subdivision, combination or stock
dividend had taken place after the issuance of the Preferred Stock.
6.5. Covenant Not to Avoid Terms of the Option. The Company covenants that it
will not, by amendment of its certificate of incorporation or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Option, but will at all
times in good faith assist in carrying out all those terms and in taking all
action necessary or appropriate to protect the rights of the Option Holder
against dilution or other impairment.
<PAGE>
7. Notice of Adjustments.
Whenever any Exercise Price shall be adjusted pursuant to
Section 6 hereof, the Company shall promptly as practicable prepare a
certificate signed by its chief financial officer setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated, the Exercise Price(s) after
giving effect to such adjustment, the number of shares which may be purchased
upon exercise of a Option which immediately prior thereto could be exercised to
purchase one share and shall cause a copy of such certificate to be mailed (by
first class mail, postage prepaid) to the Holder of the Option.
8. Fractional Shares.
No fractional shares of the Option Stock will be issued in
connection with any exercise hereunder. In the event an adjustment in the number
of shares issuable upon exercise of this Option made pursuant to Section 6
hereof results in a number of shares issuable upon exercise which includes a
fraction, this Option may be exercised for the next larger whole number of
shares.
9. No Rights as Stockholders.
The Option Holder shall not be entitled by virtue of the terms
hereof to vote or receive dividends or be deemed the holder of Preferred Stock
or any other securities of the Company which may at any time be issuable on the
exercise hereof for any purpose, nor shall anything contained herein be
construed to confer upon the Option Holder, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of directors
upon any matter submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issuance of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance, or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise until the Option shall have been exercised and the Option Stock shall
have become deliverable as provided herein.
10. Replacement of This Option.
Upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Option and, in the
case of any such loss, theft or destruction, upon delivery of indemnity
reasonably satisfactory in form and amount to the Company or, in the case of any
such mutilation, upon surrender and cancellation of this Option, the Company, at
Option Holders' expense, will execute and deliver, in lieu hereof, a new Option
of like tenor.
<PAGE>
11. Governing Law.
This Option shall be construed and interpreted in accordance
with and governed in all respects by the laws of the State of Delaware.
12. Notice.
All notices, demands, requests and other communications which
any party hereto desires or is required to deliver or otherwise give to any
other party hereunder shall be in writing and shall be deemed to have been
delivered, given and received when personally given or on the third day after it
is mailed by registered or certified mail, postage prepaid, return receipt
requested, addressed as follows:
Notices to the Company: Media Source, Inc.
5720 Avery Road
Dublin, OH 43016
Notices to the Option Holder: S. Robert Davis
5720 Avery Road
Dublin, OH 43016
Notices to the Option Holder shall be to the address set forth above. Notice of
a change in the Option Holder's address shall be given to the Company in
accordance with this Section 12.
IN WITNESS WHEREOF, the Company has caused this Option to be executed
by its officer duly authorized as of the date set forth below.
MEDIA SOURCE, INC.
Dated as of ____________, 1999 By:
-------------------------
Title:
-------------------------
<PAGE>
NOTICE OF EXERCISE
TO: Media Source, Inc.
5720 Avery Road
Dublin, OH 43016
Please be advised that __________________________ (the "Option Holder")
hereby exercises the Option to purchase ____________________ (______) shares of
Series A Convertible Preferred stock of Media Source, Inc. at a purchase price
of ________________ ($_____) per share. Enclosed is a check payable to "Media
Source, Inc." for _____________________________ as payment for the
aforementioned Preferred stock. Also enclosed herewith is my original Option to
purchase such Preferred stock.
Please mail the stock certificate for my Preferred stock to my
attention at the following address:
------------------------
------------------------
Sincerely,
-----------------------------
(Name of the Option Holder)
By:
Its:
<PAGE>
FORM OF ASSIGNMENT
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns and transfers
unto __________________________ the rights represented by the within Option to
purchase ____________________ (_____) shares of Preferred Stock of MEDIA SOURCE
INC., to which the within Option relates, and appoints
___________________________ attorney to transfer such Option on the books of
MEDIA SOURCE INC., with full power of substitution in the premises.
Dated: _______________.
EXHIBIT ONLY - DO NOT SIGN
(Signature must conform in all
respects to name of holder as
specified on the face of the
Option)
-------------------------------
-------------------------------
(Address)
Exhibit A to Option
FORM OF
CERTIFICATE OF DESIGNATION
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
MEDIA SOURCE, INC.
---------------
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
--------------
MEDIA SOURCE, INC., a Delaware corporation (the "Company"), does hereby
certify that the following resolution was duly adopted by action of the Board of
Directors of the Company:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Company by the provisions of Article IV,
Section 2 of the Certificate of Incorporation of the Company, (the "Certificate
of Incorporation"), and pursuant to Section 151(g) of the General Corporation
Law of the State of Delaware, there be created from the 300,000 shares of
preferred stock, par value $.01 per share, of the Company authorized to be
issued pursuant to the Certificate of Incorporation, a series of preferred
stock, consisting of 100,000 shares of Series A Convertible Preferred Stock (the
"Preferred Stock"), the voting powers, designations, preferences and relative,
participating, optional or other special rights of which, and qualifications,
limitations or restrictions thereof, shall be as follows:
1. Definitions. As used herein, the following terms shall have the
following meanings:
1.1 "Board of Directors" shall mean the Board of Directors of
the Company or, with respect to any action to be taken by the Board of
Directors, any committee of the Board of Directors duly authorized to take such
action.
1.2 "Common Stock" shall mean the common stock, par value $.01
per share , of the Company, or any other class of stock resulting from
successive changes or reclassifications of such common stock consisting solely
of changes in par value, or from par value to no par value, or as a result of a
subdivision, combination, or merger, consolidation or similar transaction in
which the Company is a constituent corporation.
<PAGE>
1.3 "Conversion Date" shall mean the date upon which the
Company receives the Notice of Conversion provided for in Section 5.1.
1.4 "Issue Date" shall mean __________, ____.
1.5 "Junior Stock" shall mean the Common Stock and the shares
of any other class or series of stock of the Company created on or after the
Issue Date that, by the terms of the Certificate of Incorporation or of the
instrument by which the Board of Directors, acting pursuant to authority granted
in the Certificate of Incorporation, shall fix the relative rights, preferences
and limitations thereof, shall be junior to the Preferred Stock in respect of
the right to receive dividends or to participate in any other distribution of
assets.
1.6 "Liquidation Preference" shall mean, with respect to each share of
Preferred Stock, $1.97.
1.7 "PARI PASSU Stock" shall mean the shares of any class or
series of stock of the Company created on or after the Issue Date that, by the
terms of the Certificate of Incorporation or of the instrument by which the
Board of Directors, acting pursuant to authority granted in the Certificate of
Incorporation, shall fix the relative rights, preferences and limitations
thereof, shall, in the event that the stated dividends thereon are not paid in
full, be entitled to share ratably with the Preferred Stock in the payment of
dividends, including accumulations, if any, in accordance with the sums or other
consideration which would be payable on such shares if all dividends were
declared and paid in full, or shall, in the event that the amounts payable
thereon in liquidation are not paid in full, be entitled to share ratably with
the Preferred Stock in any other distribution of assets in accordance with the
sums or other consideration which would be payable in such distribution if all
sums payable were discharged in full.
1.8 "Person" shall mean any individual, corporation, general
partnership, limited partnership, limited liability Partnership, joint venture,
association, joint-stock company, trust, limited liability Company,
unincorporated organization or government or any agency or political subdivision
thereof.
2. Voting.
2.1 The shares of Preferred Stock shall have no voting rights
except as required by law.
2.2 The Company may create, authorize or issue any shares of
Junior Stock or PARI PASSU Stock or increase or decrease the amount of
authorized capital stock of any class without the consent of the holders of
Preferred Stock and in taking such actions the Company shall not be deemed to
have affected adversely the rights, preferences, privileges or voting rights of
holders of shares of Preferred Stock.
<PAGE>
3. Liquidation Rights.
3.1 In the event of any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary, the holders of the shares of
Preferred Stock shall be entitled to receive out of the assets of the Company
available for distribution to stockholders the Liquidation Preference plus
Accrued Dividends thereon in preference to the holders of, and before any
distribution is made on, any Junior Stock, including, without limitation, on any
Common Stock.
3.2 Neither the sale, conveyance, exchange or transfer (for
cash, shares of stock, securities or other consideration) of all or
substantially all the property and assets of the Company nor the merger or
consolidation of the Company into or with any other corporation, or the merger
or consolidation of any other corporation into or with the Company, shall be
deemed to be a liquidation, dissolution or winding up, voluntary or involuntary,
for the purposes of this Section 3.
3.3 After the payment to the holders of the shares of
Preferred Stock of full preferential amounts provided for in this Section 3, the
holders of Preferred Stock as such shall have no right or claim to any of the
remaining assets of the Company.
3.4 In the event the assets of the Company available for
distribution to the holders of shares of Preferred Stock upon any liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which holders are entitled
pursuant to Section 3.1, no such distribution shall be made on account of any
shares of any PARI PASSU Stock upon such liquidation, dissolution or winding up
unless proportionate distributable amounts shall be paid on account of the
shares of Preferred Stock, ratably, in proportion to the full distributable
amounts for which holders of all Preferred Stock and PARI PASSU Stock are
entitled upon such liquidation, dissolution or winding up.
4. Conversion.
4.1 The holder of Preferred Stock shall have the right, at its
option, at any time and from time to time to convert, subject to the terms and
provisions of this Section 4, any or all of the holder's shares of Preferred
Stock. In such case, each share of Preferred Stock shall be converted into 1.75
(the "Conversion Rate") fully paid and nonassessable shares of Common Stock,
subject to Section 4.5.
The conversion right of a holder of Preferred Stock shall be exercised by
the holder by the surrender of the certificates representing shares to be
converted to the Company at any time during usual business hours at its
principal place of business, accompanied by written notice (the "Notice of
Conversion") that the holder elects to convert all or a portion of the shares of
Preferred Stock represented by such certificate. The Notice of Conversion shall
read substantially as follows:
<PAGE>
The undersigned holder (the "Holder") is surrendering to Media
Source, Inc., a Delaware corporation (the "Company"), one or
more certificates representing shares of Series A Convertible
Preferred Stock of the Company (the "Preferred Stock") in
connection with the Conversion of all or a portion of the
Preferred Stock into shares of Common Stock, $.01 par value
per share, of the Company (the "Common Stock") as set forth
below.
1. The Holder understands that the Preferred Stock was
issued by the Company pursuant to the exemption from
registration under the United States Securities Act of 1933.
2. The Holder represents and warrants that all offers
and sales of the Common Stock issued to the Holder upon such
conversion of the Preferred Stock shall be made either
pursuant to an effective registration statement under the
Securities Act, in compliance with Rule 144, or pursuant to
some other exemption from registration.
Number of shares of Preferred Stock being converted:
___________.
Number of shares of Preferred Stock issuable: __________.
Name of Holder:
(Signature of Holder)
Immediately prior to the close of business on the date of receipt by
the Company of Notice of Conversion, the converting holder of Preferred Stock
shall be deemed to be the holder of record of Common Stock issuable upon
conversion of such holder's Preferred Stock notwithstanding that certificates
representing such Common Stock shall not then be actually delivered to such
person. On the Conversion Date, all rights with respect to the shares of
Preferred Stock so converted, including the rights, if any, to receive notices,
will terminate, except only the rights of holders thereof to (i) receive
certificates for the number of shares of Common Stock into which such shares of
Preferred Stock have been converted; and (ii) exercise the rights to which they
are entitled as holders of Common Stock.
4.2 The number of shares of Common Stock into which the
Preferred Stock is convertible shall be subject to adjustment as follows:
<PAGE>
(i) In case the Company shall at any time or from time to time (A) make a
redemption payment or pay a dividend (or other distribution) payable in shares
of Common Stock on any class of capital stock (which, for purposes of this
Section 4.2 shall include, without limitation, any dividends or distributions in
the form of options, warrants or other rights to acquire capital stock) of the
Company; (B) subdivide the outstanding shares of Common Stock into a larger
number of shares; (C) combine the outstanding shares of Common Stock into a
smaller number of shares; (D) issue any shares of its capital stock in a
reclassification of the Common Stock; or (E) pay a dividend or make a
distribution to all holders of shares of Common Stock pursuant to a stockholder
rights plan, "poison pill" or similar arrangement then, and in each such case,
the Conversion Rate in effect immediately prior to such event shall be adjusted
(and any other appropriate actions shall be taken by the Company) so that the
holder of any share of Preferred Stock thereafter surrendered for conversion
shall be entitled to receive the number of shares of Common Stock that such
holder would have owned or would have been entitled to receive upon or by reason
of any of the events described above, had such share of Preferred Stock been
converted immediately prior to the occurrence of such event. An adjustment made
pursuant to this Section 4.2(i) shall become effective retroactively (x) in the
case of any such dividend or distribution, to the day immediately following the
close of business on the record date for the determination of holders of Common
Stock entitled to receive such dividend or distribution or (y) in the case of
any such subdivision, combination or reclassification, to the close of business
on the day upon which such corporate action becomes effective.
(ii) Notwithstanding anything herein to the contrary, no adjustment under
this Section 4.2 need be made to the Conversion Rate unless such adjustment
would require an increase or decrease of at least 1% of the Conversion Rate then
in effect. Any lesser adjustment shall be carried forward and shall be made at
the time of and together with the next subsequent adjustment, which, together
with any adjustment or adjustments so carried forward, shall amount to an
increase or decrease of at least 1% of such Conversion Rate.
4.3 Upon any increase or decrease in the Conversion Rate,
then, and in each such case, the Company promptly shall deliver to each holder
of Preferred Stock a certificate signed by an authorized officer of the Company,
setting forth in reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated and specifying the increased or
decreased Conversion Rate then in effect following such adjustment.
4.4 No fractional shares or scrip representing fractional
shares of Common Stock shall be issued upon the conversion of any shares of
Preferred Stock. If more than one share of Preferred Stock shall be surrendered
for conversion at one time by the same holder the number of full shares of
Common Stock issuable upon conversion thereof shall be computed on the basis of
the aggregate Liquidation Preference of the shares of Preferred Stock so
surrendered. If the conversion of any share or shares of Preferred Stock results
in a fraction, an amount equal to such fraction multiplied by the last reported
closing bid price of the Common Stock on the principal public market for the
Common Stock at the close of business on the trading day next preceding the day
of conversion shall be paid to such holder in cash by the Company.
<PAGE>
4.5 In case of any capital reorganization or reclassification
or other change of outstanding shares of Common Stock (other than a change in
par value, or from par value to no par value, or from no par value to par
value), or in case of any consolidation or merger of the Company with or into
another Person (other than a consolidation or merger in which the Company is the
resulting or surviving Person and which does not result in any reclassification
or change of outstanding Common Stock), or in case of any sale or other
disposition to another Person of all or substantially all of the assets of the
Company (any of the foregoing, a "Transaction"), each share of Preferred Stock
then outstanding shall, without the consent of any holder of Preferred Stock,
become convertible only into the kind and amount of shares of stock or other
securities (of the Company or another issuer) or property or cash receivable
upon such Transaction by a holder of the number of shares of Common Stock into
which such share of Preferred Stock could have been converted immediately prior
to such Transaction after giving effect to any adjustment event. The provisions
of this Section 4.5 and any equivalent thereof in any such certificate similarly
shall apply to successive Transactions. The provisions of this Section 4.5 shall
be the sole right of holders of Preferred Stock in connection with any
Transaction and such holders shall have no separate vote thereon.
4.6 In the case of any distribution by the Company to its
stockholders of substantially all of its assets, each holder of Preferred Stock
will participate pro rata in such distribution based on the number of shares of
Common Stock into which such holders' shares of Preferred Stock would have been
convertible immediately prior to such distribution.
4.7 The Company shall at all times reserve and keep available
for issuance upon the conversion of the Preferred Stock, such number of its
authorized but unissued shares of Common Stock as will from time to time be
sufficient to permit the conversion of all outstanding shares of Preferred
Stock, and shall take all action required to increase the authorized number of
shares of Common Stock if at any time there shall be insufficient authorized but
unissued shares of Common Stock to permit such reservation or to permit the
conversion of all outstanding shares of Preferred Stock.
4.8 The issuance or delivery of certificates for Common Stock
upon the conversion of shares of Preferred Stock shall be made without charge to
the converting holder of shares of Preferred Stock for such certificates or for
any tax in respect of the issuance or delivery of such certificates or the
securities represented thereby, and such certificates shall be issued or
delivered in the respective names of, or in such names as may be directed by,
the holders of the shares of Preferred Stock converted; provided, however, that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any such certificate in
a name other than that of the holder of the shares of Preferred Stock converted,
and the Company shall not be required to issue or deliver such certificate
unless or until the Person or Persons requesting the issuance or delivery
thereof shall have paid to the Company the amount of such tax or shall have
established to the reasonable satisfaction of the Company that such tax has been
paid.
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5. Other Provisions.
5.1 With respect to any notice to a holder of shares of
Preferred Stock required to be provided hereunder, neither failure to mail such
notice, nor any defect therein or in the mailing thereof, to any particular
holder shall affect the sufficiency of the notice or the validity of the
proceedings referred to in such notice with respect to the other holders or
affect the legality or validity of any distribution, rights, warrant,
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up, or the vote upon any such action. Any notice which
was mailed in the manner herein provided shall be conclusively presumed to have
been duly given whether or not the holder receives the notice.
5.2 Shares of Preferred Stock issued and reacquired will be
retired and canceled promptly after reacquisition thereof and, upon compliance
with the applicable requirements of Delaware law, have the status of authorized
but unissued shares of preferred stock of the Company undesignated as to series
and may with any and all other authorized but unissued shares of preferred stock
of the Company be designated or redesignated and issued or reissued, as the case
may be, as part of any series of preferred stock of the Corporation, except that
any issuance or reissuance of shares of Preferred Stock must be in compliance
with this Certificate of Designation.
5.3 All notices periods referred to herein shall commence on
the date of the mailing of the applicable notice.
IN WITNESS WHEREOF, the Company has caused this certificate to be signed
and attested this _____ day of --------------, -----.
MEDIA SOURCE, INC.
By:
--------------------------
Name:
----------------------
Title:
Attest: ----------------------
- -------------------------
Name:
--------------------
Title: Secretary
