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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-10475
MEDIA SOURCE, 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.)
6360 Rings Road, Amlin, Ohio 43002
(Address of principal executive offices) (Zip Code)
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:
Voting 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 1, 2000, was $220,419 (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 1, 2000, 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 41
Page 1 of 43 Pages
<PAGE>
PART I
ITEM 1. BUSINESS
General development of business
Media Source, Inc. (the "Company", 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"), a Florida corporation which,
under the Junior Library Guild ("JLG"), distributes children's literature
throughout the United States, primarily through subscription services. 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. Although PBF is
no longer engaged in the book fair business, it continues to sell children's
literature.
In 1999, the Company changed its name from Pages, Inc. to Media Source,
Inc., changed the symbol for its common stock to "MESH" on the OTC Bulletin
Board administered by the NASDAQ Stock Market, Inc., and approved a
one-for-twenty reverse stock split.
Narrative description of business
Market Overview. The Company distributes 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 is
literature for children in kindergarten through grade 12. The U.S. student
enrollment in that category is over 52 million. There are over 17,000 public
libraries and over 83,000 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.
Marketing and Customer Service. Currently, the Company markets its book
subscriptions and children's literature through a sales manager which leads a
team of trained telephone sales representatives. The telephone sales
representatives undergo extensive training, monitoring, and supervision to
ensure quality control and consistency.
<PAGE>
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, price, 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 offers numerous new book titles each year in its
subscription service. In addition, customers are able to purchase book titles
previously offered at a reduced price. The Company's editorial department,
located in New York City, 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.
Pages Book Fairs. PBF discontinued its book fair distribution channel when
it sold its book fair assets in June 1998. PBF continues to sell its remaining
inventory.
Growth opportunities. In 1999, the Company sold 23,300 JLG
subscriptions. 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
6.5% of the entire school library and public library market nationwide. In 1999,
in an effort to increase its revenue potential, the Company established a sales
force in Ohio in addition to maintaining its sales force in Florida.
Employees
During 1999, the Company increased it's work force from approximately 20
employees (16 permanent and 4 seasonal) to a total of 29 employees (25 permanent
and 4 seasonal). 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 Junior Library Guild is the company's principal trademark. The
Company has used the trademark in commerce for a number of years.
Competition
The distribution of children's leisure-based literature, in general, is
a highly competitive business. There are numerous competitors that sell
children's literature to public and school libraries. However, the structure of
JLG, the product, and level of customer service that it provides are unique. JLG
market's its product at discounted prices in comparison with its competitors.
Seasonality and Working Capital
The children's literature business correlates closely to the school
year. While the majority of the sales force remains intact throughout the year,
one third of the sales force is reduced during mid-June through mid-August. In
addition, the entire sales force is also reduced 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 Company addressed its Year 2000 compliance needs by implementing
accounting and telemarketing software conversions to Year 2000 compliant
software systems.
A potential problem existed for all companies that relied on computers
as the year 2000 approached. The "Year 2000" problem is the result of the past
practice in the computer industry of using two digits rather than four to
identify the applicable year. The Company experienced no internal problems or
problems with third parties in regards to the "Year 2000" problem. The Company
spent approximately $7,000 on external consultants to ensure Year 2000
compliance.
<PAGE>
Subsequent Events
On January 25, 2000, assets which were previously held for disposal at
December 31, 1999, with a net book value of $1.2 million, were sold for $1.6
million. The assets consisted of an office and warehouse facility located in
Worthington, Oh that were being used by the JLG on a temporary basis. The
Company paid in full outstanding mortgage obligations of approximately $746,000.
JLG signed a lease to rent the office and warehouse facility through September
25, 2000. At the expiration of the lease, the JLG will move and lease a new
office and warehouse facility located in Union County, Ohio.
On January 28, 2000, the Company retired $300,000 in subordinated notes
that were due August 1, 2000. In addition, the Company also retired a $50,000
subordinated note on February 1, 2000. All subordinated notes were retired at
par.
On March 8, 2000, the Company retired a $250,000 subordinated note that
was due December 31, 2005. The note was retired at 90 percent of face value.
Geographic Information
For each of the last three fiscal years, all of the JLG revenues have
been generated in the United States. In addition, all long-lived assets and
long-term relationships with financial institutions are also in the United
States.
ITEM 2. PROPERTIES
The principal facilities of the Company are as follows:
Owned/
Location Use Size Leased Expiration
Worthington, Ohio ..... *Office and Warehouse 61,530 sq. ft. Leased 9/00
Amlin, Ohio ........... Office and Warehouse 4,700 sq. ft. Leased M/M
New York, New York .... Office 750 sq. ft. Leased 4/01
St. Petersburg, Florida Office 1,000 sq. ft. Leased 6/02
* The facilities were sold on January 25, 2000. See Subsequent Events section.
These facilities are all located in appropriately designed buildings, which are
kept in good repair.
ITEM 3. LEGAL PROCEEDINGS
The Company was subject to litigation by expert witnesses used in its
1996 suit against its former auditors, Arthur Anderson & Co. LLP. The Company
settled the case through mediation and paid $61,000 on February 16, 2000.
The Illinois Department of Revenue issued two assessments,
NTLSF980498870200 on April 17, 1998 and NTLSF9804988702001 on March 24, 1998
against PBF seeking approximately $478,000, plus interest, in sales tax from
1993 through 1996. A hearing has been set before the State of Illinois,
Department of Revenue [Reg. #2225-1251, docket no, 98-ST-0132] on April 27,
2000. The taxing authority is claiming that there has been an agency
relationship between PBF and the schools. The Company denies that such a
relationship existed and plans to vigorously defend this matter seeking full
discharge of the assessments. The Company anticipates legal cost to be in the
$25,000 to $40,000 range and has recorded a liability of approximately $650,000.
<PAGE>
From time to time, the Company is involved in litigation incidental to
its business. In the opinion of management, no litigation to which the Company
currently is a party is likely to have a materially adverse effect on the
Company's results of operation or financial condition, if decided adversely to
the Company.
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 sales prices for shares of the Common Stock, as reported on the OTC Bulletin
Board.
Trade Price
---------------------------------
High* Low*
----- ----
Calendar Year Ended December, 1999
Fourth Quarter .................... 1 3/4 3/4
Third Quarter ..................... 1 1/2 3/4
Second Quarter ................... 1 7/8 1/10
First Quarter .................... 2 1/4 1/10
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
*Adjusted to give retroactive effect to a one-for-twenty reverse
stock split effective March 9, 1999.
The Bulletin Board prices represent inter-dealer quotations, without
adjustment for retail mark-up, markdown or commissions and may not represent
actual transactions
As of February 28, 2000, the Company had approximately 582 holders of
record of its Common Stock.
<PAGE>
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.
ITEM 6. SELECTED FINANCIAL DATA
All per share data has been adjusted to reflect the one-for-twenty reverse stock
split.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31
1999 1998 1997 1996 1995
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenues ........... $ 3,297 $ 2,646 $ 3,390 $ 4,611 $ 4,015
Costs and expenses.. 3,740 3,179 3,771 5,815 4,581
Valuation adjustment
- note -- -- 1,500 -- --
------- ------- ------- ------- --------
Loss from continuing
operations before
income taxes...... (443) (533) (1,881) (1,204) (566)
(Provision) benefit
for income taxes -- -- -- -- --
------- ------- ------- -------- -------
Loss from continuing
operations (443) (533) (1,881) (1,204) (566)
Discontinued operations:
Income(loss) from
operations ...... 4 (2,866) (3,500) (1,517) (8,004)
Gain(loss) on disposal -- (577) -- 3,255 (650)
Cumulative effect of change in
accounting principles -- -- -- 995 --
------- ------- ------- -------- -------
Net income(loss) ... $ (439) $ (3,976) $ (5,381) $ 1,529 $ (9,220)
========= ========= ========= ======== ========
Per Share Data:
Basic and diluted:
Loss from continuing
operations ....... $ (1.35) $ (1.63) $ (5.97) $ (4.34) $ (2.29)
Discontinued operation, net of
cumulative effect of accounting
change of $3.58 in 1996 0.01 (10.49) (11.10) 9.85 (35.04)
Net income(loss) available to common
Stockholders $ (1.34) $ (12.12) $ (17.07) $ 5.51 $ (37.33)
========= ======== ======== ======== =========
Cash dividends per
common share ...... -- -- -- -- --
Weighted average
common shares ... 328 328 315 278 247
At December 31
-------- -------- -------- -------- --------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Consolidated Balance Sheets Data:
Working capital .... $ (1,179) $ 106 $ 289 $ 3,935 $ 15,719
Total assets ....... 6,268 6,480 28,083 41,320 54,849
Long-term obligations 1,082 2,057 2,174 4,265 19,360
Stockholder' equity 773 1,226 5,202 12,876 10,674
</TABLE>
NOTE 1: The prior years have been restated to reflect discontinued operations.
See Pages Book Fairs under Part I, Item 1.
<PAGE>
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
capability of the Company's existing subscription sales organization to absorb
additional volume; (ii) the expectations of the Company with respect to the
amount of the possible judgement in the sales tax litigation described under
"Item 3, Legal Proceedings"; (iii) the Company's opportunity to increase sales
of its products and its market share; and (iv) trends affecting the Company's
financial condition or results of operations; (iv) the Company's cash on hand
and cash from operations should provide sufficient funds available for the
Company's normal business operations in the year 2000. 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, 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, 1999, Compared to Year Ended December 31, 1998
Revenues for the year ended December 31, 1999, approximated $3.3
million, compared to approximately $2.6 million for the year ended December 31,
1998, an increase of 25% or approximately $700,000. The increase in revenues
were principally attributable to a decrease of one monthly subscription shipment
in 1998 which reduced 1998 revenues by $300,000, and an additional market
strategy in 1999 which increased 1999 revenues by $270,000.
Cost of goods sold was approximately $1.6 million for the year ended
December 31, 1999, compared to approximately $1.2 million for the year ended
December 31, 1998, an increase of 40% or approximately $400,000. Cost of goods
sold as a percentage of revenues was at 49% for 1999 and 44% for 1998. The
increase was principally attributable to a year end adjustment to increase the
inventory reserve that was charged against cost of goods sold.
Selling, general, and administrative expense was approximately $1.8
million for the years ended December 31, 1999, compared to approximately $2.0
million for the year ended December 31, 1998, a decrease of 10% or approximately
$200,000. The decrease was principally attributable to a reduction of overhead
expenses allocated to continuing operations that were previously incurred by
discontinued operations.
Interest expense was approximately $180,000 for the year ended December
31, 1999, compared to $310,000 for the year ended December 31, 1998, an decrease
of 42% or approximately $130,000. The average outstanding debt in 1999
approximated $2.1 million compared to $3.1 million for 1998. Additionally, the
average interest rate for 1999 approximated 10.2%, compared to approximately
11.24% for 1998.
Depreciation and amortization expense was approximately $149,000 for
the year ended December 31, 1999, compared to $167,000 for the year ended
December 31, 1998, an decrease of 11% or approximately $18,000. The decrease was
principally attributable to certain assets becoming fully depreciated in 1998,
thus resulting in no 1999 expense.
<PAGE>
There was no income tax provision for 1999 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 1999 was approximately $443,000,
compared to approximately $533,000 million in 1998.
1999 resulted in a net loss of approximately $439,000 versus a net loss
of approximately $4.0 million in 1998. Included in the 1999 net loss was a gain
of approximately $4,000 from discontinued operations. Included in the 1998 net
loss were net a losses of approximately $2.9 million from discontinued
operations of the book fair business segment and approximately $577,000 from the
sale of PBF business assets. Earnings per share decreased to a net loss of $1.34
per share for 1999, versus a net loss per share of $12.12 in 1998. The weighted
average common and common equivalent shares for 1999 and 1998 were 328,200.
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.
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.
<PAGE>
Liquidity and Capital Resources
The Company had a net decrease in cash for the year ended December 31,
1999, of $194,000. Net cash provided by operations was $141,000 for the year
ended December 31, 1999, compared to net cash used by operations of $2.3 million
during the year ended December 31, 1998. Cash on hand was $805,000 at December
31, 1999, compared to $998,000 at December 31, 1998.
For the year ended December 31, 1999, continuing operations provided
$111,000 and discontinued operations provided $30,000 compared to continuing
operations providing $1.2 million and discontinued operations using $3.4 million
for the year ended December 31, 1998.
Net cash used in investing activities was $364,000 for the year ended
December 31, 1999. Net 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.
For the year ended December 31, 1999, net cash provided by financing
activities was $29,000. This compares to net cash used by financing activities
of $7.7 million for the year ended December 31, 1998. In 1998, proceeds from the
sale of the Company's book fair business were used to repay debt obligations.
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, 1999, PBF had $926,000 of tax liabilities that relate to
discontinued operations. 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 liabilities.
<PAGE>
The Company is pursuing the use of the Internet to increase sales as
well as customer satisfaction. Management believes that it will be able to
increase sales to existing subscribers and also attract new subscribers at a
minimal cost to the Company. Financing for the development of the processes is
be provided by cash from operations.
At December 31, 1999, the Company had a negative net working capital of
approximately $1.2 million. This resulted primarily from reclassifying the
current portion of long-term debts to short-term and $926,000 in liabilities
that relate to the Company's discontinued operations. Subsequent to December 31,
1999, the Company sold assets which were previously held for disposal at
December 31, 1999 for $1.6 million. The Company used the proceeds to pay off
approximately $746,000 in mortgage obligations and retire an additional $600,000
in subordinated notes. Cash provided by continuing operations at December 31,
1999 was $111,000. The Company believes that through a combination of cash on
hand and available from operations, there should be sufficient funds available
for the Company's normal business operations in the year 2000.
<PAGE>
S. Robert Davis deferred his 1999 salary of $185,000. Had Mr. Davis not
deferred his 1999 salary, the $111,000 positive cash flow from continuing
operations would have been a negative $74,000. Mr. Davis intends to defer his
salary for an additional 24 month. The Board of Directors has the right to pay
Mr. Davis' deferred compensation in stock or cash, should the Company deem one
more preferential than the other. It continues to be the Company's intention to
pay the deferred compensation in cash. The re-location of operations and
reduction of interest should provide additional funding to meet the future
obligations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is exposed to the impact of interest rate changes on its
debt obligations and investment risk. The Company is not exposed to foreign
currency exchange rate risk.
Interest Rate Risk. The Company's exposure to market rate risk for
changes in interest rates relate primarily to the Company's first mortgage. The
interest rate on this mortgage is prime plus 1 1/4 percent. The prime interest
rate at December 31, 1999 was 8.5 percent compared to 7.75 percent at December
31, 1998. The Company is not exposed due to the fact that the mortgage was paid
off with the proceeds from the sale of assets which were previously held for
disposal at December 31, 1999. Furthermore, the remaining debt obligations of
the Company all have fixed interest rates.
Investment Rate Risk. At December 31, 1999, the Company had trading
securities with a fair market value of $355,907 and a cost of $385,622. Through
March 30, 2000, the Company had sold its entire portfolio of trading securities;
the results produced a positive return on the Company's investments. Although
the Company is currently not in the market, it could reenter the market, at its
discretion, by purchasing trading securities at any time in the future. By doing
so, the Company would be subject to investment risk. The Company could be
benefit from increases in market rates or could be adversely affected by
decreases in market rates. The current 2000 positive return on investments could
be increased, reduced or offset by any future gains or losses.
During 1999, the Company acquired 29,560 shares of Crown Publishing
Company for an investment at cost of $86,800. These available for sale
securities have a fair market value based on new shares sold at $2.50 per share,
and thus are reported at December 31, 1999 with a fair market value of $73,900.
The Company would experience a loss of $12,900 if the shares were sold as of
December 31, 1999.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Financial Statement
Schedule.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
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.
Director or Executive
Name Age Position Officer Since
S. Robert Davis ......... 61 Chairman of the Board, President,
Randall J. Asmo ......... 35 Executive Vice President and Director 1992
Juan F. Sotos, M.D ...... 72 Director 1992
Robert J. Tierney ....... 52 Director 1992
Donald R. Hollenack ..... 35 Chief Financial Officer 1999
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.
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. Mr. Davis is also the Chairman of the Board 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. Mr. Asmo is also a director of CASCO INTERNATIONAL, INC. as
well as an officer in 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.
<PAGE>
Donald R. Hollenack Was elected Chief Financial Officer in 1999.
Previously, Mr. Hollenack served as Controller for National Church Residences, a
privately-held real estate company providing housing for the elderly and low
income families, from May 1997 to March 1999. In addition, Mr. Hollenack served
in similar capacities as Controller for J.P. Services, Inc., a distribution and
delivery company, from September 1996 to March 1997, and for Long's College Book
Company, a retail college book store, from December 1989 to September 1996.
Prior, Mr. Hollenack served as a consultant in a public accounting firm. Mr.
Hollenack is a non-practicing Certified Public Accountant.
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.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows, for the fiscal years ended December 31, 1999,
1998, and 1997, 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, its only executive officer, whose total salary and bonus
exceeded $100,000 (the "Named Executive Officer"), and the principal capacity in
which he served:
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
-----------------------------------------------------
Securities
Underlying
Options/
Name and Other Annual Warrants
Principal Position Year Salary Bonus Compensation SAR's(#)(1)
- ------------------ ---- ------ ----- ------------ ----------
<S> <C> <C> <C> <C> <C>
S. Robert Davis, ......... 1999 $185,000(2) $ 0 $ 0 0
Chairman and President ... 1998 $185,000(2) $ 0 $ 0 0
1997 $192,115 $ 0 $ 0 9,663
</TABLE>
(1) Stock options previously granted to the Named Executive Officer, by their
terms, automatically adjust to reflect certain changes in the outstanding
Common Shares of the Company, including stock dividends.
(2) Mr. Davis was paid $54,423 in salary through May 7, 1998, after which he
elected to defer and accrue his salary. In June 1999, Mr. Davis elected to
continue to defer and accrue his annual salary of $185,000 per year. Mr.
Davis' accrued salary earns interest at 7 percent.
No Executive Officers have employment agreements with the Company.
<PAGE>
Option/Warrant Grants in Last Fiscal Year to Named Executive Officer
None.
Aggregated Options Exercised in 1999 and Fiscal Year-End Option/Warrant Values
The following table provides certain information with respect to options
exercised in fiscal 1999 by the Named Executive Officer and the value of such
officers unexercised options/warrants at December 31, 1999.
Value of Unexercised
In-the-Money
Shares Number of Unexercised Options/Warrants
Acquired on Value Options/Warrants at Year End(#) at Year End($)
Name Exercise Realized($) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------- ----------- ----------- ------------- ----------- -------------
S. Robert
Davis (1) None N/A 0 0 $0 $0
(1) S. Robert Davis held no options or warrants at December 31, 1999.
Compensation of Directors
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.
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.
<PAGE>
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' 1999 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
<PAGE>
Performance Graph
The following graph 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 Specialty Retail for the five-year period from December 31,
1994 to December 31, 1999. 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>
<CAPTION>
Nasdaq S&P
Composite Specialty Retail MESH
--------- ---------------- ----
<S> <C> <C> <C>
Dec-94 100 100 100
Dec-95 139.9 75.4 36.1
Dec-96 171.7 106 72.2
Dec-97 210.2 106.4 33.3
Dec-98 291.6 82.6 44.4
Dec-99 536.9 59 1.7
</TABLE>
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, 2000, 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, and by the Named Executive Officer serving as of
December 31, 1999, 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.
Amount and Nature Percent
Name and Address of Beneficial Ownership (1) of Class(2)
- ---------------- --------------------------- -----------
S. Robert Davis ............................ 139,579(3) 42.53%
6360 Rings Road
Amlin, OH 43002
Charles R. Davis ........................... 25,610 7.80%
CASCO International, Inc. ........................
13900 Conlan Circle, Suite 150
Charlotte, NC 28277
Randall J. Asmo ............................ 9,258 2.82%
6360 Rings Road
Amlin, OH 43002
Juan F. Sotos, M.D ......................... 2,890 0.88%
700 Children's Drive, Room ED 421
Columbus, OH 43205
Robert J. Tierney .......................... 138 0.04%
Ohio State University
1945 N. High Street
#253 Arps Hall
Columbus, OH 43210
All executive officers and directors
as a group (5 persons) .................... 151,865(4) 46.27%
(1) Represents sole voting and investment power unless otherwise indicated.
(2) Based on 328,200 shares of common stock outstanding as of March 15, 2000.
(3) Includes 1,255 shares owned by Mr. Davis' wife as to which Mr. Davis
disclaims beneficial ownership.
(4) The number of shares of common stock beneficially owned by all executive
officers and directors as a group 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 the Third and Fourth Quarters of 1996, S. Robert Davis, Randall J.
Asmo, and Charles R. Davis exercised stock options by granting stockholders
notes. These notes are full recourse promissory notes bearing interest at 7
percent and were due in September 1999. These notes have been extended for an
additional three years.
In July 1997, the Company entered into 12 percent subordinated
convertible Notes for $850,000, of which S. Robert Davis, Chairman of Media
Source, Inc., provided $500,000 of the total. 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, as adjusted for the one for twenty reverse stock split, into
common stock of Media Source, Inc. The Company retired $350,000 of the Notes in
January 2000. The Note with S. Robert Davis remains outstanding, but is due on
August 1, 2000
In 1998, S. Robert Davis personally guaranteed to The Huntington
National Bank, a $200,000 subordinated note payable for Media Source, Inc.
In June 1999, S. Robert Davis informed the Company of his
intention to defer his compensation for an additional 24 months. S.
Robert Davis' 1999 deferred compensation was $185,000. At December 31,
1999, S. Robert Davis' total deferred compensation was $308,333. Mr.
Davis' deferred compensation earns interest at 7 percent. Interest on
deferred compensation at December 31, 1999 was $21,583.
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 ending
December 31, 1999.
The Company filed a report on Form 8-K dated December 3, 1999, under
item 5. The Company announced that it rescinded an option granted to
the Company Chairman, S. Robert Davis, to purchase shares of Preferred
Stock in exchange for extending the due date of his $500,000
subordinated note due August 2000.
(d) Financial Statement Schedule
See Index to Consolidated Financial Statements and Financial Statement
Schedule following "Signatures."
<PAGE>
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 29, 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 29, 1999 By:/s/S. Robert Davis
Chairman of the Board, President,
and Director
(Principal executive officer)
Dated: March 29, 1999 By:/s/Donald R. Hollenack
Chief Financial Officer
(Principal financial and
accounting officer)
Dated: March 29, 1999 By:/s/Randall J. Asmo
Director
Dated: March 29, 1999 By:/s/Juan F. Sotos, M.D.
Director
Dated: March 29, 1999 By:/s/Robert J. Tierney
Director
<PAGE>
MEDIA SOURCE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
Independent Auditors' Reports 20
Consolidated statements of operations 21
Consolidated statements of comprehensive loss 22
Consolidated balance sheets 23, 24
Consolidated statements of cash flows 25
Consolidated statements of stockholders' equity 26
Notes to the consolidated financial statements 27 - 39
Schedule II--Valuation and qualifying accounts 40
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.
<PAGE>
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. and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, comprehensive loss, cash flows
and stockholders' equity for each of the three years in the period ended
December 31, 1999. Our audits also include the information in the consolidated
financial statement schedule for the years ended December 31, 1999, 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.
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, 1999
and 1998, and the results of its operations and its cash flows for each of the
three 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, 1999, 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 11, 2000
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues .......................... $ 3,297,322 $ 2,646,160 $ 3,390,539
Costs of goods sold ............... 1,625,445 1,163,210 1,487,026
----------- ----------- -----------
Gross profit .......... ........... 1,671,877 1,482,950 1,903,513
Operating expenses:
Selling, general
and administrative ... 1,825,155 1,989,422 2,345,278
Depreciation and amortization 149,441 167,369 148,342
----------- ----------- -----------
Loss from operations ......... (302,719) (673,841) (590,107)
Other income (expense):
Interest, net .................... (180,013) (309,078) 208,671
Valuation adjustment -
note receivable -- -- (1,500,000)
Gain on settlement of lawsuit . ...--... 450,000 --
Other ............................ 39,537 -- --
----------- ----------- -----------
Loss from continuing operations
before income taxes..... (443,195) (532,919) (1,881,436)
Provision for income taxes -- -- --
Gain(loss) from discontinued operations 4,024 (2,866,344) (3,499,866)
Loss on disposal ........................... -- (577,230) --
----------- ----------- -----------
NET LOSS $(439,171) $(3,976,493) $(5,381,302)
=========== =========== ============
Earnings per common share*:
Loss from continuing operations .. $ (1.35) $ (1.63) $ (5.97)
Gain(loss) from discontinued
operations $ 0.01 $ (10.49) $ (11.10)
Net loss ..........................$ (1.34) $ (12.12) $ (17.07)
=========== =========== ============
Weighted average number of common
shares outstanding ................ 328,200 328,200 315,300
=========== =========== ============
*All per share data has been adjusted to reflect the one-for-twenty reverse
stock split.
</TABLE>
The accompanying notes are
an integral part of the
consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
NET LOSS .......................... $ (439,171) $(3,976,493) $(5,381,302)
Unrealized loss on securities available for
sale (net of tax of $4,600, reduced by
valuation allowance of $4,600) (12,900) -- --
---------- ----------- -----------
COMPREHENSIVE NET LOSS ............ $ (452,071) $(3,976,493) $(5,381,302)
=========== =========== ===========
</TABLE>
The accompanying notes are
an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
ASSETS 1999 1998
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents ........................ $ 804,605 $ 998,432
Trading securities, at market .................... 355,907 --
Accounts receivable, net of allowance for doubtful
accounts of $94,000 and $94,000, respectively 863,117 867,333
Inventory ........................................ 1,003,695 1,271,336
Prepaid expenses ................................. 206,214 167,485
---------- ---------
Total current assets ..................... 3,233,538 3,304,586
---------- ---------
Equipment, net of accumulated depreciation of $155,406
and $536,888, respectively 94,264 119,754
Other assets:
Assets held for disposal (net) ................... 1,189,189 1,253,335
Cost in excess of net assets acquired, net of
accumulated amortization of $1,055,000 and
$1,007,000, respectively 1,666,902 1,715,109
Securities available for sale, at market ......... 73,900
Other ........................................... 10,042 86,860
---------- ---------
2,940,033 3,055,304
---------- ---------
TOTAL ASSETS ........................................ $6,267,835 $6,479,644
========== =========
</TABLE>
The accompanying notes
are an integral part of the consolidated
financial statements.
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
---- ----
<S> <C> <C>
Current Liabilities:
Accounts payable $220,690 $678,108
Accrued liabilities 97,294 202,937
Accrued salary and interest - officer 329,917 130,577
Accrued tax liabilities 1,006,032 506,745
Deferred revenue 1,794,385 1,568,892
Current portion of long-term debt obligations 963,896 109,780
------- -------
Total current liabilities 4,412,214 3,197,039
------- ---------
Long-term debt 1,082,001 2,056,914
------- ---------
Total 5,494,215 5,253,953
------- ---------
Commitments and contingencies (Note 10)
Stockholders' Equity
Preferred shares: $.01 par value; authorized 300,000
shares; none issued and outstanding
Common shares: $.01 par value; authorized 500,000
shares; issued 343,137 shares 3,431 68,627
Capital in excess of stated value 21,974,029 21,908,833
Notes receivable from stock sales (902,373) (902,373)
Unrealized losses on securities available for sale(12,900) --
Accumulated deficit (20,047,444) (19,608,273)
------------ ------------
1,014,743 1,466,814
Less 14,936 shares of common stock
in treasury, at cost (241,123) (241,123)
------------ ------------
Total stockholders' equity 773,620 1,225,691
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,267,835 $6,479,644
=========== ==========
</TABLE>
The accompanying notes are
an integral part of the
consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash Flow used in Operations:
Loss from continuing operations $ (443,195) $ (532,919) $ (1,881,436)
------------ ------------ ------------
Reconciliation to net cash flow used in continuing
Depreciation and amortization . 149,441 167,369 148,342
Valuation adjustment -
note receivable ....................--... -- 1,500,000
Loss on sale of distribution channel .--... 577,230 --
Gain on sale of fixed assets .. (3,000) -- --
Changes in working capital items of continuing
Accounts receivable ............ (230,456) 9,415 227,636
Inventory ................ 267,646 318,958 (239,024)
Prepaid expenses and other assets (56,542) (51,491) 143,851
Accounts payable and accrued
liabilities ............ 201,414 385,322 793,320
Deferred revenue ......... 225,493 303,526 149,363
------------ ------------ -----------
Net cash provided by (used in)
continuing operations ..... 110,801 1,177,410 842,052
------------ ------------ ------------
Net cash provided by (used in)
discontinued operations ... 30,329 (3,443,574) (3,499,866)
------------ ------------ ------------
Net cash provided by (used in)
operations ................ 141,130 (2,266,164) (2,657,814)
------------ ------------ -----------
Cash Flow provided by (used In) Investing Activities: ...........
Payments for purchases of
property and equipment ......... (11,253) (34,658) (265,209)
securities .............. (355,907) -- --
Proceeds from sale of property
and equipment ............ 3,000 103,936 --
Proceeds from disposition of
distribution channel ...............-- . 10,500,000 --
------------ ------------ -----------
Net cash flow provided by
(used in) investing activities (364,160) 10,569,278 (265,209)
------------ ------------ -----------
Cash Flow provided by (used In) Financing Activities: ................
Proceeds from issuance of stock .......-- -- 597,217
Proceeds from debt and lease
obligations .........................-- 19,695,895 25,922,362
Proceeds from CASCO note ..............--.. 3,500,000 --
Proceeds from subordinated debt issued -- --.... 980,000
Proceeds from settlement of note
receivable ............... 150,000 -- --
Payments on debt and lease
obligations .............. (120,797) (30,912,637) (24,482,407)
------------ ------------ ------------
Net cash flow provided by (used in)
financing activities ........... 29,203 (7,716,742) 3,017,172
------------ ------------ ------------
Increase (decrease) in cash ...... (193,827) 586,372 94,149
Cash, beginning of year......... 998,432 412,060 317,911
------------ ------------ -----------
Cash, end of year ................. $ 804,605 $ 998,432 $ 412,060
=========== ========== ===========
</TABLE>
The accompanying notes are
an integral part of the
consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
Notes
Capital In Receivable
Common Excess of From
Shares* Stock Par Value Stock Sales
<S> <C> <C> <C> <C>
Balance
December 31, 1996 ... 324,864 $ 64,973 $23,951,788 $ (903,123)
Year ended December 31, 1997:
Spin-off of CASCO
INTERNATIONAL, INC. (2,635,768)
Proceeds from in-kind inventory
purchases, services,
and private 18,273 3,654 592,813 750
Net loss ......... _______ _______ ___________ __________
Balance December 31, 1997 343,137 68,627 21,908,833 (902,373)
Year ended December 31, 1998:
Net loss ................ _______ _______ ___________ __________
Balance December 31, 1998 343,137 68,627 21,908,833 (902,373)
Year ended December 31, 1999
One-for-twenty reverse stock split.. (65,196) 65,196
Unrealized loss on investments
available for sale
Net loss ............ _______ _______ ___________ __________
Balance December 31, 1999 343,137 $ 3,431 $21,974,029 $ (902,373)
*Adjusted for one-for-twenty reverse stock split
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
<TABLE>
<CAPTION>
MEDIA SOURCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
Unrealized
Loss on Accumulated Treasury
Securities Deficit Stock Total
<S> <C> <C> <C> <C>
Balance
December 31, 1996 . $ -- $ (9,996,866) $ (241,123) $ 12,875,649
Year ended December 31, 1997:
Spin-off of CASCO
INTERNATIONAL, INC. (253,612) (2,889,380)
Proceeds from in-kind inventory
purchases, services, and private
placements 597,217
Net loss ............ (5,381,302) (5,381,302)
---------- ----------- -------------- ----------
Balance
December 31, 1997 ... -- (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 -- (19,608,273) (241,123) 1,225,691
Year ended December 31, 1999
One-for-twenty reverse stock split
Unrealized loss on investments
available for sale (12,900) (12,900)
Net loss .......... (439,171) (439,171)
---------- ------------ -------------- ---------
Balance
December 31, 1999. $ (12,900) $(20,047,444) $ (241,123) $ 773,620
========== ============ ============ ============
*Adjusted for one-for-twenty reverse stock split
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements
<PAGE>
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") 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., d.b.a., 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").
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 subscriptions are
recognized upon shipment of the related merchandise.
Investments
The Company utilizes Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", which requires that debt and equity securities be classified as one
of the following three categories: trading, available-for-sale, or
held-to-maturity. At December 31, 1999, the company has investments in
securities that are trading and available-for-sale. Trading securities are
reported at fair value and unrealized gains and losses are included in income.
The Company's investments that are classified as available-for-sale are reported
at fair value and any unrealized gains or losses are reported as comprehensive
income in accordance with SFAS 130, "Reporting Comprehensive Income".
At December 31, 1999, unrealized losses of $29,715 were recognized on
common stock investments classified as trading securities with a fair market
value of $355,907 and cost of $385,622.
At December 31, 1999, unrealized losses of $12,900 were recognized on
common stock investments classified as available-for-sale securities with a fair
market value of $73,900 and cost of $86,800.
Accounts Receivable
The Company mainly sells its products to public and private school
libraries and public libraries across the United States. The accounts
receivables are well diversified and are expected to be repaid in the normal
course of business.
<PAGE>
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.
Prepaid Expenses
Prepaid expenses at December 31, 1999 and 1998 include approximately
$167,000 of prepaid selling costs for the sales of book subscriptions. Such
costs are directly attributable to the selling of subscriptions and are expensed
in the year the related sales occur.
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, 1999, 1998, and 1997, totaled approximately $101,000, $264,000, and
$447,000, respectively.
Assets held for disposition at December 31, 1999 with a net book value
of $1.2 million were sold on January 25, 2000 for $1.6 million. These assets
consist of a warehouse, office facility and real estate in Worthington, Ohio.
JLG will continue to use these assets through an operating lease that expires
September 2000. Accumulated depreciation for this property was approximately
$865,000 and $801,000 at December 31, 1999 and 1998, 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,
1999. 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, 1999, 1998, and 1997 totaled
approximately $48,000, $108,000, and $254,000, respectively.
Other assets in 1999 include deferred loan costs, long-term investment
and deposits compared to other assets in 1998 and 1997 which included 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 $345, $6,500, and $61,000,
for the years ended December 31, 1999, 1998, and 1997, respectively.
Long-Lived Assets
The Company utilizes 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.
<PAGE>
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, 1999, 1998 or 1997.
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.
Statement of Cash Flows
For purposes of the statement of cash flows, the Company considers all
short-term instruments purchased with a maturity of three months or less to be
cash equivalents.
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. As of December 31, 1999, all options for executives, key
employees and directors have been cancelled. 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.
<PAGE>
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. The fair value of cash and long-term debt approximate the carrying
amounts as of December 31, 1999 and 1998. The fair value of the Company's
long-term debt was estimated based on current rates for debt with similar
remaining maturities.
See Investments section above for disclosure of investments.
2. STOCK OPTIONS, WARRANTS AND STOCK APPRECIATION RIGHTS
At December 31, 1999, there were no shares of the Company reserved for
issuance under the incentive stock option plan, 6,500 shares were reserved under
non-statutory stock options, and 11,999 shares were reserved under outstanding
warrants. Information for the stock options and warrants is summarized as
follows:
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Incentive Stock Option Plan
Outstanding, beginning of year .. 12,033 25,950 18,037
Adjusted shares due to
spin-off of
CASCO INTERNATIONAL, INC. 0 0 2,844
Granted ................. 0 0 11,399
Canceled ..................... (12,033) (13,917) (6,330)
Exercised ..................... 0 0 0
-------- ------ -------
Outstanding, end of year .................0 12,033 25,950
======== ======= =======
Exercise price range of options
outstanding ..... $27.60 to $46.40 $27.60 to $188.00
Exercise price range of options
exercised during the year .... -- -- --
Non-Statutory Stock Options
Outstanding, beginning of year .. 7,656 11,675 7,907
Adjusted shares due to spin-off of
CASCO INTERNATIONAL, INC. 0 0 1,247
Granted ............................. 0 10,000 6,500
Canceled ..................... (1,156) (14,019) (3,979)
Exercised .................... 0 0 0
------ ------- ------
Outstanding, end of year ....... 6,500 7,656 11,675
====== ======= ======
Exercise price range
of options
outstanding .. $35.00 to $50.00 $35.00 to $50.00 $35.00 to $124.40
Exercise price range of options
exercised during the year .... -- -- --
Warrants
Outstanding, beginning of year 14,499 10,289 250
Adjusted shares due to spin-off of
CASCO INTERNATIONAL, INC. 0 0 39
Granted ............................. 0 23,785 10,000
Canceled ................... (2,500) (19,575) 0
Exercised 0 0 0
------ ------- ------
Outstanding, end of year ......... 11,999 14,499 10,289
====== ====== ======
Exercise price range of
warrants outstanding .$23.75 to $45.00 $23.75 to $45.00 $34.60 to $40.00
Exercise price range of
warrants exercised during
the year . -- -- --
</TABLE>
<PAGE>
During 1999, the Company cancelled all of the Incentive Stock Options
which were granted from the Company's 1993 Incentive Stock Option Plan.
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,
1999, are exercisable and expire February 8, 2000.
Warrants to purchase 11,999 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 1/8 above the market value of
the common stock at date of issuance of the warrant. All of the warrants are
exercisable and expire various dates through January, 2003.
A summary of options and warrants outstanding at December 31, 1999, is
as follows:
<TABLE>
<CAPTION>
Company
Date Granted or Shares Shares Exercise Proceeds
Issued Reserved Exercisable Price Upon Exercise
-------- -------- ----------- ----- -------------
<S> <C> <C> <C> <C>
Non-Statutory Stock Options:
August 8, 1997 ............ 3,250 3,250 $35.00 $113,750
August 8, 1997 ............ 3,250 3,250 50.00 162,500
----------- -------- ---------
6,500 6,500 276,250
----------- -------- ---------
Warrants:
August 14, 1996 ..... ..... 289 289 34.60 9,999
August 27, 1997 ........... 5,000 5,000 40.00 200,000
December 24, 1997 ......... 2,500 2,500 37.50 93,750
January 23, 1998 .......... 4,210 4,210 23.75 99,988
----------- -------- ---------
11,999 11,999 403,737
----------- -------- ---------
Total Options and
Warrants ............... 18,499 18,499 $ 679,987
=========== ======== =========
</TABLE>
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 was 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. At the close of business
in September 1999, the fair market value of the shares of common stock was less
than the exercise price. Therefore, no provision has been made in the 1999, 1998
or 1997 financial statements for such interest. The notes have been extended
until August 15, 2000 except for the previously mention notes for S. Robert
Davis, Randall J. Asmo and Charles R. Davis, which have been extended for an
additional three years.
<PAGE>
4. DEBT OBLIGATIONS
Debt obligations consisted of the following:
1999 1998
---- ----
Subordinated note payable with
interest payable quarterly at 8.5
percent, due July 31, 2001 - personally
guaranteed by S. Robert Davis, $ 200,000 $ 200,000
Chairman of Media Source, Inc.
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, 2007,
collateralized by office and warehouse
facility 399,501 499,911
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 346,396 366,783
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 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
-------- --------
Total debt obligations 2,045,897 2,166,694
Less short-term obligations 963,896 109,780
---------- ----------
Total long-term obligations $ 1,082,001 $ 2,056,914
=========== ===========
The prime interest rate at December 31, 1999 and 1998 was 8.50% and 7.75%,
respectively.
Future maturities on debt as of December 31, 1999 and during the next five years
and thereafter are as follows:
2000 $ 963,896
2001 335,045
2002 149,797
2003 112,023
2004 37,268
Thereafter 447,868
-------------
$2,045,897
On January 25, 2000, assets held for disposal at December 31, 1999 were
sold for $1.6 million. The proceeds from the sale were used to pay off future
mortgage obligations of approximately $746,000.
On January 28, 2000 and February 1, 2000, the Company retired a total
of $350,000 subordinated notes payable that were due August 1, 2000.
On March 8, 2000, the Company retired a $250,000 subordinated note that
was due December 31, 2005.
<PAGE>
5. LEASE OBLIGATIONS
Operating leases are principally for office and warehouse facilities
and vehicles. Rent expense under operating leases amounted to $49,954, $450,000,
and $790,000 for the years ending December 31, 1999, 1998, and 1997,
respectively. Future minimum lease payments under leases are as follows:
Year Ended
December 31, Operating
------------ ---------
2000 $ 179,107
2001 25,237
2002 7,785
2003 --
2004 --
Thereafter --
-------------
$ 212,129
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 realized.
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 1999, 1998, and 1997 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,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Provision (benefit)
for taxes at statutory rate $ (153,000) $(1,148,800) $(1,910,300)
Goodwill amortization -- (13,000) 67,000
Establishment of valuation allowance 153,000 1,434,800 1,964,300
Stock options exercised and
stock appreciation rights -- -- (153,500)
Other -- (273,000) 32,500
--------- ----------- ----------
Total provision (benefit) for
income taxes $ -- $ -- $ --
=========== ============ ===========
</TABLE>
<PAGE>
The components of net deferred tax assets as of December 31, 1999 and 1998 are
as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
----- ----
<S> <C> <C>
Assets
Provision for doubtful accounts $ 34,000 $ 57,000
Inventory costs capitalized for
tax purposes 37,000 31,000
Inventory Reserve 174,000 85,000
Accruals and reserves to be expensed
as paid for tax purposes 347,000 179,000
Other 7,800 27,000
Unrealized loss on trading securities 11,000 --
Unrealized loss on available for sale
securities 4,600 --
Net operating loss carryforwards 6,222,000 8,917,000
Investment tax credit carryforwards -- 122,000
--------- ----------
6,837,400 9,418,000
Less valuation allowance (6,742,400) (9,213,000)
---------- ----------
Deferred tax asset, net of
valuation allowance 95,000 205,000
---------- ----------
Liabilities:
Costs deducted as paid for
tax purposes (59,000) (59,000)
Excess of tax over financial
accounting depreciation and
amortization (36,000) (146,000)
---------- ----------
(95,000) (205,000)
---------- ----------
Net deferred tax asset $ -- $ --
========== ==========
</TABLE>
At December 31, 1999, operating loss carryforwards of approximately
$17.5 million are available to offset future taxable income and will expire
during the years 2000 through 2011.
7. CHILDREN'S LITERATURE ACQUISITIONS AND DISPOSALS
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.
<PAGE>
8. DISCONTINUED OPERATIONS
Operating results for PBF are included in the discontinued operations
line of the financial statements. Revenues for PBF were $188,000 for 1999, $11.7
million for 1998, and $24.4 million for 1997. Net income (losses) were $4,000
for 1999, ($3.3) million for 1998 and ($3.6) million for 1997. Included in the
1998 net loss was a loss on the sale of PBF of $577,000.
The components of net assets for the PBF discontinued operations
included in the consolidated balance sheets at December 31, 1999 and 1998 is as
follows:
December 31, December 31,
1999 1998
---- ----
Cash $ 22,283 $ 62,236
Accounts receivable, net -- 234,671
Other assets 1,765 9,246
Accounts payable -- (383,814)
Accrued liabilities (928,142) (610,116)
Long-term debt obligations (450,000) (450,000)
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.
9. SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION
Cash paid for interest during the years ended December 31, 1999, 1998,
and 1997, aggregated approximately $215,000, $757,000, and $1,275,000 and cash
paid for income taxes was approximately $357, $341,000, and $1,190,00,
respectively.
During the years ended December 31, 1999, 1998 and 1997, the Company
acquired approximately $0, $0 and $82,000 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.
<PAGE>
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.
10. 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 was
subject to litigation by expert witnesses used in its suit against its former
auditors. On February 10, 2000, the Company settled the case at mediation for
$61,000.
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 $650,000 as of December 31, 1999.
<PAGE>
11. RETIREMENT PLAN
In 1991, the Company established under Pages Book Fairs, Inc, its wholly-owned
subsidiary, a defined contribution plan pursuant to Section 401(k) of the
Internal Revenue Code, covering all eligible employees. The Company's
contributions into the Plan were discretionary. However, due to a discontinuance
of the Company's book fair business, operated by Pages Book Fairs, Inc, the Plan
was terminated in October 1998. There were no Company contributions in 1998 and
1997.
In October 1999, the Company established a new defined contribution plan
pursuant to Section 401(k) of the Internal Revenue Code. The Plan will be in
effect January 2000 and will cover all eligible employees. Employees become
eligible upon reaching age 21 and completing a year of service. The Company does
not contribute into the Plan.
12. BUSINESS CONTINUATION
As shown in the consolidated financial statements, the Company incurred
a loss of approximately $439,000 in 1999 compared to a loss of approximately
$4.0 million in 1998. Of these losses, approximately $443,000 and $533,000 were
attributable to continuing operations of the Company for 1999 and 1998,
respectively. In addition, accounts payable decreased to $221,000 in 1999
compared to $678,000 in 1998. Working capital was negative $1.2 million in 1999
compared to $108,000 in 1998. The negative working capital in 1999 resulted from
the reclassification of $850,000 in long-term debt to short term and an increase
in year end accruals. Also, included in the 1999 negative working capital is
approximately $926,000 in tax liabilities that relate to discontinued operations
of PBF that the Company is currently seeking professional advice as to what
legal manner it should pursue in order to resolve or discharge these
liabilities.
Management has previously taken measures to promote the future
profitability of the Company by selling or ceasing of operations of several of
the unprofitable business lines during the years 1995 and 1996 and discontinued
its book fair operations when it sold the assets in June 1998. Furthermore, in
2000 the Company realized a gain on the sale of assets which were held for
disposition at December 31, 1999 and also retired $600,000 in subordinated
notes. The Company expanded its JLG sales force and management believes that
with the increased sales staff and expanded sales territory coverage that new
subscriber revenues will increase.
Mr. Davis has informed the Company of his intention to defer his
salary for an additional 24 months. Had Mr. Davis not deferred his
1999 salary, the $111,000 positive cash flow for 1999 would have been
a negative $74,000 cash flow from operations.
The Board of Directors has the right to pay Mr. Davis in stock or cash
should the Company deem one more preferential than the other. However, it
continues to be the Company's intention to pay the deferred salary in cash. The
re-location of operations and reduction of interest should prove to be
beneficial for cash flow purposes.
Management believes the implementation of these actions will enable the
Company to continue its business, survive and operate in the near term.
<PAGE>
13. 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,
1999 1998 1997
----- ------ ------
<S> <C> <C> <C>
Basic Earnings Per Share:
Weighted average number of
common shares outstanding 328,200 328,200 315,300
------------ -------------- -------------
Income/(loss) from
continuing operations ....... $ (443,195) $ (532,919) $ (1,881,436)
Discontinued operations . ..... 4,024 (3,443,574) (3,499,866)
Net income(loss) available
to common stockholders $ (439,171) $ (3,976,493) $ (5,381,302)
Income/(loss) per common share:
Income/(loss) from continuing
operations . ........ $ (1.35) $ (1.63) $ (5.97)
Discontinued operations ................ 0.01 10.49) 11.10)
----------- -------------- -------------
Basic earnings/(loss) per share. $ (1.34) $ (12.12) $ (17.07)
============ ============= =============
Diluted Earnings Per Share:
Weighted average number of
common shares outstanding - basic 328,200 328,200 315,300
Effect of Dilutive Securities:
Add dilutive stock options ..... -- -- --
Deduct shares that could be
repurchased from the proceeds
of the dilutive options -- -- --
------------ ------------ --------------
Diluted potential common shares 328,200 328,200 315,300
============ ============= ==============
Income/(loss) per common share:
Income/(loss) from continuing
operations .. ....... $ (443,195) $ (532,919) $ (1,881,436)
Effect of dilutive securities .. -- -- --
------------ ------------- -------------
Income/(loss) from operations available to
stockholders (443,195) (532,919) (1,881,436)
Discontinued operations ....... 4,024 (3,443,574) (3,499,866)
Net income/(loss) available to common stockholders
and assumed conversions $ (439,171) $ (3,976,493) $ (5,381,302)
============ ============= =============
Diluted earnings/(loss) per common share:
Income/(loss) from continuing
operations ......... $ (1.35) $ (1.63) $ (5.97)
Discontinued operations .... 0.01 (10.49) (11.10)
Diluted earnings/(loss) per share $ (1.34) $ (12.12) $ (17.07)
============ ============= =============
</TABLE>
At December 31, 1999, 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.
14. 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.
<PAGE>
15. RELATED PARTY TRANSACTIONS
In June 1999, S. Robert Davis informed the Company of his intention to
defer his compensation for an additional 24 months. S. Robert Davis' 1999
deferred compensation was $185,000. At December 31, 1999, S. Robert Davis' total
deferred compensation was $308,333. Mr. Davis' deferred compensation earns
interest at 7 percent. Interest on deferred compensation at December 31, 1999
was $21,584. The Board of Directors has the right to pay Mr. Davis in stock or
cash should the Company deem one more preferential than the other. However, it
continues to be the Company's intention to pay the deferred salary in cash.
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS Three Years Ended December 31,
1998, 1997, and 1996
- ---------------- --------------- ----------- ----------- ---------- ------------
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>
1999:
Allowance for
doubtful accounts $ 94,000 $ 94,000
======== ========
Allowance for
valuation
on deferred
tax assets $9,213,000 $153,000(b) $2,623,600(d) $6,742,400
========== ========== ============ ==========
Inventory obsolescence
reserve $240,000 $250,000(e) $490,000
========== ========== ==========
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
========== ========== ============ ==========
Inventory obsolescence
reserve $ 0 $240,000(e) $240,000
========== ========== ==========
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
========== ========== ============ ==========
Inventory obsolescence
reserve $149,640 $ 149,640(e) $ 0
========== ============ ==========
</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.
(e) Amounts charged to cost of goods sold.
<PAGE>
EXHIBIT INDEX
MEDIA SOURCE, INC. FORM 10-K
FOR FISCAL YEAR ENDED DECEMBER 31, 1999
(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(c) Warrant dated December 24, 1997, between the Company and
John W. McKitrick.
10(h)3 Media Source, Inc. 1993 Incentive Stock Option Plan.
10(o)4 Promissory Note from S. Robert Davis for exercise of stock
options dated September 26,1996.
10(p)4 Promissory Note from Charles R. Davis for exercise of stock
options dated September 26, 1996.
10(q)4 Promissory Note from employees for exercise of stock options
dated December, 1996.
10(s)5 Note Purchase Agreement and 12% Convertible Subordinated Note
Due 2000, No. 4 between the Company and S. Robert Davis.
10(u) Subordinated Note Payable dated September 28, 1998 between the
Company and Huntington National Bank
10(v)6 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(z)7 Deferred Compensation Agreement dated 1/5/99, between the
Company and S. Robert Davis, Company Chairman.
10(aa)7 Option to Purchase Shares of Preferred Stock dated 10/31/99,
granted to S. Robert Davis, Company Chairman (Options
were rescinded November 24, 1999).
10(ab)7 Exhibit A to Option to Purchase Shares of Preferred Stock
dated 10/31/99.
21 Subsidiaries of Media Source, Inc.
27 Financial Data Schedule (filed only electronically).
- --------------------
<PAGE>
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, 1996, File Number 0-10475, filed in Washington,
D.C.
5 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.
6 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.
7 Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999, File Number 0-10475, filed in Washington,
D.C.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF
MEDIA SOURCE, INC.
State of Percent of Stock
Name of Subsidiary ...... Incorporation Owned by Registrant
- ------------------ ------------- -------------------
PAGES BOOK FAIRS, INC ... Florida 100%
MT LIBRARY SERVICES, INC Florida 100%
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-1-1999
<PERIOD-END> Dec-31-1999
<CASH> 804,605
<SECURITIES> 355,907
<RECEIVABLES> 957,117
<ALLOWANCES> 94,000
<INVENTORY> 1,003,695
<CURRENT-ASSETS> 3,233,538
<PP&E> 249,670
<DEPRECIATION> 155,406
<TOTAL-ASSETS> 6,267,835
<CURRENT-LIABILITIES> 4,412,214
<BONDS> 1,082,001
0
0
<COMMON> 3,431
<OTHER-SE> 770,189
<TOTAL-LIABILITY-AND-EQUITY> 6,267,835
<SALES> 3,297,322
<TOTAL-REVENUES> 3,297,322
<CGS> 1,625,445
<TOTAL-COSTS> 1,625,445
<OTHER-EXPENSES> 1,935,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 180,013
<INCOME-PRETAX> (443,195)
<INCOME-TAX> 0
<INCOME-CONTINUING> (443,195)
<DISCONTINUED> 4,024
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (439,171)
<EPS-BASIC> (1.34)
<EPS-DILUTED> (1.34)
</TABLE>
