UNITED STATES
SECURITIES AND EXHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
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
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO .
APPLICABLE ONLY TO CORPORATE ISSUERS:
State the number of share outstanding of each of the issuer's classes of common
equity, as of the latest practical date: 328,200 common shares outstanding, each
with $0.01 par value, as of October 1, 2000.
Transitional Small Business Disclosure Format (Check one): YES X NO .
<PAGE>
MEDIA SOURCE, INC.
FORM 10-QSB
INDEX
Part I - Financial Information
Item 1 - Financial Statements (unaudited)
Balance Sheets - September 30, 2000 and December 31, 1999
Statements of Operations - three and nine month periods ended
September 30, 2000 and 1999
Statements of Cash Flows - nine month periods ended September 30, 2000
and 1999
Notes to Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II - Other information
Signatures
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
------------ ----------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents ...................... $ 833,860 $ 804,605
Trading securities, at market .................. 510,976 355,907
Accounts receivable, net of allowance for doubtful
accounts of $94,000 and $94,000, respectively 1,257,142 863,117
Inventory ...................................... 892,003 1,003,695
Prepaid expenses ............................... 289,374 206,214
---------- ----------
Total Current Assets ................................ 3,783,355 3,233,538
Equipment, net of accumulated depreciation
of $176,127 and $155,406, respectively ............ 118,929 94,264
Other Assets:
Assets held for disposal (net) ................. -- 1,189,189
Cost in excess of net assets acquired, net of accumulated
amortization of $1,091,156 and $1,055,000,
respectively 1,630,747 1,666,902
Securities available for sale, at market ......... 73,900 73,900
Other ............................................ 28,756 10,042
---------- ----------
Total Other Assets .................................... 1,733,403 2,940,033
---------- ----------
Total Assets ........................................ $5,635,687 $6,267,835
========== ==========
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable .......................... $ 110,119 $ 220,690
Accrued liabilities ....................... 42,539 97,294
Accrued salary and interest - officer ..... 474,099 329,917
Accrued tax liabilities ................... 969,916 1,006,032
Deferred revenue .......................... 1,905,002 1,794,385
Current portion of long-term debt obligations 300,000 963,896
------------ ------------
Total Current Liabilities ...................... 3,801,675 4,412,214
Long-term debt ................................. 325,000 1,082,001
------------ ------------
Total Liabilities .............................. 4,126,675 5,494,215
Commitments
Stockholders' Equity:
Preferred shares: $.01 par value; 300,000 shares authorized;
no shares issued or outstanding
Common shares: $.01 par value; 500,000 shares
authorized; .. 3,431 3,431
343,137 issued and outstanding
Capital in excess of stated value ........... 21,974,029 21,974,029
Notes receivable from stock sales ........... (902,373) (902,373)
Unrealized losses on securities available for
sale ......... (12,900) (12,900)
Accumulated deficit ......................... (19,312,052) (20,047,444)
Less 14,936 shares of common stock in treasury,
at cost .... (241,123) (241,123)
------------ ------------
Total Stockholders' Equity ...................... 1,509,012 773,620
------------ ------------
Total Liabilities and Stockholder's Equity ...... $ 5,635,687 $ 6,267,835
============ ============
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues ........... $ 1,051,540 $ 756,064 $ 3,003,521 $ 2,471,046
Costs of goods sold 358,331 281,149 1,043,881 991,665
----------- ----------- ----------- -----------
Gross profit ........ 693,209 474,915 1,959,640 1,479,381
Operating expenses:
Selling, general
and administrative 451,951 327,175 1,491,757 1,381,573
Depreciation and
amortization 23,919 36,985 74,654 110,956
----------- ----------- ----------- -----------
Total operating expenses 475,870 364,160 1,566,411 1,492,529
----------- ----------- ----------- -----------
Income (loss) from
operations ........ 217,339 110,755 393,229 (13,148)
Other income (expense)
Interest, net . (7,334) (46,443) (30,051) (148,731)
Gain on the
extinguishment of debt -- -- 102,847 --
Gain on the sale of
assets -- -- 262,229 --
Realized gain on
investments .. 26,077 -- 110,667 --
Unrealized loss on
investments .. (121,375) -- (91,660) --
Other .............. -- 497 -- 49,169
----------- ----------- ----------- -----------
Total other income
(expense) ......... (102,632) (45,946) 354,032 (99,562)
----------- ----------- ----------- -----------
Income (loss) from continuing operations ......
before taxes ... 114,707 64,809 747,261 (112,710)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Income (loss) from
continuing operations 114,707 64,809 747,261 (112,710)
Gain (loss) from
discontinued operations (9,015) (65,990) (11,869) 72,280
----------- ----------- ----------- -----------
Net income (loss)... $ 105,692 $ (1,181) $ 735,392 $ (40,430)
=========== =========== =========== ===========
Earnings per common share
Income (loss)
from continuing
operations . $ 0.35 $ 0.20 $ 2.28 $ (0.34)
Income (loss) from
discontinued
operations (0.03) (0.20) (0.04) 0.22
----------- ----------- ----------- -----------
Net income (loss) $ 0.32 $ 0.00 $ 2.24 $ (0.12)
=========== =========== =========== ===========
Weighted average number of common
Shares outstanding 328,200 328,200 328,200 328,200
========== =========== =========== ===========
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
--------------------------------
2000 1999
----------- -----------
(unaudited)
Cash flow from (used) in operations:
<S> <C> <C>
Income (loss) from continuing operations ......... $ 747,262 $ (112,710)
Reconciliation to net cash flow used in continuing operations:
Depreciation and amortization ............... 74,654 110,956
Gain on the sale of fixed assets ............ (262,229) --
Gain on the extinguishment of debt .......... (102,847) --
Realized gain on investments ................ (110,667) --
Unrealized loss on investments .............. 91,660 --
Changes in working capital items of continuing operations:
Accounts receivable ....................... . (394,025) 329,165
Inventory .................................. 111,693 29,106
Prepaid expenses and other assets ............ (106,712) 35,883
Accounts payable and accrued liabilities ..... 68,814 (7,550)
Deferred revenue ............................. 110,617 (717,407)
----------- -----------
Net cash provided by (used in) continuing operations 228,220 (332,557)
Net cash provided by (used in) discontinued operations (58,330) 29,011
----------- -----------
Net cash from (used in) operations ............... 169,890 (303,546)
Cash flow from (used in) investing activities:
Payments for purchase of property and equipment (57,073) (4,008)
Proceeds from the sale of property and equipment 1,448,400 --
Payments for purchase of trading securities .... (1,249,907) --
Proceeds from the sale of trading securities .. 1,113,842 --
----------- -----------
Net cash from (used in) investing activities ..... 1,255,262 (4,008)
Cash flow from (used in) financing activities:
Proceeds from settlement of note receivable . -- 150,000
Payments on debt obligations ................ (745,897) (81,261)
Payments on subordinated debt issued ........ (650,000) --
----------- -----------
Net cash from (used in) financing activities ..... (1,395,897) 68,739
Increase (decrease) in cash ...................... 29,255 (238,815)
Cash, beginning of period ........................ 804,605 998,432
----------- -----------
Cash, end of period .............................. $ 833,860 $ 759,617
=========== ===========
</TABLE>
See accompanying notes
<PAGE>
MEDIA SOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements have not
been audited, but reflect all adjustments, which, in the opinion of management,
are necessary for a fair presentation of financial position, results of
operations and cash flows. All adjustments are of a normal and recurring nature,
except for those related to the discontinued operations of the Company's book
fair business.
Media Source, Inc. (the "Company"), through MT Library Services, Inc.,
its wholly-owned subsidiary, operates Junior Library Guild, a subscription
service that distributes first print, award winning children's books. The
Company has its own editorial division that reviews books in the manuscript
stage and makes selections for nine reading levels. The Company markets most of
its products directly to schools and public libraries but has plans to expand
into other segments.
The interim consolidated condensed financial statements and notes
thereto are presented as permitted by the Securities and Exchange Commission and
do not contain certain information included in the Company's annual financial
statements and notes thereto. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the Company's
audited financial statements and notes thereto for the fiscal year ended
December 31, 1999.
Note 2. Debt Obligations
At quarter ended September 30, 2000, the Company had a $200,000
subordinated note payable bearing interest at the lender's prime rate plus 1%,
due July 31, 2001, and $425,000 in subordinated note payables bearing interest
of 12% due in quarterly installments of $25,000 starting in April 2000.
Subsequent to quarter ending September 30, 2000, the Company retired, at
face value, the $200,000 subordinated note payable originally due July 31, 2000.
Note 3. Supplemental Cash Flow Information
Cash payments during the nine months ended September 30, 2000 and 1999,
included interest of $82,000 and $176,000, respectively, and income taxes of $0
and $0, respectively.
Note 4. Income Taxes
There was no income tax provision for the nine months ended September
30, 2000, due to the Company's net operating loss position and the full
valuation of any resulting deferred tax benefit. Estimated income tax rates
based on annualized income were taken into consideration.
<PAGE>
Note 5. Earnings Per Share
The following table represents the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
----------- ---------
(unaudited)
<S> <C> <C>
Basic and Diluted Earnings Per Share:
Weighted average number of common shares outstanding 328,200 328,200
========= =========
Income (loss) from continuing operations ........... $ 747,261 $(112,710)
Gain (loss) from discontinued operations ........... (11,869) 72,280
--------- ---------
Net income (loss) available to common stockholders . $ 735,392 $ (40,430)
========= =========
Income (loss) per common share:
Income (loss) from continuing operations ........... $ 2.28 $ (0.34)
Gain (loss) from discontinued operations ........... (0.04) 0.22
--------- ---------
Net income (loss) per share ........................ $ 2.24 $ (0.12)
========= =========
</TABLE>
At September 30, 2000, options and warrants were outstanding during the
periods but were not exercisable or "in-the-money". Therefore, they are not
included in the computation of dilutive EPS. At September 30, 1999 options and
warrants were outstanding during the periods but were not included in the
computation of dilutive EPS because the potential common stock was not
"in-the-money" and would have been antidilutive.
Note 6. Assets Held For Disposal
Assets held for disposition at December 31, 1999 consisted of a
warehouse, office facility and real estate in Worthington, Ohio that were being
used by the Junior Library Guild on a temporary basis. These assets were sold on
January 25, 2000 for $1.4 million and the Company realized a gain on the sale of
$254,000. The Junior Library Guild entered into a lease to rent the warehouse
and office facility through October 2000. At the expiration of the lease, the
Junior Library Guild will move and lease a new warehouse and office facility
located in Union County, Ohio.
Note 7. Related Party Transactions
The Junior Library Guild entered into a lease with Mid-States
Development Corp., which is 100% owned by the Company Chairman, S. Robert Davis,
to lease a warehouse and office facility in Union County, Ohio. The lease is for
twenty years commencing November 1, 2000 with annual rents of $120,000 per year
in years one through five, $132,000 per year during years six through ten,
$145,200 per year during years 11 through 15, and $159,700 per year during years
16 through 20.
<PAGE>
Note 8. Notes Receivable from Stock Sales
In the third and fourth quarters of 1996, certain officers and former
employees exercised stock options for notes. The notes were originally due in
September 1999 but were extended until August 2000. The notes are full recourse
promissory notes bearing interest at 7 percent. Interest is only payable in the
event and only to the extent that the fair market value of the common stock at
the close of business in September 1999 exceeded 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 and therefore no provision for
interest was made.
The Company offered its former employees, which pledged as collateral
for the notes their exercised shares of common stock as well as the dividend
stock they received as part of the spin off of the former subsidiary CASCO, the
option of canceling the notes and transferring their shares of common stock to
the Company in lieu of payment. The former employees accepted the Company's
offer. The Company will rescind the notes, will convert the Media Source shares
of common stock into the Company's name as treasury stock, and will retain the
CASCO shares of common stock as an investment. Using the stock closing prices at
September 30, 2000, the Company would record an approximate loss of $166,000 in
retiring the notes. The Company hopes to have the notes retired by year ending
December 31, 2000.
Note 9. Effects of Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The
guidance in SAB 101 must be adopted during the fourth quarter of fiscal 2000 and
the effects, if any, are required to be recorded through a retroactive,
cumulative-effect adjustment as of the beginning of the fiscal year, with a
restatement of all prior interim quarters in the year. Management has completed
its evaluation of the effects of SAB 101 and has determined that it will not
have an impact on its income statement presentation, operating results, or
financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Special Note Regarding Forward-Looking Statements
Certain statements contained in this Form 10-QSB under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
regarding matters that are not historical facts are "forward looking statements"
(as such term is defined in the Private Securities Litigation Reform Act of
1995) and because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Those statements include remarks regarding the
intent, belief, or current expectations of the Company, its directors, or its
officers with respect to, among other things: (i) the capability of the
Company's existing subscription sales organization to absorb additional volume;
(ii) the expectation 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; (v) 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, such as the Company's ability to
raise additional capital, are beyond the control of the Company. The
accompanying information contained in this Form 10-QSB, including, without
limitation, the information set forth under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations", identifies
important factors that could cause such differences.
<PAGE>
Third Quarter 2000 Compared with Third Quarter 1999
Revenues for the three months ended September 30, 2000, approximated
$1.1 million compared to approximately $756,000 for the three months ended
September 30, 1999, an increase of 39% or approximately $295,000. The increase
in revenues is principally attributable to an increase in the number of monthly
subscriptions, a change in pricing strategies, and a continued emphasis on
selling additional backlist book titles.
Cost of goods sold was approximately $358,000 for the three months ended
September 30, 2000, compared to approximately $281,000 for the three months
ended September 30, 1999, an increase of 27% or approximately $77,000. The
increase in cost of goods sold is due to an increase in revenues. As a
percentage of revenues, cost of goods sold was 34% during the third quarter of
2000, compared to 37% for the same period in 1999. The decrease in cost of sold
as a percentage of revenues relate to a combination of new pricing strategies
and improved purchasing strategies during the third quarter of 2000 compared to
1999.
Selling, general, and administrative expenses were approximately
$452,000 for the three months ended September 30, 2000, compared to
approximately $327,000 for the three months ended September 30, 1999, an
increase of 38% or approximately $125,000. Selling, general, and administrative
expenses have increased as cost associated to support the current and future
growth of the company have increased.
Depreciation and amortization expense was approximately $24,000 for the
three months ended September 30, 2000, compared to $37,000 for the three months
ended September 30, 1999, a decrease of 35% or approximately $13,000. The
decrease in depreciation and amortization expense is due to a reduction in
depreciable assets as a result of the selling of assets that were previously
held for disposal at December 31, 1999.
Net interest expense was approximately $7,000 for the three months ended
September 30, 2000, compared to $46,000 for the three months ended September 30,
1999, an decrease of 84% or $39,000. The decrease in net interest expense is
primarily attributable to $1.3 million in debt obligation that was retired in
the first quarter of 2000. The average outstanding debt for the three months
ended September 30, 2000, approximated $650,000 compared to $2.0 million for the
three months ended September 30, 1999. The average interest rate for the three
months ended September 30, 2000 and September 30,1999 was approximately 10.2%
respectively.
There was no income tax provision for the three months ended September
30, 2000, due to the Company's net operating loss position and the full
valuation of any resulting deferred tax benefit. Estimated income tax rates
based on annualized income were taken into consideration.
The third quarter ended Sept 30, 2000 resulted in income from continuing
operations of $115,000 compared to income from continuing operations of $65,000
in the third quarter ended September 30, 1999. The increase over 1999 was
primarily attributable to an increase in gross profits.
<PAGE>
The third quarter ended September 30, 2000 resulted in net income of
$106,000 versus a net loss of $1,000 in the third quarter ended September 30,
1999. Included in the net income for 2000 is a loss from discontinued operations
of $9,000 compared to a loss from discontinued operations of $66,000 in 1999.
Current quarter basic and diluted income per share for the third quarter ended
September 30, 2000 was $0.32 versus $0.00 per share in the comparable quarter
last year. The weighted average common and common equivalent shares for the
third quarters ended September 30, 2000 and 1999 were 328,200.
Nine Months Ended September 30, 2000 Compared with Nine Months Ended September
30, 1999
Revenues for the nine months ended September 30, 2000, approximated $3.0
million compared to approximately $2.5 million for the nine months ended
September 30, 1999, an increase of 22% or approximately $532,000. The increase
in revenues is principally attributable to increase marketing efforts in
obtaining additional monthly subscriptions, a continued emphasis on selling
additional backlist book titles, and a change in pricing strategies that
continued through the third quarter ending September 30, 2000.
Cost of goods sold was approximately $1.0 million for the nine months
ended September 30, 2000, compared to approximately $992,000 for the nine months
ended September 30, 1999, an increase of 5% or approximately $52,000. As a
percentage of revenues, cost of goods sold was 35% for the nine months ended
September 30, 2000, compared to 40% for the same period in 1999. The decrease in
cost of goods sold as a percentage of revenues continues to relate to a
combination of new pricing strategies and improved purchasing strategies that
occurred during the nine months ended September 30, 2000 compared to 1999.
Selling, general, and administrative expenses were approximately $1.5
million for the nine months ended September 30, 2000 compared to $1.4 million in
September 30, 1999, an increase of 8% or approximately $110,000. Selling,
general, and administrative expenses have increased as cost associated to
support the current and future growth of the company have increased.
Depreciation and amortization expense was approximately $75,000 for the
nine months ended September 30, 2000, compared to $111,000 for the nine months
ended September 30, 1999, a decrease of 33% or approximately $36,000. The
decrease in depreciation and amortization expense is due to a reduction in
depreciable assets as a result of the selling of assets that were previously
held for disposal at December 31, 1999.
Net interest expense was approximately $30,000 for the nine months ended
September 30, 2000, compared to $149,000 for the nine months ended September 30,
1999, an decrease of 80% or $119,000. The decrease in net interest expense is
primarily attributable to $1.3 million in debt obligation that was retired in
the first quarter of 2000. The average outstanding debt for the nine months
ended September 30, 2000, approximated $1.4 million compared to $2.1 million for
the nine months ended September 30, 1999. The average interest rate for the nine
months ended September 30, 2000 and September 30,1999 was approximately 10.2%
respectively.
There was no income tax provision for the nine months September 30,
2000, due to the Company's net operating loss position and the full valuation of
any resulting deferred tax benefit. Estimated income tax rates based on
annualized income were taken into consideration.
<PAGE>
The nine months ended September 30, 2000 resulted in income from
continuing operations of $747,000 compared to a loss from continuing operations
of $113,000 for the nine months ended September 30, 1999. The increase over 1999
was primarily attributable to an increase in gross profits, a reduction in net
interest expense associated with the retirement of debt, and gains on the
extinguishment of debt, the sale of assets, and the sale of investments.
The nine months ended September 30, 2000 resulted in net income of
$735,000 versus a net loss of $40,000 for the nine months ended September 30,
1999. Included in the net income for 2000 is a loss from discontinued operations
of $12,000 compared to a gain from discontinued operations of $72,000 in 1999.
Current quarter basic and diluted income per share for the nine months ended
September 30, 2000 was $2.24 versus a loss per share of $0.12 for the comparable
nine months last year. The weighted average common and common equivalent shares
for the nine months ended September 30, 2000 and 1999 were 328,200.
Liquidity and Capital Resources
The Company had a net increase in cash for the nine months ended
September 30, 2000, of $29,000, compared to a net decrease for the comparable
period in the prior year of $239,000. Cash on hand was $834,000 and $760,000 at
September 30, 2000 and 1999, respectively.
For the nine months ended September 30, 2000, continuing operations
provided $228,000 in cash as compared to using $333,000 during the nine months
ended September 30, 1999. Income from continuing operations for the nine months
ended September 30, 2000, adjusted for non-cash items such as depreciation and
amortization of $75,000 and total gains of $384,000, provided $438,000. Other
primary increases in cash flow from continuing operations were a $112,000
decrease in inventory, a $69,000 increase in accounts payable and accrued
liabilities, and a $111,000 increase in deferred revenue. Primary decreases in
cash flow from continuing operations were a $394,000 increase in accounts
receivable and a $107,000 increase in prepaid expenses and other assets. Income
from continuing operations for the nine months ended September 30, 1999,
adjusted for non-cash depreciation and amortization of $111,000, used $2,000.
Other primary increases in cash flow from continuing operations in 1999 were a
$329,000 decrease in accounts receivable, a $29,000 decrease in inventory and a
$36,000 decrease in prepaid expenses and other assets. Primary decreases in cash
flow from continuing operations were a $8,000 decrease in accounts payable and
accrued liabilities, and a $717,000 decrease in deferred revenue.
Net cash from investing activities was $1.3 million for the nine months
ended September 30, 2000. Proceeds from the sale of property and equipment
contributed $1.4 million and the proceeds from the sale of trading securities
contributed $1.1 million. Cash used was $1.2 million for the purchase of trading
securities and $57,000 for the purchase of property and equipment. The Company
does not anticipate any material expenditures for property and equipment during
the next twelve months.
For the nine months ended September 30,2000, cash used in financing
activities was $1.4 million for the payment of debt obligations. This compares
to cash provided by financing activities of $69,000 for the nine months ended
September 30, 1999, which included $150,000 in proceeds from the settlement of
notes receivable.
<PAGE>
At September 30, 2000, the Company had negative working capital of
approximately $18,000 compared to negative working capital of approximately $1.2
million at December 31, 1999. The improvement of $1.2 million during the nine
months ended September 30, 2000 partially relates to the decrease in the current
portion of debt from the retirement of the $1.3 million in debt in the first
quarter of 2000 and the reclass, from short-term to long-term, of $325,000 of S.
Robert Davis' remaining $425,000 subordinated note payable. Included in working
capital is $904,000 in liabilities that relate to the Company's discontinued
operations. Cash provided by continuing operations at September 30, 2000 was
$228,000. The Company believes that through a combination of cash on hand and
available from continuing operations, there should be sufficient funds available
for the Company's normal business operations in the year 2000.
During the third quarter ended September 30, 2000, S. Robert Davis
continues to defer the remainder of his $185,000 salary. Had Mr. Davis not
deferred the remainder of his salary during the first nine months of 2000, the
$228,000 positive cash flow from continuing operations would have been reduced
to $93,000. Mr. Davis intends to defer his salary for an additional 18 months.
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.
Seasonality
Although the children's literature business correlates closely to the
school year, the majority of the sales force remains intact throughout the year.
However, the entire sales force is reduced around the Christmas season. As a
subscription service, however, revenue is not seasonal and shipments of
inventory continue throughout the year. Cash receipts declines during the summer
months but do not cease, as public libraries remain, open.
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 is not exposed to market rate risk for
changes in interest rates due to all remaining debt obligations of the Company
having fixed interest rates.
Investment Rate Risk. At September 30, 2000, the Company had trading
securities with a fair market value of $510,976 and cost value of $632,351. The
Company is subject to investment rate risk. The Company could 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.
The Company has 29,560 shares of stock held for long-term 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 September
30, 2000 with a fair market value of $73,900. The Company would experience a
loss of $12,900 if the shares were sold as of September 30, 2000.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
The Illinois Department of Revenue issued two assessments, NTLSF980498870200 on
April 17, 1998 and NTLSF9804988702001 on March 24, 1998, against the Company
seeking approximately $478,000, plus interest, in sales tax from 1993 through
1996. The Illinois Department of Revenue claimed that there was an agency
relationship between the Company and the schools and therefore the Company is
subject to the assessed tax. The Company denied that such a relationship
existed. A hearing was held before the State of Illinois, Department of Revenue,
at the Office of Administrative Hearings [Reg. #2225-1251, docket no,
98-ST-0132] which recommended to the Illinois Department of Revenue the
assessments be revised to reflect no tax liability due. The Illinois Department
of Revenue accepted the Administrative Law Judge's decision on September 25,
2000 and the final revised assessments were issued on October 17, 2000
indicating no tax liability due. The Company had reserved a liability, including
interest and anticipated legal fees, of $650,000. The Company, therefore, will
reverse the liability that was reserved and report a gain on tax settlement in
the fourth quarter 2000.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description of Document
10(ac) Audit Committee Charter
<PAGE>
10(ad) Lease dated September 8, 2000 for Junior Library Guild
warehouse and office facility
27 Financial Data Schedule (filed only electronically with the
SEC)
(b) Reports on Form 8-K filed during the quarter ended September 30, 2000:
None.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Media Source, Inc.
(Registrant)
Dated: November 13, 2000 By:/s/Donald R. Hollenack
----------------------
Donald R. Hollenack
Chief Financial Officer
