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: June 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 March 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 - June 30, 2000 and December 31, 1999
Statements of Operations - three and six month periods ended
June 30, 2000 and 1999
Statements of Cash Flows - six month periods ended June 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
June 30, December 31,
2000 1999
---------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................ $ 899,733 $ 804,605
Trading securities, at market .................... 602,371 355,907
Accounts receivable, net of allowance for doubtful
accounts of $94,000 and $94,000, respectively .. 488,218 863,117
Inventory ........................................ 847,514 1,003,695
Prepaid expenses ................................. 226,944 206,214
---------- ----------
Total Current Assets ................................... 3,064,780 3,233,538
Equipment, net of accumulated depreciation
of $164,259 and $155,406, respectively ............... 124,427 94,264
Other Assets:
Assets held for disposal (net) .................... -- 1,189,189
Cost in excess of net assets acquired, net of accumulated
amortization of $1,079,104 and $1,055,000,
respectively 1,642,799 1,666,902
Securities available for sale, at market ........ 73,900 73,900
Other ........................................... 29,829 10,042
---------- ----------
Total Other Assets .................................... 1,746,528 2,940,033
---------- ----------
Total Assets ........................................ $4,935,735 $6,267,835
========== ==========
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .......................... $ 44,846 $ 220,690
Accrued liabilities ....................... 45,817 97,294
Accrued salary and interest - officer ..... 424,612 329,917
Accrued tax liabilities ................... 969,916 1,006,032
Deferred revenue .......................... 1,372,222 1,794,385
Current portion of long-term debt obligations 100,000 963,896
------------ ------------
Total Current Liabilities ...................... 2,957,413 4,412,214
Long-term debt ................................. 575,000 1,082,001
------------ ------------
Total Liabilities .............................. 3,532,413 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 ....................... (19,417,742) (20,047,444)
Less 14,936 shares of common stock in treasury,
at cost .. (241,123) (241,123)
------------ ------------
Total Stockholders' Equity ..................... 1,403,322 773,620
------------ ------------
Total Liabilities and Stockholder's Equity...... $ 4,935,735 $ 6,267,835
============ ============
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenues ........... $ 994,566 $ 828,140 $ 1,951,981 $ 1,714,982
Costs of goods sold .. 324,891 344,463 685,548 710,516
----------- ----------- ----------- -----------
Gross profit ......... 669,675 483,677 1,266,433 1,004,466
Operating expenses:
Selling, general
and administrative 530,025 526,498 1,039,806 1,054,398
Depreciation and
amortization . 22,120 36,986 50,735 73,971
----------- ----------- ----------- -----------
Total operating expenses 552,145 563,484 1,090,541 1,128,369
----------- ----------- ----------- -----------
Income (loss) from
operations ....... 117,530 (79,807) 175,892 (123,903)
Other income (expense)
Interest, net.. (9,833) (56,877) (22,717) (102,288)
Gain on the
extinguishment
of debt . .... 71,060 -- 102,847 --
Gain on the sale
of assets -- -- 262,229 --
Realized gain (loss)
on investments (74,193) -- 84,590 --
Unrealized gain on
investments .. 2,042 -- 29,715 --
Other -- 48,672 -- 48,672
----------- ----------- ----------- -----------
Total other income
(expense) (10,924) (8,205) 456,664 (53,616)
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before taxes .. 106,606 (88,012) 632,556 (177,519)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Income (loss) from
continuing operations 106,606 (88,012) 632,556 (177,519)
Gain (loss) from
discontinued operations (18,129) 57,756 (2,854) 138,270
----------- ----------- ----------- -----------
Net income (loss) .. $ 88,477 $ (30,256) $ 629,702 $ (39,249)
=========== =========== =========== ===========
Earnings per common share
Income (loss) from
continuing
operations $ 0.33 $ (0.27) $ 1.93 $ (0.54)
Income from
discontinued
operations .... (0.06) 0.18 (0.01) 0.42
----------- ----------- ----------- -----------
Net income (loss) $ 0.27 $ (0.09) $ 1.92 $ (0.12)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding 328,200 328,200 328,200 328,200
=========== =========== =========== ===========
See accompanying notes
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
---------------------------
2000 1999
----------- ------------
(unaudited)
<S> <C> <C>
Cash flow from (used) in operations:
Income (loss) from continuing operations ......... $ 632,557 $ (177,519)
Reconciliation to net cash flow used in continuing operations:
Depreciation and amortization ............. . 50,735 73,971
Gain on the sale of fixed assets ............ (262,229) --
Gain on the extinguishment of debt .......... (102,847) --
Realized gain (loss) on investments ......... (84,590) --
Unrealized gain (loss) on investments ....... (29,715) --
Changes in working capital items of continuing operations:
Accounts receivable ......................... 374,899 423,366
Inventory ................................... 156,182 33,072
Prepaid expenses and other assets ........... (45,354) 35,516
Accounts payable and accrued liabilities .... (46,966) (58,123)
Deferred revenue ............................ (422,165) (484,815)
----------- -----------
Net cash provided by (used in) continuing operations 220,507 (154,532)
Net cash used in discontinued operations ........... (45,018) (181,325)
----------- -----------
Net cash from (used in) operations ................. 175,489 (335,857)
Cash flow from (used in) investing activities:
Payments for purchase of property and equipment (50,702) (2,656)
Proceeds from the sale of property and equipment 1,448,400 --
Payments for purchase of trading securities .... (1,246,004) --
Proceeds from the sale of trading securities .. 1,113,842 --
----------- -----------
Net cash from (used in) investing activities ........ 1,265,536 (2,656)
Cash flow from (used in) financing activities:
Proceeds from settlement of note receivable .... -- 150,000
Payments on debt obligations ................... (745,897) (53,470)
Payments on subordinated debt issued ........... (600,000) --
----------- -----------
Net cash from (used in) financing activities ........ (1,345,897) 96,530
Increase (decrease) in cash ......................... 95,128 (241,983)
Cash, beginning of period ........................... 804,605 998,432
----------- -----------
Cash, end of period ................................. $ 899,733 $ 756,449
=========== ===========
See accompanying notes
</TABLE>
<PAGE>
MEDIA SOURCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements have not
been audited, but reflect all adjustments, which, in the opinion of management,
are necessary for a fair presentation of financial position, results of
operations and cash flows. All adjustments are of a normal and recurring nature,
except for those related to the discontinued operations of the Company's book
fair business.
Media Source, Inc. (the "Company"), through 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 June 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 $475,000 in subordinated note payables bearing interest of 12% due in
quarterly installments of $25,000 starting in April 2000.
On May 10, 2000, an option to purchase stock was granted to the Company
Chairman, S. Robert Davis, holder of a $500,000 subordinated convertible note
payable due August 1, 2000. In exchange for granting this option, S. Robert
Davis agreed to extend the due date of his note, cancel the conversion feature
associated with the note, and allow the Company to repay the debt over 20
quarterly installments of $25,000 starting in April 2000. The stock option
entitles S. Robert Davis to purchase from the Company 100,000 shares at 1/8th
over the closing bid price on the day of grant. The closing bid price on May 10,
2000 was $2.125 and therefore the exercise price is $2.25 per share. The option
is only exercisable after May 10, 2003, three years from the date of the grant
and expires on May 10, 2006, six years from the date of the grant.
Note 3. Supplemental Cash Flow Information
Cash payments during the six months ended June 30, 2000 and 1999,
included interest of $81,000 and $118,000, respectively, and income taxes of $0
and $0, respectively.
<PAGE>
Note 4. Income Taxes
There was no income tax provision for the six months ended June 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.
Note 5. Earnings Per Share
The following table represents the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
Six Months Ended June 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 ........... $ 632,556 $(177,519)
Gain (loss) from discontinued operations ........... (2,854) 138,270
--------- ---------
Net income (loss) available to common stockholders . $ 629,702 $ (39,249)
========= =========
Income (loss) per common share:
Income (loss) from continuing operations ........... $ 1.93 $ (0.54)
Gain (loss) from discontinued operations ........... (0.01) 0.42
--------- ---------
Net income (loss) per share ........................ $ 1.92 $ (0.12)
========= =========
</TABLE>
At June 30, 2000 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". At June 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
$254,000. The Junior Library Guild entered into a lease to rent the warehouse
and office facility through September 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.
<PAGE>
Note 7. Related Party Transactions
The Junior Library Guild's future warehouse and office facility will be
leased from Mid-States Development Corp., which is 100% owned by the Company
Chairman, S. Robert Davis. The Company is currently working out the lease terms.
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 CA Short,
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
CA Short shares of common stock as an investment. Using the stock closing prices
at June 30, 2000, the Company would record an approximate loss of $142,000 in
retiring the notes. The Company hopes to have the notes retired by year ending
December 31, 2000.
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>
Second 2000 Compared with Second Quarter 1999
Revenues for the three months ended June 30, 2000, approximated
$995,000 compared to approximately $828,000 for the three months ended June 30,
1999, an increase of 20% or approximately $167,000. 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 $325,000 for the three months
ended June 30, 2000, compared to approximately $344,000 for the three months
ended June 30, 1999, an decrease of 6% or approximately $19,000. The decrease in
cost of goods sold is a result of a change in purchasing strategies that
resulted in improvements in the buying of the product. As a percentage of
revenues, cost of goods sold was 33% during the second quarter of 2000, compared
to 42% 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 first quarter of 2000 compared to 1999.
Selling, general, and administrative expenses were approximately
$530,000 for the three months ended June 30, 2000, compared to approximately
$526,000 for the three months ended June 30, 1999, an increase of 1% or
approximately $4,000.
Depreciation and amortization expense was approximately $22,000 for the
three months ended June 30, 2000, compared to $37,000 for the three months ended
June 30, 1999, a decrease of 41% or approximately $15,000. The decrease in
depreciation and amortization expense is due to a reduction in depreciable
assets as a result of the selling of assets which were previously held for
disposal at December 31, 1999.
Net interest expense was approximately $10,000 for the three months
ended June 30, 2000, compared to $57,000 for the three months ended June 30,
1999, an decrease of 83% or $47,000. 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 June 30, 2000, approximated $688,000 compared to $2.1 million for the
three months ended June 30, 1999. The average interest rate for the three months
ended June 30, 2000 and June 30,1999 was approximately 10.2% respectively.
There was no income tax provision for the three months ended June 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 second quarter ended June 30, 2000 resulted in income from
continuing operations of $107,000 compared to a loss from continuing operation
of $88,000 in the second quarter ended June 30, 1999. The increase over 1999 was
primarily attributable to an increase in gross profits. In the second quarter
ended June 30, 2000, gains on the extinguishment of debt of $71,000 were offset
by losses on the sale of investments of $74,000.
<PAGE>
The second quarter ended June 30, 2000 resulted in net income of
$88,000 versus a net loss of $30,000 in the second quarter ended June 30, 1999.
Included in the net income for 2000 is a loss from discontinued operations of
$18,000 compared to a gain from discontinued operations of $58,000 in 1999.
Current quarter basic and diluted income per share for the second quarter ended
June 30, 2000 was $0.27 versus a loss per share of $0.09 in the comparable
quarter last year. The weighted average common and common equivalent shares for
the second quarters ended June 30, 2000 and 1999 were 328,200.
Six Months Ended June 30, 2000 Compared with Six Months Ended June 30, 1999
Revenues for the six months ended June 30, 2000, approximated $2.0
million compared to approximately $1.7 million for the six months ended June 30,
1999, an increase of 14% or approximately $300,000. 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 second
quarter ending June 30, 2000.
Cost of goods sold was approximately $686,000 for the six months ended
June 30, 2000, compared to approximately $711,000 for the six months ended June
30, 1999, an decrease of 4% or approximately $25,000. The decrease in cost of
goods sold is a result of a change in purchasing strategies that resulted in
improvements in the buying of the product. As a percentage of revenues, cost of
goods sold was 35% for the six months ended June 30, 2000, compared to 41% for
the same period in 1999. The decrease in cost of sold as a percentage of
revenues continues to relate to a combination of new pricing strategies and
improved purchasing strategies that occurred during the six months ended June
30, 2000 compared to 1999.
Selling, general, and administrative expenses were approximately $1.0
million for the six months ended June 30, 2000 and June 30, 1999 respectively.
Depreciation and amortization expense was approximately $51,000 for the
six months ended June 30, 2000, compared to $74,000 for the six months ended
June 30, 1999, a decrease of 31% or approximately $23,000. The decrease in
depreciation and amortization expense is due to a reduction in depreciable
assets as a result of the selling of assets which were previously held for
disposal at December 31, 1999.
Net interest expense was approximately $23,000 for the six months ended
June 30, 2000, compared to $102,000 for the six months ended June 30, 1999, an
decrease of 78% or $79,000. 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 six months ended June 30,
2000, approximated $1.4 million compared to $2.1 million for the six months
ended June 30, 1999. The average interest rate for the six months ended June 30,
2000 and June 30,1999 was approximately 10.2% respectively.
There was no income tax provision for the six months ended June 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 six months ended June 30, 2000 resulted in income from continuing
operations of $633,000 compared to a loss from continuing operations of $178,000
for the six months ended June 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.
<PAGE>
The six months ended June 30, 2000 resulted in net income of $630,000
versus a net loss of $39,000 for the six months ended June 30, 1999. Included in
the net income for 2000 is a loss from discontinued operations of $3,000
compared to a gain from discontinued operations of $138,000 in 1999. Current
quarter basic and diluted income per share for the six months ended June 30,
2000 was $1.92 versus a loss per share of $0.12 for the comparable six months
last year. The weighted average common and common equivalent shares for the six
months ended June 30, 2000 and 1999 were 328,200.
Liquidity and Capital Resources
The Company had a net increase in cash for the six months ended June
30, 2000, of $95,000, compared to a net decrease for the comparable period in
the prior year of $242,000. Cash on hand was $900,000 and $756,000 at June 30,
2000 and 1999, respectively.
For the six months ended June 30, 2000, continuing operations provided
$221,000 in cash as compared to using $155,000 during the six months ended
June30, 1999. Income from continuing operations for the six months ended June
30, 2000, adjusted for non-cash items such as depreciation and amortization of
$51,000 and total gains of $479,000, provided $204,000. Other primary increases
in cash flow from continuing operations were a $375,000 decrease in accounts
receivable and a $156,000 decrease in inventory. Primary decreases in cash flow
from continuing operations were a $45,000 increase in prepaid expenses and other
assets, a $47,000 decrease in accounts payable and accrued liabilities, and a
$422,000 decrease in deferred revenue. Income from continuing operations for the
six months ended June 30, 1999, adjusted for non-cash depreciation and
amortization of $74,000, used $104,000. Other primary increases in cash flow
from continuing operations in 1999 were a $423,000 decrease in accounts
receivable, a $33,000 decrease in inventory and a $36,000 decrease in prepaid
expenses and other assets. Primary decreases in cash flow from continuing were a
$58,000 decrease in accounts payable and accrued liabilities, and a $485,000
decrease in deferred revenue.
Net cash from investing activities was $1.3 million for the six months
ended June 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 $51,000 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 six months ended June 30,2000, cash used in financing
activities was $1.3 million for the payment of debt obligations. This compares
to cash provided by financing activities of $97,000 for the six months ended
June 30, 1999, which included $150,000 in proceeds from the settlement of notes
receivable.
On May 10, 2000 a $500,000 subordinated convertible note payable was
refinanced by the granting of an option to purchase stock to the Company
Chairman, S. Robert Davis. The granting of this option extends the due date of
his note, cancels the conversion feature associated with the note, and allows
the Company to repay the debt over 20 quarterly installments of $25,000 starting
in April 2000. The stock option entitles S. Robert Davis to purchase from the
Company 100,000 shares at 1/8th over the closing bid price on the day of grant.
The closing bid price on May 10, 2000 was $2.125 and therefore the exercise
price is $2.25 per share. The option is only exercisable after May 10, 2003,
three years from the date of the grant and expires on May 10, 2006, six years
from the date of the grant.
<PAGE>
At June 30, 2000, the Company had working capital of approximately
$107,000 compared to negative working capital of approximately $1.2 million at
December 31, 1999. The improvement of $1.3 million during the six months ended
June 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 $375,000 of S. Robert Davis'
remaining $475,000 subordinated note payable. Included in working capital is
$909,000 in liabilities that relate to the Company's discontinued operations.
Cash provided by continuing operations at June 30, 2000 was $221,000. 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 second quarter ended June 30, 2000, S. Robert Davis elected
to make a $4,000 contribution to the Company's 401K plan but continues to defer
the remainder of his $185,000 salary. Had Mr. Davis not deferred the remainder
of his salary during the first six months of 2000, the $221,000 positive cash
flow from continuing operations would have been reduced to $132,000. Mr. Davis
intends to defer his salary for an additional 21 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 June 30, 2000, the Company had trading
securities with a fair market value and cost value of $602,371. 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 June 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 June 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. A hearing has held before the State of Illinois,
Department of Revenue [Reg. #2225-1251, docket no, 98-ST-0132] on April 27, 2000
and the Company is currently waiting the decision. The taxing authority is
claiming that there has been an agency relationship between the Company 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.
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
27 Financial Data Schedule
(filed only electronically with the SEC)
(b) Reports on Form 8-K filed during the quarter ended June 30, 2000:
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Media Source, Inc.
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(Registrant)
Dated: August 11, 2000 By: /s/ Donald R. Hollenack
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Donald R. Hollenack
Chief Financial Officer
