UNITED STATES
SECURITIES AND EXCHANGE 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, 2002
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 small business issuer as specified in its charter)
DELAWARE 34-1297143
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5695 Avery Road, Dublin, Ohio 43016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (614) 793-8749
Check whether the issuer (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: 323,775 common shares
outstanding, each with $0.01 par value, as of July 31, 2002.
Transitional Small Business Disclosure Format (Check one): YES NO X .
MEDIA SOURCE, INC.
FORM 10-QSB
INDEX
Part I - Financial Information
Item 1 - Financial Statements (unaudited)
Consolidated Balance Sheet - June 30, 2002
Consolidated Statements of Operations - three and six months ended
June 30, 2002 and 2001
Consolidated Statements of Cash Flows - six months ended June 30, 2002
and 2001
Notes to Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II - Other information
Signatures
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ................................. $2,555,876
Accounts receivable, net of allowance for doubtful
accounts of $65,000 ..................................... 1,274,294
Inventory ................................................. 831,285
Prepaid expenses .......................................... 320,869
Deferred income taxes ..................................... 420,000
---------
Total current assets ............................ 5,402,324
Property and equipment:
Building and improvements ................................. 1,441,379
Equipment ................................................. 305,369
---------
1,746,748
Less accumulated depreciation ............................. 326,840
---------
Total property and equipment, net ............... 1,419,908
Other Assets:
Cost in excess of net assets acquired ..................... 1,570,489
Deferred income taxes ..................................... 328,000
Other ..................................................... 66,184
---------
Total other assets .............................. 1,964,673
---------
TOTAL ASSETS ................................................... $8,786,905
==========
See accompanying notes
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................... $ 269,060
Accrued liabilities ........................................ 481,907
Accrued tax liabilities .................................... 135,156
Deferred revenue ........................................... 2,072,877
Current portion of capital lease obligation ................ 12,970
------------
Total current liabilities ........................ 2,971,970
------------
Long-term capital lease obligation .............................. 1,217,773
------------
Total liabilities ................................ 4,189,743
------------
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
343,137 shares issued and outstanding
Capital in excess of stated value .......................... 21,815,126
Notes receivable from stock sales .......................... (704,013)
Accumulated deficit ........................................ (16,258,559)
------------
4,855,985
Less shares of common stock in treasury of 19,361 at cost .. (258,823)
------------
Total stockholders' equity ....................... 4,597,162
------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY ...................... $ 8,786,905
=============
See accompanying notes
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
---------- ----------- ----------- -----------
Revenues ............ $ 1,835,595 $ 1,390,506 $ 3,582,610 $ 2,713,982
Costs of goods sold 663,569 469,875 1,285,522 936,033
----------- ----------- ----------- -----------
Gross profit ........ 1,172,026 920,631 2,297,088 1,777,949
Operating expenses:
Selling, general
and administrative 767,737 688,348 1,457,308 1,248,419
Depreciation and
amortization ...... 25,360 33,866 53,217 66,770
---------- ---------- ----------- ------------
Total operating expenses 793,097 722,214 1,510,525 1,315,189
---------- ---------- ----------- ------------
Income from operations .. 378,929 198,417 786,563 462,760
Other income (expense)
Interest, net ...... (18,936) (19,475) (38,959) (47,905)
Realized gain (loss)
on investments .... (15,075) (112,230) 1,218 (127,878)
Unrealized gain (loss)
on investments .... 13,714 147,174 (2,723) 20,236
Other .............. 6,375 58,926 6,376 60,426
--------- --------- ----------- -----------
Total other income
(expense) .... (13,922) 74,395 (34,088) (95,121)
Income from operations ---------- ---------- ----------- -----------
before taxes ........ 365,007 272,812 752,475 367,639
Income tax benefit .... 115,000 123,000 230,000 158,000
---------- ---------- ---------- -----------
NET INCOME .......... $ 480,007 $ 395,812 $ 982,475 $ 525,639
=========== =========== =========== ============
Basic earnings
per common share: $ 1.48 $ 1.22 $ 3.03 $ 1.62
=========== =========== =========== ============
Weighted average number of common
shares outstanding 323,775 323,775 323,775 323,775
=========== =========== =========== ============
Diluted earnings
per common share: $ 1.17 $ 1.09 $ 2.42 $ 1.45
=========== =========== =========== ============
Weighted average number of common
shares outstanding 410,272 362,148 406,287 362,439
=========== =========== =========== ============
See accompanying notes
MEDIA SOURCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
-------------------------
2002 2001
-------- ----------
Cash Flow from Operations:
Net income ...................................... $ 982,475 $ 525,639
Reconciliation to net cash flow provided by (used in) operations:
Depreciation and amortization ......... .... 53,217 66,770
Realized (gain) loss on investments ........ (1,218) 127,878
Unrealized (gain) loss on investments ...... 2,723 (20,236)
Deferred income taxes ...................... (230,000) (158,000)
Changes in working capital items of operations:
Accounts receivable ........................ 691,107 675,175
Inventory .............................. ... 86,980 106,419
Prepaid expenses and other assets .......... 104,699 25,445
Accounts payable and accrued liabilities ... (135,462) (716,962)
Deferred revenue ........................... (815,458) (681,487)
--------- ---------
Net cash provided by (used in) operations ....... 739,063 (49,359)
Cash Flow from Investing Activities:
Issuance of note receivable ................ -- (400,000)
Proceeds from note receivable .............. -- 200,000
Payments for purchase of property and equipment (13,422) (43,811)
Payments for purchase of trading securities .... (1,385) (2,913)
Proceeds from the sale of trading securities .. 280,859 --
------- ---------
Net cash provided by (used in) investing activities . 266,052 (246,724)
Cash Flow from Financing Activities:
Payments on capital lease obligations .......... (6,074) (31,250)
Payments on subordinated debt issued ........... -- (400,000)
-------- ---------
Net cash used in financing activities ............... (6,074) (431,250)
Increase (decrease) in cash ......................... 999,041 (727,333)
Cash, beginning of period ........................... 1,556,835 1,374,825
--------- ----------
Cash, end of period ............................. $ 2,555,876 $ 647,492
=========== ============
See accompanying notes
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.
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 fifteen reading levels. The Company markets its book
subscriptions and children's literature through a network of trained telephone
sales representatives directly to public libraries and both private and public
schools.
The Company also operates Oxford Resources, Inc., a wholly owned
subsidiary, which publishes and sells children's books to the public as well as
to the school and library market. Oxford Resources, Inc. publishes under the
name Darby Creek Publishing.
The interim consolidated 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, 2001.
Note 2. 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.
Note 3. Reclassification
Certain 2001 amounts have been reclassified to conform to 2002
presentation.
Note 4. Supplemental Cash Flow Information
Cash payments during the six months ended June 30, 2002 and 2001, included
interest of approximately $54,000 and $73,000, respectively, and income taxes of
approximately $0 and $17,000, respectively.
Note 5. Income Taxes
There was no income tax provision for the three months ended June 30, 2002
and 2001, due to the availability of net operating loss carryforwards and a
reduction in the deferred income tax valuation allowance resulting in a deferred
tax benefit equal to the provision for the quarter. Estimated income tax rates
based on annualized income were taken into consideration. The aforementioned
valuation allowance has been previously provided as a reduction of the value of
the deferred tax asset attributable to the Company's net operating loss
carryforwards. The six-month period ended June 30, 2002 reflects an additional
reduction in the valuation allowance and a related tax benefit to provide for
the probable future utilization of net operating loss carryforwards.
Note 6. Earnings Per Share
The following table represents the computation of basic and diluted
earnings per share.
Six months ended June 30,
-------------------------
2002 2001
---------- ----------
(unaudited)
Basic Earnings Per Share:
Weighted average number of common shares
outstanding 323,775 323,775
Net income available to common stockholders ... $982,475 $525,639
Basic net income per share .................... $ 3.03 $ 1.62
Diluted Earnings Per Share:
Weighted average number of common shares
outstanding - basic ........................ 323,775 323,775
Effect of Diluted Securities:
Dilutive stock options ........................ 82,511 38,664
--------- --------
Dilutive potential common shares .............. 406,287 362,439
========= ========
Net income available to common stockholders and
assumed conversions ......................... $982,475 $525,639
Diluted net income per share .................. $ 2.42 $ 1.45
Note 7. Related Party Transactions
The Junior Library Guild leases from Mid-States Development Corp., which is
100% owned by the Company Chairman, S. Robert Davis, a warehouse and office
facility in Union County, Ohio. The lease is for twenty years and terminates on
October 31, 2020 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. The lease
is classified as a capital lease.
Note 8. Recent Accounting Pronouncement
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets". SFAS 142 requires
goodwill to be tested for impairment under certain circumstances, and written
off when impaired, rather that being amortized as previous standards required.
SFAS 142 is effective for fiscal years beginning after December 15, 2001. In
accordance with SFAS No. 142, the Company ceased amortizing goodwill as of the
beginning of fiscal 2002. The Company has goodwill of approximately $1.6 million
as of June 30, 2002.
The following table presents the impact of SFAS 142 on net income and net
income per share had the standard been in effect for the three and six months
ended June 30, 2001:
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
------- -------- ------- -------
Net income - as reported .. $480,007 $395,812 $982,475 $525,639
Adjustments:
Amortization of goodwill -- 12,052 -- 24,103
-------- -------- -------- --------
Net income - as adjusted ....$480,007 $407,864 $982,475 $549,742
======== ======== ======== ========
Basic net income per share -
as reported $ 1.48 $ 1.22 $ 3.03 $ 1.62
Basic net income per share -
adjusted .... $ 1.48 $ 1.26 $ 3.03 $ 1.70
Diluted net income per share -
as reported $ 1.17 $ 1.09 $ 2.42 $ 1.45
Diluted net income per share -
adjusted .. $ 1.17 $ 1.13 $ 2.42 $ 1.52
The Company is required to perform impairment tests on goodwill on an
annual basis. As of June 30, 2002, no impairment of goodwill has been
recognized. There can be no assurance that the future goodwill impairment tests
will not result in a charge to earnings.
Note 9. Notes Receivable from Stock Sales
In the third and fourth quarters of 1996, S. Robert Davis, Company
Chairman, Randall J. Asmo, Executive Vice President and Charles R. Davis, son of
S. Robert Davis, exercised stock options for notes. The notes were due in August
2002 but have been extended until August 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, in other section of this Quarter Report,
and in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and in oral statements made with the
approval of an authorized executive officer which are not historical or current
facts including, without limitation, the Company's expectation with respect to
expenditure for property and equipment, the Company's ability to use the
internet to increase sales to existing subscribers and to attract new
subscribers, the Company's expectation with respect to expenditures for internet
development, and the Company's expectation with respect to the funds available
to the Company for operations in 2002 are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and are subject to certain risks and uncertainties that could
cause actual results to differ materially from historical results and those
presently anticipated or projected. Readers are cautioned not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. The following important factors, among others, in some cases have affected
and in the future could affect the Company's actual results and could cause the
Company's actual financial performance to differ materially from that expressed
in any forward-looking statement: (i) the competitive conditions that currently
exist in the Company's industry, which could adversely impact sales and erode
gross margins; and (ii) the inability to carry out marketing and sales plans
would have a materially adverse impact on the Company's profitability. The
foregoing list should not be construed as exhaustive and the Company disclaims
any obligations subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
Critical Accounting Policies
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgements, assumptions and estimates that affect
the amounts reported in the Consolidated Financial Statements and accompanying
notes. Estimates are used for, but not limited to, the accounting for the
allowance for doubtful accounts, inventory allowances, investment impairments,
goodwill impairments, and realization of deferred tax assets related to net
operating loss carryforwards. Actual results could differ from these estimates.
The following critical accounting policies are impacted significantly by
judgements, assumptions and estimates used in the preparation of the
Consolidated Financial Statements.
The allowance for doubtful accounts is based on our assessment of the
collectibility of specific customer accounts and the aging of the accounts
receivable. If actual defaults are higher than our historical experience, our
estimates of the recoverability of amounts due us could be aversely affected.
Inventory purchases and commitments are based upon future demand forecasts.
If there is a sudden and significant decrease in the demand of our products or
there is a higher risk of inventory obsolescence due to aging, the Company may
be required to increase its inventory allowances and our gross margin could be
adversely affected.
The Company previously provided a valuation allowance principally as a
reduction of the value of the deferred tax asset attributable to the Company's
net operating loss carryforwards. The Company will continue to evaluate the
probable future utilization of net operating loss carryforwards and when, in
management's opinion, it is more likely than not that a portion of the gross
deferred tax asset will be realized through future taxable earnings or tax
planning strategies, the valuation allowance will be reduced accordingly.
Second Quarter 2002 Compared with Second Quarter 2001
Revenues for the three months ended June 30, 2002, approximated $1.8
million compared to approximately $1.4 million for the three months ended June
30, 2001, an increase of 32% or approximately $445,000. The increase in revenues
is principally attributable to an increase in the number of monthly
subscriptions and the selling of additional backlist book titles
Cost of goods sold was approximately $664,000 for the three months ended
June 30, 2002, compared to approximately $470,000 for the three months ended
June 30, 2001 an increase of 41% or approximately $194,000. The increase in cost
of goods sold corresponds to the increase in revenues, specifically the increase
in backlist book sales. As a percentage of revenues, cost of goods sold was 36%
during the second quarter of 2002, compared to 34% for the same period in 2001.
Selling, general, and administrative expense were approximately $768,000
for the three months ended June 30, 2002, compared to approximately $688,000 for
the three months ended June 30, 2001, an increase of 12% or approximately
$79,000. The increase in selling, general, and administrative expenses that
occurred during the second quarter of 2002 compared to 2001 is principally
attributable to increased costs associated to support the current and future
growth of the company.
Depreciation and amortization expense was approximately $25,000 for the
three months ended June 30, 2002, compared to $34,000 for the three months ended
June 30, 2001, a decrease of 25% or approximately $9,000. The decrease is
principally attributable to the absence in 2002 of amortization expense related
to goodwill in accordance with SFAS No. 142.
Net interest expense was approximately $19,000 for the three months ended
June 30, 2002, compared to approximately $19,500 for the three months ended June
30, 2001, an decrease of 3% or approximately $500.
There was no income tax provision for the three months ended June 30, 2002
and 2001, due to the availability of net operating loss carryforwards and a
reduction in the valuation allowance resulting in a deferred tax benefit equal
to the provision. Estimated income tax rates based on annualized income were
taken into consideration. The aforementioned valuation allowance has been
previously provided as a reduction of the value of the deferred tax asset
attributable to the Company's net operating loss carryforwards. The second
quarter ended June 30, 2002 reflects an additional reduction in the valuation
allowance and a related tax benefit to provide for the probable future
utilization of net operating loss carryforwards.
The second quarter ended June 30, 2002 resulted in net income of
approximately $480,000 versus net income of approximately $396,000 in the second
quarter ended June 30, 2001, an increase of 21% or approximately $84,000. Income
from operations increased 90% or approximately $181,000 during the second
quarter of 2002 compared the second quarter of 2001. However, this increase was
offset by a $88,000 decrease in other income and expense. The combined effect
resulted in a 34% increase or approximately $92,000 in income from continuing
operations before taxes. Current quarter basic and diluted income per share for
the second quarter ended June 30, 2002 was $1.48 and $1.17 respectively, versus
basic and diluted income per share of $1.22 and $1.09 in the comparable quarter
last year. The weighted average common and common equivalent shares for the
second quarters 2002 and 2001 was 323,775.
Six Months ended June 30, 2002 Compared with Six Months ended June 30, 2001
Revenues for the six months ended June 30, 2002, approximated $3.6 million
compared to approximately $2.7 million for the six months ended June 30, 2001,
an increase of 32% or approximately $869,000. The increase in revenues continues
to be principally attributable to an increase in the number of monthly
subscriptions in 2002 compared to 2001 in addition to an increase in the selling
of additional backlist book titles
Cost of goods sold was approximately $1.3 million for the six months ended
June 30, 2002, compared to approximately $936,000 for the six months ended June
30, 2001 an increase of 37% or approximately $349,000. The increase in cost of
goods sold corresponds to the increase in revenues, specifically the increase in
backlist book sales. As a percentage of revenues, cost of goods sold was 36% for
the six months ended June 30, 2002, compared to 34% for the six months ended
June 30, 2001.
Selling, general, and administrative expense were approximately $1,5
million for the six months ended June 30, 2002, compared to approximately $1.2
million for the six months ended June 30, 2001, an increase of 17% or
approximately $209,000. The increase in selling, general, and administrative
expenses that occurred during the first six month of 2002 compared to 2001
continues to be principally attributable to increased costs associated to
support the current and future growth of the company.
Depreciation and amortization expense was approximately $53,000 for the six
months ended June 30, 2002, compared to $67,000 for the six months ended June
30, 2001, a decrease of 20% or approximately $14,000. The decrease is
principally attributable to the absence in 2002 of amortization expense related
to goodwill in accordance with SFAS No. 142.
Net interest expense was approximately $39,000 for the six months ended
June 30, 2002, compared to approximately $48,000 for the six months ended June
30, 2001, an decrease of 19% or approximately $9,000. The decrease is
principally due to the absence of outstanding debt in 2002 compared to
approximately $333,000 in average outstanding debt for the six months ended June
30, 2001
There was no income tax provision for the six months ended June 30, 2002
and 2001, due to the availability of net operating loss carryforwards and a
reduction in the valuation allowance resulting in a deferred tax benefit equal
to the provision. Estimated income tax rates based on annualized income were
taken into consideration. The aforementioned valuation allowance has been
previously provided as a reduction of the value of the deferred tax asset
attributable to the Company's net operating loss carryforwards. The six months
ended June 30, 2002 reflects an additional reduction in the valuation allowance
and a related tax benefit to provide for the probable future utilization of net
operating loss carryforwards.
The six months ended June 30, 2002 resulted in net income of approximately
$982,000 versus net income of approximately $526,000 for the six months ended
June 30, 2001, an increase of 87% or approximately $457,000. Income from
operations increased 70% or approximately $324,000 during the six months ended
June 30, 2002 compared to the six months ended June 30, 2001. In addition, a
decrease in other expenses in 2002 compared to 2001 contributed approximately
$61,000 to income from continuing operations before taxes and an increase in
income tax benefit in 2002 compared 2001 contributed $72,000 to net income.
Basic and diluted income per share for the six months ended June 30, 2002 was
$3.03 and $2.42 respectively, versus basic and diluted income per share of $1.62
and $1.45 for the comparable period last year. The weighted average common and
common equivalent shares for the six months ended June 30, 2002 and 2001 was
323,775.
Liquidity and Capital Resources
The Company had a net increase in cash for the six months ended June 30,
2002, of approximately $999,000, compared to a net decrease for the comparable
period in 2001 of approximately $727,000. Cash on hand was approximately $2.6
million and $647,000 at June 30, 2002 and 2001 respectively, a twelve month
increase of approximately $1.9 million.
For the six months ended June 30, 2002, operations provided cash of
approximately $739,000 compared to using cash of approximately $49,000 for the
same period ended June 30, 2001. Income from operations for the six months ended
June 30, 2002, adjusted for non-cash items such as depreciation of approximately
$53,000 and deferred taxes of approximately $230,000, provided approximately
$807,000 in cash. Primary increases in cash flow from operations in 2002 were
from a $691,000 decrease in accounts receivable, a $87,000 decrease in inventory
and a $105,000 decrease in prepaid expenses and other assets. Primary decreases
in cash flow from operations were a $135,000 decrease in accounts payable and
accrued liabilities and a $815,000 decrease in deferred revenue.
In fiscal 2001, income from operations for the six months ended June 30,
2001, adjusted for non-cash items such as depreciation and amortization of
approximately $67,000, net losses on investments of approximately $108,000 and
deferred taxes of approximately $158,000, provided approximately $542,000 in
cash. Primary increases in cash flow from operations in 2001 were from a
$675,000 decrease in accounts receivable and a $106,000 decrease in inventory.
Primary decreases in cash flow from operations were a $717,000 decrease in
accounts payable and accrued liabilities and a $681000 decrease in deferred
revenue.
Cash from investing activities for the six months ended June 30, 2002 was
approximately $266,000 compared to cash used in investing activities of
approximately $247,000 for the six months ended June 30, 2001. Proceeds from the
sale of trading securities provided approximately $281,000 during 2002. For the
six months ended June 30, 2001, the primary use of cash was a $400,000 loan made
to an affiliated company, of which $200,000 had been repaid. The Company does
not anticipate material expenditures for property and equipment during the next
six months.
For the six months ended June 30, 2002 and June 30, 2001, cash used in
financing activities was approximately $6,000 and $431,000, respectively. The
decrease is principally attributable to the payment of the remaining debt
obligations during the six months ended June 30, 2001 of $400,
At June 30, 2002, the Company had net working capital of approximately $2.4
million, an increase of approximately $1.1 million over the prior year. Total
current assets at June 30, 2002 increased by approximately $1.7 million over
June 30, 2001 while total current liabilities increased by approximately
$605,000 over the same period. The increase in cash accounted for $1.9 million
of the $2.4 million increase in working capital.
The Company's principal source of liquidity and short-term funding is from
operating cash flows. The Company operates primarily in the library market
throughout the United States. As a result of doing business, sales are constant
throughout the year with some fluctuations associated with the start and end of
the school years. Consequently, cash receipts are constant as well throughout
the year with some corresponding fluctuations associated with the start and end
of the school years.
The Company believes it's liquidity and availability of funds would not be
materially impacted in the short-term by a decrease in the demand of the
Company's product. The Company sells annual subscriptions to a customer base of
approximately 10,000. These subscriptions have staggered start dates throughout
the year. As a result of the customer base located throughout the country and
staggered subscriptions, any decrease in the demand would not immediately be
felt.
Furthermore, two primary and significant uses of operating cash flows are
variable costs associated with selling the product as well as product
purchasing. Since any impact from the decrease in the demand of the Company's
product would be minimal in the short-term, the Company, through management
controls in place, would be able to respond in a timely manner to downward
trends. Thus, the Company would be able to affect a decrease in variable selling
and purchasing costs corresponding to a decrease in demand.
The Company's major commitment relates to a capital lease for the use of an
office and warehouse facility by JLG. The lease is a twenty-year obligation with
minimum monthly lease payments starting at $10,000 per month.
The Company maintains its belief that through its course of business,
management policies and cash flow from operations, there should be sufficient
funds available for the Company's normal business operations in the year 2002.
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 decline during the summer
months but do not cease, as public libraries remain open.
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
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:
Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K filed during the quarter ended June 30, 2002:
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: August 13, 2002 By: /s/
-------------------------------
Donald R. Hollenack
Chief Financial Officer
(Principal financial and
accounting officer and
authorized signatory of
the Company)