FORM 10-QSB
(Mark One)| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
| o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from __________ to __________.
Commission file number: 1-16053
MEDIA SCIENCES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
| DELAWARE (State or other jurisdiction of incorporation or organization) |
87-0475073 (I.R.S. Employer Identification No.) |
8 Allerman Road, Oakland, NJ 07436
(Address of principal executive offices)
(201) 677-9311
(Issuer's telephone number)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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 o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 4, 2006, the issuer had 11,114,529 shares of common stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes o No x
| Page | ||||
|---|---|---|---|---|
| PART I. | FINANCIAL INFORMATION | |||
| Item 1. | Financial Statements | 3 | ||
|
Condensed Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and June 30, 2005 |
3 | |||
|
Condensed Consolidated Statements of Income For the Three and Nine Months Ended March 31, 2006 and 2005 (Unaudited) |
4 | |||
|
Condensed Consolidated Statement of Changes in Shareholders' Equity For the Nine Months Ended March 31, 2006 (Unaudited) |
5 | |||
|
Condensed Consolidated Statements of Cash Flows For the Nine Months Ended March 31, 2006 and 2005 (Unaudited) |
6 | |||
| Notes to Consdense Consolidated Financial Statements | 7 | |||
| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
15 | ||
| Item 3. | Controls and Procedures | 20 | ||
| Part II. | OTHER INFORMATION | |||
| Item 4. | Submission of Matters to a Vote of Security Holders | 21 | ||
| Item 5. | Other Information | 21 | ||
| Item 6. | Exhibits | 23 | ||
| Signatures | 24 |
PART I. FINANCIAL INFORMATION
March 31, June 30,
ASSETS 2006 2005 (Restated)
(Unaudited) (Note 1)
------------ ------------
CURRENT ASSETS :
Cash $ 1,070,575 $ 611,016
Accounts receivable, less allowance for doubtful accounts
of $50,000 at March, $35,000 at June 2,329,076 2,175,512
Inventories 4,138,113 3,196,323
Deferred tax assets 582,778 959,910
Prepaid expenses and other current assets 422,121 308,822
------------ ------------
Total Current Assets 8,542,663 7,251,583
PROPERTY AND EQUIPMENT, NET 2,541,899 2,058,251
OTHER ASSETS:
Goodwill and other intangible assets, net 3,584,231 3,584,231
Other assets 78,201 63,911
------------ ------------
3,662,432 3,648,142
------------ ------------
TOTAL ASSETS $ 14,746,994 $ 12,957,976
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit $ -- $ 1,620,233
Bank term loan 150,000 100,000
Accounts payable 1,542,408 1,254,921
Accrued compensation and benefits 535,996 128,413
Other accrued expenses and current liabilities 353,568 14,019
Income taxes payable 362,500 295
Accrued product warranty 256,060 291,733
Deferred revenue 699,179 526,853
------------ ------------
Total Current Liabilities 3,899,711 3,936,467
OTHER LIABILITIES :
Bank term loan, less current maturities 500,000 375,000
Deferred rent liability 311,946 341,988
Deferred revenue, less current portion 430,658 280,418
Deferred tax liabilities 443,556 404,099
------------ ------------
Total Other Liabilities 1,686,160 1,401,505
------------ ------------
TOTAL LIABILITIES 5,585,871 5,337,972
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY :
Series A Convertible Preferred stock, $.001 par value
Authorized 1,000,000 shares; none issued -- --
Common Stock, $.001 par value
Authorized 20,000,000 shares;
issued 11,067,029 shares in March,
10,953,606 shares in June 11,067 10,954
Additional paid-in capital 9,802,729 9,753,405
Cost of common stock in treasury, none in March,
54,577 shares in June -- (112,913)
Accumulated deficit (652,673) (2,031,442)
------------ ------------
Total shareholders' equity 9,161,123 7,620,004
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 14,746,994 $ 12,957,976
============ ============
See accompanying notes to condensed consolidated financial statements.
Three Months Ended Nine Months Ended
March 31, March 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
NET SALES $ 5,371,581 $ 4,070,179 $ 15,247,732 $ 13,140,444
COST OF GOODS SOLD:
Cost of goods sold, excluding depreciation
and amortization 2,182,348 1,981,371 6,260,166 6,514,070
Depreciation and amortization 128,979 66,629 380,747 200,845
------------ ------------ ------------ ------------
Total cost of goods sold 2,311,327 2,048,000 6,640,913 6,714,915
------------ ------------ ------------ ------------
GROSS PROFIT 3,060,254 2,022,179 8,606,819 6,425,529
OTHER COSTS AND EXPENSES:
Selling, general and administrative, excluding
depreciation and amortization, loss from
sublease and moving expense,
and impact of variable plan accounting 2,162,035 1,818,132 6,091,139 5,221,622
Depreciation and amortization 58,096 71,880 163,472 197,550
Loss from sublease and moving expenses -- 528,050 -- 528,050
Impact of variable plan accounting -- 192,321 -- 238,956
------------ ------------ ------------ ------------
Total other costs and expenses 2,220,131 2,610,383 6,254,611 6,186,178
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 840,123 (588,204) 2,352,208 239,351
Interest expense, net 4,283 44,533 54,259 149,918
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 835,840 (632,737) 2,297,949 89,433
Provision (benefit) for income taxes 334,336 (176,168) 919,180 121,714
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 501,504 (456,569) 1,378,769 (32,281)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- (82,740) -- 29,161
Provision (benefit) for income taxes -- (27,783) -- 18,180
------------ ------------ ------------ ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- (54,957) -- 10,981
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 501,504 $ (511,526) $ 1,378,769 $ (21,300)
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) from continuing operations $ 0.05 $ (0.04) $ 0.13 $ (0.00)
Income (loss) from discontinued operations $ -- $ (0.01) $ -- $ 0.00
------------ ------------ ------------ ------------
Net Income (loss) $ 0.05 $ (0.05) $ 0.13 $ (0.00)
============ ============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) from continuing operations $ 0.04 $ (0.04) $ 0.12 $ (0.00)
Income (loss) from discontinued operations $ -- $ (0.01) $ -- $ 0.00
------------ ------------ ------------ ------------
Net Income (loss) $ 0.04 $ (0.05) $ 0.12 $ (0.00)
============ ============ ============ ============
WEIGHTED AVERAGE SHARES USED TO COMPUTE NET
EARNINGS (LOSS) PER SHARE
Basic 11,002,426 10,288,450 10,983,361 10,046,760
Diluted 11,635,422 10,288,450 11,481,475 10,046,760
See accompanying notes to condensed consolidated financial statements.
Common Stock Additional Total
------------------------- Paid-in Treasury Accumulated Shareholders'
Shares Amount Capital Stock Deficit Equity
----------- ----------- ----------- ----------- ----------- -------------
BALANCES, JUNE 30, 2005 10,953,606 $ 10,954 $ 9,753,405 $ (112,913) $(1,869,486) $ 7,781,960
----------- ----------- ----------- ----------- ----------- -------------
Cumulative net increase in
net loss - pre-2004 -- -- -- -- (161,956) (161,956)
----------- ----------- ----------- ----------- ----------- -------------
BALANCES, JUNE 30, 2005 (Restated) 10,953,606 $ 10,954 $ 9,753,405 $ (112,913) $(2,031,442) $ 7,620,004
Issuance of common stock for
exercise of stock warrants 150,000 150 149,850 -- -- 150,000
Issuance of common stock for
exercise of stock options 18,000 18 12,332 -- -- 12,350
Cancellation of shares held in
treasury and returned to unissued
status (54,577) (55) (112,858) 112,913 -- --
Net income -- -- -- -- 1,378,769 1,378,769
----------- ----------- ----------- ----------- ----------- -------------
BALANCES, MARCH 31, 2006 11,067,029 $ 11,067 $ 9,802,729 $ -- $ (652,673) $ 9,161,123
=========== =========== =========== =========== =========== =============
See accompanying notes to condensed consolidated financial statements.
Nine Months Ended
March 31,
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES :
Income (loss) from continuing operations $ 1,378,769 $ (32,281)
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:
Depreciation and amortization 544,219 398,395
Deferred income taxes 416,589 (238,013)
Provision for bad debts 26,729 2,969
Impact of variable plan accounting -- 238,956
Cash provided by discontinued operations -- 10,981
Non-cash compensation expense 56,934 --
Changes in operating assets and liabilities :
Accounts receivable (180,293) (931,662)
Insurance claim receivable -- 500,000
Receivable from landlord -- 200,000
Inventories (941,790) (231,824)
Prepaid expenses and other current assets (113,299) 33,646
Other assets (14,290) (21,758)
Accounts payable 287,487 (869,311)
Accrued compensation and benefits 407,583 4,483
Other accrued expenses and current liabilities 303,876 10,100
Income taxes payable 362,205 294,490
Deferred rent liability (30,042) 208,182
Deferred revenue 322,566 605,368
----------- -----------
Net cash provided by operating activities 2,827,243 182,721
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES :
Purchases of property and equipment (1,084,801) (1,327,064)
----------- -----------
Net cash used in investing activities (1,084,801) (1,327,064)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES :
Bank line of credit, net (1,620,233) (871,054)
Proceeds from bank term loan, net of repayments 175,000 500,000
Payments of other short-term debt -- (31,749)
Proceeds from issuance of common stock 162,350 1,575,654
----------- -----------
Net cash provided by (used in) financing activities (1,282,883) 1,172,851
----------- -----------
NET INCREASE IN CASH 459,559 28,508
CASH, BEGINNING OF PERIOD 611,016 666,116
----------- -----------
CASH, END OF PERIOD $ 1,070,575 $ 694,624
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION :
Interest paid $ 53,514 $ 149,651
Income taxes paid $ 58,073 $ 52,775
See accompanying notes to condensed consolidated financial statements.
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America. The condensed consolidated financial statements presented herein are unaudited but reflect all adjustments which, in our opinion, are necessary for the fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods presented. All adjustments reflected in the interim consolidated financial statements are of a normal recurring nature. You should read these condensed consolidated financial statements in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-KSB for the year ended June 30, 2005. The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three and nine months ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year.
Reclassifications
Certain prior fiscal year balances
were reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates. On an
on-going basis, we evaluate our estimates, including those related to revenue recognition,
accounts receivable, inventories, long-lived assets, warranty reserves, income taxes and
contingencies. These estimates are based on historical facts and various other assumptions
that we believe are reasonable.
As a result of new processes and controls implemented during the quarter over tax compliance and tax accounting, the Company identified errors in previously filed tax returns, for which amended returns will be filed. These errors also contributed to errors in the Company’s tax accounting for the year ended June 30, 2003 and prior years. For these periods, the Company’s tax expense was understated by $161,956.
These errors had no effect on the Company’s results of operations or cash flows for the current quarter, prior quarters in this fiscal year, or comparative periods presented for the prior fiscal year. The cumulative effect of these errors overstated the Company’s deferred tax assets by $243,974, taxes payable by $82,018, and retained earnings by $161,956 on prior balance sheets presented this year and for the years ended June 30, 2005 and 2004 in our Form 10-KSB for the year ended June 30, 2005. The affected balances have been restated in the comparative balance sheet included in this Form 10-QSB. The Company will be filing amended Form 10-QSBs for its first and second fiscal quarters ended September 30 and December 31, 2005 and an amended Form 10-KSB for the year ended June 30, 2005 to reflect the restatement. Investors should look to the revised financial information regarding the restatement in this Form 10-QSB, until the above amendments are filed.
The following table reflects the effects of the errors on previously issued financial statements:
1Q & 2Q 2006 2005 2004 2003 & Prior
-------------------------- --------------- --------------- ------------- --------------
Income tax expense no effect no effect no effect $161,956
understatement
-------------------------- --------------- --------------- ------------- --------------
Net income no effect no effect no effect $161,956
overstatement
-------------------------- --------------- --------------- ------------- --------------
Cash flows from operations no effect no effect no effect no effect
-------------------------- --------------- --------------- ------------- --------------
Ending Balance Sheet
- Deferred tax assets $243,974 $243,974 $243,974 $243,974
overstatement overstatement overstatement overstatement
- Income taxes payable * $82,018 $82,018 $82,018 $82,018
overstatement * overstatement * overstatement overstatement
- Retained earnings $161,956 $161,956 $161,956 $161,956
overstatement overstatement overstatement overstatement
-------------------------- --------------- --------------- ------------- --------------
* In the June 30, 2005 and September 30, 2005 balance sheets, Taxes payable was overstated and/or Prepaid taxes, included in the “Prepaid expenses and other current assets” caption, was understated by the aggregate $82,018 error. In all other periods presented in this table, the Company had an Income taxes payable liability, which was overstated as shown.
The following table reflects the effects of the restatement on the Company’s accumulated deficit and total shareholders’ equity:
Common Stock Additional Total
------------------------- Paid-in Treasury Accumulated Shareholders'
Shares Amount Capital Stock Deficit Equity
----------- ----------- ----------- ----------- ----------- -------------
BALANCES, JUNE 30, 2005 10,953,606 $ 10,954 $ 9,753,405 $ (112,913) $(1,869,486) $ 7,781,960
Cumulative net increase in
net loss - pre-2004 -- -- -- -- (161,956) (161,956)
----------- ----------- ----------- ----------- ----------- -------------
BALANCES, JUNE 30, 2005 (Restated) 10,953,606 $ 10,954 $ 9,753,405 $ (112,913) $(2,031,442) $ 7,620,004
=========== =========== =========== =========== =========== =============
Media Sciences International, Inc. and Subsidiaries, collectively referred to as the “Company,” manufactures and distributes supplies for workgroup color printers. Our products include solid ink sticks, color toner cartridges and other consumable items. We distribute our products through an international network of dealers and distributors. We also sell directly to end users located in the United States through programs designed to foster our supplies business, such as our INKlusive free color printer program. In May 2005, we discontinued our electronic pre-press sales and service operations conducted by our subsidiary, Cadapult Graphic Systems, Inc. (“Cadapult”) (see Note 10.) We have our corporate headquarters in New Jersey.
The Company follows the intrinsic value method of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for its employee stock options. Financial Accounting Standards Board Statement No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) permits the Company to elect to follow the intrinsic value method of APB 25 rather than the alternative fair value accounting provided under SFAS 123, but requires pro forma net income (loss) and income (loss) per share disclosures as well as various other disclosures. As a result of amendments to SFAS 123, the Company will be required to expense the fair value of employee stock options over the vesting period beginning with its quarter ending September 30, 2006. The Company has also adopted the disclosure provisions required under Financial Accounting Standards Board Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”). Under APB 25, because the exercise price of all of the Company’s stock options has equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized at the time the options were granted.
Prior to May 10, 2005, certain stock options permitted cashless exercise and were accounted for pursuant to variable plan accounting treatment. Under variable plan accounting treatment, non-cash compensation expense is increased or decreased as a result of changes in the market price of the Company’s common stock. For the three months ended March 31, 2006 there was no non-cash compensation expense or benefit and for the three months ended March 31, 2005, we recognized non-cash compensation expense of $205,601 including a $13,280 non-cash compensation expense which was included in the loss from discontinued operations. For the nine months ended March 31, 2006 there was no non-cash compensation expense or benefit and for the nine months ended March 31, 2005, non-cash compensation expense was $255,244, of which $16,288 was included in the income from discontinued operations.
On May 10, 2005, our Board of Directors of the Company rescinded the cashless exercise provisions for all of the Company’s outstanding option grants. Consequently, the Company’s stock options were no longer subject to variable plan accounting treatment after the fiscal year ended June 30, 2005.
Pro forma information regarding net income (loss) and income (loss) per common share is required by SFAS 123 and SFAS 148, and has been determined as if the Company had accounted for its employee stock options under the fair value method of those statements.
The fair values of options granted in the three and nine months ended March 31, 2006 and 2005 were estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions, respectively:
Three and Nine Months Ended
March 31,
2006 2005
-------- --------
Risk-free interest rate 4.72% 4-4.5%
Dividend yield 0.0% 0.0%
Expected common stock market price volatility factor 50-75% 9-15%
Average expected life of stock options 9 years 10 years
For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the options’ vesting periods. The Company’s pro forma information follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2006 2005 2006 2005
--------- --------- ----------- ---------
Net income (loss) as reported $ 501,504 $(511,526) $ 1,378,769 $ (21,300)
Impact of variable plan accounting, net of related
tax effects -- 159,001 -- 199,004
Stock-based employee compensation expense
under fair value method, net of related
tax effects (7,157) (14,126) (30,269) (53,627)
--------- --------- ----------- ---------
Pro forma net income (loss) $ 494,347 $(366,651) $ 1,348,500 $ 124,077
========= ========= =========== =========
Net income (loss) per common share:
Basic, as reported $0.05 $(0.05) $0.13 $(0.00)
Diluted, as reported $0.04 $(0.05) $0.12 $(0.00)
Basic and diluted, pro forma $0.04 $(0.04) $0.12 $ 0.01
NOTE 4 – INVENTORIES :
Inventories are summarized as follows:
March 31, June 30,
2006 2005
---------- ----------
Raw materials $1,589,939 $1,040,390
Finished goods 2,548,174 2,155,933
---------- ----------
$4,138,113 $3,196,323
========== ==========
The Company’s borrowings consisted of the following:
March 31, June 30,
2006 2005
---------- ----------
Short-term debt:
Revolving line-of-credit with bank $ -- $1,620,233
Current maturities of note payable to bank 150,000 100,000
---------- ----------
$ 150,000 $1,720,233
========== ==========
Long-term debt:
Note payable to bank, less current maturities $ 500,000 $ 375,000
========== ==========
We have a revolving line of credit which provides for maximum borrowings of $3 million. As of March 31, 2006, we had no outstanding balance under this line. In connection with the negotiation of this facility during 2004, we granted a security interest in all of our assets. Borrowings through January 23, 2006 bore interest at a rate of 0.75% over the bank’s Prime Rate. On January 23, 2006, we entered into an Amended and Restated Committed Line of Credit Note, and an Amendment to Loan Documents (collectively, the “Amendments”). The Amendments reduced the interest rate by 0.75% to the bank’s Prime Rate, and extended the maturity date by one year to November 30, 2007. The Amendments also modified certain financial covenants, which are described below.
On March 17, 2006, we entered into a five-year term note with our bank in the amount of $0.25 million that bears interest at a fixed rate of 7.75%, and requires monthly repayments of principal of $4,167. The proceeds were used to finance the purchase of certain long-lived manufacturing property and equipment. The note is cross collateralized and contains cross default provisions with the revolving line of credit.
On July 27, 2005, we entered into an equipment lease line of credit with $1 million in availability with the bank. Borrowings bear interest at a rate of approximately 1% over the bank’s Prime Rate, with terms of three to seven years. The bank will hold title to the equipment leased under the line of credit. Any unutilized balance on the line of credit expires on November 30, 2006. In December 2005, we entered into an operating lease under this line, reducing the availability under the line by $228,682. This lease requires monthly rent payments of $3,453, for 72 months.
In March 2005, we entered into a five-year term note with our bank in the amount of $0.5 million that bears interest at a fixed rate of 6.5%, and requires monthly repayments of principal of $8,333. At March 31, 2006, this note had a remaining principal balance of $0.4 million. The proceeds were used to finance the leasehold improvements to our Oakland facility. The note is cross collateralized and contains cross default provisions with the revolving line of credit.
Both the amended revolving line-of-credit and the five-year term notes with the bank are subject to two amended financial covenants as follows :
| (a) The Company will maintain, as of the end of each fiscal quarter, a ratio of Funded Debt to EBITDA of not more than 2.50 to 1.00, measured on a rolling four quarter basis commencing with quarter ending June 30, 2005. |
| (b) The Company will maintain, as of the end of each fiscal quarter, a ratio of EBITDA to Fixed Charge (“EBITDA to Fixed Charge”) of more than 1.00 to 1.00, measured on a rolling four quarter basis commencing with quarter ending June 30, 2006. (Measurement will be on a six month basis for quarter ended March 31, 2006 and a nine month basis for quarter ending March 31, 2006). |
| As used herein: |
| “CPLTD” means the scheduled payments of principal on all indebtedness for borrowed money having an original term of more than one year (including but not limited to amortization of capitalized lease obligations), as shown on the Company’s financial statements as of one year prior to the date of determination. |
| “EBITDA” means net income plus interest expense plus income tax expense plus depreciation plus amortization. |
| “EBITDA to Fixed Charge” means (i) EBITDA minus Unfunded Capital Expenditures divided by (ii) taxes actually paid plus CPLTD and interest expense. |
| “Funded Debt” means all borrowed debt including senior borrowed debt and subordinated debt. |
| “Unfunded Capital Expenditures” represents the difference between actual capital expenditures and term financing, the proceeds of which were used to purchase such capital expenditures. In effect, this represents capital expenditures which were purchased with operating cash flow. |
At no time since the inception of this loan agreement has the Company been in violation of these covenants.
Basic earnings (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings (loss) per common share is computed using the weighted average number of common shares outstanding as adjusted for the incremental shares attributed to outstanding options and warrants to purchase common stock, and other potentially dilutive securities.
The following table sets forth the computation of the basic and diluted earnings (loss) per common share from continuing operations, discontinued operations, and net income (loss):
Three Months Ended Nine Months Ended
March 31, March 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Numerator for basic and diluted:
Income (loss) from continuing operations $ 501,504 $ (456,569) $ 1,378,769 $ (32,281)
Income (loss) from discontinued operations -- (54,957) -- 10,981
------------ ------------ ------------ ------------
Net Income (loss) $ 501,504 $ (511,526) $ 1,378,769 $ (21,300)
============ ============ ============ ============
Denominator :
Denominator for basic earnings (loss) per
common share - weighted average shares 11,002,426 10,288,450 10,983,361 10,046,760
Effect of dilutive securities - stock
options and warrants 632,996 -- 498,114 --
------------ ------------ ------------ ------------
Denominator for diluted earnings (loss)
per common share - adjusted weighted
average shares and assumed conversions 11,635,422 10,288,450 11,481,475 10,046,760
============ ============ ============ ============
Basic earnings (loss) per share
Income (loss) from continuing operations $ 0.05 $ (0.04) $ 0.13 $ (0.00)
Income (loss) from discontinued operations $ -- $ (0.01) $ -- $ 0.00
------------ ------------ ------------ ------------
Net Income (loss) $ 0.05 $ (0.05) $ 0.13 $ (0.00)
============ ============ ============ ============
Diluted earnings (loss) per share
Income (loss) from continuing operations $ 0.04 $ (0.04) $ 0.12 $ (0.00)
Income (loss) from discontinued operations $ -- $ (0.01) $ -- $ 0.00
------------ ------------ ------------ ------------
Net Income (loss) $ 0.04 $ (0.05) $ 0.12 $ (0.00)
============ ============ ============ ============
The following warrants and options to purchase common stock were excluded from the computation of diluted income (loss) per common share from continuing operations and net income per common share for the three and nine months ended March 31, 2006 and 2005 because they were anti-dilutive for those periods:
Three Months Ended Nine Months Ended
March 31, March 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Anti-dilutive warrants and options 41,200 1,248,641 97,200 1,248,641
The Company provides a warranty for all of its consumable supply products and for its INKlusive printer program. The Company’s warranty stipulates that it will pay reasonable and customary charges for the repair of a printer needing service as a result of using the Company’s products. The Company estimates the costs that may be incurred and records a liability in the amount of such costs at the time product revenue is recognized. Factors that may affect the warranty include the number of units shipped to customers, historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of the recorded warranty liability and adjusts the amount as necessary. These expenses are classified as selling, general and administrative costs.
Changes in accrued product warranty for the three and nine months ended March 31, 2006 and 2005 are as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
2006 2005 2006 2005
------------ ------------ ------------ ------------
Warranty reserve at the beginning of the period $ 275,268 $ 339,382 $ 291,733 $ 340,592
Warranties accrued during the period 200,321 272,686 696,833 848,159
Warranties settled during the period (219,529) (296,357) (732,506) (873,040)
------------ ------------ ------------ ------------
Net change in warranty reserve (19,208) (23,671) (35,673) (24,881)
Warranty reserve at March 31, $ 256,060 $ 315,711 $ 256,060 $ 315,711
============ ============ ============ ============
Engineering and product development costs, which consist of salaries and related benefit costs of our technical staff, as well as product development costs, including conceptual formulation, design and testing of product alternatives, and construction of prototypes, are expensed as incurred. For the three months ended March 31, 2006 and 2005, engineering and product development costs were approximately $0.19 million and $0.15 million, respectively. For the nine months ended March 31, 2006 and 2005, engineering and product development costs were approximately $0.54 million and $0.37 million, respectively.
The Company accounts for advertising costs in accordance with Statement of Position 93-7, “Reporting on Advertising Costs.” Advertising expenses are deferred until first use of the advertising. Deferred advertising costs at March 31, 2006 and 2005 totaled approximately $0.01 million and $0.05 million, respectively. Advertising expense for the three months ended March 31, 2006 and 2005 amounted to approximately $0.17 million and $0.24 million, respectively. Advertising expense for the nine months ended March 31, 2006 and 2005 amounted to approximately $0.58 million and $0.69 million, respectively.
In a prior year (May 2005), a decision was made to cease certain sales and service operations under Cadapult. Specifically, the Company ceased all electronic pre-press sales and service operations and the service operations were sold on May 7, 2005. Accordingly, the results of operations of the electronic pre-press sales and service operations have been reclassified and are included in discontinued operations for the three and nine months ended March 31, 2005. Sales and service revenues from the discontinued operations for the three and nine months ended March 31, 2005 were $0.26 and $1.15 million, respectively. The pre-tax income (loss) from discontinued operations for the three and nine months ended March 31, 2005 was $(0.08) and $0.03 million, respectively.
Cadapult continues to sell Media Sciences supplies and the INKlusive free color printer program to end users. Since this is essentially the same business as the rest of the Company’s continuing operations, and as a result of the presentation of Cadapult’s electronic pre-press sales and service operations as discontinued operations, segment information is no longer presented.
In the nine months ended March 31, 2006, pursuant to the employment contract with the Company’s Chief Executive Officer, dated July 1, 2003, the Company incurred a non-cash compensation expense of $56,934.
On February 7, 2006, the Board of Directors voted to cancel 54,577 shares of treasury stock. This action reduced the number of shares outstanding by 54,577 and had no impact on total shareholders’ equity. The treasury stock was cancelled and returned to unissued status.
Our disclosure and analysis in this report contain forward-looking information, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, about our financial results and estimates, business prospects and products in development that involve substantial risks and uncertainties. You can identify these statements by the fact that they do not relate strictly to historic or current facts. These forward-looking statements use terms such as “believes,” “expects,” “may”, “will,” “should,” “anticipates,” “estimate,” “project,” “plan,” or “forecast” or other words of similar meaning relating to future operating or financial performance or by discussions of strategy that involve risks and uncertainties. From time to time, we also may make oral or written forward-looking statements in other materials we release to the public. These forward-looking statements are based on many assumptions and factors, and are subject to many conditions, including, but not limited to, our continuing ability to obtain additional financing, dependence on contracts with suppliers and major customers, competitive pricing for our products, demand for our products, changing technology, our introduction of new products, industry conditions, anticipated future revenues and results of operations, retention of key officers, management or employees, prospective business ventures or combinations and their potential effects on our business. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements are made based upon management’s current expectations and beliefs concerning future developments and their potential effects upon our business. We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. We cannot predict whether future developments affecting us will be those anticipated by management, and there are a number of factors that could adversely affect our future operating results or cause our actual results to differ materially from the estimates or expectations reflected in such forward-looking statements. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise.
You should read the following discussion and analysis in conjunction with the information set forth in the unaudited financial statements and notes thereto, included elsewhere herein, and the audited financial statements and the notes thereto, included in our Form 10-KSB for the year ended June 30, 2005, filed September 13, 2005.
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), “Share-Based Payment”, which amends FASB Statement No. 123 and will be effective for us for the fiscal year beginning July 1, 2006. The new standard will require us to expense employee stock options and other share-based payments over the service period. The new standard may be adopted in one of three ways – the modified prospective transition method, a variation of the modified prospective transition method or the modified retrospective transition method. We are currently evaluating how we will adopt the standard and evaluating the effect that the adoption of SFAS 123(R) will have on our financial position and results of operations, although it is likely that we will have to recognize additional compensation expense in the periods after adoption.
RESULTS OF OPERATIONS
FOR THE THREE AND NINE
MONTHS ENDED MARCH 31, 2006 AND 2005
Sales. Our consolidated sales from continuing operations for the three months ended March 31, 2006 compared to the same period in 2005, increased approximately 32% to $5.4 million from $4.1 million. Sales of solid ink sticks increased approximately 23%, while sales of color toner cartridges increased by approximately 68%. Our consolidated sales from continuing operations for the nine months ended March 31, 2006 compared to the same period in 2005, increased approximately 16% to $15.2 million from $13.1 million. Sales of solid ink sticks increased approximately 14%, while sales of color toner cartridges increased by approximately 36%. Direct sales of supplies through our Cadapult subsidiary for the three and nine months ended March 31, 2006 decreased by approximately 22% and 42%, respectively, as we focused on building our sales through our distribution channels.
In late September 2005, we started shipping color toner cartridges for the Oki 5000 series of color printers. In late December 2005, we started shipping solid ink sticks for the new Xerox Phaser 8500 and 8550, and color toner cartridges for the Ricoh 3800 and related engines. In mid-March 2006, we started shipping universal, high capacity cartridges for use in Xerox Phaser 7300, Oki 9300 and 9500, and Konica 7830 office color printers. In early April 2006, we started shipping high capacity cartridges for use in Xerox Phaser 6250, Konica Minolta magicolor 3300, Epson AcuLaser C4100 and Brother HL-4200CN office color printers, the first independently manufactured, new-build, office color toner cartridges featuring chip technology. As a result of these new products and current sales trends of existing products, we expect the growth of color toner cartridge sales to continue to outpace the growth of our solid inks for the remainder of fiscal 2006.
Gross Profit. The consolidated gross profit for the three months ended March 31, 2006 was $3.1 million, or approximately 57% of sales, as compared to $2.0 million, or approximately 50% of sales, for the three months ended March 31, 2005. The consolidated gross profit for the nine months ended March 31, 2006 was $8.6 million, or approximately 56% of sales, as compared to $6.4 million, or approximately 49% of sales, for the nine months ended March 31, 2005. We benefited from margin expansion in both our solid ink and color toner cartridge lines. Our solid ink margins increased due to manufacturing efficiencies, which more than offset certain increases in our raw material costs. Our color toner cartridge margins expanded significantly due to the mix of products making up our color toner cartridge sales. While our margins can and do vary due to sales product mix, we believe that they will remain fairly consistent with our current results throughout the remainder of fiscal 2006.
Selling, General and Administrative. Consolidated selling, general and administrative expenses for the three months ended March 31, 2006 increased to $2.2 million, or 40% of sales, from $1.8 million, or 45% of sales, exclusive of non-recurring charges, for the three months ended March 31, 2005. Consolidated selling, general and administrative expenses for the nine months ended March 31, 2006 increased to $6.1 million, or 40% of sales, from $5.2 million, or 40% of sales, exclusive of non-recurring charges, for the nine months ended March 31, 2005. These increases are attributed to additional compensation and benefits expense and research and development expense, partially offset by decreased warranty expense. For the three and nine months ended March 31, 2005, non-cash compensation expenses of $0.19 million and $0.24 million, respectively, were incurred to reflect the impact of variable plan accounting treatment. These have been shown as a separate line item on our income statement. Since our stock options are no longer subject to variable plan accounting treatment, we do not anticipate further non-cash compensation charges until our adoption of SFAS 123(R). While we intend to increase expenditures in advertising, marketing, research and development and general payroll costs, we expect our selling, general and administrative expenses to remain relatively consistent as a percentage of sales.
For comparability, the non-recurring costs of moving the Company’s operations and an impairment charge associated with vacating and subleasing the prior facility were excluded from the above analysis for the three and nine months ended March 31, 2005. These non-recurring charges, shown as separate line items, were approximately $0.53 million for both the three and nine month periods ended March 31, 2005.
Depreciation and Amortization. For the three months ended March 31, 2006 compared to the same period in 2005, our depreciation and amortization expense increased to $0.19 million, of which $0.13 million was included in cost of goods sold, from $0.14 million, of which $0.07 million was included in cost of goods sold. For the nine months ended March 31, 2006 compared to the same period in 2005, our depreciation and amortization expense increased to $0.54 million, of which $0.38 million was included in cost of goods sold, from $0.40 million, of which $0.20 million was included in cost of goods sold. The year-over-year increase in depreciation and amortization was primarily due to leasehold improvements related to our new facility, additions to our manufacturing equipment, and placing in service capitalized tool and die costs associated with the launch of new color toner cartridge models, discussed above in Sales. There was no amortization expense associated with intangibles for the three or nine months ended March 31, 2006. For the three and nine months ended March 31, 2005, amortization of intangibles was $1,062 and $4,750, respectively.
Interest Expense, Net. For the three months ended March 31, 2006 compared to the same period in 2005, our net interest expense decreased to $0.004 million from $0.045 million. For the nine months ended March 31, 2006 compared to the same period in 2005, our net interest expense decreased to $0.054 million from $0.150 million. The year-over-year decrease in net interest expense was due to year-over-year retirement of debt funded by cash flows generated from operations.
Income Taxes. For the three months ended March 31, 2006, we recorded an income tax expense from continuing operations of $0.33 million as compared to an income tax benefit from continuing operations of $0.18 million for the three months ended March 31, 2005. For the nine months ended March 31, 2006, we recorded an income tax expense from continuing operations of $0.92 million as compared to an income tax expense from continuing operations of $0.12 million for the nine months ended March 31, 2005. An effective tax rate of 40% was used for the three and nine months ended March 31, 2006, and 28% and 118% was used for the three and nine months ended March 31, 2005, respectively. The effective aggregate state and federal tax rate for the periods ended March 31, 2005 differed from that for the periods ended March 31, 2006 due primarily to the impact of variable plan accounting in 2005.
Income (Loss) from Continuing Operations. For the three months ended March 31, 2006, we earned $0.5 million from continuing operations, or $0.05 per share basic and $0.04 per share diluted, as compared to the three months ended March 31, 2005, where we incurred a loss of $0.5 million from continuing operations, or $(0.04) per share basic and diluted. For the nine months ended March 31, 2006, we earned $1.4 million from continuing operations, or $0.13 per share basic and $0.12 per share diluted, as compared to the nine months ended March 31, 2005, where we incurred a loss of $0.03 million, or $0.00 per share basic and diluted.
Income (Loss) from Discontinued Operations. In May 2005, we ceased and sold certain sales operations under Cadapult. Specifically, we ceased all electronic pre-press equipment sales and service operations. The results of operations for that line of business are classified as a discontinued operation.
Sales and service revenues from the discontinued operations for the three and nine months ended March 31, 2005 were $0.26 million and $1.15 million, respectively. Income (loss), net of tax from discontinued operations, for the three and nine months ended March 31, 2005 was $(0.055) million and $0.011 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We experienced positive cash flows from operating activities for the nine months ended March 31, 2006. Cash flows from operating activities of $2.8 million resulted primarily from income from continuing operations of $1.4 million, non-cash charges of $1.0 million, an increase in accounts payable of $0.29 million, an increase in accrued expenses and other liabilities (including compensation and benefits) of $0.71 million, an increase in income taxes payable of $0.36 million, and an increase in deferred revenue of $0.32 million, offset by increases in accounts receivable of $0.18 million, inventories of $0.94 million, and an increase in prepaid expenses and other current assets of $0.11 million.
Accounts receivable increased over the levels at June 30, 2005 due to the noted increase in year-over-year sales. At March 31, 2006, 98% of gross receivables were aged at less than 60 days, and approximately $0.06 million (2%) of gross receivables were aged at greater than 90 days.
Under the Company’s INKlusive program, a customer commits to purchase a fixed quantity of supplies from the Company over a two or three year period. These supplies are automatically shipped to the customer on a regular basis. In exchange, and through a financing partner, the Company provides the customer with a color printer at no additional charge. Under our agreement with the financing company, at the time of placement of the INKlusive printer, we are paid in full for the printer and the two or three years of supplies. The Company recognizes the revenue from the supplies as they are shipped over the term of the INKlusive agreement. Deferred revenue consists principally of billings on INKlusive contracts prior to shipping supplies to fulfill those contracts.
Cash flow generated by the INKlusive program is a function of the net number of printer placements in the program. During the three and nine months ended March 31, 2006, there was an increase in the net number of printers placed in the program. This resulted in an increase in deferred revenues during those periods, and therefore contributed positively to our cash flow.
The cash we used in investing activities for the nine months ended March 31, 2006 included the purchase of equipment and tooling in the amount of $1.08 million. In addition to these expenditures, we plan additional capital expenditures of approximately $0.25 million through June 30, 2006, which we plan to finance through internal cash generation. We plan to rent additional equipment through operating leases, under our equipment lease line of credit.
We have a revolving line of credit which provides for maximum borrowings of $3 million. As of March 31, 2006, we had no outstanding balance under this line. In connection with the negotiation of this facility during 2004, we granted a security interest in all of our assets. Borrowings through January 23, 2006 bore interest at a rate of 0.75% over the bank’s Prime Rate. On January 23, 2006, we entered into an Amended and Restated Committed Line of Credit Note, and an Amendment to Loan Documents (collectively, the “Amendments”). The Amendments reduced the interest rate by 0.75% to the bank’s Prime Rate, and extended the maturity date by one year to November 30, 2007. The Amendments also modified certain financial covenants, which are described below.
On March 17, 2006, we entered into a five-year term note with our bank in the amount of $0.25 million that bears interest at a fixed rate of 7.75%, and requires monthly repayments of principal of $4,167. The proceeds were used to finance the purchase of certain long-lived manufacturing property and equipment. The note is cross collateralized and contains cross default provisions with the revolving line of credit.
On July 27, 2005, we entered into an equipment lease line of credit with $1 million in availability with the bank. Borrowings bear interest at a rate of approximately 1% over the bank’s Prime Rate, with terms of three to seven years. The bank will hold title to the equipment leased under the line of credit. Any unutilized balance on the line of credit expires on November 30, 2006. In December 2005, we entered into an operating lease under this line, reducing the availability under the line by $228,682. This lease requires monthly rent payments of $3,453, for 72 months.
In March 2005, we entered into a five-year term note with our bank in the amount of $0.5 million that bears interest at a fixed rate of 6.5%, and requires monthly repayments of principal of $8,333. The proceeds were used to finance the leasehold improvements to our new facility. The note is cross collateralized and contains cross default provisions with the revolving line of credit.
Both the amended revolving line-of-credit and the five-year term notes with the bank are subject to two amended financial covenants as follows :
| (a) The Company will maintain, as of the end of each fiscal quarter, a ratio of Funded Debt to EBITDA of not more than 2.50 to 1.00, measured on a rolling four quarter basis commencing with quarter ending June 30, 2005. |
| (b) The Company will maintain, as of the end of each fiscal quarter, a ratio of EBITDA to Fixed Charge (“EBITDA to Fixed Charge”) of more than 1.00 to 1.00, measured on a rolling four quarter basis commencing with quarter ending June 30, 2006. (Measurement will be on a six month basis for quarter ended March 31, 2006 and a nine month basis for quarter ending March 31, 2006). |
| As used herein: |
| “CPLTD” means the scheduled payments of principal on all indebtedness for borrowed money having an original term of more than one year (including but not limited to amortization of capitalized lease obligations), as shown on the Company’s financial statements as of one year prior to the date of determination. |
| “EBITDA” means net income plus interest expense plus income tax expense plus depreciation plus amortization. |
| “EBITDA to Fixed Charge” means (i) EBITDA minus Unfunded Capital Expenditures divided by (ii) taxes actually paid plus CPLTD and interest expense. |
| “Funded Debt” means all borrowed debt including senior borrowed debt and subordinated debt. |
| “Unfunded Capital Expenditures” represents the difference between actual capital expenditures and term financing, the proceeds of which were used to purchase such capital expenditures. In effect, this represents capital expenditures which were purchased with operating cash flow. |
At no time since the inception of this loan agreement has the Company been in violation of these covenants.
We believe that we will be able to fund our cash requirements for the foreseeable future through a combination of internal cash generation, the revolving line of credit and the lease line of credit.
We have been subject to several significant increases in raw materials costs over the last 18 months, primarily resulting from increases in energy costs. We have embarked on a program to improve our procurement of raw materials and to optimize our processes to increase our manufacturing yields. Through these efforts we have been able to offset the increases in raw material costs. We believe we will be able to offset any near-term inflation in operating costs through increased productivity.
While we do not experience any significant quarter to quarter seasonality, we do experience some seasonality within certain quarters.
The Company’s management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
There have not been any changes, except as described below, in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s management, including its Chief Executive Officer and its Chief Financial Officer, does not expect that disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud, even as the same are improved to address any deficiencies. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Because of the inherent limitations of a cost-effective control system, misstatements due to error or fraud may occur and not be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
On March 15, 2006, the Company hired a Chief Financial Officer, with substantial Sarbanes-Oxley compliance experience. With the hiring of its Chief Financial Officer, the Company is developing a detailed plan to address compliance with Section 404 of the Sarbanes-Oxley Act of 2002. In mid-March, the Company initiated and since then has made progress on several projects focused on assessing potential risks, better understanding and documenting its processes, and implementing certain preventative or detective controls to address key risks. These are important first steps toward designing and implementing an effective compliance plan. As a non-accelerated filer with a fiscal year end of June 30, the Company must first begin to comply with the requirements of Section 404 for the fiscal year ending June 30, 2008.
As part of its risk assessment, the Company undertook an extensive review of its tax compliance efforts and the controls associated with its tax accounting process. As a result of new processes and controls implemented during the quarter, the Company identified errors in previously filed tax returns that contributed to errors in the Company’s tax accounting for the years ended June 30, 2003 and prior years. These errors and their effects are discussed further in Note 1A to the condensed consolidated financial statements contained in Item 1 of Part 1 of this quarterly report on Form 10-QSB. In order to ensure continued independence with its registered public accounting firm, the Company on April 10, 2006 engaged Cipolla Sziklay, LLC (an accounting firm not affiliated with the Company’s independent registered public accounting firm) to provide tax services.
In the period up to and following March 31, the Company has implemented additional procedures and controls in purchasing, receiving, and inventory management. The Company is in the process of recruiting additional personnel to further segregate certain duties. We will continue to conduct a thorough risk assessment, document our processes, and where necessary, enhance our system of internal controls. The Company is committed to the continued improvement of its control systems and financial reporting process.
The shareholders of the Company voted on four items at the Annual Meeting of Shareholders held on January 19, 2006:
| 1. | the election of seven directors to serve until the next annual meeting and until their successors have been duly elected and qualified; |
| 2. | ratification of a proposal to amend the Company’s 1998 Incentive Plan to increase the number of shares of common stock reserved for issuance from 500,000 to 1,000,000; |
| 3. | the ratification of the issuances of employment-issued stock options for 200,000 shares of common stock; and |
| 4. | the ratification of the selection of J.H. Cohn LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2006. |
The total shares voted at the meeting was 7,565,515. The nominees for directors were elected based upon the following votes:
Withheld
For Authority
--------- ---------
1. Election of directors
Michael W. Levin 7,563,015 2,500
Frances Blanco 7,459,815 105,700
Paul C. Baker 7,562,615 2,900
Edwin Ruzinsky 7,562,615 2,900
Donald Gunn 7,459,815 105,700
Henry Royer 7,562,615 2,900
Alan Bazaar 7,563,015 2,500
The voting results on the other proposals were:
For Against Abstentions Non-Votes
--------- --------- ----------- ---------
2. Ratification of amendment to 1998 Incentive 4,563,347 128,966 895 2,872,307
Plan
3. Ratification of stock option issuances 4,608,426 83,650 1,132 2,872,307
4. Ratification of independent registered 7,559,220 5,800 495 0
public accounting firm
On March 17, 2006, we entered into a five-year term note with our bank in the amount of $0.25 million that bears interest at a fixed rate of 7.75%, and requires monthly repayments of principal of $4,167. The proceeds were used to finance the purchase of certain long-lived manufacturing property and equipment. The note is cross collateralized and contains cross default provisions with the revolving line of credit.
We have a revolving line of credit which provides for maximum borrowings of $3 million. On January 23, 2006, we entered into an Amended and Restated Committed Line of Credit Note, and an Amendment to Loan Documents (collectively, the “Amendments”). The Amendments reduced the interest rate by 0.75% to the bank’s Prime Rate, and extended the maturity date by one year to November 30, 2007. The Amendments also modified certain financial covenants, which are described below.
Both the amended revolving line-of-credit and the five-year term note with the bank entered in March 2005 are subject to two amended financial covenants as follows :
| (a) The Company will maintain, as of the end of each fiscal quarter, a ratio of Funded Debt to EBITDA of not more than 2.50 to 1.00, measured on a rolling four quarter basis commencing with quarter ending June 30, 2005. |
| (b) The Company will maintain, as of the end of each fiscal quarter, a ratio of EBITDA to Fixed Charge (“EBITDA to Fixed Charge”) of more than 1.00 to 1.00, measured on a rolling four quarter basis commencing with quarter ending June 30, 2006. (Measurement will be on a six month basis for quarter ended March 31, 2006 and a nine month basis for quarter ending March 31, 2006). |
| As used herein: |
| “CPLTD” means the scheduled payments of principal on all indebtedness for borrowed money having an original term of more than one year (including but not limited to amortization of capitalized lease obligations), as shown on the Company’s financial statements as of one year prior to the date of determination. |
| “EBITDA” means net income plus interest expense plus income tax expense plus depreciation plus amortization. |
| “EBITDA to Fixed Charge” means (i) EBITDA minus Unfunded Capital Expenditures divided by (ii) taxes actually paid plus CPLTD and interest expense. |
| “EBITDA “Funded Debt” means all borrowed debt including senior borrowed debt and subordinated debt. |
| “Unfunded Capital Expenditures” represents the difference between actual capital expenditures and term financing, the proceeds of which were used to purchase such capital expenditures. In effect, this represents capital expenditures which were purchased with operating cash flow. |
On February 7, 2006, the Board of Directors voted to cancel 54,577 shares of treasury stock. This action reduces the number of shares outstanding by 54,577 and has no impact on total shareholders’ equity. The treasury stock was cancelled and returned to unissued status.
The following exhibits are filed with this report:
|
Exhibit Number
Exhibit 10.1 Exhibit 10.2 Exhibit 10.3 Exhibit 10.4* Exhibit 10.5 Exhibit 11* Exhibit 31.1* Exhibit 31.2* Exhibit 32.1* Exhibit 32.2* _____ * Filed herewith. |
Description of Exhibit
Amendment to Loan Documents, dated as of January 23, 2006 (Incorporated by reference to Exhibit 10.1 of Form 10-QSB filed on February 9, 2006) Amended and Restated Committed Line of Credit Note, dated January 23, 2006 (Incorporated by reference to Exhibit 10.2 of Form 10-QSB filed on February 9, 2006) Guaranty and Suretyship Agreement, dated January 23, 2006 (Incorporated by reference to Exhibit 10.3 of Form 10-QSB filed on February 9, 2006) Term Note with PNC Bank, dated March 17, 2006, with Security Agreement and Guarantee Agreement with Donald Gunn, dated March 31, 2006 (Incorporated by reference to Exhibit 10.1 of Form 8-K/A filed on April 24, 2006) Statement re: computation of per share earnings is hereby incorporated by reference to "Financial Statements" of Part I - Financial Information, Item 1 - Financial Statements, contained in this Form 10-QSB. Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350 Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350 |
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MEDIA SCIENCES INTERNATIONAL, INC. |
| Dated: May 15, 2006 | By: /s/ Michael W. Levin
Michael W. Levin Chief Executive Officer and President |
| Dated: May 15, 2006 | By: /s/ Kevan D. Bloomgren
Kevan D. Bloomgren Chief Financial Officer |