SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q/A
Amendment No. 1
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2002
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to ________
Commission file number 1-13469
MediaBay, Inc.
(Exact name of Registrant as Specified in its Charter)
Florida 65-0429858
(State or other jurisdiction of (I.R.S. Employment
incorporation or organization) Identification No.)
2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 539-9528
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirement for the past 90 days.
Yes |X| No |_|
As of May 10, 2002, there were 13,882,852 shares of the Issuer's Common Stock
outstanding.
1
Explanatory Note
This Amendment No. 1 to MediaBay, Inc.'s Quarterly Report on Form 10-Q/A
for the quarterly period ended March 31, 2002 includes unaudited restated
condensed consolidated financial statements at March 31, 2002 and December 31,
2001 and for the three months ended March 31, 2002 and March 31, 2001. The
Company is restating its previously issued condensed consolidated financial
statements to correct errors in the accounting treatment relating to previously
disclosed financing transactions as described in Note 2 (Restatement) to the
Notes to the Financial Statements.
This Form 10-Q/A amends and restates Items 1 and 2 of Part I and Item 6
of Part II of the original Form 10-Q only for the effects of the restatement,
and no other information included in the original Form 10-Q is amended hereby.
The Company did not amend its Annual Reports on Form 10-K or Quarterly
Reports on Form 10-Q for periods affected by the restatement that ended on or
prior to December 31, 2001, and the financial statements and related financial
information contained in such reports should no longer be relied upon.
2
MEDIABAY, INC.
Quarter ended March 31, 2002
Form 10-Q/A
Index
Page
----
PART I: Financial Information
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at March 31, 2002 and
December 31, 2001, as restated (unaudited) 4
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2002 and 2001, as restated (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and 2001, as restated (unaudited) 6
Notes to Condensed Consolidated Financial Statements (unaudited) 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3: Quantitative and Qualitative Disclosures of Market Risk 18
PART II: Other Information
Item 2: Changes in Securities and Use of Proceeds 18
Item 6: Exhibits and Reports on Form 8-K 19
Signatures 20
Certification of Principal Executive Officer 21
Certification of Principal Financial Officer 22
3
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
MEDIABAY, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
March 31, December 31,
2002 2001
------------- -------------
Assets (As restated, (As restated,
see Note 2) see Note 2)
Current assets:
Cash and cash equivalents $ 23 $ 64
Accounts receivable, net of allowances for sales returns and
doubtful accounts of $3,573 and $4,539 at March 31, 2002
and December 31, 2001, respectively 4,230 4,798
Inventory 4,098 4,061
Prepaid expenses and other current assets 1,417 1,628
Royalty advances 769 773
-------- --------
Total current assets 10,537 11,324
Fixed assets, net of accumulated depreciation of $505 and $450 at
March 31, 2002 and December 31, 2001, respectively 483 467
Deferred member acquisition costs 6,221 4,868
Deferred income taxes 16,774 16,852
Other intangibles, net 1,861 2,292
Goodwill 9,879 8,649
-------- --------
$ 45,755 $ 44,452
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 14,704 $ 13,891
Current portion - long-term debt 9,047 1,600
-------- --------
Total current liabilities 23,751 15,491
-------- --------
Long-term debt, net of original issue discount of $1,344 and $1,215
at March 31, 2002 and December 31, 2001, respectively 6,640 15,849
-------- --------
Common stock subject to contingent put rights 4,550 4,550
Preferred stock, no par value, authorized 5,000,000 shares; 25,000
shares and no shares issued and outstanding at March 31, 2002
and December 31, 2001, respectively 2,500 --
Common stock; no par value, authorized 150,000,000 shares; issued
and outstanding 13,875,602 at March 31, 2002 and 13,861,866 at
December 31, 2001, respectively 93,468 93,468
Contributed capital 8,241 7,730
Accumulated deficit (93,395) (92,636)
-------- --------
Total stockholders' equity 10,814 8,562
-------- --------
$ 45,755 $ 44,452
======== ========
See accompanying notes to condensed consolidated financial statements.
4
MEDIABAY, INC.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended
March 31,
2002 2001
------------- -------------
(As restated, (As restated,
see Note 2) see Note 2)
Sales, net of returns, discounts and allowances of
$2,131 and $3,309 for the three months ended
March 31, 2002 and 2001, respectively $ 9,480 $ 9,601
Cost of sales 4,289 3,816
------- --------
Gross profit 5,191 5,785
Expenses:
Advertising and promotion 2,188 3,186
General and administrative 2,487 2,962
Depreciation and amortization 498 1,492
------- --------
Operating profit (loss) 18 (1,855)
Interest expense 732 554
------- --------
Loss before income taxes (714) (2,409)
Benefit for income taxes -- 13,000
------- --------
Net (loss) income (714) 10,591
Dividends on preferred stock 45 --
------- --------
Net (loss) income applicable to common shares $ (759) $ 10,591
======= ========
Basic and diluted (loss) earnings per common share:
Basic (loss) earnings per common share $ (.05) $ .77
======= ========
Diluted (loss) earnings per common share $ (.05) $ .58
======= ========
See accompanying notes to condensed consolidated financial statements.
5
MEDIABAY, INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three months ended
March 31,
2002 2001
------------- -------------
(As restated, (As restated,
see Note 2) see Note 2)
Cash flows from operating activities:
Net (loss) income applicable to common shares $ (759) $ 10,591
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Depreciation and amortization 498 1,492
Amortization of deferred member acquisition costs 1,264 1,961
Amortization of deferred financing costs and original issue discount 377 99
Deferred income tax benefit -- (13,000)
Changes in asset and liability accounts, net of asset acquisition:
Decrease in accounts receivable, net 567 877
Decrease (increase) in inventory 23 (571)
Decrease in prepaid expenses 293 112
Decrease (increase) in royalty advances 14 (305)
Increase in deferred member acquisition costs (2,617) (1,565)
Increase (decrease) in accounts payable and accrued expenses 555 (288)
-------- --------
Net cash provided by (used in) operating activities 215 (597)
-------- --------
Cash flows from investing activities:
Acquisition of fixed assets (77) (23)
Assets acquired, net of cash (379) --
-------- --------
Net cash used in investing activities (456) (23)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of long-term debt 500 300
Payment of long-term debt (300) --
Increase in deferred financing costs -- (91)
-------- --------
Net cash provided by financing activities 200 209
-------- --------
Net decrease in cash and cash equivalents (41) (411)
Cash and cash equivalents at beginning of period 64 498
-------- --------
Cash and cash equivalents at end of period $ 23 $ 87
======== ========
See accompanying notes to condensed consolidated financial statements.
6
MEDIABAY, INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share data)
(Unaudited)
(1) Organization
MediaBay, Inc. ("MediaBay" or the "Company"), a Florida corporation, was
formed on August 16, 1993. MediaBay is a leading spoken audio content, marketing
and publishing company, whose businesses include direct response and interactive
marketing, retail product distribution, media publishing and broadcasting.
MediaBay's content libraries include over 60,000 classic radio programs, 3,500
film and television programs and thousands of audiobooks, much of which is
proprietary. MediaBay distributes its products to its own customer database of
approximately 2.8 million names and 2.2 million e-mail addresses, in over 7,000
retail outlets and on the Internet through streaming and downloadable audio.
MediaBay's content programming can be heard on over 500 radio stations and on
the Sirius Satellite Radio service.
(2) Restatement
Subsequent to the issuance of its consolidated financial statements for
the three month period ended March 31, 2002, the Company's management determined
that amounts previously reported did not reflect fully the impact of certain
previously disclosed financing transactions undertaken by the Company from 1998
through 2001. The following discussion outlines the impact of the restatement
with respect to these transactions on the unaudited quarterly results for the
three months ended March 31, 2002 and 2001 and as of March 31, 2002 and December
31, 2001.
In December 1998, the Company obtained $15,000 of bridge financing from
its chairman, Norton Herrick ("NH"), and in connection with this financing
issued 500,000 warrants. The Company has determined that $1,905 of debt
discount, with a corresponding increase in contributed capital, should have been
recorded to reflect the relative fair value assigned to the warrants. The amount
of amortization expense not previously recorded by the Company associated with
these warrants, which has been recorded within interest expense, for the three
months ended March 31, 2002 and 2001 is $33. The remaining unamortized debt
discount as of March 31, 2002 and December 31, 2001 is $360 and $393,
respectively.
At various dates throughout 1999 and 2000, NH sold $12,016 of his original
$15,000 note to third party investors. Portions of the notes sold were
subsequently converted into common stock. TheCompany has recorded a reduction to
contributed capital in the amount of $797 to reflect the reclassification of a
portion of this debt discount to contributed capital. In addition, under a
December 31, 1998 letter agreement the Company agreed to issue up to 350,000
additional warrants to NH in the event the Company was unable to obtain
alternative financing to replace the $15,000 note by September 30, 1999. As a
result, the Company issued warrants to NH at various times throughout 1999 and
2000 with an exercise price of $8.41 per share based upon a formula set out in
the letter agreement. As the warrants are contingently issuable and reflect
compensation to NH, the Company has recorded an increase to contributed capital
of $1,027 to reflect the intrinsic value associated with these warrants.
In June 1999, the Company obtained a portion of the financing for the
acquisition of Audiobooks Direct through a bridge loan from NH in the amount of
$4,350 which was subsequently repaid in July 1999. In connection with this
financing, the Company has recorded an increase to contributed capital of $1,405
to reflect the relative fair value associated with a beneficial conversion
feature. In addition, the Company has recorded a reduction in contributed
capital of $1,124 to reflect the repurchase of the intrinsic value associated
with the beneficial conversion feature at the time the loan was repaid.
7
In connection with this bridge loan, the Company agreed under a June 11,
1998 letter agreement to issue 125,000 warrants to NH if the $4,350 bridge loan
was refinanced. The warrants were issued on September 30, 1999, following
receipt of shareholder approval, and have an exercise price of $8.41 per share
based upon a formula set out in the letter agreement. As the warrants are
contingently issuable and reflect compensation to NH, the Company has recorded
an increase to contributed capital of $378 to reflect the intrinsic value
associated with these warrants.
From December 1999 to February 2000, Evan Herrick, the son of NH and the
brother of Michael Herrick, Chief Executive Officer and a director, and Howard
Herrick, an executive vice president and a director, loaned the Company $3,000
for which he received $3,000 principal amount 9% convertible promissory notes
due December 31, 2004. The notes were originally convertible into shares of
common stock at $11.125 per share. The Company has recorded an increase to
contributed capital of $147 to reflect the intrinsic value associated with the
beneficial conversion feature of the loan.
In May 2001, the Company obtained $3,300 of financing from Huntingdon
Corporation ("HC"), a company wholly owned by NH, and in connection with this
financing issued 1,650,000 warrants. The Company has determined that an
additional debt discount of $446 and $619 should have been recorded as of March
31, 2002 and December 31, 2001, respectively, to reflect the relative fair value
assigned to the warrants and additional discount associated with a beneficial
conversion feature. In addition, the Company has recorded an increase to
contributed capital of $695 to reflect this discount and the associated tax
effects. Previously recorded debt discount of $135 and $203 associated with this
transaction has been reclassified by the Company from prepaid expenses and other
current assets to debt discount within long-term debt as of March 31, 2002 and
December 31, 2001, respectively. The amount of additional amortization expense
associated with these warrants and beneficial conversion feature, which has been
recorded within interest expense, for the three months ended March 31, 2002 is
$174.
In February 2002, the Company obtained an additional $500 of financing
from HC and issued an additional 250,000 warrants in connection with this
financing. The Company has determined that an additional $43 of debt discount
should have been recorded as of March 31, 2002 to reflect the relative fair
value assigned to the warrants and the beneficial conversion feature. In
addition, the Company has recorded a reduction to contributed capital of $7 as
of March 31, 2002 to reflect this discount and the associated tax effects.
Previously recorded debt discount of $360 associated with this transaction has
been reclassified by the Company from prepaid expenses and other current assets
to debt discount within long-term debt as of March 31, 2002. The amount of
additional amortization expense associated with these warrants and beneficial
conversion feature, which has been recorded within interest expense, for the
three months ended March 31, 2002 is $27.
The net impact of the restatement has increased the accumulated deficit by
$2,972 as of December 31, 2001.
As a result of the foregoing, the interim condensed consolidated financial
statements as of March 31, 2002 and December 31, 2001 and for the three month
periods ended March 31, 2002 and March 31, 2001 have been restated from the
amounts previously reported to reflect additional interest expense, additional
debt discount, and the impact on contributed capital and accumulated deficit. A
summary of the significant effects of the restatement is as follows:
8
For the three months ended: March 31, 2002 March 31, 2001
----------------------------- ---------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
----------- --------- ---------- --------
Interest expense $ 498 $ 732 $ 521 $ 554
Net (loss) income (480) (714) 10,624 10,591
Net (loss) income applicable to common shares (525) (759) 10,624 10,591
Basic and diluted (loss) earnings per common share:
Basic (loss) earnings per common share $ (.04) $ (.05) $ .77 $ .77
Diluted (loss) earnings per common share $ (.04) $ (.05) $ .58 $ .58
As of: March 31, 2002 December 31, 2001
----------------------------- ---------------------------
As As
Previously As Previously As
Reported Restated Reported Restated
----------- --------- ---------- --------
Prepaid expenses and other current assets $ 1,912 $ 1,417 $ 1,831 $ 1,628
Total assets 46,676 45,755 45,003 44,452
Long-term debt, net of original issue discount 7,984 6,640 17,064 15,849
Contributed capital 4,612 8,241 4,094 7,730
Accumulated deficit (90,189) (93,395) (89,664) (92,636)
Total stockholders' equity 10,391 10,814 7,898 8,562
(3) Significant Accounting Policies
Basis of Presentation
The interim unaudited condensed consolidated financial statements should
be read in conjunction with the Company's audited consolidated financial
statements contained in its Annual Report on Form 10-K. The preparation of
financial statements in accordance with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure 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 these estimates. On an
ongoing basis management reviews its estimates based on current available
information. Changes in facts and circumstances may result in revised estimates.
In the opinion of management, the interim unaudited financial statements include
all material adjustments, all of which are of a normal recurring nature,
necessary to present fairly the Company's financial position, results of
operations and cash flows for the periods presented. The results for any interim
period are not necessarily indicative of results for the entire year or any
other interim period.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
basis and operating loss and tax credit carryforwards. A valuation allowance is
provided when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in the period that includes the rate enactment date.
9
Consolidation Policy
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts have
been eliminated.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
(4) Deferred Income Taxes
The ultimate realization of deferred tax assets is dependent on the
generation of future taxable income during the periods in which those temporary
timing differences become deductible. As a result of a series of strategic
initiatives, the Company's operations have improved. Although realization of net
deferred tax assets is not assured, management has determined, based on the
Company's improved operations, that it is more likely than not that a portion of
the Company's deferred tax asset relating to temporary differences between the
tax bases of assets or liabilities and their reported amounts in the financial
statements will be realized in future periods. Accordingly, in the first quarter
of 2001, the Company reduced the valuation allowance for deferred tax assets in
the amount of $13,000 and recorded an income tax benefit.
(5) Long-term Debt
Bank Debt
On April 1, 2002, the maturity date of the principal amount of the
revolving credit facility of $5,880 was extended to January 15, 2003 with
certain conditions and certain prepayments described below. The interest rate
for the revolving credit facility is the prime rate plus 2%. The Company is
required to make payments of $200 on May 31, 2002 and June 30, 2002 and monthly
payments of $150 at the end of each month beginning in July 2002 and ending
December 31, 2002.
Related Party Debt
On January 18, 2002, Evan Herrick, son of Norton Herrick, the Company's
Chairman, and brother of Michael Herrick, Chief Executive Officer and a director
and Howard Herrick, an executive vice president and a director, exchanged $2,500
principal amount of a $3,000 principal amount convertible note of MediaBay, Inc.
(the "Note") in exchange for 25,000 shares of Series A Preferred Stock of
MediaBay (the "Preferred Shares"), having a liquidation preference of $2,500.
The Preferred Share dividend rate of 9% ($9.00 per share) is the same as the
interest rate of the Note, and is payable in additional Preferred Shares, shares
of common stock of MediaBay or cash, at the holder's option, provided that if
the holder elects to receive payment in cash, the payment will accrue until
MediaBay is permitted to make the payment under its existing credit facility.
The conversion rate of the Preferred Shares is the same as the conversion rate
of the Note. The Preferred Shares vote together with the Common Stock as a
single class on all matters submitted to stockholders for a vote, and certain
matters require the majority vote of the Preferred Shares. The holder of each
Preferred Shares shall have a number of votes for each Preferred Share held
multiplied by a fraction, the numerator of which is the liquidation preference
and the denominator of which is $1.75.
On February 22, 2002, as previously committed to on May 14, 2001,
Huntingdon Corporation, a business wholly owned by MediaBay's chairman,
purchased a $500 principal amount convertible senior promissory note due June
30, 2003 (the "2002 Note"). The 2002 Note was issued in consideration of a $500
loan made to the Company by Huntingdon. As partial consideration for the loan
and pursuant to an agreement dated April 30, 2001, the Company granted to
Huntingdon warrants to purchase 250,000 of Common Stock at an exercise price of
$.56 per share. The warrants are exercisable until May 14, 2011. The Company has
determined the total debt discount relating to the issuance of the warrants and
the beneficial conversion feature of the February Note to be $431. The amount
amortized to interest expense as of March 31, 2002 was $27.
10
(6) Stockholders' Equity and Stock Options and Warrants
Stock Options and Warrants
In addition to the 250,000 warrants described in Note 5 above, during the
three months ended March 31, 2002, the Company granted plan and non-plan options
and warrants to purchase a total of 307,500 shares of the Company's common stock
to consultants and Board members. The fair value of $133, computed using
accepted option-pricing model, has been included in prepaid expenses and
contributed capital and is being amortized to expense over their respective
service periods. The options and warrants vest on various dates and have
exercise periods from three to five years from date of vesting. Exercise prices
range from $1.00 to $5.00 per share. During the three months ended March 31,
2002, non-plan options to purchase 75,000 shares of the Company's common stock
were cancelled and warrants to purchase 100,000 shares of the Company's common
stock expired.
The Company issued plan options to purchase 140,500 shares of the
Company's common stock to employees. The options vest on various dates and have
a five year exercise period. Exercise prices range from $1.00 to $5.00 per
share. The Company cancelled five-year plan options to purchase a total of
33,000 shares of the Company's common stock.
Common and Preferred Stock
In the first quarter of 2002, the Company issued 13,736 shares of its
common stock to a consultant under a consulting agreement. The shares have been
valued at $25 and are being amortized to expense over the period of benefit. The
Company also issued 25,000 shares of preferred stock with a liquidation value of
$2,500 to a principal stockholder in exchange for a $2,500 principal amount
convertible note.
(7) Net (Loss) Earnings Per Share of Common Stock
Basic earnings (loss) per share were computed using the weighted average
number of common shares outstanding for the three months ended March 31, 2002
and 2001 of 13,865,834 and 13,861,866, respectively.
For the three months ended March 31, 2002, common equivalent shares, which
were not included in the computation of diluted loss per share because they
would have been anti-dilutive were 2,095,945 common equivalent shares, as
calculated under the treasury stock method and 15,966,000 common equivalent
shares relating to convertible subordinated debt and preferred stock calculated
under the "if-converted method". Interest expense on the convertible
subordinated debt added back to net loss would have been $237 and preferred
dividends added back to net loss applicable to common shares would have been $45
for the three months ended March 31, 2002.
Differences in the weighted average number of common shares outstanding
for purposes of computing diluted earnings per share for the three months ended
March 31, 2001 were due to the inclusion of 7,192 common equivalent shares, as
calculated under the treasury stock method and 4,773,000 common equivalent
shares relating to convertible subordinated debt calculated under the
"if-converted method". Interest expense on the convertible subordinated debt
added back to net income was $217 for the three months ended March 31, 2001.
11
(8) Asset Acquisition
On March 1, 2002, the Company acquired inventory, licensing agreements and
certain other assets, used by Great American Audio in connection with its
old-time radio business, including the exclusive license to "The Shadow" radio
programs. The Company expended $379 in cash, including fees and expenses.
Additional payments of nine monthly installments of $74 commence on June 15,
2002. The Company estimates other costs related to the asset purchase are
approximately $305. The preliminary allocation of asset value is as follows:
Other assets $ 5
Net Inventory 60
Royalty Advances (The Shadow) 10
Goodwill 1,230
------
Total $1,305
======
(9) Supplemental Cash Flow Information
Cash paid for interest expense was $162 and $131 for the three months
ended March 31, 2002 and 2001, respectively.
In the first quarter of 2002, the Company issued 13,736 shares of the
Company's common stock to consultants under a consulting agreement. The shares
have been valued at $25 and are being amortized to expense over the period of
benefit.
(10) Segment Reporting
For 2002 and 2001, the Company has divided its operations into four
reportable segments: Corporate, Audio Book Club ("ABC") a membership-based club
selling audiobooks in direct mail and on the Internet; Radio Spirits ("RSI")
which produces, sells, licenses and syndicates old-time radio programs and
MediaBay.com a media portal offering spoken word audio content in secure digital
download formats. Segment operating income is total segment revenue reduced by
operating expenses identifiable with that business segment. Corporate includes
general corporate administrative costs, professional fees, interest expenses and
amortization of acquisition related costs. The Company evaluates performance and
allocates resources among its three operating segments based on operating income
and opportunities for growth. The Company did not expend any funds or receive
any income in the three months ended March 31, 2002 and 2001 from its newest
subsidiary RadioClassics. Inter-segment sales are recorded at prevailing sales
prices.
Segment Reporting
Three Months Ended March 31, 2002
Inter-
Corporate ABC RSI Mbay.com segment Total
-------- -------- -------- -------- ------- --------
Sales, net of returns, discounts and allowances $ -- $ 7,921 $ 1,532 $ 50 $ (23) $ 9,480
Operating profit (loss) (1,013) 1,052 95 (116) -- 18
Depreciation and amortization 437 31 30 -- -- 498
Interest expense 724 -- 8 -- -- 732
Dividends on Preferred Stock 45 -- -- -- -- 45
Net (loss) income applicable to common shares (1,782) 1,052 87 (116) -- (759)
Total assets -- 31,661 14,169 1 (76) 45,755
Acquisition of fixed assets -- 70 7 -- -- 77
Three Months Ended March 31, 2001
Inter-
Corporate ABC RSI Mbay.com segment Total
-------- ------- ------- -------- ------- --------
Sales, net of returns, discounts and allowances $ 7,788 $ 1,737 $ 147 $ (71) $ 9,601
Operating profit (loss) (1,629) 782 (420) (606) 18 (1,855)
Depreciation and amortization 1,311 33 42 106 -- 1,492
Interest expense 550 -- 4 -- -- 554
Benefit for income taxes -- 9,835 3,165 -- 13,000
Net (loss) income applicable to common shares (2,179) 10,618 2,739 (606) 19 10,591
Total assets 2,000 37,156 20,201 1,354 (143) 60,568
Acquisition of fixed assets -- 4 9 10 -- 23
12
(11) Goodwill and Other Intangibles
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). The Company adopted SFAS 142 on January 1,
2002. SFAS 142 changed the accounting for goodwill and indefinite-lived
intangible assets from an amortization method to an impairment-only approach.
Goodwill and indefinite-lived intangible assets are tested for impairment
annually or when certain triggering events require such tests and are written
down, with a resulting charge to operations, only in the period in which the
recorded value of goodwill and indefinite-lived intangible assets is more than
their fair value.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
the Company ceased amortization of goodwill as of January 1, 2002. The following
table presents the quarterly results of the Company on a comparable basis:
For Three Months Ended March 31,
2002 2001
---------- ----------
Net (loss) income:
Reported net (loss) income applicable to common shares $ (759) $ 10,591
Goodwill amortization -- 127
---------- ----------
Adjusted net (loss) income $ (759) $ 10,718
========== ==========
Basic (loss) earnings per common share:
Reported basic net (loss) earnings per common share $ (.05) $ .77
Goodwill amortization -- .01
---------- ----------
Adjusted basic (loss) earnings per common share $ (.05) $ .78
========== ==========
Diluted (loss) earnings per common share:
Reported diluted net (loss) earnings per common share $ (.05) $ .58
Goodwill amortization -- .01
---------- ----------
Adjusted diluted (loss) earnings per common share $ (.05) $ .59
========== ==========
SFAS 142 requires the Company to perform an evaluation of whether goodwill
is impaired as of January 1, 2002, the effective date of the statement for the
Company. The Company is currently in the process of evaluating whether its
goodwill is impaired as of January 1, 2002. Any transitional impairment loss
resulting from the adoption of SFAS 142 will be recognized as a cumulative
effect of a change in accounting principle in the Company's statements of
operations as of January 1, 2002. Any impairment losses incurred after the
initial application of this standard will be reported in operating results.
Subsequent impairment tests will be performed in the fourth quarter of each year
in connection with the annual budgeting and planning process. The Company has
allocated total goodwill, net of accumulated amortization of $1,518, of $9,879
to the Company's Radio Spirits division.
The company amortizes other intangible assets over their estimated useful
lives over periods from three to seven years. Other intangible assets primarily
relate to mailing and non-compete agreements, customer lists, and license
agreements associated with the Company's Audio Book Club and Radio Spirits
divisions. Amortization expense for other intangible assets was $436 for the
three months ended March 31, 2002. The following table presents the Company's
estimate of amortization expenses for all of 2002, and for each of the
succeeding years:
13
For the years ending December 31,
2002 $ 1,079
2003 $ 436
2004 $ 338
2005 $ 329
The following table presents details of Other Intangibles at March 31, 2002 and
December 31, 2001:
March 31, 2002 December 31, 2001
---------------------------------------- ---------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
------ ------------ ------ ------ ------------ ------
Mailing Agreements $2,892 $1,481 $1,411 $2,892 $1,362 $1,530
Customer Lists 4,380 4,125 255 4,380 3,818 562
Non-Compete Agreements 200 120 80 200 110 90
Other 115 -- 115 110 -- 110
------ ------ ------ ------ ------ ------
Total Other Intangibles $7,587 $5,726 $1,861 $7,582 $5,290 $2,292
====== ====== ====== ====== ====== ======
(12) Recent Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). This
statement addresses the diverse accounting practices for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The Company is required to adopt the provisions of SFAS 143 at
the beginning of January 1, 2003. The Company has not determined the impact, if
any, the adoption of this statement will have on its financial position, results
of operations, or cash flows.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 develops a single accounting model for long-lived
assets to be disposed of by sale, addresses significant implementation issues
related to previous guidance, and requires that long-lived assets to be disposed
of by sale be measured at the lower of their carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The adoption of SFAS 144 did not have any impact on the Company's
financial position, results of operations, or cash flows.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The Company is in the process of
evaluating the impact that this statement will have on its financial position,
results of operations and cash flows.
(13) Subsequent Events
Subsequent to March 31, 2002, the Company cancelled warrants to purchase a
total of 75,000 shares of the common stock issued to a consultant and plan
options to purchase a total of 49,250 shares of the Company's common stock to
officers, employees and consultants.
In April 2002, the Company issued 6,250 shares of the Company's common
stock to a consultant. The shares have been valued at $25 and are being
amortized over one year, the consultants' period of service.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in thousands, except per share data)
Forward-looking Statements
Certain statements in this Form 10-Q/A constitute "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995. All statements other than statements of historical facts included in this
Report, including, without limitation, statements regarding our future financial
position, business strategy, budgets, projected costs and plans and objectives
of our management for future operations are forward-looking statements. In
addition, forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe," or "continue" or the negative thereof or
variations thereon or similar terminology. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we
cannot assure you that such expectations will prove to be correct. These forward
looking statements involve certain known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from any results, performances or achievements express
or implied by such forward-looking statements. Important factors that could
cause actual results to differ materially from our expectations, without
limitation, our history of losses, our ability to meet stock repurchase
obligations, anticipate and respond to changing customer preferences, license
and produce desirable content, protect our databases and other intellectual
property from unauthorized access, pay our trade creditors and collect
receivables and successfully implement our acquisition strategy, dependence on
third-party providers, suppliers and distribution channels; competition; the
costs and success of our marketing strategies, product returns and member
attrition. Undue reference should not be placed on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to update any forward-looking statements.
Restatement
As discussed in Note 2 to the condensed consolidated financial statements,
the Company has restated its financial statements for the three month periods
ended March 31, 2002 and 2001, and the balance sheet as of March 31, 2002 and
December 31, 2001. The Management's Discussion and Analysis of Financial
Condition and Results of Operations gives effect to this restatement.
Introduction
MediaBay is a leading spoken audio content, marketing and publishing
company, whose businesses include direct response and interactive marketing,
retail product distribution, media publishing and broadcasting. MediaBay's
content libraries include over 60,000 classic radio programs, 3,500 film and
television programs and thousands of audiobooks, much of which is proprietary.
MediaBay distributes its products to its own customer database of approximately
2.8 million names and 2.2 million e-mail addresses, in over 7,000 retail outlets
and on the Internet through streaming and downloadable audio. MediaBay's content
programming can be heard on over 500 radio stations and on the Sirius Satellite
Radio service. We report financial results on the basis of four business
segments; Corporate, Audio Book Club ("ABC"), Radio Spirits ("Radio Spirits" or
"RSI") and MediaBay.com. A fifth division, RadioClassics, is aggregated with
Radio Spirits for financial reporting purposes. Except for corporate, each
segment serves a unique market segment within the spoken word audio industry.
MediaBay's content libraries include over 60,000 classic radio programs,
3,500 film and television programs and thousands of audiobooks. The majority of
our content is acquired under exclusive licenses from the rights holders
enabling us to manufacture the product giving us significantly better product
margins than other companies.
Our customer base includes over 2.8 million spoken audio buyers who have
purchased via catalogs and direct mail marketing. We also currently have an
additional 2.2 million e-mail addresses of spoken audio buyers and enthusiasts
online. Our old-time radio products are sold in over 7,000 retail locations,
including Costco, Target, Sam's Club, Barnes & Noble, Borders and Amazon.com.
15
Our web sites receive more than 2 million unique monthly web site visitors
and are among the most heavily trafficked bookselling web sites on the Internet.
We serve more than 450,000 classic radio streams of our content on a monthly
basis to web site visitors at RadioSpirits.com and MediaBay.com.
Our marketing programs have consisted primarily of direct mail, media
advertising and marketing on the Internet. We capitalize direct response
marketing costs for the acquisition of new members in accordance with AICPA
Statement of Position 93-7 "Reporting on Advertising Costs" and amortize these
costs over the period of future benefit, based on our historical experience.
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended
March 31, 2001
Sales, net of returns, discounts and allowance for the three months ended
March 31, 2002 were $9,480, a decrease of $121 or 1.3%. as compared to $9,601
for the three months ended March 31, 2001. The decrease in sales was primarily
attributable to the timing of wholesale orders at Radio Spirits.
Cost of sales for the three months ended March 31, 2002 increased $473 to
$4,289 from $3,816 in the prior comparable period. Cost of sales in the first
quarter of 2002 was negatively impacted by substantially higher new member
enrollments at Audio Book Club in the first quarter of 2002 as compared to the
first quarter of 2001. The initial purchases by these new members are at
substantially reduced prices to encourage enrollment. These offers which are
typically four audiobooks for $.99 plus shipping and handling, result in an
initial loss to us which is recovered through additional member purchases at
regular prices. Because we do not capitalize the cost of these heavily
discounted audiobooks, the initial purchase has the effect of reducing gross
profit in the period of enrollment. As a result of lower net sales and higher
cost of sales, gross profit decreased $594 to $5,191 from $5,785 for the three
months ended March 31, 2001.
Advertising and promotion expenses decreased $998, or 31%, to $2,188 for
the three months ended March 31, 2002 as compared to $3,186 in the prior
comparable period. The decrease is principally due to timing of new member
direct mail campaigns and the write-down of deferred member acquisition costs in
the third quarter of 2001 related to new member acquisition campaigns which were
determined to be no longer profitable.
General and administrative expenses for the three months ended March 31,
2002 decreased $475 to $2,487 from $2,962 for the three months ended March 31,
2001. The decrease in general and administrative expenses principally relate to
reductions in bad debt expenses, due to better payment experience, and payroll
and related costs and professional fees, principally as a result of the
consolidation of our old-time radio operations at our New Jersey location.
Depreciation and amortization expenses for the three months ended March
31, 2002 were $498, a decrease of $994, as compared to $1,492 for the prior
comparable period. The decrease is principally attributable to implementation of
SFAS No. 142 which provides that goodwill should not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to its carrying amount.
Primarily due to reduced returns, reductions in advertising expense,
general and administrative expenses and decreased amortization of goodwill, our
operating profit for the three months ended March 31, 2002 was $18, an
improvement of $1,873, as compared to a net operating loss of $1,855 for the
three months ended March 31, 2001.
Net interest expense for the three months ended March 31, 2002 was $732 as
compared to $554 for the three months ended March 31, 2001. The increase in
interest expenses is principally due to additional charges of $234 for the three
months ended March 31, 2002, as compared to $33 for the three months ended March
31, 2001, for amortization of debt discount related to warrants and beneficial
conversion features related to our financings.
16
The net loss before income taxes for the three months ended March 31,
2002 decreased $1,695 to $714, as compared to a net loss of $2,409 for the three
months ended March 31, 2001.
As a result of the series of strategic initiatives, our operations
improved. Although realization of net deferred tax assets is not assured, we
determined in March 2001, based on our improved operations, that it was more
likely than not that a portion of our deferred tax asset relating to temporary
differences between the tax bases of assets or liabilities and their reported
amounts in the financial statements will be realized in future periods.
Accordingly, in the first quarter of 2001, we reduced the valuation allowance
for deferred tax assets in the amount of $13,000 and recorded an income tax
benefit.
Primarily due to the reduction in the valuation allowance for deferred tax
assets in 2001, we had net income of $10,591, or $.58 per diluted share for the
three months ended March 31, 2001, as compared to a net loss of $759, or $.05
per diluted share, for the three months ended March 31, 2002.
Liquidity and Capital Resources
Historically, we have funded our cash requirements through sales of our
equity and debt securities and borrowings from financial institutions and our
principal shareholders. We have implemented a series of initiatives to increase
cash flow. While these initiatives have generated cash from operating activities
in the last three quarters, there can be no assurance that we will not in the
future require additional capital to fund the expansion of operations,
acquisitions, working capital or other related uses. Management believes that
additional sources of capital are available if required.
For the three months ended March 31, 2002, our cash decreased by $41, as
we had net cash provided by operating activities and financing activities of
$215 and $200, respectively and used net cash of $456 for investing activities.
Net cash provided by operating activities principally consisted of depreciation
and amortization expenses of $498, amortization of deferred financing costs and
original issue discount of $377, decreases in accounts receivable and prepaid
expenses of $567 and $293, respectively, increases in accounts payable and
accrued expenses of $555 partially offset by the net loss of $759 and a net
increase in deferred member acquisition costs of $1,353.
The decrease in accounts receivable was primarily attributable to the
collection of retail receivables from the holiday selling season from our radio
programs. The decrease in prepaid expenses is principally due to the timing of
our marketing activities. The increase in deferred member acquisition cost is
due to the timing of direct-response advertising campaigns and an increase in
the size of the campaigns intended to grow Audio Book Club the membership. The
increase in accounts payable and accrued expenses is principally due to the
timing of vendor invoicing and payments.
Net cash used in investing activities consists of acquisitions of fixed
assets, principally computer equipment, and the acquisition by RSI, our wholly
owned subsidiary of inventory, licensing agreements and certain other assets,
used by Great American Audio in connection with its old-time radio business,
including the exclusive license to "The Shadow" radio programs. We made
payments, including costs, of $379. Additional payments of nine monthly
installments of $74 commence on June 15, 2002. Other costs related to the asset
purchase are estimated at approximately $305.
On February 22, 2002, as previously committed to on May 14, 2001,
Huntingdon Corporation, a business wholly owned by our chairman, purchased a
$500 principal amount convertible senior promissory note due June 30, 2003. For
a further description of this transaction, see Note 5 of the Notes to
Consolidated Financial Statements presented elsewhere in this Form 10-Q/A.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). This statement addresses the diverse
accounting practices for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company is
required to adopt the
17
provisions of SFAS 143 beginning January 1, 2003. The Company has not determined
the impact, if any, the adoption of this statement will have on our financial
position, results of operations, or cash flows.
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 develops a single accounting model for long-lived
assets to be disposed of by sale, addresses significant implementation issues
related to previous guidance, and requires that long-lived assets to be disposed
of by sale be measured at the lower of their carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The adoption of SFAS 144 did not have any impact on the Company's
financial position, results of operations, or cash flows.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." The Company is in the process of
evaluating the impact that this statement will have on its financial position,
results of operations and cash flows.
Quarterly Fluctuations
Our operating results vary from period to period as a result of purchasing
patterns of members, the timing, costs, magnitude and success of direct mail
campaigns and Internet initiatives and other new member recruitment advertising,
member attrition, the timing and popularity of new audiobook releases and
product returns.
The timing of new member enrollment varies depending on the timing,
magnitude and success of new member advertising, particularly Internet
advertising and direct mail campaigns. We believe that a significant portion of
our sales of old-time radio and classic video programs are gift purchases by
consumers. Therefore, we tend to experience increased sales of these products in
the fourth quarter in anticipation of the holiday season and the second quarter
in anticipation of Fathers' Day.
Item 3: Quantitative and Qualitative Disclosures of Market Risk
The Company is exposed to market risk for the impact of interest rate
changes. As a matter of policy the Company does not enter into derivative
transactions for hedging, trading or speculative purposes.
The Company's exposure to market risk for changes in interest rates
relates to its variable rate debt. The Company has total debt outstanding as of
March 31, 2002, net of original issue discount of $1,344, of $15,687 of which
interest on $8,880 principal amount of this debt is payable at the prime rate
plus 2%. If the prime rate were to increase our interest expense would increase,
however a hypothetical 10% change in interest rates would not have had a
material impact on our fair values, cash flows, or earnings for the three months
ended March 31, 2002. All of our other debt is at fixed rates of interest.
Part II - Other Information
Item 2: Changes in Securities and Use of Proceeds (Dollars in thousands, except
per share date)
In the first quarter of 2001, in addition to the 250,000 warrants issued
as partial consideration for a loan and pursuant to an agreement dated April 30,
2001, we issued warrants to purchase 200,000 shares of our Common Stock and plan
options to purchase 248,000 shares of our common stock to officers, employees,
Board members and consultants. The warrants and options have exercise prices
ranging from $1.00 to $5.00, vest at various times and have exercise periods
ranging from three to five years. Non-plan options to purchase 75,000 shares of
our common stock were cancelled and warrants to purchase 100,000 shares of our
common stock expired. We also cancelled five-year plan options to purchase a
total of 43,000 shares of our common stock. We issued 13,736 shares of our
common stock to a consultant under a consulting agreement.
In January 2002, we issued 25,000 shares of preferred stock with a
liquidation value of $2,500 to a principal stockholder in exchange for a $2,500
principal amount convertible note.
18
The foregoing securities were issued in private transactions pursuant to
an exemption from the registration requirement offered by Section 4(2) of the
Securities Act of 1933.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification of Hakan Lindskog, Chief Executive Officer of
MediaBay, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of John Levy, Executive Vice President and Chief
Financial Officer of MediaBay, Inc., 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
None.
19
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, MediaBay, Inc. has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MediaBay, Inc.
Dated: April 25, 2003 By: /s/ Hakan Lindskog
----------------------------------
Hakan Lindskog
Chief Executive Officer
and President
Dated April 25, 2003 By: /s/ John F. Levy
----------------------------------
John F. Levy
Chief Financial Officer
(principal accounting and
financial officer)
20
Certification of Principal Executive Officer
I, Hakan Lindskog, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of MediaBay,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
Date: April 25, 2003
/s/ Hakan Lindskog
-----------------------
Hakan Lindskog
Chief Executive Officer
21
MediaBay, Inc.
Certification of Principal Financial Officer
I, John F. Levy, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of MediaBay,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
Date: April 25, 2003
/s/ John F. Levy
-----------------------
John F. Levy
Chief Financial Officer
22