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