SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 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 |_|
Indicate by check mark whether the Registrant is an accelerated filer as defined
in Rule 12b-2 of the Securities Exchange Act of 1934. Yes |_| No |X|
As of August 11, 2003, there were 14,124,068 shares of the Registrant's Common
Stock outstanding.
1
MEDIABAY, INC.
Quarter ended June 30, 2003
Form 10-Q
Index
Page
----
PART I: Financial Information
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at June 30, 2003
and December 31, 2002, (unaudited) 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2003 and 2002, (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002, (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations. 16
Item 3: Quantitative and Qualitative Disclosures of Market Risk 22
Item 4: Controls and Procedures 22
Part II: Other Information
Item 2: Changes in Securities and Use of Proceeds 23
Item 6: Exhibits and Reports on Form 8-K 23
Signatures 24
2
PART I: Financial Information
Item 1: Financial Statements
MEDIABAY, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
June 30, 2003 December 31, 2002
------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 28 $ 397
Accounts receivable, net of allowances for sales returns and doubtful accounts of
$4,214 and $5,325 at June 30, 2003 and December 31, 2002, respectively 6,213 7,460
Inventory 5,095 5,244
Prepaid expenses and other current assets 637 503
Royalty advances 1,036 1,044
-------- --------
Total current assets 13,009 14,648
Fixed assets, net of accumulated depreciation of $724 and $665 at June 30, 2003 and
December 31, 2002, respectively 295 358
Deferred member acquisition costs 6,150 7,396
Deferred income taxes 16,224 16,224
Other intangibles, net 115 122
Goodwill 9,658 9,871
-------- --------
$ 45,452 $ 48,619
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 16,009 $ 16,616
Current portion - long-term debt 3,490 2,368
-------- --------
Total current liabilities 19,499 18,984
-------- --------
Long-term debt and related accrued interest, net of original issue discount of $354 and
$567 at June 30, 2003 and December 31, 2002, respectively 13,107 14,680
-------- --------
Common stock subject to contingent put rights 1,100 4,550
-------- --------
Preferred stock, no par value, authorized 5,000,000 shares; 25,000 shares of Series A
issued and outstanding at June 30, 2003 and December 31, 2002 and 3,350 shares and
no shares of Series B at June 30, 2003 and December 31, 2002, respectively 2,828 2,500
Common stock; no par value, authorized 150,000,000 shares; issued and outstanding 94,800
14,341,376 at June 30, 2003 and 14,341,376 at December 31, 2002, respectively 94,547 2,500
Contributed capital 11,281 8,251
Accumulated deficit (96,911) (95,146)
-------- --------
Total stockholders' equity 11,745 10,405
-------- --------
$ 45,452 $ 48,619
======== ========
See accompanying notes to condensed consolidated financial statements.
3
MEDIABAY, INC.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
-------- -------- -------- --------
Sales, net of returns, discounts and allowances of $5,043 and
$4,160 and $9,421 and $6,291 for the three and six months
ended June 30, 2003 and 2002, respectively $ 9,407 $ 11,977 $ 20,105 $ 21,457
Cost of sales 4,124 5,194 9,359 9,483
-------- -------- -------- --------
Gross profit 5,283 6,783 10,746 11,974
Expenses:
Advertising and promotion 2,612 2,588 5,459 4,776
General and administrative 2,206 2,547 5,680 5,033
Depreciation and amortization 99 448 198 945
-------- -------- -------- --------
Operating profit (loss) 366 1,200 (591) 1,220
Interest expense 532 805 1,055 1,538
-------- -------- -------- --------
Income (loss) before income taxes (166) 395 (1,646) (318)
Income tax expense -- -- -- --
-------- -------- -------- --------
Net income (loss) (166) 395 (1,646) (318)
Dividends on preferred stock 62 57 118 102
======== ======== ======== ========
Net income (loss) applicable to common shares $ (228) $ 338 $ (1,764) $ (420)
======== ======== ======== ========
Basic and diluted earnings (loss) per share common share: $ (.02) $ .02 $ (.12) $ (.03)
See accompanying notes to condensed consolidated financial statements.
4
MEDIABAY, INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six months ended June 30,
2003 2002
-------- --------
Cash flows from operating activities:
Net (loss) applicable to common shares $ (1,764) $ (420)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Net settlement expenses (690) --
Depreciation and amortization 198 945
Amortization of deferred member acquisition costs 3,131 2,617
Amortization of deferred financing costs and original issue discount 248 820
Non-current accrued interest and dividends payable 534 --
Changes in asset and liability accounts, net of asset acquisition:
Decrease (increase) in accounts receivable, net 1,246 (586)
Decrease (increase) in inventory 149 (371)
(Increase) decrease in prepaid expenses (132) 617
Decrease (increase) in royalty advances 8 (226)
Increase in deferred member acquisition costs (1,885) (4,647)
(Decrease) increase in accounts payable and accrued expenses (383) 2,007
-------- --------
Net cash provided by operating activities 660 756
-------- --------
Cash flows from investing activities:
Acquisition of fixed assets (15) (91)
Assets acquired, net of cash (250) (379)
-------- --------
Net cash used in investing activities (265) (470)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of long-term debt -- 500
Payment of long-term debt (1,050) (774)
Increase in deferred financing costs (42) (45)
Proceeds from exercise of stock options and warrants -- 212
Net proceeds from issuance of Preferred Stock 328 --
-------- --------
Net cash used in financing activities (764) (107)
-------- --------
Net (decrease) increase in cash and cash equivalents (369) 179
Cash and cash equivalents at beginning of period 397 64
-------- --------
Cash and cash equivalents at end of period $ 28 $ 243
======== ========
See accompanying notes to condensed consolidated financial statements.
5
MEDIABAY, INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share data)
(Unaudited)
(1) Organization
MediaBay, Inc. (the "Company" or "MediaBay"), a Florida corporation, was
formed on August 16, 1993. MediaBay is a marketer of spoken audio products,
including audiobooks and old-time radio shows, through direct response, retail
and Internet channels. The Company markets audiobooks primarily through its
Audio Book Club. Its old-time radio programs are marketed through direct-mail
catalogs, over the Internet at RadioSpirits.com and, on a wholesale basis, to
major retailers.
(2) 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.
Revenue Recognition
The Company derives its principal revenue through sales of audiobooks,
classic radio shows and other spoken word audio products directly to consumers
principally through direct mail. The Company also sells classic radio shows to
retailers either directly or through distributors. The Company derives
additional revenue through rental of its proprietary database of names and
addresses to non-competing third parties through list rental brokers. The
Company also derives a small amount of revenue from advertisers included in its
nationally syndicated classic radio shows. The Company recognizes sales to
consumers, retailers and distributors upon shipment of merchandise. List rental
revenue is recognized on notification by the list brokers of rental by a third
party when the lists are rented. The Company recognizes advertising revenue upon
notification of the airing of the advertisement by the media buying company
representing the Company. Allowances for future returns are based upon
historical experience and evaluation of current trends.
Shipping and Handling Revenue and Costs
Amounts paid to the Company for shipping and handling by customers is
included in sales. Amounts the Company incurs for shipping and handling costs
are included in cost of sales. The Company recognizes shipping and handling
revenue upon shipment of merchandise. Shipping and handling expenses are
recognized on a monthly basis from invoices from the third party fulfillment
houses, which provide the services.
Cost of Sales
Cost of sales includes the following:
o Product costs (including free audiobooks in the initial
enrollment offer to prospective members)
o Royalties to publishers and rightsholders
o Fulfillment costs, including shipping and handling
o Customer service
o Direct response billing, collection and accounts receivable
management.
6
Cooperative Advertising and Related Selling Expenses
The Company classifies the cost of certain credits, allowances,
adjustments and payments given to customers for the services or benefits
provided as a reduction of net sales.
Stock-Based Compensation
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued. SFAS 123, which prescribes the
recognition of compensation expense based on the fair value of options on the
grant date, allows companies to continue applying APB 25 if certain pro forma
disclosures are made assuming a hypothetical fair value method application. Had
compensation expense for the Company's stock options been recognized on the fair
value on the grant date under SFAS 123, the Company's net loss and net loss per
share for the three and six months ended June 30, 2003 and 2002 would have been
as follows:
Three Months Ended Six Months
June 30, Ended June 30,
-------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Net (loss) income applicable to common shares, as reported $ (228) $ 338 $(1,764) $ (420)
Add: Stock-based employee compensation expense included in
reported net loss applicable to common shares, net of
related tax effects -- -- -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects -- -- (36) (147)
------- ------- ------- -------
Pro forma net (loss) income applicable to common shares $ (228) $ 338 $(1,800) $ (567)
======= ======= ======= =======
Net (loss) income per share
Basic and diluted - as reported $ (.02) $ .02 $ (.12) $ (.03)
======= ======= ======= =======
Basic and diluted - pro forma $ (.02) $ .02 $ (.13) $ (.04)
======= ======= ======= =======
No dividend yield and the following assumptions were used in the pro forma
calculation of compensation expense:
No. of Exercise Assumed Risk-free Fair Value
Date Shares Price Volatility Interest Rate per Share
---- ------ ----- ---------- ------------- ---------
First Six Months 2002 140,500 $1.88 165% 4.49% $1.05
First Six Months 2003 40,000 $1.50 165% 4.85% $ .98
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 those 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 enactment date.
7
Deferred Member Acquisition Costs
Promotional costs directed at current members are expensed on the date the
promotional materials are mailed. The cost of any premiums, gifts or the
discounted audiobooks in the promotional offer to new members is expensed as
incurred. The Company accounts for direct response advertising for the
acquisition of new members in accordance with AICPA Statement of Position 93-7,
"Reporting on Advertising Costs" ("SOP 93-7"). SOP 93-7 states that the cost of
direct response advertising (a) whose primary purpose is to elicit sales to
customers who could be shown to have responded specifically to the advertising
and (b) that results in probable future benefits should be reported as assets
net of accumulated amortization. Accordingly, the Company has capitalized direct
response advertising costs and amortizes these costs over the period of future
benefit, which has been determined to be generally 30 months. The costs are
being amortized on accelerated basis consistent with the recognition of related
revenue.
Royalties
The Company is liable for royalties to licensors based upon revenue earned
from the respective licensed product. The Company pays certain of its publishers
and other rightsholders advances for rights to products. Royalties earned on the
sale of the products are payable only in excess of the amount of the advance.
Advances, which have not been recovered through earned royalties, are recorded
as an asset. Advances not expected to be recovered through royalties on sales
are charged to royalty expense.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
(3) 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.
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 $61 and $121 and
$385 and $821 for the three and six months ended June 30, 2003 and 2002,
respectively. The Company estimates intangible amortization expenses of the
following:
Six months ended December 31, 2003 $ 61
Year ended December 31, 2004 23
Year ended December 31, 2005 8
Year ended December 31, 2006 8
Year ended December 31, 2007 8
Year ended December 31, 2008 1
-------
Total $109
=======
8
The following table presents details of Other Intangibles at June 30, 2003
and December 31, 2002:
June 30, 2003 December 31, 2002
---------------------------- ----------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Mailing Agreements $ 592 $ 592 $ -- $ 592 $ 524 $ 68
Customer Lists 4,380 4,380 -- 4,380 4,380 --
Non-Compete Agreements 313 203 110 200 151 49
Other 5 -- 5 5 -- 5
------ ------ ------ ------ ------ ------
Total Other Intangibles $5,290 $5,175 $ 115 $5,177 $5,055 $ 122
====== ====== ====== ====== ====== ======
Goodwill of $9,658 and $9,871 as of June 30, 2003 and December 31, 2002
respectively is attributable to the Company's Radio Spirits business. The change
of $213 is related to the finalization of the acquisition of Great American
Audio, which occurred in March 2002.
(4) Long-term Debt
Bank Debt
As of August 1, 2003, the Company had $3,300 of indebtedness outstanding
under the Amended and Restated Credit Agreement dated as of October 3, 2002, as
amended, by and among the Company and Radio Spirits, Inc. and Audio Book Club,
Inc., wholly-owned subsidiaries of the Company, as co-borrowers, and ING (U.S.)
Capital LLC, as administrative agent, and the other lenders named therein (the
"Credit Agreement"). The maturity date of the Credit Agreement is April 30,
2004; provided however, that the Company is required to make monthly payments of
principal of $190 in August through September 2003, $200 in October through
December 2003 and $225 in January through March 2004. The Company is not
permitted to make any additional borrowings under the Credit Agreement. The
interest rate on the credit facility is equal to the prime rate plus 2 1/2%. The
Company granted the lenders under the Credit Agreement a security interest in
substantially all of the Company's assets and the assets of its subsidiaries and
pledged the stock of its subsidiaries.
The Company is required to maintain Minimum EBITDA, as defined below, of
the following:
o $4,000,000 for the period beginning on January 1, 2001 and
ending prior to June 30, 2003;
o $5,000,000 for the period beginning on January 1, 2001 and
ending prior to September 30, 2003;
o $6,000,000 for the period beginning on January 1, 2001 and
ending prior to December 31, 2003.
o $7,000,000 for the period beginning on January 1, 2001 and
ending prior to March 31, 2004
Under the Credit Agreement, "EBITDA" means, for any period, the sum
of (i) net income, (ii) interest expense, (iii) income tax expense,
(iv) depreciation expense, (v) extraordinary and nonrecurring losses
and (vi) amortization expense, less extraordinary and nonrecurring
gains (in each case, determined in accordance with generally
accepted accounting principles) plus adjustments for (x) the pro
forma effect of any Permitted Acquisition (as defined in the Credit
Agreement) and (y) non-cash stock compensation; provided that EBITDA
shall be adjusted for the effect of treating the Company's
advertising expense and new member acquisition costs as expensed as
incurred.
The Company was in compliance with this covenant at June 30, 2003.
9
In addition to limiting the Company's ability to incur additional
indebtedness, the Credit Agreement prohibits the Company from, among other
things:
o merging into or consolidating with another entity;
o selling all or substantially all of its assets;
o declaring or paying cash dividends; and
o materially changing the nature of its business.
We anticipate making the principal payments from cash flow generated from
operations.
The balance of our bank debt, after making the above payments, of $1.6
million is due April 30, 2004. We are currently seeking to refinance or extend
this debt. Historically we have been able to extend the maturity of this debt.
(5) Stockholders' Equity and Stock Options and Warrants
Stock Options and Warrants
From January 1, 2003 to June 30, 2003, the Company issued options to
purchase 160,000 shares of its common stock to certain directors, employees and
consultants to the Company under its 2000 Stock Option plan. The Company also
cancelled options to purchase 155,000 shares of its common stock. The Company
also issued non-plan warrants to purchase 90,000 shares of its common stock to a
former employee and consultant at prices ranging from $1.50 to $3.00 per share
as part of non-competition agreements.
Preferred Stock
On May 7, 2003, the Company sold 3,350 shares of a newly created Series B
Convertible Preferred Stock (the "Series B Stock") with a liquidation preference
of $100 per share for $335. Of the total sold, 1,400 shares ($140) were
purchased by Carl Wolf, Chairman and a director of the Company, and 200 shares
($20) were purchased by John Levy, Executive Vice President and Chief Financial
Officer of the Company. The holders of shares of Series B Convertible Preferred
Stock will receive dividends at the rate of $9.00 per share, payable quarterly,
in arrears, in cash on each March 31, June 30, September 30 and December 31;
provided that payment will accrue until the Company is permitted to make such
payment in cash under its Agreement with its senior lender.
The Series B Stock is convertible into shares of Common Stock into
MediaBay Common Stock at a conversion rate equal to a fraction, (i) the
numerator of which is equal to the number of Series B Stock times $100 plus
accrued and unpaid dividends though the date of conversion and (ii) the
denominator is $0.77, the average price of the Company's stock on May 6, 2003.
In the event of a liquidation, dissolution or winding up of the Company,
the holders of Series B Stock shall be entitled to receive out of the assets of
the Company, a sum in cash equal to $100.00 per share before any amounts are
paid to the holders of the Company common stock and on a pari passu with the
holders of the Series A Convertible Preferred Stock. The holders of Series B
Stock shall have no voting rights, except as required by law and except that the
vote or consent of the holders of a majority of the outstanding shares of Series
B Stock, voting separately as a class, will be required for any amendment,
alteration or repeal of the terms of the Series B Stock that adversely effects
the rights, preferences or privileges of the Series B Stock
(6) Litigation Settlement
In December 1998 the Company acquired certain assets from a third party.
The parties also entered into certain other agreements including a mailing
agreement and a non-compete agreement. As consideration for the assets acquired
and the related transactions, including the mailing agreement and the
non-compete agreement, the third party received cash consideration of $30,750
and an aggregate of 325,000 shares of the Company's common stock (the "Shares")
and warrants to purchase an additional 100,000 shares of the Company's common
stock. The parties also entered into a Registration and Shareholder Rights
Agreement pursuant to which, the Company granted the third party the right under
certain circumstances, commencing December 31, 2004, to require the Company to
purchase from the third party the Shares at a price of $15.00 per Share.
10
During the fourth quarter of 2000, the Company reviewed long-lived assets
and certain related identifiable intangibles. The Company determined that the
revised estimates of cash flows from the assets acquired would no longer be
sufficient to recover the carrying value of goodwill associated with the
acquisition. As a result, in the fourth quarter of 2000, the Company recorded an
impairment charge of $22,785, representing the entire amount of unamortized
goodwill.
In 2001, the Company commenced litigation alleging, among other things,
that the Company was fraudulently induced to purchase certain of the assets. On
June 16, 2003, Audio Book Club, Inc. ("ABC"), a wholly owned subsidiary of
MediaBay entered into a settlement agreement with respect to the lawsuit.
Pursuant to the settlement agreement, ABC received $350 in cash, the return for
cancellation of 325,000 shares of MediaBay common stock issued in connection
with the acquisition and the termination of put rights granted to the seller in
the acquisition with respect to 230,000 of the shares (put rights with respect
to the remaining 95,000 shares had previously terminated). The termination of
the put rights terminated a $3,450 future contingent obligation of MediaBay and
results in a corresponding increase in stockholders' equity.
The calculation of the settlement of litigation recorded in Contributed
Capital is as follows:
Termination of contingent put rights $ 3,450
Return for cancellation of 325,000 shares of common stock 247
Cash received 350
-------
Total received in settlement of litigation 4,047
Legal and other costs incurred in connection with the litigation 1,040
-------
Settlement of litigation recorded in Contributed Capital $ 3,007
=======
(7) Net Income (Loss) Per Share of Common Stock
Basic (loss) earnings per share was computed using the weighted average
number of common shares outstanding for the three and six months ended June 30,
2003 of 14,341,376 and for the three and six months ended June 30, 2002 of
13,987,118 and 13,926,811, respectively.
For the three months ended June 30, 2003 common equivalent shares which
were not included in the computation of diluted loss per share because they
would have been anti-dilutive were 586,000 common equivalent shares, as
calculated under the treasury stock method and 16,910,000 common equivalent
shares relating to convertible subordinated debt and convertible preferred stock
calculated under the "if-converted method". Interest expense and dividends on
the convertible subordinated debt and convertible preferred stock added back to
net income applicable to common stockholders would have been $346 for the three
months ended June 30, 2003.
For the six months ended June 30, 2003 common equivalent shares which were
not included in the computation of diluted loss per share because they would
have been anti-dilutive were 813,000 common equivalent shares, as calculated
under the treasury stock method and 16,781,000 common equivalent shares relating
to convertible subordinated debt and convertible preferred stock calculated
under the "if-converted method". Interest expense and dividends on the
convertible subordinated debt and convertible preferred stock added back to net
income applicable to common stockholders would have been $652 for the six months
ended June 30, 2003.
Differences in the weighted average number of common shares outstanding
for purposes of computing diluted earnings per share for the three months ended
June 30, 2002 were due to the inclusion of 3,232,627 common equivalent shares,
as calculated under the treasury stock method and 15,708,000 common equivalent
shares relating to convertible subordinated debt and convertible preferred stock
calculated under the "if-converted method". Interest expense and dividends on
the convertible subordinated debt and convertible preferred stock added back to
net income was $280 for the three months ended June 30, 2002.
11
For the six months ended June 30, 2002, common equivalent shares, which
were not included in the computation of diluted loss per share because they
would have been anti-dilutive were 2,466,075 common equivalent shares, as
calculated under the treasury stock method and 15,627,000 common equivalent
shares relating to convertible debt and preferred stock calculated under the
"if-converted method." Interest expense and dividends on the convertible
subordinated debt and convertible preferred stock that were not added back to
net loss were $571 for the six months ended June 30, 2002 due to their
anti-dilutive effect.
(8) Commitments
On April 18, 2003, the Company signed a sixty-six month extension of its
lease on its office space in Cedar Knolls, New Jersey. Minimum annual lease
commitments including capital improvement payments under all non-cancelable
operating leases are as follows:
Year ending December 31,
2003............................................... $ 156
2004............................................... 168
2005............................................... 192
2006............................................... 198
2007............................................... 204
Thereafter......................................... 310
-------
Total lease commitments............................ $ 1,228
=======
On May 1, 2003, the Company entered into a two-year consulting agreement
with XNH Consulting Services, Inc. ("XNH"), a company wholly-owned by Norton
Herrick, the Company's former Chairman. The agreement provides, among other
things that XNH will provide consulting and advisory services to MediaBay and
that XNH will be under the direct supervision of the Company's Board of
Directors. For its services, the Company has agreed to pay XNH a fee of $8 per
month and to provide Mr. Herrick with health insurance and other benefits
applicable to the Company's officers to the extent such benefits may be provided
under the Company's benefit plans. The consulting agreement provides that the
indemnification agreement with Mr. Herrick entered into on November 15, 2002
pursuant to which, the Company agreed to indemnify Mr. Herrick to the maximum
extent permitted by the corporate laws of the State of Florida or, if more
favorable, the Company's Articles of Incorporation and By-Laws in effect at the
time the agreement was executed, against all claims (as defined in the
agreement) arising from or out of or related to Mr. Herrick's services as an
officer, director, employee, consultant or agent of the Company or any
subsidiary or in any other capacity shall remain in full force and effect and to
also indemnify XNH on the same basis. Mr. Herrick resigned as Chairman of
MediaBay, Inc. effective May 1, 2003 and the Company and Mr. Herrick terminated
the employment agreement signed as of November 2, 2002 on May 1, 2003.
(9) Supplemental Cash Flow Information
Cash paid for interest expense was $284 and $357 for the six months ended
June 30, 2003 and 2002, respectively.
During the six months ended June 30, 2002, the Company issued 19,986
shares of the Company's common stock to consultants under consulting agreements.
The shares have been valued at $50 and are being amortized to expense over the
period of benefit.
12
(10) Segment Reporting
For 2003 and 2002, the Company has divided its operations into four
reportable segments: Corporate; Audio Book Club ("ABC") a membership-based club
selling audiobooks via 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 six months ended June 30, 2003 and 2002 from its RadioClassics
subsidiary. Inter-segment sales are recorded at prevailing sales prices.
Segment Reporting
Three Months Ended June 30, 2003
Corporate ABC RSI Mbay.com Inter-segment Total
--------- --- --- -------- ------------- -----
Sales, net of returns, discounts and allowances -- 7,274 2,110 35 (11) 9,408
Operating (loss) profit before depreciation
and amortization (104) 448 260 (140) -- 327
Depreciation and amortization 61 26 11 -- -- 99
Interest expense 529 532
Dividends on preferred stock 62 -- 3 -- -- 62
Net income (loss) applicable to common shares (756) 422 246 (140) -- (228)
Total assets -- 29,317 16,187 3 -- 45,452
Acquisition of fixed assets -- 3 1 -- (55) 4
Three Months Ended June 30, 2002
Corporate ABC RSI Mbay.com Inter-segment Total
--------- --- --- -------- ------------- -----
Sales, net of returns, discounts and allowances $ -- $ 9,208 $ 2,775 $ 57 $ (63) $11,977
Operating (loss) profit before depreciation
and amortization (1,104) 1,784 597 (115) 38 1,200
Depreciation and amortization 385 33 30 -- -- 448
Interest expense 768 -- 37 -- -- 805
Dividends on preferred stock 57 -- -- -- -- 57
Net income (loss) applicable to common shares (1,929) 1,784 560 (115) 38 338
Total assets -- 29,171 18,557 2 (65) 47,665
Acquisition of fixed assets -- 3 11 -- -- 14
Six Months Ended June 30, 2003
Corporate ABC RSI Mbay.com Inter-segment Total
--------- --- --- -------- ------------- -----
Sales, net of returns, discounts and allowances -- 15,380 4,710 52 (37) 20,105
Operating (loss) profit before depreciation and
amortization (1,269) 809 358 (296) 5 (393)
Depreciation and amortization 121 54 26 -- -- 198
Interest expense 1,048 -- 7 -- -- 1055
Dividends on preferred stock 118 -- -- -- -- 118
Net income (loss) applicable to common shares (2,556) 755 328 (296) 5 (1,764)
Total assets -- 29,317 16,187 3 (55) 45,452
Acquisition of fixed assets -- 13 2 -- -- 15
Six Months Ended June 30, 2002
Corporate ABC RSI Mbay.com Inter-segment Total
--------- --- --- -------- ------------- -----
Sales, net of returns, discounts and allowances $ -- $17,129 $ 4,307 $ 107 $ (86) 21,457
Operating (loss) profit (2,116) 2,837 692 (231) 38 1,220
Operating (loss) profit before depreciation
and amortization 821 64 60 -- -- 945
Interest expense 1,493 -- 45 -- -- 1,538
Dividends on preferred stock 102 -- -- -- -- 102
Net income (loss) applicable to common shares (3,711) 2,837 647 (231) 38 (420)
Total assets -- 29,171 18,557 2 (65) 47,665
Acquisition of fixed assets -- 73 18 -- -- 91
13
(11) Recent Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities"("SFAS 149"). SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133. With certain
exceptions, SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. Management does not believe adoption of this standard will have a material
impact on the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of this statement is not expected
to have a material effect on the Company's financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" ("SFAS 148") which amends
SFAS No. 123. This statement provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No. 123.
The transition guidance and disclosure requirements are effective for fiscal
years ending after December 15, 2002. The Company has included the required
interim disclosure in Note 2 to these Financial Statements. The adoption of this
statement did not have a material effect on the Company's financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This interpretation requires a guarantor
to recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. It also enhances
guarantor's disclosure requirements to be made in its interim and annual
financial statements about its obligations under certain guarantees it has
issued. The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. In the normal course of business, the Company does not issue guarantees to
third parties; accordingly, this interpretation will not have an effect on the
Company's financial position or results of operations.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections", was approved
by the FASB. This statement is effective January 1, 2003. Among other things,
this statement requires that gains or losses on the extinguishment of debt will
generally be required to be reported as a component of income from continuing
operations and will no longer be classified as an extraordinary item. Therefore,
beginning in 2003, the Company's prior financial statements will need to be
reclassified to include those gains and losses previously recorded as an
extraordinary item as a component of income from continuing operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" (SFAS 146"). SFAS 146 requires the recognition of a
liability for costs associated with an exit plan or disposal activity when
incurred and nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)", which allowed
recognition at the date of an entity's commitment to an exit plan. The
provisions of this statement are effective for exit or disposal activities that
are initiated by the Company after December 31, 2002.
14
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. 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 adoption of this statement did not have a material
effect on the Company's financial position or results of operations.
(12) Subsequent Events
On July 31, 2003, a director exercised options to purchase 300,000 shares
of MediaBay common stock at an exercise price of $.50 per share pursuant to an
Option Agreement dated November 23, 2001. The options were exercised on a
"cash-less" basis and the closing stock price on July 31, 2001 was $.78,
accordingly, the Company issued to the director a certificate for 107,692 shares
of MediaBay common stock.
15
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 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 the Company's 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 the Company
believes 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 the Company's 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, the Company's history of
losses; its ability to meet stock repurchase obligations, anticipate and respond
to changing customer preferences, license and produce desirable content, protect
its databases and other intellectual property from unauthorized access; pay
trade creditors and collect receivables; dependence on third-party providers,
suppliers and distribution channels; competition; the costs and success of its
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. The Company undertakes no obligation to update any
forward-looking statements.
Introduction
The Company is a marketer of spoken audio products, including audiobooks
and old-time radio shows, through direct response, retail and Internet channels.
The Company's content and products are sold in multiple formats, including
physical (cassette and compact disc) and secure digital download formats.
The Company reports 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, Radio Classics, 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.
Results of Operations
Three Months Ended June 30, 2003 Compared to Three Months Ended
June 30, 2002
Sales, net of returns, discounts and allowances for the three months ended
June 30, 2003 were $9,407 a decrease of $2,570, as compared to $11,977 for the
three months ended June 30, 2002. The decrease in sales is principally due to
decreased sales at our Audio Book Club of $1,934 in large part due to a decrease
in membership and new member sales as a result of the timing and size of new
member marketing activities during 2003 and higher return rates from members
acquired in 2002 and $1,610 lower wholesale sales of our old-time radio products
due to lower consumer demand and higher returns. This decrease was partially
offset by $938 of sales in the three months ended June 30, 2003, of The World's
Greatest Old-Time Radio continuity program, a program introduced in the third
quarter of 2002, which is similar to Audio Book Club and offers old-time radio
products.
Cost of sales for the three months ended June 30, 2003 decreased $1,070 to
$4,124 from $5,194 in the prior comparable period. Cost of sales as a percentage
of net sales increased to 43.8% from 43.4%. Principally due to lower sales, as
described above, gross profit decreased $1,500, to $5,283 for the three months
ended June 30, 2003 as compared to $6,783 for the three months ended June 30,
2002.
16
Advertising and promotion expenses increased $24 to $2,612 for the three
months ended June 30, 2003 as compared to $2,588 in the prior comparable period.
The increase is principally due to increased advertising expenditures during the
year ended December 31, 2002 compared to the year ended December 31, 2001, which
resulted in increased amortization of deferred member acquisition costs in the
three months ended June 30, 2003 as compared to the three months ended June 30,
2002. The Company actually spent $1,851 on advertising in the three months ended
June 30, 2003; a reduction of $1,413, as compared to $3,264 spent on advertising
in the three months ended June 30, 2002.
General and administrative expenses for the three months ended June 30,
2003 decreased $341 to $2,206 from $2,547 for the three months ended June 30,
2002. The decrease in general and administrative expenses is due to lower
professional fees and other general and administrative costs partially offset by
a $248 increase in bad debt expense principally relating to higher bad debt
rates at Audio Book Club relating to higher new member intake in 2002
principally from members obtained through the Internet.
Depreciation and amortization expenses for the three months ended June 30,
2003 were $99, a decrease of $349, as compared to $448 for the prior comparable
period. The decrease is principally attributable to reductions in the
amortization of intangibles, which had been fully amortized or written off
during the year ended December 31, 2002. Interest expense for the three months
ended June 30, 2003 decreased $273 to $532 as compared to $805 for the three
months ended June 30, 2002. The decrease is principally due to the pay down of a
portion of our senior credit facility, a decrease in interest rates on our
variable rate debt as interest rates have declined and inclusion in the three
months ended June 30, 2002 of $215 for amortization of debt discount and
deferred financing fees as compared to $128 for the three months ended June 30,
2003. Preferred dividends for the three months ended June 30, 2003 were $62 as
compared to $57 for the three months ended June 30, 2002. The increase is due to
the issuance in May 2003 of 3,350 shares of a newly created Series B Convertible
Preferred Stock (the "Series B Stock") with a liquidation preference of $100 per
share for $335.
Principally due to lower sales and related gross profit, partially offset
by lower general and administrative expenses, amortization and depreciation and
interest expense, the Company reported a net loss applicable to common shares of
$228, or $.02 per diluted share of common stock as compared to net income
applicable to common shares for the three months ended June 30, 2003 of $338, or
$.02 per diluted share for the three months ended June 30, 2002.
Six Months Ended June 30, 2003 Compared to Six Months Ended
June 30, 2002
Sales, net of returns, discounts and allowances for the six months ended
June 30, 2003 were $20,105, a decrease of $1,352, as compared to $21,457 for the
six months ended June 30, 2002. The decrease in sales is principally due to
decreased sales at our Audio Book Club of $1,749 in large part due to a decrease
in membership and new member sales as a result of the timing and size of new
member marketing activities during 2003 and higher returns from members acquired
in 2002, and $1,466 lower wholesale sales of our old-time radio products due to
lower consumer demand and higher returns. The decrease was partially offset by
$1,586 of sales in the six months ended June 30, 2003, of The World's Greatest
Old-Time Radio continuity program, a program introduced in the third quarter of
2002, which is similar to Audio Book Club and offers old-time radio products and
an increase in old-time radio direct-to-consumer sales of $199 principally from
a radio advertising campaign.
Cost of sales for the six months ended June 30, 2003 decreased $124 to
$9,359 from $9,483 in the prior comparable period. Cost of sales as a percentage
of net sales increased to 46.5% for the six months ended June 30, 2003 compared
to 44.2% for the three months ended June 30, 2002. The increase in cost of goods
sold as a percentage of net sales is principally due to an increase at the Radio
Spirits operations as a result of discounting in the direct mail business
relating to a new customer acquisition program marketed through a radio
advertising campaign, increased returns in the wholesale business resulting in
higher fulfillment costs as a percentage of revenue and increased provisions for
obsolete inventory and an increase in new members in The World's Greatest
Old-Time Radio continuity, whose initial purchases are at substantially reduced
prices. Principally due
17
to lower sales, gross profit decreased $1,228 to $10,746 for the six months
ended June 30, 2003 as compared to $11,974 for the six months ended June 30,
2002.
Advertising and promotion expenses increased $683 to $5,459 for the six
months ended June 30, 2003 as compared to $4,776 in the prior comparable period.
The increase is principally due to increased advertising expenditures during the
year ended December 31, 2002 compared to the year ended December 31, 2001, which
resulted in increased amortization of deferred member acquisition costs in the
six months ended June 30, 2003 as compared to the six months ended June 30,
2002. The Company actually spent $4,223 on advertising in the six months ended
June 30, 2003; a reduction of $2,583, as compared to $6,806 spent on advertising
in the six months ended June 30, 2002.
General and administrative expenses for the six months ended June 30, 2003
increased $648 to $5,680 from $5,033 for the six months ended June 30, 2002.
General and administrative expense increases are principally attributable to
increased bad debt expense of $762, principally relating to higher bad debt
rates at Audio Book Club relating to higher new member intake in 2002
principally from members obtained through the Internet, partially offset by
lower professional fees and other expenses.
Depreciation and amortization expenses for the six months ended June 30,
2003 were $198, a decrease of $747, as compared to $945 for the prior comparable
period. The decrease is principally attributable to reductions in the
amortization of intangibles, which had been fully amortized or written off
during the year ended December 31, 2002.
Net interest expense for the six months ended June 30, 2003 decreased $483
to $1,055 as compared to $1,538 for the six months ended June 30, 2001. The
decrease is principally due to the pay down of a portion of our senior credit
facility, a decrease in interest rates on our variable rate debt as interest
rates have declined and inclusion in net interest expense of $248 and $449 for
the six months ended June 30, 2003 and 2002, respectively, for amortization of
debt discount related to warrants and beneficial conversion features related to
our financings. Preferred stock dividends were $118 and $102 for the six months
ended June 30, 2003 and 2002, respectively. The increase in preferred stock
dividends is due to the issuance in May 2003 of 3,350 shares of a newly created
Series B Convertible Preferred Stock (the "Series B Stock") with a liquidation
preference of $100 per share for $335.
Due to the lower sales and related gross profit, higher advertising
expenses and bad debt expense, partially offset by lower amortization,
depreciation and interest expense, the Company reported a net loss applicable to
common shares of $1,764, or $.12 per diluted share of common stock as compared
to a net loss applicable to common shares for the six months ended June 30, 2003
of $420, or $.03 per diluted share.
Liquidity and Capital Resources
Historically, the Company has funded its cash requirements through sales
of equity and debt securities and borrowings from financial institutions and the
Company's principal shareholders.
At June 30, 2003, the Company owed approximately $12,562 to trade and
other creditors. Approximately $5,638 of these accounts payable were more than
60 days past due. If the Company does not make satisfactory payments to its
vendors they may refuse to continue to provide it products or services on
credit, which could interrupt the Company's supply of products or services.
The Company has implemented a series of initiatives to increase cash flow
including significant reductions in marketing and advertising expenditures to
attract new members to its Audio Book Club. There can be no assurance that the
Company will not in the future require additional capital to pay its creditors,
fund the expansion of operations, make acquisitions or for working capital.
Management believes that additional sources of capital are available if
required.
For the six months ended June 30, 2003, cash decreased by $369, as the
Company had net cash provided by operating activities of $660 and used net cash
of $265 and $764 for investing and financing activities, respectively. Net cash
provided by operating activities principally consisted of net income of $1,243,
18
depreciation and amortization expenses of $198, amortization of deferred
financing costs and original issue discount of $248, non-current accrued
interest and dividends payable of $534, decreases in accounts receivable,
inventory and royalty advances of $1,246, $149 and $8, respectively, and a net
decrease in deferred member acquisition costs of $1,246, partially offset by an
increase in prepaid expenses of $132 and decreases in accounts payable and
accrued expenses of $383 and net settlement costs of $690.
On June 16, 2003, Audio Book Club, Inc. ("ABC"), a wholly owned subsidiary
of MediaBay entered into a settlement agreement with respect to a lawsuit in
which ABC was the plaintiff and arising out of an acquisition made by ABC.
Pursuant to the settlement agreement, ABC received $350 in cash, the return for
cancellation of 325,000 shares of MediaBay common stock issued in connection
with the acquisition and the termination of put rights granted to the seller in
the acquisition with respect to 230,000 of the shares (put rights with respect
to the remaining 95,000 shares had previously terminated). The termination of
the puts rights terminates a $3,450 future contingent obligation of MediaBay and
results in a corresponding increase in stockholders' equity.
The calculation of the settlement of litigation is as follows:
Termination of contingent put rights $ 3,450
Return for cancellation of 325,000 shares of common stock 247
Legal and other costs incurred in connection with the
litigation, net of cash received of $350 690
-------
Net settlement of litigation recorded in Contributed Capital $ 3,007
=======
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 deferred member acquisition cost is due to changes in
the timing and reduction of the size of marketing campaigns to attract new
members due both to an attempt to target the best performing members and cash
constraints which have limited our ability to execute planned campaigns. The
Company actually spent $4,223 on advertising in the six months ended June 30,
2003; a reduction of $2,583, as compared to $6,806 spent on advertising in the
six months ended June 30, 2002. The increase in prepaid expenses is principally
due to the timing of marketing activities.
Net cash used in investing activities consists of acquisition of fixed
assets of $15, principally computer equipment and the acquisition of intangible
assets and goodwill, including legal fees and other costs incurred in obtaining
covenants not to compete from a former employee and a former consultant of $92,
and the acquisition of certain old-time radio assets of $158.
In accordance with the terms of its senior credit facility, the Company
repaid $1,050 of principal on its senior credit facility during the six months
ended June 30, 2003. On April 9, 2003, the maturity date of the principal amount
of the senior credit facility of $4,030 was extended to April 30, 2004 with
certain conditions. In addition to its scheduled monthly principal payments of
$190 in August through September 2003 and $200 in October through December 2003;
the Company is required to make payments of $225 per month for the months of
January, February and March 2004. The interest rate for the revolving credit
facility is the prime rate plus 2.5%.
On May 7, 2003, the Company sold 3,350 shares of a newly created Series B
Convertible Preferred Stock (the "Series B Stock") with a liquidation preference
of $100 per share for $335. Of the total sold, 1,400 shares ($140) were
purchased by Carl Wolf, Chairman and a director of the Company, and 200 shares
($20) were purchased by John Levy, Executive Vice President and Chief Financial
Officer of the Company. The holders of shares of Series B Convertible Preferred
Stock will receive dividends at the rate of $9.00 per share, payable quarterly,
in arrears, in cash on each March 31, June 30, September 30 and December 31;
provided that payment will accrue until the Company is permitted to make such
payment in cash under its Agreement with its senior lender.
19
The Series B Stock is convertible into shares of Common Stock into
MediaBay Common Stock at a conversion rate equal to a fraction, (i) the
numerator of which is equal to the number of Series B Stock times $100 plus
accrued and unpaid dividends though the date of conversion and (ii) the
denominator is the $0.77, the closing sale price of the Company's stock on
May 6, 2003.
In the event of a liquidation, dissolution or winding up of MediaBay, the
holders of Series B Stock shall be entitled to receive out of the assets of
MediaBay, a sum in cash equal to $100.00 per share before any amounts are paid
to the holders of MediaBay common stock and on a pari passu with the holders of
the Series A Convertible Preferred Stock. The holders of Series B Stock shall
have no voting rights, except as required by law and except that the vote or
consent of the holders of a majority of the outstanding shares of Series B
Stock, voting separately as a class, will be required for any amendment,
alteration or repeal of the terms of the Series B Stock that adversely effects
the rights, preferences or privileges of the Series B Stock.
On April 18, 2003 the Company signed a sixty-six month extension of its
lease on its office space in Cedar Knolls, New Jersey. Minimum annual lease
commitments including capital improvement payments under all non-cancelable
operating leases are as follows:
Year ending December 31,
2003............................................... $ 156
2004............................................... 168
2005............................................... 192
2006............................................... 198
2007............................................... 204
Thereafter......................................... 310
-------
Total lease commitments............................ $ 1,228
=======
On May 1, 2003, the Company entered into a two-year consulting agreement
with XNH Consulting Services, Inc. ("XNH"), a company wholly-owned by Norton
Herrick, the Company's former Chairman. The agreement provides, among other
things that XNH will provide consulting and advisory services to MediaBay and
that XNH will be under the direct supervision of the Company's Board of
Directors. For its services, the Company has agreed to pay XNH a fee of $8 per
month and to provide Mr. Herrick with health insurance and other benefits
applicable to the Company's officers to the extent such benefits may be provided
under the Company's benefit plans. The consulting agreement provides that the
indemnification agreement with Mr. Herrick entered into on November 15, 2002
pursuant to which, the Company agreed to indemnify Mr. Herrick to the maximum
extent permitted by the corporate laws of the State of Florida or, if more
favorable, the Company's Articles of Incorporation and By-Laws in effect at the
time the agreement was executed, against all claims (as defined in the
agreement) arising from or out of or related to Mr. Herrick's services as an
officer, director, employee, consultant or agent of the Company or any
subsidiary or in any other capacity shall remain in full force and effect and to
also indemnify XNH on the same basis. Mr. Herrick resigned as Chairman of
MediaBay, Inc. effective May 1, 2003 and the Company and Mr. Herrick terminated
the employment agreement signed as of November 2, 2002 on May 1, 2003.
20
Recent Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS 149"). SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133. With certain
exceptions, SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. Management does not believe adoption of this standard will have a material
impact on the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of this statement is not expected
to have a material effect on the Company's financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement 123" which amends SFAS No. 123. This statement provides alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation and amends the disclosure
requirements of SFAS No. 123. The transition guidance and annual disclosure
provisions are effective for fiscal years ending after December 15, 2002. The
Company has included the required interim disclosure in Note 2 to the Financial
Statements presented elsewhere in this report. The adoption of this statement
did not have a material effect on the Company's financial position or results of
operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This interpretation requires a guarantor
to recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. It also enhances
guarantor's disclosure requirements to be made in its interim and annual
financial statements about its obligations under certain guarantees it has
issued. The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. In the normal course of business, the Company does not issue guarantees to
third parties; accordingly, this interpretation will not have an effect on the
Company's financial position or results of operations.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections", was approved
by the FASB. This statement is effective January 1, 2003. Among other things,
this statement requires that gains or losses on the extinguishment of debt will
generally be required to be reported as a component of income from continuing
operations and will no longer be classified as an extraordinary item. Therefore,
beginning in 2003, our prior financial statements will need to be reclassified
to include those gains and losses previously recorded as an extraordinary item
as a component of income from continuing operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS 146"). SFAS 146 requires the recognition of a
liability for costs associated with an exit plan or disposal activity when
incurred and nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)", which allowed
recognition at the date of an entity's commitment to an exit plan. The
provisions of this statement are effective for exit or disposal activities that
are initiated by the Company after December 31, 2002.
21
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. 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 adoption of this statement did not have a material
effect on the Company's financial position or results of operations.
Quarterly Fluctuations
The Company's 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. The Company believes 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
June 30, 2003 of $16,597, net of original issue discount of $354, of which
interest on $8,494 principal amount of this debt is payable at the prime rate
plus 2.0 to 2.5%. If the prime rate were to increase the Company's interest
expense would increase, however a hypothetical 10% change in interest rates
would not have had a material impact on its fair values, cash flows, or earnings
for the six months ended June 30, 2003. All of the Company's other debt is at
fixed rates of interest.
Item 4. Controls and Procedures
The Company's certifying officers have concluded based on an evaluation of
the Company's disclosure controls and procedures that was carried out under
their supervision and with their participation that the disclosure controls and
procedures as of the end of the quarter ended June 30, 2003 are effective in
ensuring that material information relating to the Company, including its
consolidated subsidiaries, is made known to the certifying officers by others
within those entities, as appropriate to allow timely decisions regarding
required disclosure, particularly during the period in which this Form 10-Q was
being prepared and that information required to be disclosed by the Company in
its reports that it files under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. In addition, there was no
change in internal control over financial reporting during the quarter ended
June 30, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
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Part II - Other Information
Item 2: Changes in Securities and Use of Proceeds (Dollars in thousands, except
per share date)
In the six months ended June 30, 2003, the Company issued plan options to
purchase 160,000 shares of its common stock to officers, employees and Board
members. The options have exercise prices ranging from $1.25 to $1.50, vest at
various times and have a five-year exercise period. The Company also cancelled
five-year plan options to purchase a total of 155,000 shares of common stock. We
also issued non-plan warrants to purchase 90,000 shares of its common stock to a
former employee and consultant at prices ranging from $1.50 to $3.00 per share.
On May 7, 2003, the Company sold 3,350 shares of a newly created Series B
Convertible Preferred Stock (the "Series B Stock") with a liquidation preference
of $100 per share for $335. Of the total sold, 1,400 shares ($140) were
purchased by Carl Wolf, Chairman and a director of the Company, and 200 shares
($20) were purchased by John Levy, Executive Vice President and Chief Financial
Officer of the Company. The Series B Stock is convertible into shares of Common
Stock into MediaBay Common Stock at a conversion rate equal to a fraction, (i)
the numerator of which is equal to the number of Series B Stock times $100 plus
accrued and unpaid dividends though the date of conversion and (ii) the
denominator is the $0.77, the closing sale price of the Company's stock on May
6, 2003.
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
31.1 Rule 13a-14(a) Certificate of Principal Executive Officer
31.2 Rule 13a-14(a) Certificate of Principal Financial Officer
32.1 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
32.2 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
Report dated June 24, 2003 reporting changes in Company's certifying
accountants.
Report dated June 16, 2003, reporting Audio Book Club, Inc.'s
("ABC"), a wholly-owned subsidiary of MediaBay, settlement agreement
with respect to a lawsuit in which ABC was the plaintiff.
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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: August 11, 2003 By: /s/ Hakan Lindskog
-------------------------------------
Hakan Lindskog
Chief Executive Officer and President
Dated August 11, 2003 By: /s/ John F. Levy
-------------------------------------
John F. Levy
Chief Financial Officer
(principal accounting and financial officer)
24