SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
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 Small Business Issuer 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 14, 2001, there were 13,861,866 shares of the Issuer's Common Stock
outstanding.
1
MEDIABAY, INC.
QUARTER ENDED MARCH 31, 2001
FORM 10-Q
Index
Page
PART I: Financial Information ----
Item 1: Financial Statements
Consolidated Balance Sheets at March 31, 2001 and
December 31, 2000 (unaudited) 3
Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2000 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
Item 3: Quantitative and Qualitative Disclosures of Market Risk 15
PART II: Other Information
Item 2: Changes in Securities and Use of Proceeds 16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
MEDIABAY, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
March 31, December 31,
2001 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 87 $ 498
Accounts receivable, net of allowances for sales returns and doubtful accounts
of $4,512 and $4,516 at March 31, 2001 and December 31, 2000, respectively 4,538 5,415
Inventory 7,258 6,687
Prepaid expenses and other current assets 1,073 1,104
Royalty advances 4,017 3,712
Deferred member acquisition costs - current 7,894 7,520
Deferred income taxes - current 550 --
-------- --------
Total current assets 25,417 24,936
Fixed assets, net of accumulated depreciation of $1,769 and $1,576 at
March 31, 2001 and December 31, 2000, respectively 1,550 1,708
Deferred member acquisition costs - non-current 4,292 5,062
Non-current prepaid expenses 114 177
Deferred income taxes - non-current 12,450 --
Investment in I-Jam Multimedia LLC 2,000 2,000
Other intangibles, net of accumulated amortization of $9,958 and $8,781 at
March 31, 2001 and December 31, 2000, respectively 5,714 6,891
Goodwill, net of accumulated amortization of $1,136 and $1,009 at March 31,
2001 and December 31, 2000, respectively 9,031 9,158
-------- --------
$ 60,568 $ 49,932
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 16,421 $ 16,703
Current portion - long-term debt 700 400
-------- --------
Total current liabilities 17,121 17,103
-------- --------
Long-term debt 15,864 15,864
-------- --------
Preferred stock, no par value, authorized 5,000,000 shares; no shares issued and
outstanding -- --
Common stock subject to contingent put rights 4,550 4,550
Common stock; no par value, authorized 150,000,000 shares; issued and outstanding
13,861,866 at March 31, 2001 and December 31, 2000 93,462 93,468
Contributed capital 3,761 3,761
Accumulated deficit (74,190) (84,814)
-------- --------
Total common stockholders' equity 23,033 12,415
-------- --------
$ 60,568 $ 49,932
======== ========
See accompanying notes to consolidated financial statements.
3
MEDIABAY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2001 2000
-------- --------
Sales $ 12,910 $ 16,127
Returns, discounts and allowances 3,309 5,181
-------- --------
Net sales 9,601 10,946
Cost of sales 3,816 5,750
-------- --------
Gross profit 5,785 5,196
Expenses:
Advertising and promotion 3,186 2,440
General and administrative 2,962 3,182
Depreciation and amortization 1,492 1,983
-------- --------
Operating loss (1,855) (2,409)
Interest expense, net of interest income of $0 and $54
in 2001 and 2000, respectively 521 1,068
-------- --------
Loss before income taxes (2,376) (3,477)
Benefit for income taxes 13,000 --
-------- --------
Net income (loss) $ 10,624 $ (3,477)
======== ========
Basic and diluted earnings (loss) per common share:
Basic earnings (loss) per common share $ .77 $ (.34)
======== ========
Diluted earnings (loss) per common share $ .58 $ (.34)
======== ========
See accompanying notes to consolidated financial statements.
4
MEDIABAY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $ 10,624 $ (3,477)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 1,492 1,983
Amortization of deferred member acquisition costs 1,961 1,117
Amortization of deferred financing costs 66 136
Deferred income tax benefit (13,000) --
Changes in asset and liability accounts, net of
acquisitions:
Decrease in accounts receivable, net 877 1,860
Increase in inventory (571) (570)
Decrease (increase) in prepaid expenses 112 (601)
Increase in royalty advances (305) (1,109)
Increase in deferred member acquisition costs (1,565) (1,427)
Decrease in accounts payable and accrued expenses (288) (486)
-------- --------
Net cash used in operating activities (597) (2,574)
-------- --------
Cash flows from investing activities:
Acquisition of fixed assets (23) (221)
Cash paid in acquisitions -- (97)
-------- --------
Net cash used in investing activities (23) (318)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 29,491
Proceeds from issuance of long-term debt 300 2,000
Payment of long-term debt -- (930)
Increase in deferred financing costs (91) (9)
-------- --------
Net cash provided by financing activities 209 30,552
-------- --------
Net (decrease) increase in cash and cash equivalents (411) 27,660
Cash and cash equivalents at beginning of period 498 198
-------- --------
Cash and cash equivalents at end of period $ 87 $ 27,858
======== ========
See accompanying notes to consolidated financial statements.
5
MEDIABAY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
(1) ORGANIZATION
MediaBay, Inc. (the "Company"), a Florida corporation, was formed on August
16, 1993. MediaBay, Inc. is a leading seller of spoken audio and nostalgia
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 direct mail membership club and at
Audiobookclub.com. Its old-time radio and classic video programs are marketed
through direct-mail catalogs, on the Internet at Radiospirits.com and, on a
wholesale basis, to major retailers. The Company's spoken audio products are
also available for purchase in secure downloadable format over the Internet
through its content-rich media portal at MediaBay.com.
(2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The interim unaudited financial statements should be read in conjunction
with the Company's audited financial statements contained in its Annual Report
on Form 10-KSB for the year ended December 31, 2000. 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.
6
(3) 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.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
March 31, December 31,
Deferred tax assets: 2001 2000
-------- -----------
Federal and state net operating loss carry-forwards $ 15,890 $ 14,801
Accounts receivable, principally due to allowance
for doubtful accounts and reserve for returns 1,252 1,274
Fixed assets/Intangibles 12,933 13,026
-------- --------
Total gross deferred tax assets 30,075 29,101
Less valuation allowance (17,075) (29,101)
-------- --------
Net deferred tax assets $ 13,000 $ --
======== ========
(4) LONG-TERM DEBT
Bank Debt
In March 2001, the maturity date of the principal amount of the revolving
credit facility of $6,580 was extended and, on April 30, 2001, the loan
documents were amended to extend the maturity date to September 30, 2002 with
certain conditions. The interest rate for the revolving credit facility is the
prime rate plus 2%. The Company is required to make mandatory payments of
principal as follows: $100 on September 30, 2001 and $300 on each of December
31, 2001, March 31, 2002 and June 30, 2002.
Related Party Debt
In February 2001, the Company received an advance of $300, from Huntingdon
Corporation, an affiliate of Norton Herrick, MediaBay's Chairman ("Huntingdon").
In March 2001, the Company agreed with Huntingdon for Huntingdon to loan to
the Company an additional $2,500 with certain conditions, including extension of
the maturity date of the revolving credit facility. Huntingdon, at its option,
will be permitted to increase its $2,500 loan to the Company to $3,000, on the
same terms. The loan was completed and a secured senior convertible note was
issued to Huntington on May 14, 2001 (see Note 11).
(5) STOCKHOLDERS' EQUITY AND STOCK OPTIONS AND WARRANTS
Stock Options and Warrants
In the first quarter of 2001, the Company issued warrants to purchase
50,000 shares of its common stock at $4.00 per share and warrants to purchase
50,000 shares of its common stock at $6.00 per share to a consultant pursuant to
a consulting agreement. The Company canceled five-year plan options to purchase
a total of 72,250 shares of the Company's common stock. In addition, the Company
cancelled warrants to purchase a total of 200,000 shares of the Company's common
stock
(6) NET LOSS 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, 2001
and 2000 of 13,861,866 and 10,253,079, respectively.
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.
Common equivalent shares, which were not included in the computation of diluted
loss per share because they would have been anti-dilutive were 1,036,127 for the
three months ended March 31, 2000.
7
(7) SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was $131 and $920 for the three months ended
March 31, 2001 and 2000, respectively.
(8) RELATED PARTY TRANSACTION
In the first quarter of 2001, Glebe Resources, Inc., a company wholly owned
by Norton Herrick, provided a security deposit to a vendor in the amount of
$100. Glebe received no compensation for and did not profit from this
transaction.
(9) SEGMENT REPORTING
For 2001 and 2000, the Company has divided its operations into four
reportable segments: (i) Corporate, which includes general corporate
administrative costs, professional fees and interest expenses; (ii) Audio Book
Club ("ABC"), a membership-based club selling audiobooks via direct mail and the
Internet; (iii) Radio Spirits ("RSI"), which produces, sells, licenses and
syndicates old-time radio programs and (iv) MediaBay.com, our media portal
offering spoken audio content in secure digital download formats. Segment
operating income is total segment revenue reduced by operating expenses
identifiable with that business segment. The Company evaluates performance and
allocates resources among its four operating segments based on operating income
and opportunities for growth. Inter-segment sales are recorded at prevailing
sales prices.
SEGMENT REPORTING
THREE MONTHS ENDED MARCH 31, 2001 INTER-
CORPORATE ABC RSI MBAY.COM SEGMENT TOTAL
--------- --- --- -------- ------- -----
Net Revenue $ -- $ 7,788 $ 1,737 $ 147 $ (71) $ 9,601
Profit (loss) before depreciation
Amortization and interest expense (318) 816 (380) (500) 19 (363)
Depreciation and amortization 1,311 33 42 106 -- 1,492
Net interest expense 517 -- 4 -- -- 521
Net income (2,146) 783 (426) (606) 19 (2,376)
Assets 15,000 27,321 17,036 1,354 (143) 60,568
Non-cash expenses 79 477 (82) 21 -- 495
Addition to fixed assets -- 4 9 10 -- 23
THREE MONTHS ENDED MARCH 31, 2000 INTER-
CORPORATE ABC RSI MBAY.COM SEGMENT TOTAL
--------- --- --- -------- ------- -----
Net Revenue $ -- $ 9,034 $ 2,051 $ -- $ (139) $ 10,946
Profit (loss) before depreciation
Amortization and interest expense (591) 371 41 (344) 97 (426)
Depreciation and amortization 1,808 25 33 117 -- 1,983
Net interest expense 1,068 -- -- -- -- 1,068
Net income (3,467) 346 8 (461) 97 (3,477)
Assets -- 101,334 18,241 1,056 (59) 120,572
Non-cash expenses -- (310) -- -- 11 (310
Addition to fixed assets -- -- 18 202 -- 221
(10) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", subsequently amended by SFAS No.
137 and SFAS No. 138, which was effective January 1, 2001. SFAS No. 133 provides
a comprehensive standard for the recognition and measurement of derivatives and
hedging activities. The statement requires all derivatives to be recorded on the
balance sheet at fair value and also prescribes special accounting for certain
types of hedges. The Company has not entered into any derivative or hedging
transactions, nor has it identified any embedded derivatives, and therefore, has
concluded the Company's transition adjustment is zero on its adoption of SFAS
No. 133 as of January 1, 2001.
8
(11) SUBSEQUENT EVENTS
On May 14, 2001 the Company issued a $2,500 secured senior convertible note
to Huntingdon, in consideration for loans made by Huntingdon to the Company in
the amount of $2,500. This note is convertible into MediaBay common stock at a
conversion rate of $.56 per share. The convertible note, in certain respects,
ranks pari passu with the current revolving credit facility and has a security
interest in all of the assets of the Company, except inventory, receivables and
cash. The note bears interest at the prime rate plus 2% and matures on September
30, 2002. Interest, at Huntingdon's option, (i) is payable in-kind, (ii) is
payable in shares of common stock or (iii) will accrue until the revolving
credit facility is repaid in full and, thereafter, payable in cash.
The Company also issued an $800 secured senior subordinated convertible
note to Huntingdon in consideration of $800 of advances made by Huntingdon in
December 2000 and February 2001. The note bears interest at 12% per annum and
interest, at Huntingdon's option, (i) is payable in-kind, (ii) is payable in
shares of common stock or (iii) will accrue until the revolving credit facility
is repaid in full and, thereafter, payable in cash. The note is convertible into
MediaBay common stock at a conversion rate of $.56 per share and is secured by a
second security interest in all of the assets of the Company, except inventory,
receivables and cash. The note matures on December 31, 2002.
In connection with these transactions, Huntingdon was granted ten-year
warrants to purchase 1,650,000 shares of common stock at an exercise price of
$0.56 per share as consideration of the $800 of advances and the $2,500 of
loans, plus ten-year warrants to purchase an additional 250,000 shares of common
stock at an exercise price of $0.56 per share if Huntingdon loans the Company an
additional $500. Huntingdon was granted registration rights relating to the
shares of common stock issuable upon conversion of the notes and exercise of the
warrants.
On May 14, 2001, the Company also modified a $1,984 senior subordinated
convertible note held by Norton Herrick as consideration for Mr. Herrick's
consent to the above transactions, elimination of the variable conversion price
feature of the note and foregoing current cash interest until MediaBay's
revolving credit facility is repaid. The modified note is convertible into
common stock at a conversion rate of $.56 per share and interest, at Mr.
Herrick's option, (i) is payable in-kind, (ii) is payable in shares of common
stock or (iii) will accrue until the revolving credit facility is repaid in full
and, thereafter, payable in cash. Mr. Herrick was granted registration rights
relating to the shares of common stock issuable upon conversion of the notes and
exercise of the warrants.
On May 14, 2001, the Company also modified a $3,000 senior subordinated
convertible note held by Evan Herrick, Norton Herrick's son as consideration for
Mr. Herrick's consent to the transactions and agreement to exchange the note for
preferred stock if requested by MediaBay under specified circumstances. The
modified note, which does not permit cash interest to be paid currently, is
convertible into common stock at a conversion rate of $.56 per share. Evan
Herrick was granted registration rights relating to the shares of common stock
issuable upon conversion of the notes and exercise of the warrants.
Subsequent to March 31, 2001, in addition to the warrants described above,
the Company granted plan options and warrants to purchase a total of 364,000
shares of the Company's common stock to officers, employees and consultants. The
options vest at various times and have exercise periods ranging from two to five
years. The weighted average exercise price of these options and warrants is
$3.31. In addition, the Company cancelled plan options to purchase 1,075,000
shares of the Company's common stock.
9
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 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, as more fully
described in the Company's Annual Report on Form 10-KSB, include, 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, successfully implement our Internet strategy, license content for
digital download, the growth of the digital download market and other advances
in technologies, dependence on third party providers and suppliers; 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.
INTRODUCTION
MediaBay, Inc. ("We", "Our", the "Company") is a leading seller of spoken
audio and nostalgia products, including audiobooks and old-time radio shows,
through direct response, retail and Internet channels. Our content and products
are sold in multiple formats, including physical (cassette and compact disc) and
secure digital download formats.
Our content library consists of more than 50,000 hours of spoken audio
content including audiobooks, old-time radio shows, audio versions of
newspapers, magazines and other unique spoken word content. The majority of our
content is acquired under license from the rights holders enabling us to
manufacture the product giving us significantly better product margins than
other companies.
Our customer base includes over 2.55 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 5,000 retail locations
including Costco, Target, Best Buy, Sam's Club, Barnes & Noble, Waldenbooks, B.
Dalton Booksellers, Borders, Amazon.com, Books-A-Million and The Museum Company.
10
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 350,000 classic radio and nostalgia video streams of our
content on a monthly basis to web site visitors at RadioSpirits.com and
MediaBay.com.
We have undertaken a significant review of our strategic objectives and
operations. While we remain committed to growth and believe strongly in both the
potential of our core markets and the future of digital downloads of premium
spoken word content, our priorities have been for the last nine months, and
continue to be, to operate our core businesses on a more profitable basis and to
improve cash flow. To this end, we have implemented a number of key initiatives
and are seeing positive results in our operations and cash flow. The initiatives
are as follows:
o As a result of implementing a standardized merchandising program in
our catalogs, we have reduced the number of SKUs (Stock Keeping Units)
in our inventory.
o We have revised the logic used in determining customer shipments,
which we believe reduces the level of customer returns and decreases
the level of required inventory. Returns as a percentage of gross
sales declined from 32.1% of gross sales for the three months ended
March 31, 2000 to 25.6% of gross sales for the three months ended
March 31, 2001.
o We have eliminated our Audio Book Club every day low price discounting
structure and currently sell most titles to members at full
manufacturers' suggested retail prices. The average selling price of
an Audio Book Club product has increased 67% since March 2000.
Partially as a result of this change, gross profit as a percentage of
net sales increased from 47.5% for the three months ended March 31,
2000 to 60.3% of net sales for the three months ended March 31, 2001.
o As a result of targeting the best prospect segments and improving the
effectiveness of our mail pieces, our cost to acquire new members by
direct mail promotions has decreased 55% from May 2000 to May 2001.
o We have discontinued doing cost per thousand guaranteed impressions
and cost per click advertising on the Internet in favor of cost per
customer acquired agreements only. Our cost to acquire a member on the
Internet has declined by 67% from March 2000 to March 2001.
o We have developed new, higher margin old-time radio product lines.
o We have internally developed better information systems for improving
title selection, inventory management and direct mail prospect list
selection.
o We have streamlined the operations structure of our divisions and have
been able to eliminate positions that are no longer necessary to
achieve our goals. In February of 2001 we eliminated ten positions.
We believe these initiatives have had a positive impact to date and will
substantially increase the profitability and improve the cash flow of our
operations.
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
11
experience. Due to the amount and timing of direct response advertising
campaigns, including the impact of capitalizing new member direct response
marketing costs, comparisons of our historical operating results from period to
period may not be meaningful.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2001 Compared to Three Months Ended
March 31, 2000
Gross sales for the three months ended March 31, 2001 were $12,910 a
decrease of $3,217, or 19.9%, as compared to $16,127 for the three months ended
March 31, 2000. The decrease in gross sales was primarily attributable to a
slowdown in the aggressive marketing at both the Audio Book Club and Radio
Spirits. In addition, we revised the logic used in determining customer product
shipments, which resulted in lower gross sales but also lower return rates.
Returns, discounts and allowances for the three months ended March 31, 2001
decreased $1,872 to $3,309, or 25.6% of gross sales, as compared to $5,181, or
32.1% of gross sales for the three months ended March 31, 2000. The decrease in
returns as a percentage of sales is due to aforementioned revisions in the logic
used in determining customer shipments.
Principally as a result of lower gross sales, partially offset by lower
returns, net sales for the three months ended March 31, 2001 decreased $1,345,
or 12.3%, to $9,601.
Cost of sales for the three months ended March 31, 2001 decreased $1,934,
or 33.8%, to $3,816 from $5,750 in the prior comparable period. Cost of sales as
a percentage of net sales decreased to 39.7% from 52.5%. We increased the
average selling price per title by eliminating our Audio Book Club every day low
price discounting structure and sold most titles to members at full
manufacturers' suggested retail prices. We also revised the merchandising of
products in our catalogs and on our web sites, to sell only those items, which
contribute greater gross profit. As a result, gross profit increased $589, or
11.3% to $5,785, or 60.3% of net sales as compared to a gross profit percentage
of net sales of 47.5% for the three months ended March 31, 2000.
Advertising and promotion expenses increased $746 or 30.6% to $3,186 for
the three months ended March 31, 2001 as compared to $2,440 in the prior
comparable period. Actual amounts expended for advertising and promotion in the
three months ended March 31, 2001 were $2,790, an increase of $40, from the
amount expended in the three months ended March 31, 2000 of $2,750. The
difference between the amount expended and the amount recorded as expense is due
to the capitalization of direct response advertising. Beginning in January 1999,
the Company was required to 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.
General and administrative expenses for the three months ended March 31,
2001 decreased $219 to $2,963 from $3,182 for the three months ended March 31,
2000. General and administrative expense decreases are principally attributable
to decreases in bad debt expenses, attendant with our decrease in net sales, and
telephone costs related to a reduction in "800" service calls, partially offset
by increases in payroll costs as we upgraded our staff. During 2000, we
streamlined our operations and the structure of our divisions. As a result, we
eliminated positions that are no longer necessary to achieve our goals. In
February of 2001 we eliminated ten positions. We expect the payroll savings from
the elimination of these positions to be realized in future periods.
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Depreciation and amortization expenses for the three months ended March 31,
2001 were $1,492, a decrease of $491, as compared to $1,983 for the prior
comparable period. The decrease is principally attributable to the writedown of
goodwill taken in the fourth quarter of 2000.
Net interest expense for the three months ended March 31, 2001 decreased
$547 to $521 as compared to $1,068 for the three months ended March 31, 2000.
The decrease in interest expenses is attributable to a reduction of $20,785 in
bank and other debt in the twelve months ended March 31, 2001.
Primarily due to reduced returns, reductions in cost of sales and general
and administrative expenses, decreased amortization of goodwill and lower
interest expense, the net loss before income tax benefit for the three months
ended March 31, 2001 decreased $1,101 to $2,376, as compared to a net loss of
$3,477 for the three months ended March 31, 2000.
As a result of the series of strategic initiatives described above, our
operations have improved. Although realization of net deferred tax assets is not
assured, we have determined, based on our improved operations, that it is 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, we had net income of $10,624, or $.58 per fully diluted share for the
three months ended March 31, 2001, as compared to a net loss of $3,477, or $.17
per share, for the three months ended March 31, 2000.
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 successfully reduced cash used in
operations in the first quarter, 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.
For the three months ended March 31, 2001, our cash decreased by $411, as
we used net cash of $597 and $23 for operating and investing activities,
respectively, and had cash provided by financing activities of $209. Net cash
used in operations principally consisted of the net income of $10,624, offset by
a $13,000 reduction in the valuation allowance for deferred tax assets,
increases in inventories of $571, royalty advances of $305, and a decrease in
accounts payable and accrued expenses of $288. Net cash used in operations was
partially offset by depreciation and amortization expenses included in net
income of $1,492, a decrease in accounts receivable of $877, a decrease in
prepaid expenses and other current assets of $112 and a net decrease in deferred
member acquisition costs of $396.
The increase in inventory is primarily due to the timing of purchases. The
increase in royalty advances is primarily attributable to the renewal and
expansion of licensing agreements with our significant publishers. 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 the timing of
direct-response advertising campaigns and a reduction in the size of the
campaigns designed to result in better response rates.
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Cash used in investing activities was for the acquisition of fixed assets,
principally for computer equipment.
In February 2001, we received an advance of $300 from Huntingdon
Corporation, an affiliate of Norton Herrick, MediaBay's Chairman ("Huntingdon").
On May 14, 2001 we issued a $2,500 secured senior convertible note to
Huntingdon, in consideration for loans made by Huntingdon to the Company in the
amount of $2,500. This note is convertible into MediaBay common stock at a
conversion rate of $.56 per share. The convertible note, in certain respects,
ranks pari passu with the current revolving credit facility and has a security
interest in all our assets, except inventory, receivables and cash. The note
bears interest at the prime rate plus 2% and matures on September 30, 2002.
Interest, at Huntingdon's option, (i) is payable in-kind, (ii) is payable in
shares of common stock or (iii) will accrue until the revolving credit facility
is repaid in full and, thereafter, payable in cash.
We also issued an $800 secured senior subordinated convertible note to
Huntingdon in consideration of $800 of advances made by Huntingdon in December
2000 and February 2001. The note bears interest at 12% per annum and interest,
at Huntingdon's option, (i) is payable in-kind, (ii) is payable in shares of
common stock or (iii) will accrue until the revolving credit facility is repaid
in full and, thereafter, payable in cash. The note is convertible into MediaBay
common stock at a conversion rate of $.56 per share and is secured by a second
security interest in all of the assets of the Company, except inventory,
receivables and cash. The note matures on December 31, 2002.
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
its sales of old-time radio and classic video programs are gift purchases by
consumers. Therefore, we tends 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 DISCLOSURE OF MARKET RISK
We are exposed to market risk for the impact of interest rate changes. As a
matter of policy we do not enter into derivative transactions for hedging,
trading or speculative purposes.
Our exposure to market risk for changes in interest rates relate to our
long-term debt. Interest on $9,080 of our long-term debt is payable at the prime
rate plus 2%. If the prime rate were to increase our interest expense would
increase.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In the first quarter of 2001, we issued warrants to purchase 50,000 shares
of our common stock at $4.00 per share and warrants to purchase 50,000 shares of
our common stock at $6.00 per share to a consultant pursuant to a consulting
agreement.
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
Exhibit 10.1 Amended and Restated Credit Agreement, dated as of April 30,
2001, among Registrant Audio Book Club, Inc. ("ABC"), Radio
Spirits, Inc. ("RSI") and ING (U.S.) Capital LLC ("ING")
Exhibit 10.2 Form of Amended and Restated Security Agreement, dated as of
April 30, 2001 among Registrant, RSI, ABC, VideoYesteryear, Inc.
("VYI"), MediaBay.com, Inc. ("MBCI"), Audiobookclub.com ("ABCC"),
ABC-COA Acquisition Corp. ("abc-coa"), MediaBay Services, Inc.
("MSI"), ABC Investment Corp. (AIC"), MediaBay Publishing, Inc.
("MPI"), Radio Classics, Inc. ("RCI") and ING
Exhibit 10.3 Form of Amended and Restated Intellectual Property Security
Agreement, dated as of April 30, 2001 among Registrant, RSI, ABC,
VYI, MBCI, ABCC, ABC-COA, MSI, AIC, MPI, RCI and ING
Exhibit 10.4 $1,984,250 principal amount 9% convertible senior subordinated
promissory note of Registrant issued to Norton Herrick due
December 31, 2004
Exhibit 10.5 $3,000,000 principal amount 9% convertible senior subordinated
promissory note of Registrant issued to Evan Herrick due December
31, 2004
Exhibit 10.6 $2,500,000 principal amount convertible senior promissory note of
Registrant issued to Huntingdon Corporation ("Huntingdon") due
September 30, 2002
Exhibit 10.7 $800,000 principal amount 12% convertible senior subordinated
promissory note of Registrant issued to Huntingdon due December
31, 2002
Exhibit 10.8 Form of Security Agreement dated as of April 30, 2001 between
Registrant, the subsidiaries of Registrant set forth on Schedule
2 annexed thereto and Huntingdon
(b) Reports on Form 8-K
None
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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: May 21, 2001 By: /s/ Michael Herrick
------------------------------------
Michael Herrick
Chief Executive Officer and President
Dated: May 21, 2001 By: /s/ John F. Levy
------------------------------------
John F. Levy
Chief Financial and Accounting Officer
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