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 June 30, 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 Registrant as Specified in its Charter)
Florida 65-0429858
(State or Other Jurisdiction of (I.R.S. Employment
Incorporation or Organization) Identification No.)
2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone number, Including Area Code: (973) 539-9528
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirement for the past 90 days.
Yes __X__ No ____
As of August 14, 2001, there were 13,861,866 shares of the Issuer's Common Stock
outstanding.
1
MEDIABAY, INC.
Quarter ended June 30, 2001
Form 10-Q
Index
Page
----
PART I: Financial Information
Item 1: Financial Statements
Consolidated Balance Sheets at June 30, 2001 and
December 31, 2000 (unaudited) 3
Consolidated Statements of Operations for the three and
six months ended June 30, 2001 and 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 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 16
PART II: Other Information
Item 2: Changes in Securities and Use of Proceeds 17
Item 6: Exhibits and Reports on Form 8-K 18
Signatures 19
2
PART I: Financial Information
Item 1: Financial Statements
MEDIABAY, INC.
Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
June 30, December 31,
2001 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 277 $ 498
Accounts receivable, net of allowances for sales returns and doubtful
accounts of $3,957 and $4,516 at June 30, 2001 and December 31, 2000,
respectively
4,445 5,415
Inventory 7,005 6,687
Prepaid expenses and other current assets 1,263 1,104
Royalty advances 3,983 3,712
Deferred member acquisition costs - current 6,899 7,520
Deferred income taxes - current 550 --
-------- --------
Total current assets 24,422 24,936
Fixed assets, net of accumulated depreciation of $1,947 and $1,576 at June 30, 2001 and
December 31, 2000, respectively 1,410 1,708
Deferred member acquisition costs - non-current 3,707 5,062
Non-current prepaid expenses and other assets 417 177
Deferred income taxes - non-current 12,450 --
Investment in I-Jam Multimedia LLC 2,000 2,000
Other intangibles, net of accumulated amortization of $11,136 and $8,781 at June 30,
2001 and December 31, 2000, respectively 4,536 6,891
Goodwill, net of accumulated amortization of $1,263 and $1,009 at June 30, 2001 and
December 31, 2000, respectively 8,904 9,158
-------- --------
$ 57,846 $ 49,932
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 12,922 $ 16,703
Current portion - long-term debt 1,000 400
-------- --------
Total current liabilities 13,922 17,103
-------- --------
Long-term debt 18,064 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 June 30, 2001 and December 31, 2000 93,462 93,468
Contributed capital 4,081 3,761
Accumulated deficit (76,233) (84,814)
-------- --------
Total common stockholders' equity 21,310 12,415
-------- --------
$ 57,846 $ 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 Six months ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Sales $ 14,003 $ 16,175 $ 26,913 $ 32,302
Returns, discounts and allowances 3,088 3,699 6,397 8,880
-------- -------- -------- --------
Net sales 10,915 12,476 20,516 23,422
Cost of sales 5,455 6,547 9,271 12,297
-------- -------- -------- --------
Gross profit 5,460 5,929 11,245 11,125
Expenses:
Advertising and promotion 2,698 3,136 5,884 5,576
General and administrative 2,760 3,462 5,722 6,644
Depreciation and amortization 1,487 1,964 2,979 3,947
-------- -------- -------- --------
Operating loss (1,485) (2,633) (3,340) (5,042)
Interest expense, net of interest income of $42 and $96 for three
and six months ended June 30, 2000, respectively 558 510 1,079 1,578
-------- -------- -------- --------
(Loss) income before income taxes (2,043) (3,143) (4,419) (6,620)
Benefit for income taxes -- -- 13,000 --
-------- -------- -------- --------
(Loss) income before extraordinary item (2,043) (3,143) 8,581 (6,620)
Extraordinary loss on early extinguishment of debt -- (2,152) -- (2,152)
-------- -------- -------- --------
Net (loss) income $ (2,043) $ (5,295) $ 8,581 $ (8,772)
======== ======== ======== ========
Basic (loss) income per share:
(Loss) income before extraordinary item $ (.15) $ (.23) $ .62 $ (.56)
Extraordinary item -- (.16) -- (.18)
-------- -------- -------- --------
Net (loss) income $ (.15) $ (.39) $ .62 $ (.74)
======== ======== ======== ========
Diluted (loss) income per share:
(Loss) income before extraordinary item $ (.15) $ (.23) $ .43 $ (.56)
Extraordinary item -- (.16) -- (.18)
-------- -------- -------- --------
Net (loss) income $ (.15) $ (.39) $ .43 $ (.74)
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
MEDIABAY, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six months ended June 30,
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) $ 8,581 $ (8,772)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 2,979 3,947
Amortization of deferred member acquisition costs 4,009 2,528
Amortization of deferred financing costs 175 222
Deferred income tax benefit (13,000) --
Extraordinary loss on early extinguishment of debt -- 2,152
Changes in asset and liability accounts, net of acquisitions:
Decrease in accounts receivable, net 971 2,770
Increase in inventory (318) (491)
Decrease in prepaid expenses 162 109
Increase in royalty advances (270) (1,163)
Increase in deferred member acquisition costs (2,034) (6,298)
Decrease in accounts payable and accrued expenses (3,788) (789)
-------- --------
Net cash used in operating activities (2,533) (5,785)
-------- --------
Cash flows from investing activities:
Acquisition of fixed assets (59) (711)
Maturity of short-term investment -- 100
Investment in I-Jam -- (2,000)
Additions to goodwill related to acquisitions -- (1,207)
-------- --------
Net cash used in investing activities (59) (3,818)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 29,432
Net proceeds from issuance of long-term debt 2,800 2,000
Payment of long-term debt -- (21,723)
Increase in deferred financing costs (429) (170)
-------- --------
Net cash provided by financing activities 2,371 9,539
-------- --------
Net (decrease) in cash and cash equivalents (221) (64)
Cash and cash equivalents at beginning of period 498 198
-------- --------
Cash and cash equivalents at end of period $ 277 $ 134
======== ========
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.
(4) Long-term Debt
Bank Debt
On April 30, 2001, the maturity date of the principal amount of the
revolving credit facility of $6,580 was extended 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 June 2001, Norton Herrick agreed to loan, or to cause his affiliates to
loan, the Company, at the Company's option, subject to certain conditions
including approval by the Company's shareholders, up to $10,000 in the event the
Company is unable to obtain third party debt financing for future acquisitions.
On May 14, 2001, the Company issued a $2,500 secured senior convertible
note to Huntingdon Corporation, a wholly owned affiliate of the Company's
chairman, Norton Herrick, ("Huntingdon") in consideration for loans made by
Huntingdon to the Company in the amount of $2,500 and an $800 secured senior
subordinated convertible note to Huntingdon in consideration of $800 of advances
made by Huntingdon in December 2000 and February 2001 on terms described in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2000.
In connection with these transactions, Huntingdon was also granted ten-year
warrants, as described in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2000. The warrants have been valued at $383 using an
accepted valuation method, have been included in prepaid expenses and are being
amortized over the life of the loan.
On May 14, 2001, the Company also modified, as described in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 2000, a $1,984
senior subordinated convertible note held by Norton Herrick and a $3,000 senior
subordinated convertible note held by Evan Herrick, Norton Herrick's son, as
consideration for their consent to the loans made on May 14, 2001.
7
(5) Stockholders' Equity
Stock Options and Warrants
During the six months ended June 30, 2001, in addition to the warrants
described above, the Company issued plan options and warrants to purchase
559,000 shares of its common stock at a weighted average exercise price of $3.32
per share to officers, employees and consultants. The options vest at various
times and have exercise periods ranging from one to five years. The Company
canceled five-year plan options, ten-year plan options and warrants to purchase
a total of 1,497,250 shares of the Company's common stock. In addition, 300,000
one-year warrants expired during the six months ended June 30, 2001.
(6) Net Loss Per Share of Common Stock
Basic earnings (loss) per share was computed using the weighted average
number of common shares outstanding for the three and six months ended June 30,
2001 of 13,861,866 and for the three and six months ended June 30, 2000 of
13,421,866 and 11,837,473, respectively.
Differences in the weighted average number of common shares outstanding for
purposes of computing diluted earnings per share for the six months ended June
30, 2001 were due to the inclusion of 165,000 common equivalent shares, as
calculated under the treasury stock method, and 7,018,000 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 $475 for the six months ended June 30, 2001. Common
equivalent shares, which were not included in the computation of diluted loss
per share because they would have been anti-dilutive were 2,004,431 at June 30,
2000.
(7) Supplemental Cash Flow Information
Cash paid for interest expense was $597 and $1,756 for the six months ended
June 30, 2001 and 2000, respectively.
In addition to the warrants described in Note 4, included in the total
options and warrants granted during the six months ended June 30, 2001 and 2000
were options and warrants valued at $22 and $335, respectively, granted to
various consultants. These options were valued using accepted valuation models,
have been included in prepaid expenses and are being amortized over the period
of service.
(8) Related Party Transaction
In the first quarter of 2001, Glebe Resources, Inc., a company wholly owned
by Norton Herrick, ("Glebe") provided a security deposit to a vendor in the
amount of $100. The security deposit was returned to Glebe and Glebe received no
compensation for and did not profit from this transaction.
8
(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, the Company's media
portal offering spoken audio content in secure digital download formats. Segment
net income is total segment revenue reduced by 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 June 30, 2001
Corporate ABC RSI Mbay.com Intersegment Total
--------- --- --- -------- ------------ -----
Net Sales $ -- $ 8,069 $ 2,865 $ 56 ($75) $ 10,915
Profit (loss) before depreciation, amortization
and interest (529) 543 252 (273) 9 2
Depreciation and amortization 1,311 33 43 100 -- 1,487
Net interest expense 555 -- 3 -- -- 558
Net income (loss) (2,395) 510 206 (373) 9 (2,043)
Assets 15,000 24,459 17,417 1,043 (73) 57,846
Non-cash expenses 54 1,531 49 11 -- 1,645
Additions to fixed assets -- 4 27 5 -- 36
Three Months Ended June 30, 2000
Corporate ABC RSI Mbay.com Intersegment Total
--------- --- --- -------- ------------ -----
Net Sales $ -- $ 8,137 $ 3,545 $1,052 ($258) $ 12,476
Profit (loss) before depreciation, amortization,
interest, and extraordinary loss on early
extinguishment of debt (449) (770) 70 496 (16) (669)
Depreciation and amortization 1,813 25 37 89 -- 1,964
Net interest expense 508 -- 2 -- -- 510
Net income (loss) (4,922) (795) 31 407 (16) (5,295)
Assets 2,000 71,528 19,622 1,400 (94) 94,456
Net addition to deferred member acquisition
costs -- (1,962) (1,498) -- -- (3,460)
Additions to fixed assets -- 35 211 245 -- 491
Six Months Ended June 30, 2001
Corporate ABC RSI Mbay.com Intersegment Total
--------- --- --- -------- ------------ -----
Net Sales $ -- $15,857 $ 4,602 $ 203 ($146) $ 20,516
Profit (loss) before depreciation, amortization,
interest and income tax benefit (847) 1,359 (128) (773) 28 (361)
Depreciation and amortization 2,622 66 85 206 -- 2,979
Net interest expense 1,072 -- 7 -- -- 1,079
Net income (loss) 8,459 1,293 (220) (979) 28 8,581
Assets 15,000 24,459 17,417 1,043 (73) 57,846
Non-cash expenses 133 2,008 (33) 32 -- 2,140
Additions to fixed assets -- 8 36 15 -- 59
Six Months Ended June 30, 2000
Corporate ABC RSI Mbay.com Intersegment Total
--------- --- --- -------- ------------ -----
Net Sales $ -- $ 17,171 $ 5,596 $ 1,052 ($397) $ 23,422
Profit (loss) before depreciation, amortization,
interest and extraordinary loss on early
extinguishment of debt (1,040) (399) 111 152 81 (1,095)
Depreciation and amortization 3,621 50 70 206 -- 3,947
Net interest expense 1,576 -- 2 -- -- 1,578
Net income (loss) (8,389) (449) 39 (54) 81 (8,772)
Assets 2,000 71,528 19,622 1,400 (94) 94,456
Net addition to deferred member acquisition
costs -- (2,272) (1,498) -- -- (3,770)
Additions to fixed assets -- 35 229 447 -- 711
9
(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.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations be accounted for
under the purchase method. The statement further requires separate recognition
of intangible assets that meet one of two criteria. The statement applies to all
business combinations initiated after June 30, 2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. The statement also
provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. Existing
goodwill will continue to be amortized through the remainder of fiscal 2001 at
which time amortization will cease and the Company will perform a transitional
goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning
after December 15, 2001. The Company is currently evaluating the impact of the
new accounting standards on existing goodwill and other intangible assets. While
the ultimate impact of the new accounting standards has yet to be determined,
goodwill amortization expense for the six months ended June 30, 2001 was $254.
10
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 7,000 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.
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 400,000 classic radio and nostalgia video streams of our
content on a monthly basis to web site visitors at RadioSpirits.com and
MediaBay.com.
11
In 2000, we performed 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 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 which, we believe 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 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 June 30, 2001 Compared to Three Months Ended June 30,
2000
Gross sales for the three months ended June 30, 2001 were $14,003 a
decrease of $2,172, as compared to $16,175 for the three months ended June 30,
2000. The decrease in gross sales is principally due to the timing of direct
mail advertising at our old-time radio business and the fact that in 2000, we
recorded $1,000 of marketing revenue from I-Jam Multimedia LLC for promotion of
the I-Jam digital audio player.
Returns, discounts and allowances for the three months ended June 30, 2001
decreased $611 to $3,088, or 22.1% of gross sales, as compared to $3,699, or
22.9% of gross sales for the three months ended June 30, 2000.
Principally as a result of the I-Jam marketing revenue in 2000, net sales
for the three months ended June 30, 2001 decreased $1,561, or 12.5%, to $10,915.
Cost of sales for the three months ended June 30, 2001 decreased $1,092, or
16.7%, to $5,455 from $6,547 in the prior comparable period. Cost of sales as a
percentage of net sales decreased to 50.0% from 52.5%. We revised the
merchandising of products in our catalogs and on our web sites, to sell those
items, which contribute greater gross profit. We also benefited from settlements
with certain vendors. Gross profit as a percentage of net sales was adversely
effected by a large increase in new member enrollments in the second quarter of
2001 as a result of a very successful marketing campaign at Audio Book Club.
Initial purchases by new members are at substantially reduced prices to
encourage enrollment. These offers, which are typically four books for either
$.99 or $.01 plus shipping and handling, result in an initial loss which is
recovered through additional member purchases at regular prices. Because we are
not able to capitalize this loss on new member product shipments under generally
accepted accounting principles, the initial purchase has the effect of reducing
gross profit in the period of enrollment. As a result of improved product
margins, partially offset by increased new member product shipments, gross
profit as a percentage of net sales increased from 47.5% to 50.0%. Principally
due to lower gross sales, as described above, partially offset by an improved
gross profit margin, gross profit decreased $469 to $5,460 for the three months
ended June 30, 2001 as compared to the three months ended June 30, 2000.
12
Advertising and promotion expenses decreased $438 or 14.0% to $2,698 for
the three months ended June 30, 2001 as compared to $3,136 in the prior
comparable period. Actual amounts expended for advertising and promotion in the
three months ended June 30, 2001, net of negotiated settlements with certain
vendors, were $1,120, a decrease of $5,475, from the amount incurred in the
three months ended June 30, 2000 of $6,595. The difference between the amount
incurred and the amount recorded as expense is due to the capitalization of
direct response advertising.
General and administrative expenses for the three months ended June 30,
2001 decreased $702 to $2,760 from $3,462 for the three months ended June 30,
2000. General and administrative expense decreases are principally attributable
to decreases in telephone costs related to a reduction in "800" service calls,
public relations costs and consulting services principally relating to Internet
maintenance and development and settlements from certain vendors.
Depreciation and amortization expenses for the three months ended June 30,
2001 were $1,487, a decrease of $477, as compared to $1,964 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 June 30, 2001 increased $48
to $558 as compared to $510 for the three months ended June 30, 2000. The
increase is principally due to additional subordinated debt issued in May 2001.
Primarily due to reduced returns, reductions in cost of sales, advertising
expenses and general and administrative expenses, as discussed above, our
earnings before interest, taxes, depreciation and amortization and an
extraordinary loss in 2000 on early extinguishment of debt, ("EBITDA") increased
$671 to $2 for the three months ended June 30, 2001 as compared to the three
months ended June 30, 2000. EBITDA is not a recognized measure of performance
under generally accepted accounting principles, however we believe that EBITDA
is a relevant measure of our performance because it reflects our operations
without giving effect to costs associated with our acquisitions. Principally due
to the lower costs enumerated above and decreased amortization of goodwill, the
net loss before an extraordinary item for the three months ended June 30, 2001
decreased $1,100 to $2,043, or $(.15) per share, as compared $3,143, or $(.23)
per share for the three months ended June 30, 2000.
The Company recorded an extraordinary loss on early extinguishment of debt
in the second quarter of 2000 in the amount of $2,152. Accordingly, the net loss
for the three months ended June 30, 2001 decreased $3,252 to $2,043, or $(.15)
per share as compared to a net loss of $5,295, or $(.39) per share, for the
three months ended June 30, 2000.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Gross sales for the six months ended June 30, 2001 were $26,913, a decrease
of $5,389, as compared to $32,302 for the six months ended June 30, 2000. The
decrease in gross sales was primarily attributable to a slowdown in the
aggressive marketing at Audio Book Club to focus on sales with greater
profitability in the first quarter of 2001, the timing of direct mail
advertising campaigns at our old-time radio business, and the I-Jam marketing
revenue recorded in 2000.
Returns, discounts and allowances for the six months ended June 30, 2001
decreased $2,483 to $6,397, or 23.8% of gross sales, as compared to $8,880, or
27.5% of gross sales for the six months ended June 30, 2000.
13
Principally as a result of lower gross sales, as described above, partially
offset by lower returns, net sales for the six months ended June 30, 2001
decreased $2,906, or 12.4%, to $20,516 as compared to $23,422 for the six months
ended June 30, 2000.
Cost of sales for the six months ended June 30, 2001 decreased $3,026, or
24.6%, to $9,271 from $12,297 in the prior comparable period. Cost of sales as a
percentage of net sales decreased to 45.2% from 52.5%. We revised the
merchandising of products in our catalogs and on our web sites, to sell only
those items, which contribute greater gross profit. We also benefited from
settlements with certain vendors. As a result, gross profit as a percentage of
net sales increased to 54.8% for the six months ended June 30, 2001 as compared
to a gross profit as a percentage of net sales of 47.5% for the six months ended
June 30, 2000. Gross profit as a percentage of net sales was adversely effected
by a large increase in new member enrollments in the second quarter of 2001 as a
result of a very successful direct marketing campaign at Audio Book Club.
Initial purchases by new members are at substantially reduced prices to
encourage enrollment. These offers, which are typically four books for either
$.99 or $.01 plus shipping and handling, result in an initial loss which is
recovered through additional member purchases at regular prices. Because we
cannot capitalize this loss on new member product shipments under generally
accepted accounting principles, the initial purchase has the effect of reducing
gross profit in the period of enrollment. Principally due to improved margins on
products, gross profit increase $120 to $11,245 for the six months ended June
30, 2001 as compared to $11,125 for the six months ended June 30, 2000.
Advertising and promotion expenses increased $308 or 5.5% to $5,884 for the
six months ended June 30, 2001 as compared to $5,576 in the prior comparable
period. Actual amounts expended for advertising and promotion, net of
settlements with certain vendors, in the six months ended June 30, 2001 were
$3,910, a decrease of $5,436, from the amount incurred in the six months ended
June 30, 2000 of $9,349. The difference between the amount incurred and the
amount recorded as expense is due to the capitalization of direct response
advertising.
General and administrative expenses for the six months ended June 30, 2001
decreased $922 to $5,722 from $6,644 for the six months ended June 30, 2000.
General and administrative expense decreases are principally attributable to
decreases in bad debt expenses, attendant with our decrease in net sales,
telephone costs related to a reduction in "800" service calls, public relations
expenditures, consulting costs, principally relating to Internet maintenance and
development, partially offset by increases in payroll costs as we upgraded our
staff. We also benefited from settlements with certain vendors in 2001.
Depreciation and amortization expenses for the six months ended June 30,
2001 were $2,979, a decrease of $968, as compared to $3,947 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 six months ended June 30, 2001 decreased $499
to $1,079 as compared to $1,578 for the six months ended June 30, 2000. In April
2000, we repaid $20,293 of our bank debt.
Primarily due to reduced returns, reductions in cost of sales, advertising
expenses and general and administrative expenses, as discussed above, our loss
before interest, taxes, depreciation and amortization and an extraordinary loss
on early extinguishment of debt in 2000, (EBITDA) decreased $734 to $(361) for
the six months ended June 30, 2001 as compared to $(1,095) the six months ended
June 30, 2000. EBITDA is not a recognized measure of performance under generally
accepted accounting principles, however we believe that EBITDA is a relevant
measure of our performance because it reflects our operations without giving
effect to costs associated with our acquisitions. Principally due to the lower
costs enumerated above
14
and decreased amortization of goodwill, the net loss before taxes and an
extraordinary item for the six months ended June 30, 2001 decreased $2,201 to
$4,419, as compared to $6,620 for the six months ended June 30, 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.
When we repaid $20,293 of our bank debt in April 2000, we recorded an
extraordinary loss of $2,152 relating to the write-off of deferred financing
fees incurred in connection with such debt.
Due, in part, to the reduction in the valuation allowance for deferred tax
assets, we had net income of $8,581, or $.43 per diluted share for the six
months ended June 30, 2001, as compared to a net loss of $8,772, or $.74 per
share, for the six months ended June 30, 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 six months of 2001, 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 six months ended June 30, 2001, our cash decreased by $221, as we
used net cash of $2,533 and $59 for operating and investing activities,
respectively, and had cash provided by financing activities of $2,371. Net cash
used in operations principally consisted of the net income of $8,581, offset by
a $13,000 reduction in the valuation allowance for deferred tax assets,
increases in inventories of $318, royalty advances of $270, and a decrease in
accounts payable and accrued expenses of $3,788. A portion of the decrease in
accounts payable and accrued expenses relates to settlements with vendors. Net
cash used in operations was partially offset by depreciation and amortization
expenses included in net income of $2,979, a decrease in accounts receivable of
$971, a decrease in prepaid expenses and other current assets of $162 and a net
decrease in deferred member acquisition costs of $1,975.
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, net of returns, at our old-time radio business. The decrease in
deferred member acquisition cost is principally due to settlements with direct
response vendors, principally on the Internet, and reductions in the size of our
direct response advertising campaigns resulting in better response rates.
Cash used in investing activities was for the acquisition of fixed assets,
principally for kiosks to be placed at certain retail stores and computer
equipment.
In February 2001, we received an advance of $300 from Huntingdon
Corporation.
15
In June 2001, Norton Herrick agreed to loan, or to cause his affiliates to
loan, the Company, at the Company's option, subject to certain conditions
including approval by the Company's shareholders, up to $10,000. For a further
description of this transaction, see Note 4 of the Notes to Consolidated
Financial Statements presented elsewhere in this Form 10-Q.
On May 14, 2001 the Company issued a $2,500 secured senior convertible note
and an $800 secured senior subordinated convertible note to Huntingdon. For a
further description of these transactions, see Note 4 of the Notes to
Consolidated Financial Statements presented elsewhere in this Form 10-Q.
On May 14, 2001, the Company modified a $1,984 senior subordinated
convertible note held by Norton Herrick. The Company also modified a $3,000
senior subordinated convertible note held by Evan Herrick, Norton Herrick's son.
For a further description of these transactions, see Note 4 of the Notes to
Consolidated Financial Statements presented elsewhere in this Form 10-Q.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations be accounted for
under the purchase method. The statement further requires separate recognition
of intangible assets that meet one of two criteria. The statement applies to all
business combinations initiated after June 30, 2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. The statement also
provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. Existing
goodwill will continue to be amortized through the remainder of fiscal 2001 at
which time amortization will cease and the Company will perform a transitional
goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning
after December 15, 2001. The Company is currently evaluating the impact of the
new accounting standards on existing goodwill and other intangible assets. While
the ultimate impact of the new accounting standards has yet to be determined,
goodwill amortization expense for the six months ended June 30, 2001 was $254.
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. We believe that a significant portion of our sales of old-time
radio and classic video programs are gift purchases by consumers. Therefore, we
tend to experience increased sales of these products in the fourth quarter in
anticipation of the holiday season and the second quarter in anticipation of
Fathers' Day.
Item 3. Quantitative and Qualitative 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.
16
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds.
(Dollars in thousands, except per share data)
During the six months ended June 30, 2001, in addition to the warrants
issued to Huntingdon on May 14, 2001, described below, the Company issued plan
options and warrants to purchase 559,000 shares of its common stock at an
weighted average exercise price of $3.32 per share to officers, employees and
consultants. The options vest at various times and have exercise periods ranging
from one to five years. Certain of the warrants also include limitations on
exercise based on stock price and trading volumes. The Company canceled
five-year plan options, ten-year plan options and warrants to purchase a total
of 1,497,250 shares of the Company's common stock. In addition, 300,000 one-year
warrants expired during the six months ended June 30, 2001.
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 bears interest at a rate equal to 2% above the
higher of (i) the rate of interest announced publicly by the Wall Street Journal
as the "base rate on corporate loans posted at least 75% of the nation's 30
largest banks" and (ii) .5% above the federal funds rate and is convertible into
MediaBay common stock at any time prior to its maturity on September 30, 2002.
On May 14, 2001, 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 the rate of 12% per annum is convertible into MediaBay common stock at any
time prior to its maturity on December 31, 2002.
On May 14, 2001, Huntingdon was granted 1,650,000 ten-year warrants with an
exercise price of $.56 per share. The warrants were issued as additional
consideration for loans made by Huntingdon to the Company.
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 bears interest at the
rate of 9% per annum and is convertible into common stock at any time prior to
its maturity on December 31, 2004.
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 the Company under specified circumstances. The
modified note bears interest at the rate of 9% per annum and is convertible into
common stock at any time prior to its maturity on December 31, 2004
Each of the notes described above is convertible into common stock at a
conversion rate of $.56 principal amount per share.
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.
17
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
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 14, 2001 By: /s/ Michael Herrick
--------------------------------------------
Michael Herrick
Chief Executive Officer and President
Dated August 14, 2001 By: /s/ John F. Levy
------------------------------------
John F. Levy
Chief Financial and Accounting Officer
19