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 September 30, 2001
OR
[X] 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 November 16, 2001, there were 13,861,866 shares of the Issuer's Common
Stock outstanding.
1
MEDIABAY, INC.
Quarter ended September 30, 2001
Form 10-Q
Index
Page
PART I: Financial Information
Item 1: Financial Statements
Consolidated Balance Sheets at September 30, 2001 (unaudited)
and December 31, 2000 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 2001 and 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
September 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. 12
Item 3: Quantitative and Qualitative Disclosures of Market Risk 18
PART II: Other Information
Item 2: Changes in Securities and Use of Proceeds 19
Item 6: Exhibits and Reports on Form 8-K 19
Signatures 20
2
PART I: Financial Information
Item 1: Financial Statements
MEDIABAY, INC.
Consolidated Balance Sheets
(Dollars in thousands)
September 30,
2001 December 31,
(Unaudited) 2000
------------- -----------
Assets
Current assets:
Cash and cash equivalents $ 171 $498
Accounts receivable, net of allowances
for sales returns and doubtful accounts of
$3,734 and $4,516 at September 30, 2001 and
December 31, 2000, respectively 3,952 5,415
Inventory 4,517 6,687
Prepaid expenses and other current assets 1,241 1,104
Royalty advances 1,114 3,712
Deferred member acquisition costs - current 4,050 7,520
Deferred income taxes - current 550 --
----------- ----------
Total current assets 15,595 24,936
Fixed assets, net of accumulated depreciation of
$380 and $1,576 at September 30, 2001 and
December 31, 2000, respectively 496 1,708
Deferred member acquisition costs - non-current 1,835 5,062
Non-current prepaid expenses and other assets 6 177
Deferred income taxes - non-current 12,450 --
Investment in I-Jam Multimedia LLC -- 2,000
Other intangibles, net of accumulated amortization
of $4,797 and $8,781 at September 30, 2001 and
December 31, 2000, respectively 2,786 6,891
Goodwill, net of accumulated amortization
of $1,391 and $1,009 at September 30, 2001 and
December 31, 2000, respectively 8,776 9,158
----------- ----------
$ 41,944 $ 49,932
=========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses 13,869 $ 16,703
Current portion - long-term debt 8,980 400
----------- ----------
Total current liabilities 22,849 17,103
----------- ----------
Long-term debt 9,984 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 September 30, 2001 and December 31, 2000 93,462 93,468
Contributed capital 4,081 3,761
Accumulated deficit (92,982) (84,814)
----------- ----------
Total common stockholders' equity 4,561 12,415
----------- ----------
$ 41,944 $ 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 Nine months ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
-------- -------- -------- --------
Sales $ 12,513 $ 12,854 $ 39,426 $ 45,156
Returns, discounts and allowances 2,634 3,125 9,031 12,005
-------- -------- -------- --------
Net sales 9,879 9,729 30,395 33,151
Cost of sales 5,285 5,452 14,556 17,749
Cost of sales - write-downs 2,261 -- 2,261 --
Advertising and promotion 3,158 2,520 9,042 8,096
Advertising and promotion - write-downs 3,971 -- 3,971 --
General and administrative 2,814 3,365 8,536 10,009
Asset write-downs and strategic charges 7,044 -- 7,044 --
Depreciation and amortization 1,486 1,980 4,465 5,927
-------- -------- -------- --------
Operating loss (16,140) (3,588) (19,480) (8,630)
Interest expense, net of interest income of $10 and $106 for the
three and nine months ended September 30, 2000, respectively (608) (541) (1,688) (2,119)
-------- -------- -------- --------
Loss before income taxes (16,748) (4,129) (21,168) (10,749)
Benefit for income taxes -- -- 13,000 --
-------- -------- -------- --------
Loss before extraordinary item (16,748) (4,129) (8,168) (10,749)
Extraordinary loss on early extinguishment of debt -- -- -- (2,152)
-------- -------- -------- --------
Net loss $(16,748) $ (4,129) $ (8,168) $(12,901)
======== ======== ======== ========
Basic and diluted loss per share:
Loss before extraordinary item $ (1.21) $ (.31) $ (.59) $ (.87)
Extraordinary item -- -- -- (.17)
-------- -------- -------- --------
Net loss $ (1.21) $ (.31) $ (.59) $ (1.04)
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
MEDIABAY, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine months ended
September 30,
2001 2000
---- ----
Cash flows from operating activities:
Net loss $ (8,168) $(12,901)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 4,465 5,927
Amortization of deferred member acquisition costs 6,105 4,195
Amortization of deferred financing costs 316 325
Deferred income tax benefit (13,000) --
Extraordinary loss on early extinguishment of debt -- 2,152
Asset write-downs and strategic charges 13,276 --
Changes in asset and liability accounts, net of acquisitions and
asset write-downs and strategic charges:
Decrease in accounts receivable, net 1,216 4,231
(Increase) decrease in inventory (90) 587
Decrease in prepaid expenses 105 101
Decrease (increase) in royalty advances 275 (1,274)
Increase in deferred member acquisition costs (3,381) (7,807)
Decrease in accounts payable and accrued expenses (3,458) (1,275)
-------- --------
Net cash used in operating activities $ (2,339) $ (5,739)
-------- --------
Cash flows from investing activities:
Acquisition of fixed assets (147) (805)
Acquisition of intangible assets (110) --
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 (257) (3,912)
-------- --------
Cash flows from financing activities:
Net proceeds from issuance of common stock -- 29,410
Net proceeds from issuance of long-term debt 2,800 2,000
Payment of long-term debt (100) (21,723)
Increase in deferred financing costs (431) (203)
-------- --------
Net cash provided by financing activities 2,269 9,484
-------- --------
Net (decrease) in cash and cash equivalents (327) (167)
Cash and cash equivalents at beginning of period 498 198
-------- --------
Cash and cash equivalents at end of period $ 171 $ 31
======== ========
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%. In September 2001 in accordance with the loan agreement, the
Company made a $100 principal payment on its revolving credit facility and the
amount which may be borrowed under the revolving loan agreement was reduced to
$6,480, the amount outstanding under the revolving loan agreement. The Company
is required to make payments of principal of $300 on each of December 31, 2001,
March 31, 2002 and June 30, 2002, with the balance due September 30, 2002. The
Company is in discussions with a number of parties, including its current
lenders, to refinance the revolving credit facility and believes it will have
new credit facilities in place before September 30, 2002.
Related Party Debt
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 nine months ended September 30, 2001, in addition to the
warrants described above, the Company issued plan options and warrants to
purchase 565,000 shares of its common stock at a weighted average exercise price
of $3.31 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 1,586,250 shares of the Company's common stock. In addition,
300,000 one-year warrants expired during the nine months ended September 30,
2001.
(6) Net Loss Per Share of Common Stock
Basic loss per share was computed using the weighted average number of
common shares outstanding for the three and nine months ended September 30, 2001
of 13,861,866 and for the three and nine months ended September 30, 2000 of
13,421,866 and 12,369,459, respectively. Common equivalent shares totaling
10,035,000, including 9,765,000 shares associated with the conversion of $12,484
of convertible debt, and the related reduction in interest expense for the nine
months ended September 30, 2001 of $771, were not included in the computation of
diluted loss per share at September 30, 2001 because they would have been
anti-dilutive. Common equivalent shares which were not included in the
computation of diluted loss per share because they would have been anti-dilutive
were 1,018,262 at September 30, 2000.
(7) Asset Write-Downs and Strategic Charges
The Company has conducted a review of its operations including product
offerings, marketing methods and fulfillment. In the third quarter of 2001, the
Company began to implement a series of actions and decisions designed to improve
gross profit margin, refine its marketing efforts and reduce general and
administrative costs. Specifically, the Company reduced the number of items
offered for sale at both its Radio Spirits and Audio Book Club subsidiaries,
intends to move fulfillment of its old-time radio products to a third party
fulfillment provider, limited its investment and marketing efforts in
downloadable audio and refined its marketing of old-time radio products and its
marketing efforts to existing Audio Book Club members. In connection with the
movement of the fulfillment of old-time radio products to a third party
provider, the Company intends to close its old-time radio operations in
Schaumburg, Illinois and run all of its operations from its corporate
headquarters located in Cedar Knolls, New Jersey. The Company has also reviewed
its general and administrative costs and has eliminated certain activities
unrelated to its old-time radio and Audio Book Club operations.
As a result of these third quarter decisions, the Company has recorded
$11,276 of strategic charges for the three months ended September 30, 2001.
These charges include: $2,261 of inventory written down to net realizable value
due to a reduction in the number of SKU's; $2,389 of write-downs to deferred
member acquisition costs at Audio Book Club related to new member acquisition
campaigns that have been determined to be no longer profitable and recoverable
through future operations based upon historical performance and future
projections; $1,885 of write-downs to royalty advances paid to audiobook
publishers and other license holders primarily associated with inventory titles
that will no longer be carried and sold to members; $1,582 of write-downs to
deferred member acquisition costs at Radio Spirits related to old-time radio new
customer acquisition campaigns that have been determined to be no longer
profitable and recoverable through future operations based upon historical
performance and future projections; a write-down of $683 of customer lists
acquired in the Columbia House Audiobook Club purchase due to the inability to
recover this asset through future operations; $635 of fixed assets of the
old-time radio operations written down to net realizable value due to the
closing of the Schaumburg, Illinois facility; $464 of write-downs of royalty
advances paid for downloadable licensing rights that are no longer recoverable
due to the strategic decisions made; $357 of write-downs of prepaid assets, $297
of write-offs to receivables and $192 of net write-offs of capitalized website
development costs related to downloadable audio all of which are no longer
recoverable due to the strategic changes in the business; and $531 accrued for
lease termination costs in connection with the closing of the Schaumburg,
Illinois facility. Of these charges, $2,261 related to inventory write-downs has
been recorded to costs of sales - write-downs, $3,971 has been recorded to
advertising and promotion - write-downs and the remaining $5,044 has been
recorded to asset write-downs and strategic charges.
In addition to these strategic charges, the Company has recorded a charge
of $2,000 to write-off the entire carrying amount of its cost method investment
in I-Jam. This charge has been recorded to asset write-downs and strategic
charges. The Company has determined that an other than temporary decline in the
value of this investment has occurred in the third quarter 2001 triggered by a
strategic change in the direction of the investee as a result of continued
losses and operating deficiencies, along with projected future losses.
8
(8) Supplemental Cash Flow Information
Cash paid for interest expense was $840 and $1,955 for the nine months
ended September 30, 2001 and 2000, respectively.
In addition to the warrants described in Note 4, included in the total
options and warrants granted during the nine months ended September 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,
and the unamortized amount of $159 at September 30, 2001 has been written off as
part of the write-off of prepaid expenses (See Note 7).
(9) 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.
(10) 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. Intersegment sales are recorded at prevailing sales prices.
Three Months Ended September 30, 2001
Corporate ABC RSI Mbay.com Intersegment Total
Net sales $-- $ 7,681 $ 2,242 $ 27 $ (71) $ 9,879
Profit (loss) before asset write-downs and
strategic charges, depreciation, amortization and
interest (706) (483) 90 (263) (16) (1,378)
Asset write-downs and strategic charges 2,000 6,031 4,342 903 -- 13,276
Depreciation and amortization 1,310 32 45 99 -- 1,486
Net interest expense 606 -- 2 -- -- 608
Net loss (4,624) (6,546) (4,299) (1,264) (16) (16,748)
Assets 13,000 15,179 13,843 10 (88) 41,944
Non-cash expenses 30 704 45 -- -- 779
Additions to fixed assets -- 14 73 1 -- 88
Three Months Ended September 30, 2000
Corporate ABC RSI Mbay.com Intersegment Total
Net sales $-- $ 7,046 $ 2,686 $ 181 $ (184) $ 9,729
Profit (loss) before depreciation, amortization
And interest (622) (752) 359 (586) (7) (1,608)
Depreciation and amortization 1,816 28 37 99 -- 1,980
Net interest expense 537 -- 4 -- -- 541
Net (loss) income (2,975) (780) 318 (685) (7) (4,129)
Assets 2,000 67,821 18,709 1,407 (117) 89,820
Net addition to deferred member acquisition
costs -- 78 80 -- -- 158
Additions to fixed assets -- 72 8 14 -- 94
9
(10) Segment Reporting (continued)
Nine Months Ended September 30, 2001
Corporate ABC RSI Mbay.com Intersegment Total
Net sales $-- $ 23,538 $ 6,844 $ 230 $(217) $ 30,395
Profit (loss) before asset write-downs and
strategic charges, depreciation, amortization
and interest (1,553) 876 (38) (1,036) 12 (1,739)
Asset write-downs and strategic charges 2,000 6,031 4,342 903 -- 13,276
Depreciation and amortization 3,933 98 130 304 -- 4,465
Net interest expense 1,679 -- 9 -- -- 1,688
Net income (loss) 3,835 (5,253) (4,519) (2,243) 12 (8,168)
Assets 13,000 15,179 13,843 10 (88) 41,944
Non-cash expenses 163 2,712 12 32 -- 2,919
Additions to fixed assets -- 22 109 16 -- 147
Nine Months Ended September 30, 2000
Corporate ABC RSI Mbay.com Intersegment Total
Net sales $-- $ 24,217 $ 8,282 $ 1,233 $ (581) $ 33,151
Profit (loss) before depreciation, amortization
interest and extraordinary loss on
early extinguishment of debt (1,662) (1,151) 470 (434) 74 (2,703)
Depreciation and amortization 5,437 78 107 305 -- 5,927
Net interest expense 2,113 -- 6 -- -- 2,119
Net (loss) income (11,364) (1,229) 357 (739) 74 (12,901)
Assets 2,000 67,820 18,709 1,407 (117) 89,820
Net addition to deferred member acquisition
costs -- (2,194) (1,418) -- -- (3,612)
Additions to fixed assets -- 107 237 461 -- 805
(11) 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 nine months ended September 30, 2001 was
$382.
10
(11) Recently Issued Accounting Standards (continued)
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting For Asset Retirement Obligations" ("SFAS 143"). This
Statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. This standard requires entities to record the
fair value of a liability for an asset retirement obligation in the period
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The Company is
required to adopt the provisions of SFAS 143 at the beginning of its fiscal year
2002. The Company has not determined the impact, if any, the adoption of this
statement will have on its financial position or results of operations.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This
Statement also amends ARB No. 51, "Consolidated Financial Statements", to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. This Statement requires that one accounting model be
used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired. This Statement also broadens the presentation of
discontinued operations to include more disposal transactions. The provisions of
this Statement are required to be adopted by the Company at the beginning of its
fiscal year 2002. The Company has not determined the impact, if any, adoption of
this statement will have on its financial position or results of operations.
(12) Subsequent Events
Subsequent to September 30, 2001, the Company cancelled options to purchase
235,000 shares of the Company's common stock.
11
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.
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We have conducted a review of our operations including product offerings,
marketing methods and fulfillment. In the third quarter of 2001, we began to
implement a series of actions and decisions designed to improve gross profit
margin, refine our marketing efforts and reduce general and administrative
costs. Specifically, we reduced the number of items offered for sale at both its
Radio Spirits and Audio Book Club subsidiaries, intend to move fulfillment of
our old-time radio products to a third party fulfillment provider, limited our
investment and marketing efforts in downloadable audio and refined our marketing
of old-time radio products and our marketing efforts to existing Audio Book Club
members. In connection with the movement of the fulfillment of old-time radio
products to a third party provider, we intend to close our old-time radio
operations in Schaumburg, Illinois and run all of our operations from our
corporate headquarters located in Cedar Knolls, New Jersey. We have also
reviewed our general and administrative costs and have eliminated certain
activities unrelated to our old-time radio and Audio Book Club operations. We
believe these decisions along with the strategic initiatives implemented over
the last eighteen months, have had a positive impact to date and will
substantially improve our cash flow and operating results.
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 September 30, 2001 Compared to Three Months Ended
September 30, 2000
Gross sales for the three months ended September 30, 2001 were $12,513 a
decrease of $341, as compared to $12,854 for the three months ended September
30, 2000. Returns, discounts and allowances for the three months ended September
30, 2001 decreased $491 to $2,634, or 21.1% of gross sales, as compared to
$3,125, or 24.3% of gross sales for the three months ended September 30, 2000.
Principally as a result of the reduction in returns as a percentage of
gross sales, net sales for the three months ended September 30, 2001 increased
$150, or 1.5%, to $9,879.
Cost of sales for the three months ended September 30, 2001 was $7,546, of
which $2,261 represented a charge included in cost of sales as a write-down in
the third quarter of 2001. Excluding the write-down, cost of sales decreased
$167, or 3.1%, to $5,285 from $5,452 in the prior comparable period. Cost of
sales as a percentage of net sales, excluding the aforementioned write-down,
decreased to 53.5% from 56.0%. We revised the merchandising of products in our
catalogs and on our web sites to sell those items which contribute greater gross
profit. Principally due to higher net sales, as described above, and an improved
gross profit margin, excluding the aforementioned write-down, gross profit,
excluding the write-down, increased $317 to $4,594 for the three months ended
September 30, 2001 as compared to $4,277 for the three months ended September
30, 2000.
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Advertising and promotion expenses increased $638 or 25.3% to $3,158 for
the three months ended September 30, 2001 as compared to $2,520 in the prior
comparable period. Actual amounts incurred for advertising and promotion in the
three months ended September 30, 2001, were $2,411, an increase of $49, from the
amount incurred in the three months ended September 30, 2000 of $2,362. The
difference between the amount incurred and the amount recorded as expense is due
to the capitalization and amortization of direct response advertising.
General and administrative expenses for the three months ended September
30, 2001 decreased $551 to $2,814 from $3,365 for the three months ended
September 30, 2000. General and administrative expense decreases are principally
attributable to decreases in payroll and related costs due to previously
announced staff reductions, office expenses, telephone costs related to a
reduction in "800" service calls, public relations costs and consulting services
principally relating to Internet maintenance and development.
Depreciation and amortization expenses for the three months ended September
30, 2001 were $1,486, a decrease of $494, as compared to $1,980 for the prior
comparable period. The decrease is principally attributable to the writedown of
goodwill taken in the fourth quarter of 2000.
As a result of the actions and decisions made after our aforementioned
review of our operations, we have recorded $11,276 of strategic charges for the
three months ended September 30, 2001. These charges include: $2,261 of
inventory written down to net realizable value due to a reduction in the number
of SKU's; $2,389 of write-downs to deferred member acquisition costs at Audio
Book Club related to new member acquisition campaigns that have been determined
to be no longer profitable and recoverable through future operations based upon
historical performance and future projections; $1,885 of write-downs to royalty
advances paid to audiobook publishers and other license holders primarily
associated with inventory titles that will no longer be carried and sold to
members; $1,582 of write-downs to deferred member acquisition costs at Radio
Spirits related to old-time radio new customer acquisition campaigns that have
been determined to be no longer profitable and recoverable through future
operations based upon historical performance and future projections; a
write-down of $683 of customer lists acquired in the Columbia House Audiobook
Club purchase due to the inability to recover this asset through future
operations; $635 of fixed assets of the old-time radio operations written down
to net realizable value due to the closing of the Schaumburg, Illinois facility;
$464 of write-downs of royalty advances paid for downloadable licensing rights
that are no longer recoverable due to the strategic decisions made; $357 of
write-downs of prepaid assets, $297 of write-offs to receivables and $192 of net
write-offs of capitalized website development costs related to downloadable
audio all of which are no longer recoverable due to the strategic changes in the
business; and $531 accrued for lease termination costs in connection with the
closing of the Schaumburg, Illinois facility. Of these charges, $2,261 related
to inventory write-downs has been recorded to costs of sales - write-downs,
$3,971 had been recorded to advertising and promotion - write-downs and the
remaining $5,044 has been recorded to asset write-downs and strategic charges.
In addition to these strategic charges, we have has recorded a charge of
$2,000 to write-off the entire carrying amount of its cost method investment in
I-Jam. This charge has been recorded to asset write-downs and strategic charges.
We have determined that an other than temporary decline in the value of this
investment has occurred in the third quarter 2001 triggered by a strategic
change in the direction of the investee as a result of continued losses and
operating deficiencies, along with projected future losses.
Net interest expense for the three months ended September 30, 2001
increased $67 to $608 as compared to $541 for the three months ended September
30, 2000. The increase is principally due to additional subordinated debt issued
in May 2001.
Principally due to the asset write-downs and strategic charges, partially
offset by the lower costs enumerated above and decreased amortization of
goodwill, the net loss for the three months ended September 30, 2001 increased
$12,619 to $16,748, or $(1.21) per share of common stock, as compared to $4,129,
or $(.31) per share for the three months ended September 30, 2000.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000
Gross sales for the nine months ended September 30, 2001 were $39,426, a
decrease of $5,730, as compared to $45,156 for the nine months ended September
30, 2000. The decrease in gross sales is primarily attributable to more focused
marketing at Audio Book Club to concentrate on more profitable new members and
the I-Jam marketing revenue we recorded in 2000 for promotion of the I-Jam
digital audio player. Returns, discounts and allowances for the nine months
ended September 30, 2001 decreased $2,974 to $9,031, or 22.9% of gross sales, as
compared to $12,005, or 26.6% of gross sales for the nine months ended September
30, 2000.
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As a result of lower gross sales, as described above, partially offset by
lower returns, net sales for the nine months ended September 30, 2001 decreased
$2,756, or 8.3%, to $30,395 as compared to $33,151 for the nine months ended
September 30, 2000.
Cost of sales for the nine months ended September 30, 2001 was $16,817 of
which, $2,261 represented a charge included as a write-down in the third quarter
of 2001. Excluding the write-down, cost of sales for the nine months ended
September 30, 2001 decreased $3,193, or 18.0%, to $14,556 from $17,749 in the
prior comparable period. Cost of sales as a percentage of net sales, excluding
the aforementioned write-down, decreased to 47.9% from 53.5%. We revised the
merchandising of products in our catalogs and on our web sites to sell only
those items which contribute greater gross profit. As a result, gross profit as
a percentage of net sales, excluding the write-down, increased to 52.1% for the
nine months ended September 30, 2001 as compared to a gross profit, as a
percentage of net sales, of 46.5% for the nine months ended September 30, 2000.
Principally due to improved margins on products, gross profit, excluding the
write-down, increased $437 to $15,839 for the nine months ended September 30,
2001 as compared to $15,402 for the nine months ended September 30, 2000.
Advertising and promotion expenses increased $946 or 11.7% to $9,042 for
the nine months ended September 30, 2001 as compared to $8,096 in the prior
comparable period. Actual amounts incurred for advertising and promotion, net of
settlements with certain vendors principally for unprofitable Internet marketing
campaigns, in the nine months ended September 30, 2001 were $6,319, a decrease
of $5,389, from the amount incurred in the nine months ended September 30, 2000
of $11,708. 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 nine months ended September 30,
2001 decreased $1,473 to $8,536 from $10,009 for the nine months ended September
30, 2000. General and administrative expense decreases are principally
attributable to decreases in bad debt expenses, attendant with our decrease in
net sales, telephone cost savings related to a reduction in "800" service calls,
public relations expenditures and consulting costs, principally relating to
Internet maintenance and development. We also benefited from settlements with
certain vendors in 2001.
Depreciation and amortization expenses for the nine months ended September
30, 2001 were $4,465, a decrease of $1,462, as compared to $5,927 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 nine months ended September 30, 2001 decreased
$431 to $1,688 as compared to $2,119 for the nine months ended September 30,
2000. In 2000, we repaid $21,723 of our bank debt.
Principally due to the strategic charges partially offset by lower costs
enumerated above and decreased amortization of goodwill, the net loss before
taxes and an extraordinary item for the nine months ended September 30, 2001
increased $10,419 to $21,168, as compared to $10,749 for the nine months ended
September 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.
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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 offset by the strategic charges enumerated above, we had a net loss of
$8,168, or $.59 per share for the nine months ended September 30, 2001, as
compared to a net loss of $12,901, or $1.04 per share, for the nine months ended
September 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 nine 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. The asset
write-downs and strategic charges taken in the third quarter of 2001 are not
expected to impact future cash flows except for $531 of accrued for lease
termination costs in connection with the closing of the Schaumburg, Illinois
facility and $297 of receivable write-offs.
Debt in the amount of $8,980 is payable within the next twelve months.
Payments of $300 are due each of December 31, 2001, March 31, 2002 and June 30,
2002. The remaining amount of $8,080 is due September 30, 2002. We anticipate
making the payments on December 31, 2001, March 31, 2002 and June 30, 2002 from
cash flow generated from operations. We are in discussions with a number of
parties, including our current lenders, to refinance the remaining debt of
$8,080 and believe we will have new credit facilities in place before September
30, 2002.
For the nine months ended September 30, 2001, our cash decreased by $327,
as we used net cash of $2,339 and $257 for operating and investing activities,
respectively, and had cash provided by financing activities of $2,269. Net cash
used in operations principally consisted of the net loss of $8,168 including a
$13,000 reduction in the valuation allowance for deferred tax assets, increases
in inventories of $90 and a decrease in accounts payable and accrued expenses of
$3,458. Net cash used in operations was partially offset by asset write-downs
and strategic charges of $13,276 and depreciation and amortization expenses
included in net loss of $4,781, a decrease in accounts receivable of $1,216, a
decrease in prepaid expenses of $105, a decrease in royalty advances of $275 and
a net decrease in deferred member acquisition costs of $2,724.
The decrease in accounts payable is principally due to payments made to
vendors as our cash flow improved and settlements with certain vendors. 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, and the acquisition of certain rights related to our video products.
On May 14, 2001 we issued a $2,500 secured senior convertible note to
Huntingdon. In addition, we issued an $800 secured senior subordinated
convertible note to Huntingdon for advances previously received including an
advance of $300 received in February 2001. For a further description of these
transactions, see Note 4 of the Notes to Consolidated Financial Statements
presented elsewhere in this Form 10-Q.
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On May 14, 2001, we modified a $1,984 senior subordinated convertible note
held by Norton Herrick. We 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.
In September 2001 in accordance with our revised loan agreement, we made a
$100 principal payment on our revolving credit facility and the amount we may
borrow under the revolving loan agreement was reduced to $6,480, the amount
outstanding under the revolving loan agreement.
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. We have not entered into any derivative or hedging
transactions, nor have we identified any embedded derivatives, and therefore,
has concluded our 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 we will perform a transitional goodwill
impairment test. SFAS No. 142 is effective for fiscal periods beginning after
December 15, 2001. We are 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 nine months ended September 30, 2001 was $382.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting For Asset Retirement Obligations" ("SFAS 143"). This
Statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. This standard requires entities to record the
fair value of a liability for an asset retirement obligation in the period
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. We are required to
adopt the provisions of SFAS 143 at the beginning of its fiscal year 2002. We
have not
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determined the impact, if any, the adoption of this statement will have on our
financial position or results of operations.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions". This
Statement also amends ARB No. 51, "Consolidated Financial Statements", to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. This Statement requires that one accounting model be
used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired. This Statement also broadens the presentation of
discontinued operations to include more disposal transactions. The provisions of
this Statement are required to be adopted by the Company at the beginning of its
fiscal year 2002. We have not determined the impact, if any, adoption of this
statement will have on our financial position or results of operations.
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 $8,980 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. (Dollars in thousands, except
per share data)
During the nine months ended September 30, 2001, in addition to the
warrants issued to Huntingdon on May 14, 2001, the Company issued plan options
and warrants to purchase 565,000 shares of its common stock at an weighted
average exercise price of $3.31 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 1,586,250 shares of the Company's common stock. In addition, 300,000 one-year
warrants expired during the nine months ended September 30, 2001.
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
None
(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: November 19, 2001 By: /s/ Michael Herrick
--------------------------------------
Michael Herrick
Chief Executive Officer and President
Dated November 19, 2001 By: /s/ John F. Levy
--------------------------------------
John F. Levy
Chief Financial and Accounting Officer
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