Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 2002
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to ________
Commission file number 1-13469
MediaBay, Inc.
(Exact name of Registrant as Specified in its Charter)
Florida 65-0429858
(State or other jurisdiction of (I.R.S. Employment
incorporation or organization) Identification No.)
2 Ridgedale Avenue, Cedar Knolls, New Jersey 07927
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 539-9528
Indicate by checkmark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirement for the past 90 days.
Yes |X| No |_|
As of May 10, 2002, there were 13,882,852 shares of the Issuer's Common Stock
outstanding.
1
MEDIABAY, INC.
Quarter ended March 31, 2002
Form 10-Q
Index
Page
----
PART I: Financial Information
Item 1: Financial Statements
Consolidated Balance Sheets at March 31, 2002 and
December 31, 2001 (unaudited) 3
Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and 2001 (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 14
PART II: Other Information
Item 2: Changes in Securities and Use of Proceeds 15
Item 6: Exhibits and Reports on Form 8-K 15
Signatures 16
2
PART I: Financial Information
Item 1: Financial Statements
MEDIABAY, INC.
Consolidated Balance Sheets
(Dollars in thousands)
March 31, 2002 December 31,
(Unaudited) 2001
-------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 23 $ 64
Accounts receivable, net of allowances for sales returns and doubtful
accounts of $3,573 and $4,539 at March 31, 2002 and December 31, 2001,
respectively 4,230 4,798
Inventory 4,098 4,061
Prepaid expenses and other current assets 1,912 1,831
Royalty advances 769 773
Deferred member acquisition costs - current 4,166 3,435
Deferred income taxes - current 550 550
-------- --------
Total current assets 15,748 15,512
Fixed assets, net of accumulated depreciation of $505 and $450 at March 31, 2002
and December 31, 2001, respectively 483 467
Deferred member acquisition costs - non-current 2,055 1,433
Deferred income taxes - non-current 16,650 16,650
Other intangibles, net of accumulated amortization of $5,026 and $4,590 at
March 31, 2002 and December 31, 2001, respectively 1,861 2,292
Goodwill, net of accumulated amortization of $1,518 at March 31, 2002 and
December 31, 2001 9,879 8,649
-------- --------
$ 46,676 $ 45,003
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 14,704 $ 13,891
Current portion - long-term debt 9,047 1,600
-------- --------
Total current liabilities 23,751 15,491
-------- --------
Long-term debt 7,984 17,064
-------- --------
Common stock subject to contingent put rights 4,550 4,550
Preferred stock, no par value, authorized 5,000,000 shares; 25,000 shares and
no shares issued and outstanding at March 31, 2002 and December 31, 2001,
respectively 2,500 --
Common stock; no par value, authorized 150,000,000 shares; issued and
outstanding 13,875,602 at March 31, 2002 and 13,861,866 at December 31, 2001 93,468 93,468
Contributed capital 4,612 4,094
Accumulated deficit (90,189) (89,664)
-------- --------
Total stockholders' equity 10,391 7,898
-------- --------
$ 46,676 $ 45,003
======== ========
See accompanying notes to consolidated financial statements.
3
MEDIABAY, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended March 31,
2002 2001
-------- --------
Sales $ 11,611 $ 12,910
Returns, discounts and allowances 2,131 3,309
-------- --------
Net sales 9,480 9,601
Cost of sales 4,289 3,816
-------- --------
Gross profit 5,191 5,785
Expenses:
Advertising and promotion 2,188 3,186
General and administrative 2,487 2,962
Depreciation and amortization 498 1,492
-------- --------
Operating profit (loss) 18 (1,855)
Interest expense 498 521
-------- --------
Loss before income taxes (480) (2,376)
Benefit for income taxes -- 13,000
-------- --------
Net (loss) income (480) 10,624
Dividends on preferred stock 45 --
-------- --------
(Loss) income applicable to common shares $ (525) $ 10,624
======== ========
Basic and diluted (loss) earnings per common share:
Basic (loss) earnings per common share $ (.04) $ .77
======== ========
Diluted (loss) earnings per common share $ (.04) $ .58
======== ========
See accompanying notes to consolidated financial statements.
4
MEDIABAY, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Three months ended March 31,
2002 2001
-------- --------
Cash flows from operating activities:
Net (loss) income applicable to common shares $ (525) $ 10,624
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Depreciation and amortization 497 1,492
Amortization of deferred member acquisition costs 1,264 1,961
Amortization of deferred financing costs 144 66
Deferred income tax benefit -- (13,000)
Changes in asset and liability accounts, net of asset acquisition:
Decrease in accounts receivable, net 567 877
Decrease (increase) in inventory 23 (571)
Decrease in prepaid expenses 293 112
Decrease (increase) in royalty advances 14 (305)
Increase in deferred member acquisition costs (2,617) (1,565)
Increase (decrease) in accounts payable and accrued expenses 555 (288)
-------- --------
Net cash provided by (used in) operating activities 215 (597)
-------- --------
Cash flows from investing activities:
Acquisition of fixed assets (77) (23)
Cash paid for asset acquisition (379) --
-------- --------
Net cash used in investing activities (456) (23)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 500 300
Payment of long-term debt (300) --
Increase in deferred financing costs -- (91)
-------- --------
Net cash provided by financing activities 200 209
-------- --------
Net decrease in cash and cash equivalents (41) (411)
Cash and cash equivalents at beginning of period 64 498
-------- --------
Cash and cash equivalents at end of period $ 23 $ 87
======== ========
See accompanying notes to consolidated financial statements.
5
MEDIABAY, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share data)
(Unaudited)
(1) Organization
MediaBay, Inc. ("MediaBay" or the "Company"), a Florida corporation, was
formed on August 16, 1993. MediaBay is a leading spoken audio content, marketing
and publishing company, whose businesses include direct response and interactive
marketing, retail product distribution, media publishing and broadcasting.
MediaBay's content libraries include over 60,000 classic radio programs, 3,500
film and television programs and thousands of audiobooks, much of which is
proprietary. MediaBay distributes its products to its own customer database of
approximately 2.8 million names and 2.2 million e-mail addresses, in over 7,000
retail outlets and on the Internet through streaming and downloadable audio.
MediaBay's content programming can be heard on over 500 radio stations and on
the Sirius Satellite Radio service.
(2) Significant Accounting Policies
Basis of Presentation
The interim unaudited consolidated financial statements should be read in
conjunction with the Company's audited financial statements contained in its
Annual Report on Form 10-K for the year ended December 31, 2001. 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.
(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.
6
(4) Long-term Debt
Bank Debt
On April 1, 2002, the maturity date of the principal amount of the
revolving credit facility of $5,880 was extended to January 15, 2003 with
certain conditions and certain prepayments described below. The interest rate
for the revolving credit facility is the prime rate plus 2%. The Company is
required to make payments of $200 on May 31, 2002 and June 30, 2002 and monthly
payments of $150 at the end of each month beginning in July 2002 and ending
December 31, 2002.
Related Party Debt
On January 18, 2002, a principal shareholder of the Registrant, exchanged
$2,500 principal amount of a $3,000 principal amount convertible note of
MediaBay, Inc. (the "Note") in exchange for 25,000 shares of Series A Preferred
Stock of MediaBay (the "Preferred Shares"), having a liquidation preference of
$2,500. The Preferred Share dividend rate of 9% ($9.00 per share) is the same as
the interest rate of the Note, and is payable in additional Preferred Shares,
shares of common stock of MediaBay or cash, at the holder's option, provided
that if the holder elects to receive payment in cash, the payment will accrue
until MediaBay is permitted to make the payment under its existing credit
facility. The conversion rate of the Preferred Shares is the same as the
conversion rate of the Note. The Preferred Shares vote together with the Common
Stock as a single class on all matters submitted to stockholders for a vote, and
certain matters require the majority vote of the Preferred Shares. The holder of
each Preferred Shares shall have a number of votes for each Preferred Share held
multiplied by a fraction, the numerator of which is the liquidation preference
and the denominator of which is $1.75.
On February 22, 2002, as previously committed to on May 14, 2001,
Huntingdon Corporation, a business wholly owned by MediaBay's chairman,
purchased a $500 principal amount convertible senior promissory note due June
30, 2003 (the "2002 Note"). The 2002 Note was issued in consideration of a $500
loan made to the Company by Huntingdon. As partial consideration for the loan
and pursuant to an agreement dated April 30, 2001, the Company granted to
Huntingdon warrants to purchase 250,000 of Common Stock at an exercise price of
$.56 per share. The warrants are exercisable until May 14, 2011.
(5) Stockholders' Equity and Stock Options and Warrants
Stock Options and Warrants
In addition to the 250,000 warrants described in Note 4 above, during the
three months ended March 31, 2002, the Company granted plan and non-plan options
and warrants to purchase a total of 307,500 shares of the Company's common stock
to consultants and Board members. The fair value of $133, computed using
accepted option-pricing model, has been included in prepaid expenses and
contributed capital and is being amortized to expense over their respective
service periods. The options and warrants vest on various dates and have
exercise periods from three to five years from date of vesting. Exercise prices
range from $1.00 to $5.00 per share. During the three months ended March 31,
2002, non-plan options to purchase 75,000 shares of the Company's common stock
were cancelled and warrants to purchase 100,000 shares of the Company's common
stock expired.
The Company issued plan options to purchase 140,500 shares of the
Company's common stock to employees. The options vest on various dates and have
a five year exercise period. Exercise prices range from $1.00 to $5.00 per
share. The Company cancelled five-year plan options to purchase a total of
33,000 shares of the Company's common stock.
Common and Preferred Stock
In the first quarter of 2002, the Company issued 13,736 shares of its
common stock to a consultant under a consulting agreement. The Company also
issued 25,000 shares of preferred stock with a liquidation value of $2,500 to a
principal stockholder in exchange for a $2,500 principal amount convertible
note.
7
(6) Net Loss Per Share of Common Stock
Basic earnings (loss) per share were computed using the weighted average
number of common shares outstanding for the three months ended March 31, 2002
and 2001 of 13,865,834 and 13,861,866, respectively.
For the three months ended March 31, 2002, common equivalent shares, which
were not included in the computation of diluted loss per share because they
would have been anti-dilutive were 2,095,945 common equivalent shares, as
calculated under the treasury stock method and 15,966,000 common equivalent
shares relating to convertible subordinated debt and preferred stock calculated
under the "if-converted method". Interest expense on the convertible
subordinated debt added back to net loss would have been $237 and preferred
dividends added back to net loss applicable to common shares would have been $45
for the three months ended March 31, 2002.
Differences in the weighted average number of common shares outstanding
for purposes of computing diluted earnings per share for the three months ended
March 31, 2001 were due to the inclusion of 7,192 common equivalent shares, as
calculated under the treasury stock method and 4,773,000 common equivalent
shares relating to convertible subordinated debt calculated under the
"if-converted method". Interest expense on the convertible subordinated debt
added back to net income was $217 for the three months ended March 31, 2001
(7) License , Inventory and Miscellaneous Asset Purchase
On March 1, 2002, the Company acquired inventory, licensing agreements and
certain other assets, used by Great American Audio in connection with its
old-time radio business, including the exclusive license to "The Shadow" radio
programs. The Company expended $379 in cash, including fees and expenses.
Additional payments of nine monthly installments of $74 commence on June 15,
2002. The Company estimates other costs related to the asset purchase are
approximately $305. The preliminary allocation of asset value is as follows:
Miscellaneous $ 5
Net Inventory 60
Royalty Advances (The Shadow) 10
Goodwill 1,230
------
Total $1,305
======
(8) Supplemental Cash Flow Information
Cash paid for interest expense was $162 and $131 for the three months
ended March 31, 2002 and 2001, respectively.
In the first quarter of 2001, the Company issued 13,736 shares of the
Company's common stock to consultants under a consulting agreement. The shares
have been valued at $25 and are being amortized to expense over the period of
benefit.
(9) Segment Reporting
For 2002 and 2001, the Company has divided its operations into four
reportable segments: Corporate, Audio Book Club ("ABC") a membership-based club
selling audiobooks in direct mail and on the Internet; Radio Spirits ("RSI")
which produces, sells, licenses and syndicates old-time radio programs and
MediaBay.com a media portal offering spoken word audio content in secure digital
download formats. Segment operating income is total segment revenue reduced by
operating expenses identifiable with that business segment. Corporate includes
general corporate administrative costs, professional fees, interest expenses and
amortization of acquisition related costs. The Company evaluates performance and
allocates resources among its three operating segments based on operating income
and opportunities for growth. The Company did not expend any funds or receive
any income in the three months ended March 31, 2002 and 2001 from its newest
subsidiary RadioClassics. Inter-segment sales are recorded at prevailing sales
prices.
8
Segment Reporting
Three Months Ended March 31, 2002
Corporate ABC RSI Mbay.com Inter-segment Total
--------- --- --- -------- ------------- -----
Net revenue $ -- $ 7,921 $1,532 $ 50 $ (23) $ 9,480
Operating profit (loss) (1,013) 1,052 95 (116) -- 18
Depreciation and amortization 437 31 30 -- -- 498
Interest expense 490 -- 8 -- -- 498
Income tax expense (benefit) -- -- -- -- -- --
Net income (1,503) 1,052 87 (116) -- (480)
Assets 32,582 14,169 1 (76) 46,676
Addition to fixed assets -- 70 7 -- -- 77
Three Months Ended March 31, 2001
Corporate ABC RSI Mbay.com Inter-segment Total
--------- --- --- -------- ------------- -----
Net revenue $ -- $ 7,788 $ 1,737 $ 147 $ (71) $ 9,601
Operating profit (loss) (1,629) 782 (420) (606) 18 (1,855)
Depreciation and amortization 1,311 33 42 106 -- 1,492
Interest expense 517 -- 4 -- -- 521
Income tax benefit -- 9,835 3,165 -- 13,000
Net (loss) income before income tax benefit (2,146) 783 (426) (606) 19 (2,376)
Assets 2,000 37,156 20,201 1,354 (143) 60,568
Addition to fixed assets -- 4 9 10 -- 23
(10) Adoption of Recently Issued Accounting Standards
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
the Company ceased amortization of goodwill as of January 1, 2002. The following
table presents the quarterly results of the Company on a comparable basis:
For Three Months Ended March 31,
2002 2001
---------- ----------
Net (loss) income:
Reported net (loss) income $ (525) $ 10,624
Goodwill amortization -- 127
---------- ----------
Adjusted net (loss) income $ (525) $ 10,751
========== ==========
Basic (loss) earnings per common share:
Reported basic net (loss) earnings per common share $ (.04) $ .77
Goodwill amortization -- .01
---------- ----------
Adjusted basic (loss) earnings per common share $ (.04) $ .78
========== ==========
Diluted (loss) earnings per common share:
Reported diluted net (loss) earnings per common share $ (.04) $ .58
Goodwill amortization -- .01
---------- ----------
Adjusted diluted (loss) earnings per common share $ (.04) $ .59
========== ==========
9
(11) Recently Issued Accounting Standards
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." ("SFAS 145"). The Company is in the process of evaluating the
impact that this statement will have on its financial position, results of
operations and cash flows.
(12) Subsequent Events
Subsequent to March 31, 2002, the Company cancelled warrants to purchase a
total of 75,000 shares of the common stock issued to a consultant and plan
options to purchase a total of 49,250 shares of the Company's common stock to
officers, employees and consultants.
In April 2002, the Company issued 6,250 shares of the Company's common
stock to a consultant. The shares have been valued at $25 and are being
amortized over one year, the consultants' period of service.
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-K, 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 and successfully implement our acquisition strategy, dependence on
third-party providers, suppliers and distribution channels; competition; the
costs and success of our marketing strategies, product returns and member
attrition. Undue reference should not be placed on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to update any forward-looking statements.
Introduction
MediaBay is a leading spoken audio content, marketing and publishing
company, whose businesses include direct response and interactive marketing,
retail product distribution, media publishing and broadcasting. MediaBay's
content libraries include over 60,000 classic radio programs, 3,500 film and
television programs and thousands of audiobooks, much of which is proprietary.
MediaBay distributes its products to its own customer database of approximately
2.8 million names and 2.2 million e-mail addresses, in over 7,000 retail outlets
and on the Internet through streaming and downloadable audio. MediaBay's content
programming can be heard on over 500 radio stations and on the Sirius Satellite
Radio service. We report financial results on the basis of four business
segments; Corporate, Audio Book Club ("ABC"), Radio Spirits ("Radio Spirits" or
"RSI") and MediaBay.com. A fifth division, RadioClassics, is aggregated with
Radio Spirits for financial reporting purposes. Except for corporate, each
segment serves a unique market segment within the spoken word audio industry.
MediaBay's content libraries include over 60,000 classic radio programs,
3,500 film and television programs and thousands of audiobooks. The majority of
our content is acquired under exclusive licenses from the rights holders
enabling us to manufacture the product giving us significantly better product
margins than other companies.
Our customer base includes over 2.8 million spoken audio buyers who have
purchased via catalogs and direct mail marketing. We also currently have an
additional 2.2 million e-mail addresses of spoken audio buyers and enthusiasts
online. Our old-time radio products are sold in over 7,000 retail locations,
including Costco, Target, Sam's Club, Barnes & Noble, Borders and Amazon.com.
Our web sites receive more than 2 million unique monthly web site visitors
and are among the most heavily trafficked bookselling web sites on the Internet.
We serve more than 450,000 classic radio streams of our content on a monthly
basis to web site visitors at RadioSpirits.com and MediaBay.com.
11
Our marketing programs have consisted primarily of direct mail, media
advertising and marketing on the Internet. We capitalize direct response
marketing costs for the acquisition of new members in accordance with AICPA
Statement of Position 93-7 "Reporting on Advertising Costs" and amortize these
costs over the period of future benefit, based on our historical experience.
Results of Operations
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31,
2001
The following table sets forth, for the periods indicated, historical operating
data as a percentage of net sales.
Three Months Ended
March 31,
2002 2001
---- ----
Net sales .......................................... 100% 100%
==== ====
Cost of sales ...................................... 45 40
Advertising and promotion .......................... 23 33
General and administrative expense ................. 27 31
Depreciation and amortization expense .............. 5 16
Operating profit (loss) ............................ -- (20)
Loss before income tax benefit ..................... (6) (25)
Income tax benefit ................................. -- 135
Net (loss) income .................................. (6) 110
Gross sales for the three months ended March 31, 2002 were $11,611 a
decrease of $1,299 as compared to $12,910 for the three months ended March 31,
2001. The decrease in gross sales was primarily attributable to the timing of
wholesale orders at Radio Spirits and revising the logic used in determining
Audio Book Club customer product shipments, which resulted in lower gross sales
but also lower return rates.
Returns, discounts and allowances for the three months ended March 31,
2002 decreased $1,178 to $2,131, or 18.4% of gross sales, as compared to $3,309,
or 25.6% of gross sales for the three months ended March 31, 2001. The decrease
in returns as a percentage of sales is due to the aforementioned revisions in
the logic used in determining customer shipments, as well as better than
expected performance of the Radio Spirits products at retailers.
As a result of lower gross sales offset by lower returns as a percentage
of gross sales, net sales for the three months ended March 31, 2002 decreased
$121, or 1.3%, to $9,480 as compared to $9,601 for the three months ended March
31, 2001.
Cost of sales for the three months ended March 31, 2002 increased $473 to
$4,289 from $3,816 in the prior comparable period. Cost of sales in the first
quarter of 2002 was negatively impacted by substantially higher new member
enrollments at Audio Book Club in the first quarter of 2002 as compared to the
first quarter of 2001. The initial purchases by these new members are at
substantially reduced prices to encourage enrollment. These offers which are
typically four audiobooks for $.99 plus shipping and handling, result in an
initial loss to us which is recovered through additional member purchases at
regular prices. Because we do not capitalize the cost of these heavily
discounted audiobooks, the initial purchase has the effect of reducing gross
profit in the period of enrollment. As a result of lower net sales and higher
cost of sales, gross profit decreased $594 to $5,191 from $5,785 for the three
months ended March 31, 2001.
Advertising and promotion expenses decreased $998, or 31%, to $2,188 for
the three months ended March 31, 2002 as compared to $3,186 in the prior
comparable period. The decrease is principally due to timing of new member
direct mail campaigns and the write-down of deferred member acquisition costs in
the third quarter of 2001 related to new member acquisition campaigns which were
determined to be no longer profitable.
12
General and administrative expenses for the three months ended March 31,
2002 decreased $475 to $2,487 from $2,962 for the three months ended March 31,
2001. The decrease in general and administrative expenses principally relate to
reductions in bad debt expenses, due to better payment experience, and payroll
and related costs and professional fees, principally as a result of the
consolidation of our old-time radio operations at our New Jersey location.
Depreciation and amortization expenses for the three months ended March
31, 2002 were $498, a decrease of $994, as compared to $1,492 for the prior
comparable period. The decrease is principally attributable to implementation of
SFAS No. 142 which provides that goodwill should not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to its carrying amount.
Primarily due to reduced returns, reductions in advertising expense,
general and administrative expenses and decreased amortization of goodwill, our
operating profit for the three months ended March 31, 2002 was $18, an
improvement of $1,873, as compared to a net operating loss of $1,855 for the
three months ended March 31, 2001.
Net interest expense for the three months ended March 31, 2002 was $543 as
compared to $521 for the three months ended March 31, 2001.
The net loss before income tax benefit in 2001 for the three months ended
March 31, 2002 decreased $1,851 to $525, as compared to a net loss of $2,376 for
the three months ended March 31, 2001.
As a result of the series of strategic initiatives, our operations
improved. Although realization of net deferred tax assets is not assured, we
determined in March 2001, based on our improved operations, that it was more
likely than not that a portion of our deferred tax asset relating to temporary
differences between the tax bases of assets or liabilities and their reported
amounts in the financial statements will be realized in future periods.
Accordingly, in the first quarter of 2001, we reduced the valuation allowance
for deferred tax assets in the amount of $13,000 and recorded an income tax
benefit.
Primarily due to the reduction in the valuation allowance for deferred tax
assets in 2001, we had net income of $10,624, or $.58 per fully diluted share
for the three months ended March 31, 2001, as compared to a net loss of $525, or
$.04 per share, for the three months ended March 31, 2002.
Liquidity and Capital Resources
Historically, we have funded our cash requirements through sales of our
equity and debt securities and borrowings from financial institutions and our
principal shareholders. We have implemented a series of initiatives to increase
cash flow. While these initiatives have generated cash from operations in the
last three quarters, there can be no assurance that we will not in the future
require additional capital to fund the expansion of operations, acquisitions,
working capital or other related uses.
For the three months ended March 31, 2002, our cash decreased by $41, as
we had cash provided from operations and financing activities of $215 and $200,
respectively and used net cash of $456 for investing activities. Net cash
provided in operations principally consisted of depreciation and amortization
expenses of $497, decreases in accounts receivable and prepaid expenses of $567
and $293, respectively, increases in accounts payable and accrued expenses of
$555 partially offset by the net loss of $525 and a net increase in deferred
member acquisition costs of $1,353.
The decrease in accounts receivable was primarily attributable to the
collection of retail receivables from the holiday selling season from our radio
programs. The decrease in prepaid expenses is principally due to the timing of
our marketing activities. The increase in deferred member acquisition cost is
due to the timing of direct-response advertising campaigns and an increase in
the size of the
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campaigns intended to grow Audio Book Club the membership. The increase in
accounts payable and accrued expenses is principally due to the timing of vendor
invoicing and payments.
Cash used in investing activities consists of acquisitions of fixed
assets, principally computer equipment, and the acquisition by RSI, our wholly
owned subsidiary of inventory, licensing agreements and certain other assets,
used by Great American Audio in connection with its old-time radio business,
including the exclusive license to "The Shadow" radio programs. We made
payments, including costs, of $379. Additional payments of nine monthly
installments of $74 commence on June 15, 2002. Other costs related to the asset
purchase are estimated at approximately $305.
On February 22, 2002, as previously committed to May 14, 2001, Huntingdon
Corporation, a business wholly owned by our chairman, purchased a $500 principal
amount convertible senior promissory note due June 30, 2003. For a further
description of this transaction, see Note 4 of the Notes to Consolidated
Financial Statements presented elsewhere in this Form 10-Q.
Quarterly Fluctuations
Our operating results vary from period to period as a result of purchasing
patterns of members, the timing, costs, magnitude and success of direct mail
campaigns and Internet initiatives and other new member recruitment advertising,
member attrition, the timing and popularity of new audiobook releases and
product returns.
The timing of new member enrollment varies depending on the timing,
magnitude and success of new member advertising, particularly Internet
advertising and direct mail campaigns. We believe that a significant portion of
our sales of old-time radio and classic video programs are gift purchases by
consumers. Therefore, we tend to experience increased sales of these products in
the fourth quarter in anticipation of the holiday season and the second quarter
in anticipation of Fathers' Day.
Item 3. Quantitative and Qualitative 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 $8,880 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)
In the first quarter of 2001, in addition to the 250,000 warrants issued
as partial consideration for a loan and pursuant to an agreement dated April 30,
2001, we issued warrants to purchase 200,000 shares of our Common Stock and plan
options to purchase 248,000 shares of our common stock to officers, employees,
Board members and consultants. The warrants and options have exercise prices
ranging from $1.00 to $5.00, vest at various times and have exercise periods
ranging from three to five years. Non-plan options to purchase 75,000 shares of
our common stock were cancelled and warrants to purchase 100,000 shares of our
common stock expired. We also cancelled five-year plan options to purchase a
total of 43,000 shares of our common stock. We issued 13,736 shares of our
common stock to a consultant under a consulting agreement.
In January 2002, we issued 25,000 shares of preferred stock with a
liquidation value of $2,500 to a principal stockholder in exchange for a $2,500
principal amount convertible note.
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
Report dated January 18, 2002 relating to the issuance of 25,000
shares of preferred stock in exchange for a $2,500 principal amount
convertible note.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, MediaBay, Inc. has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MediaBay, Inc.
Dated: May 15, 2002 By: /s/ Michael Herrick
------------------------------------
Michael Herrick
Chief Executive Officer and President
Dated: May 15, 2002 By: /s/ John F. Levy
------------------------------------
John F. Levy
Chief Financial Officer
(principal accounting and financial officer)
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