SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 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 August 13, 2002, there were 14,252,352 shares of the Issuer's Common Stock
outstanding.
1
MEDIABAY, INC.
Quarter ended June 30, 2002
Form 10-Q
Index
Page
----
PART I: Financial Information
Item 1: Financial Statements
Consolidated Balance Sheets at June 30, 2002 and
December 31, 2001 (unaudited) 3
Consolidated Statements of Operations for the three and six months
ended June 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 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. 13
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)
(Unaudited)
June 30, December 31,
2002 2001
---- ----
Assets
Current assets:
Cash and cash equivalents $ 243 $ 64
Accounts receivable, net of allowances for sales returns and doubtful
accounts of $4,346 and $4,539 at June 30, 2002 and December 31,
2001, respectively 5,384 4,798
Inventory 4,492 4,061
Prepaid expenses and other current assets 1,430 1,831
Royalty advances 1,009 773
Deferred member acquisition costs - current 4,679 3,435
Deferred income taxes - current 550 550
-------- --------
Total current assets 17,787 15,512
Fixed assets, net of accumulated depreciation of $568 and $450 at June
30, 2002 and December 31, 2001, respectively 434 467
Deferred member acquisition costs - non-current 2,220 1,433
Deferred income taxes - non-current 16,650 16,650
Other intangibles 1,476 2,292
Goodwill 9,879 8,649
-------- --------
$ 48,446 $ 45,003
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 14,780 $ 13,891
Current portion - long-term debt 9,873 1,600
-------- --------
Total current liabilities 24,653 15,491
-------- --------
Long-term debt and related accrued interest 7,061 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 June 30, 2002 and December
31, 2001, respectively 2,500 --
Common stock; no par value, authorized 150,000,000 shares; issued and
outstanding 14,150,852 at June 30, 2002 and 13,861,866
at December 31, 2001 94,723 93,468
Contributed capital 4,594 4,094
Accumulated deficit (89,635) (89,664)
-------- --------
Total common stockholders' equity 12,182 7,898
-------- --------
$ 48,446 $ 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 Six months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Sales $16,137 $ 14,003 $27,748 $ 26,913
Returns, discounts and allowances 4,160 3,088 6,291 6,397
------- -------- ------- --------
Net sales 11,977 10,915 21,457 20,516
Cost of sales 5,194 5,455 9,483 9,271
------- -------- ------- --------
Gross profit 6,783 5,460 11,974 11,245
Expenses:
Advertising and promotion 2,588 2,698 4,776 5,884
General and administrative 2,547 2,760 5,033 5,722
Depreciation and amortization 448 1,487 945 2,979
------- -------- ------- --------
Operating profit (loss) 1,200 (1,485) 1,220 (3,340)
Interest expense 590 558 1,089 1,079
------- -------- ------- --------
Income (loss) before income taxes 610 (2,043) 131 (4,419)
Benefit for income taxes -- -- -- 13,000
------- -------- ------- --------
Net income (loss) 610 (2,043) 131 8,581
Dividends on preferred stock 57 -- 102 --
======= ======== ======= ========
Net income (loss) applicable to common shares $ 553 $ (2,043) $ 29 $ 8,581
======= ======== ======= ========
Basic and diluted earnings (loss) per share common share:
Basic earnings (loss) per common share $ .04 $ (.15) $ .00 $ .62
======= ======== ======= ========
Diluted earnings (loss) per common share $ .03 $ (.15) $ .00 $ .43
======= ======== ======= ========
See accompanying notes to consolidated financial statements.
4
MEDIABAY, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Six months ended June 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 29 $ 8,581
Adjustments to reconcile net income to net cash provided (used) in
operating activities:
Depreciation and amortization 945 2,979
Amortization of deferred member acquisition costs 2,617 4,009
Amortization of deferred financing costs 371 175
Deferred income tax benefit -- (13,000)
Changes in asset and liability accounts, net of asset acquisition:
(Increase) decrease in accounts receivable, net (586) 971
Increase in inventory (371) (318)
Decrease in prepaid expenses 617 162
Increase in royalty advances (226) (270)
Increase in deferred member acquisition costs (4,647) (2,034)
Increase (decrease) in accounts payable and accrued expenses 2,007 (3,788)
------- --------
Net cash provided (used) in operating activities 756 (2,533)
------- --------
Cash flows from investing activities:
Acquisition of fixed assets (91) (59)
Cash paid for asset acquisition (379) --
------- --------
Net cash used in investing activities (470) (59)
------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 212 --
Net proceeds from issuance of long-term debt 500 2,800
Payment of long-term debt (774) --
Increase in deferred financing costs (45) (429)
------- --------
Net cash (used) provided by financing activities (107) 2,371
------- --------
Net increase (decrease) in cash and cash equivalents 179 (221)
Cash and cash equivalents at beginning of period 64 498
------- --------
Cash and cash equivalents at end of period $ 243 $ 277
======= ========
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 media company specializing in
spoken audio content, marketing and publishing, 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 3.0 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 is comprised of four operating divisions, Audio Book Club, the
leading club for audiobooks, Radio Spirits, the leading seller of classic radio
programs, MediaBay.com, the Company's digital audio download service, and
RadioClassics, the leading distributor of classic radio content across multiple
broadcast platforms, including cable, satellite and traditional radio.
(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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
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 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 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 made
payments of $200 in May and June 2002 and is required to make monthly payments
of $150 at the end of each month beginning in July 2002 and ending December 31,
2002.
Subordinated Debt
During the three months ended June 30, 2002, an unrelated third party
holder of the Company's subordinated debt converted principal amount of $1,000
into 200,000 shares of the Company's common stock. At June 30, 2002, the
principal amount of subordinated debt held by the unrelated third party was
$3,200.
Related Party Debt
On January 18, 2002, a principal shareholder of the Registrant exchanged
the $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% 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 of the 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 ("Huntingdon"), 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.
7
(5) Stockholders' Equity and Stock Options and Warrants
Stock Options and Warrants
During the six months ended June 30, 2002, the Company granted plan and
non-plan options and warrants to purchase a total of 657,500 shares of the
Company's common stock to the Company's chairman, consultants and Board members.
The fair value of $529, computed using an 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 ten years from date of
vesting. Exercise prices range from $0.56 to $5.00 per share. During the six
months ended June 30, 2002, non-plan options and warrants to purchase 150,000
shares of the Company's common stock were cancelled and warrants to purchase
100,000 shares of the Company's common stock expired.
Options and warrants to purchase 69,000 shares of the Company's common
stock were exercised during the second quarter of 2002, resulting in proceeds to
the Company of $212.
During the six months ended June 30, 2002, 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 287,750 shares of the Company's common stock.
Common and Preferred Stock
During the six months ended June 30, 2002, the Company issued 19,986
shares of its common stock to consultants under consulting agreements. 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 as more fully described in Note 4 above.
During the three months ended June 30, 2002, the Company issued 200,000
shares of common stock to an unrelated third party upon conversion of $1,000
principal amount of subordinated debt.
(6) Net Loss Per Share of Common Stock
Basic earnings (loss) per share was computed using the weighted average
number of common shares outstanding for the three and six months ended June 30,
2002 of 13,987,118 and 13,926,811, respectively and for the three and six months
ended June 30, 2001 of 13,861,866.
Differences in the weighted average number of common shares outstanding
for purposes of computing diluted earnings per share for the three months ended
June 30, 2002 were due to the inclusion of 3,232,627 common equivalent shares,
as calculated under the treasury stock method and 15,708,000 common equivalent
shares relating to convertible subordinated debt and convertible preferred stock
calculated under the "if-converted method". Interest expense and dividends on
the convertible subordinated debt and convertible preferred stock added back to
net income was $280 for the three months ended June 30, 2002. Differences in the
weighted average number of common shares outstanding for purposes of computing
diluted earnings per share for the six months ended June 30, 2002 were due to
the inclusion of 2,466,075 common equivalent shares, as calculated under the
treasury stock method. Common equivalent shares, which were not included in the
calculation of fully diluted shares because they were anti-dilutive, were
15,627,000 relating to convertible subordinated debt and convertible preferred
stock calculated under the "if-converted method". Interest expense and dividends
on the convertible subordinated debt and convertible preferred stock that were
not added back to net income were $571 for the six months ended June 30, 2002.
Differences in the weighted average number of common shares outstanding
for purposes of computing diluted earnings per share for the six months ended
June 30, 2001 were due to the inclusion of 165,000 common equivalent shares, as
calculated under the treasury stock method, and 7,018,000 common equivalent
shares relating to convertible subordinated debt calculated under the
"if-converted method". Interest expense on the convertible subordinated debt
added back to net income was $475 for the six months ended June 30, 2001.
8
(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 commenced 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 $357 and $597 for the six months ended
June 30, 2002 and 2001, respectively.
During the six months ended June 30, 2002, the Company issued 19,986
shares of the Company's common stock to consultants under consulting agreements.
The shares have been valued at $50 and are being amortized to expense over the
period of benefit.
(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 reportable segments based on operating
income and opportunities for growth. The Company did not expend any funds or
receive any income in the six months ended June 30, 2002 and 2001 from its
newest subsidiary RadioClassics, which is aggregated with RSI for segment
reporting purposes. Inter-segment sales are recorded at prevailing sales prices.
Segment Reporting
Three Months Ended June 30, 2002
Corporate ABC RSI Mbay.com Intersegment Total
--------- --- --- -------- ------------ -----
Net Sales $ -- $9,208 $2,775 $57 $(63) $11,977
Operating (loss) profit (1,104) 1,784 597 (115) 38 1,200
Depreciation and amortization 385 33 30 -- -- 448
Interest expense and dividends on preferred
stock 610 -- 37 -- -- 647
Net income (loss) applicable to common shares (1,714) 1,784 560 (115) 38 553
Assets -- 29,952 18,557 2 (65) 48,446
Additions to fixed assets -- $3 $11 -- -- $14
Three Months Ended June 30, 2001
Corporate ABC RSI Mbay.com Intersegment Total
--------- --- --- -------- ------------ -----
Net Sales $ -- $8,069 $2,865 $56 ($75) $10,915
Operating (loss) profit (1,840) 510 209 (373) 9 (1,485)
Depreciation and amortization 1,311 33 43 100 -- 1,487
Interest expense 555 -- 3 -- -- 558
Net income (loss) applicable to common shares (2,395) 510 206 (373) 9 (2,043)
Assets 2,000 34,294 20,582 1,043 (73) 57,846
Additions to fixed assets -- 4 27 5 -- 36
9
Six Months Ended June 30, 2002
Corporate ABC RSI Mbay.com Intersegment Total
--------- --- --- -------- ------------ -----
Net Sales $ -- $17,129 $4,307 $107 $(86) 21,457
Operating (loss) profit (2,116) 2,837 692 (231) 38 1,220
Depreciation and amortization 821 64 60 -- -- 945
Interest expense and dividends on preferred
stock 1,146 -- 45 -- -- 1,191
Net income (loss) applicable to common shares (3,262) 2,837 647 (231) 38 29
Assets -- 29,952 18,557 2 (65) 48,446
Additions to fixed assets -- $73 $18 -- -- $91
Six Months Ended June 30, 2001
Corporate ABC RSI Mbay.com Intersegment Total
--------- --- --- -------- ------------ -----
Net Sales $ -- $15,857 $4,602 $203 ($146) $20,516
Operating (loss) profit (3,469) 1,292 (213) (979) 29 (3,340)
Depreciation and amortization 2,622 66 85 206 -- 2,979
Interest expense 1,072 -- 7 -- -- 1,079
Net income (loss) applicable to common shares 8,459 1,293 (220) (979) 28 8,581
Assets 2,000 34,294 20,582 1,043 (73) 57,846
Additions to fixed assets -- $8 $36 $15 -- $59
(10) Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
the Company ceased amortization of goodwill as of January 1, 2002. The Company
completed the transitional impairment test, which did not result in an
impairment loss. Subsequent impairment tests will be performed in the fourth
quarter of each year in connection with the annual budgeting and planning
process. We allocated total goodwill, net of accumulated amortization of $1,518,
of $9,879 to our Radio Spirits division. The following table presents the
quarterly and six-month results of the Company on a comparable basis:
For Three Months Ended For Six Months
June 30, Ended June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net income (loss):
Reported net income (loss) applicable to common
shares $ 553 $ (2,043) $ 29 $ 8,581
Goodwill amortization -- 127 -- 254
--------- --------- --------- ---------
Adjusted net income (loss) $ 553 $ (1,916) $ 29 $ 8,835
========= ========= ========= =========
Basic earnings (loss) per common share:
Reported basic net earnings (loss) per common share $ .04 $ (.15) $ .00 $ .62
Goodwill amortization -- .01 -- .02
--------- --------- --------- ---------
Adjusted basic earnings (loss) per common share $ .04 $ (.14) $ .00 $ .64
========= ========= ========= =========
Diluted (loss) earnings per common share:
Reported diluted net earnings (loss) per common share $ .03 $ (.15) $ .00 $ .43
Goodwill amortization -- .01 -- .01
--------- --------- --------- ---------
Adjusted diluted earnings (loss) per common share $ .03 $ (.14) $ .00 $ .44
========= ========= ========= =========
We amortize other intangible assets over their estimated useful lives over
periods from three to seven years. Other intangible assets primarily relate to
mailing and non-compete agreements, customer lists, and license agreements
associated with the Company's Audio Book Club and Radio Spirits divisions.
Amortization expense for other intangible assets was $385 for the three months
ended June 30, 2002 and $821 for the six months ended June 30, 2002. The
following table presents our estimate of amortization expenses for all of 2002,
and for each of the five succeeding years:
10
For the years ending December 31,
2002 $ 1,079
2003 $ 436
2004 $ 338
2005 $ 329
2006 $ --
2007 $ --
The following table presents details of Other Intangibles at June 30, 2002 and
December 31, 2001:
June 30, 2002 December 31, 2001
----------------------------- -----------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Mailing Agreements $2,892 $1,600 $1,292 $2,892 $1,362 $1,530
Customer Lists 4,380 4,380 -- 4,380 3,818 562
Non-Compete Agreements 200 131 69 200 110 90
Licenses and other 115 -- 115 110 -- 110
------ ------ ------ ------ ------ ------
Total Other Intangibles $7,587 $6,111 $1,476 $7,587 $5,290 $2,292
====== ====== ====== ====== ====== ======
(11) Recently Issued Accounting Standards
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS 144"). SFAS 144 develops a single accounting model for long-lived
assets to be disposed of by sale, addresses significant implementation issues
related to previous guidance, and requires that long-lived assets to be disposed
of by sale be measured at the lower of their carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The adoption of SFAS 144 did not have any impact on the Company's
financial position, results of operations, or cash flows.
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.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146
will be effective for the Company for disposal activities initiated after
December 31, 2002. The Company is in the process of evaluating the effect that
adopting SFAS 146 will have on its financial statements.
(12) Subsequent Events
In July 2002, the Company obtained an "Exclusive Field of Use License"
("License") to U.S. Patent No. 4,528,643 known as the "Freeny Patent", entitled
"System for Reproducing Information in Material Objects at a Point of Sale
Location", and corresponding Canadian, UK and European patents in the spoken
audio, E-book and print-on-demand markets from E-Data Corporation. The license
also enables the Company, in certain instances, to pursue infringers of the
Freeny Patent in related fields, including the music download market.
The Freeny patent covers a specific system and method of distributing
information over electronic and wireless networks and systems. These patents are
the basic building blocks of the rapidly growing e-commerce market for books,
spoken word audio products, music, films and other products digitally
distributed through the Internet, point of sale kiosk networks and other
delivery systems and networks. In July 2001, the Court of Appeals for the
Federal Circuit held that the patent covers the sale of software, video games,
music and other
11
products including spoken audio and E-books downloaded by businesses and
consumers to offices and homes and then copied on to compact discs, digital
audio devices, mp3 players, paper or other storage media. E-Data has previously
resolved its claims of patent infringement and settled with a number of
companies.
Under the terms of the license agreement, the Company has the exclusive
right to use the patent in the spoken word audio, print-on-demand and E-book
markets. The license covers the life of the patent in its respective territories
and assigns to the Company the right to claims for accrued, current and future
royalties, profits and damages arising from infringement in the markets. The
assignment of accrued royalties, profits and damages survives the term of the
patent. The Company also possesses the right to pursue infringers, in certain
instances, in related fields, including the music download market. The Company
and E-Data will share in cash proceeds derived from the licensed markets, with
the Company receiving the majority of the revenue.
As consideration for the License, the Company issued to E-Data 100,000
shares of its common stock and a warrant to purchase up to 50,000 shares of the
Company's common stock at a price of $5.00 per share. The warrant has been
valued at $37 using an accepted valuation method. The total value of the
License, based on the consideration paid by the Company, has been included in
intangible assets and will be amortized over the useful life of the License. The
Company also received a warrant to purchase 50,000 shares of E-Data common stock
with an exercise price of $.25.
Subsequent to June 30, 2002, in addition to the warrant issued to E-Data,
discussed above, the Company issued five-year plan options to purchase 15,000
shares of MediaBay common stock to a consultant. These options have been valued
at $14 using an accepted valuation method. The Company also cancelled plan
options to purchase 11,000 shares of MediaBay common stock.
In August 2002, payment of interest on the notes due to Huntingdon of
$2,500, $800 and $500 was extended to January 15, 2004.
12
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 media company specializing in spoken audio content,
marketing and publishing, whose businesses include direct response and
interactive marketing, retail product distribution, media publishing and
broadcasting.
MediaBay is comprised of four operating divisions, Audio Book Club, the
leading club for audiobooks, Radio Spirits, the leading seller of classic radio
programs, MediaBay.com, the Company's digital audio download service, and
RadioClassics, the leading distributor of classic radio content across multiple
broadcast platforms, including cable, satellite and traditional radio. We report
financial results on the basis of four reportable segments; Corporate, Audio
Book Club ("ABC"), Radio Spirits ("Radio Spirits" or "RSI") and MediaBay.com.
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 total customer file includes approximately 3.0 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, Cracker Barrel, Sam's Club, Barnes &
Noble, Borders and Amazon.com.
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.
13
Results of Operations
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30,
2001
Gross sales for the three months ended June 30, 2002 were $16,137 an
increase of $2,134, or 15.2%, as compared to $14,003 for the three months ended
June 30, 2001. The increase in gross sales is principally due to increased sales
at our Audio Book Club due to an increase in membership and sales per member.
These increases were partially offset by planned lower direct mail sales of our
old time radio products as we focused on more profitable customers.
Returns, discounts and allowances for the three months ended June 30, 2002
were $4,160, as compared to $3,088 for the three months ended June 30, 2001. The
increase in returns, discounts and allowances is largely due to the increased
gross sales and a higher reserve for returns on certain wholesale accounts of
our classic radio programs.
Principally as a result of higher gross sales partially offset by higher
reserves for returns, net sales for the three months ended June 30, 2002
increased $1,062, or 9.7%, to $11,977 as compared to $10,915 for the three
months ended June 30, 2001.
Cost of sales for the three months ended June 30, 2002 decreased $261, or
4.8%, to $5,194 from $5,455 in the prior comparable period. Cost of sales as a
percentage of net sales decreased to 43.4% from 50.0% and gross profit as a
percentage of net sales rose to 56.6% for three months ended June 30, 2002 as
compared to 50.0% for the three months ended June 30, 2001. Principally due to
higher gross sales, as described above, and an improved gross profit margin,
gross profit increased $1,323, or 24.2%, to $6,783 for the three months ended
June 30, 2002 as compared to $5,460 for the three months ended June 30, 2001.
The substantial improvement in gross profit margin came as a result of revisions
in the merchandising of products in our catalogs, to retail chains and on our
web sites, to sell those items which contribute greater gross profit. This
increase in gross profit occurred despite up-front enrollment costs, included in
cost of goods sold, associated with a high number of new members acquired in the
second quarter of 2002 as a result of successful direct marketing efforts at
Audio Book Club. Initial purchases by new members are at substantially reduced
prices to encourage enrollment. These offers, which are typically four books for
either $.99 or $.01 plus shipping and handling, result in an initial loss, which
is recovered through additional member purchases at regular prices. Because we
cannot capitalize this loss on new member product shipments under generally
accepted accounting principles, the initial purchase has the effect of reducing
gross profit in the period of enrollment.
Advertising and promotion expenses decreased $110 or 4.1% to $2,588 for
the three months ended June 30, 2002 as compared to $2,698 in the prior
comparable period. The decrease in reported advertising expense is principally
due to lower advertising expenditures in 2001 and the write-down of deferred
member acquisition costs in the third quarter of 2001, which resulted in lower
amortization of new member acquisition costs in 2002 and thus lower reported
advertising expense in 2002. We have attracted approximately 56% more new
members in the three months ended June 30, 2002 as compared to the three months
ended June 30, 2001.
General and administrative expenses for the three months ended June 30,
2002 decreased $213 to $2,547 from $2,760 for the three months ended June 30,
2001. General and administrative expense decreases are principally attributable
to decreases in payroll and related expenses due to the consolidation of certain
of our classic radio operations into our New Jersey facility and reductions in
our allowance for bad debts as our historical bad debt experience improves.
Depreciation and amortization expenses for the three months ended June 30,
2002 were $448, a decrease of $1,039, as compared to $1,487 for the prior
comparable period. The decrease is principally attributable to discontinuation
in 2002 of amortization of certain intangible assets acquired in our
acquisitions because they were fully amortized in 2001. We also implemented 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
14
impairment, through a comparison of fair value to its carrying amount. We have
completed the transitional goodwill impairment test, which did not result in an
impairment loss.
Interest expense for the three months ended June 30, 2002 increased $32 to
$590 as compared to $558 for the three months ended June 30, 2001. The increase
is principally due to increased borrowings offset by a decrease in interest
rates. Preferred dividends for the three months ended June 30, 2002 were $57 on
25,000 shares of Series A Preferred Stock.
Primarily due to increased sales, reductions in cost of sales, advertising
expenses and general and administrative expenses, as discussed above, our
earnings before interest, taxes, depreciation and amortization, ("EBITDA")
increased $1,646 to $1,648 for the three months ended June 30, 2002 as compared
to $2 for the three months ended June 30, 2001. EBITDA is not a recognized
measure of performance under generally accepted accounting principles, however
we believe that EBITDA is a relevant measure of our performance because it
reflects our operations without giving effect to costs associated with our
acquisitions.
Principally due to the lower costs enumerated above and decreased
amortization of goodwill, the Company reported net income applicable to common
shares of $553, or $.03 per diluted share of common stock, an improvement of
$2,596, as compared to a net loss for the three months ended June 30, 2002 of
$2,043, or $.15 per share for the three months ended June 30, 2001.
Six Months Ended June 30, 2002 Compared to Six Months Ended
June 30, 2001
Gross sales for the six months ended June 30, 2002 were $27,748, an
increase of $835, as compared to $26,913 for the six months ended June 30, 2001.
The increase in gross sales is principally due to increase sales at our Audio
Book Club due to an increase in membership and sales per member. These increases
were partially offset by planned lower direct mail sales of our old time radio
products as we focused on more profitable customers.
Returns, discounts and allowances for the six months ended June 30, 2002
decreased $106 to $6,291, or 22.7% of gross sales, as compared to $6,397, or
23.8% of gross sales, for the six months ended June 30, 2001. The decrease in
returns as a percentage of net sales is primarily attributable to better
historical return experience at Audio Book Club.
Principally as a result of increased gross sales and lower returns, net
sales for the six months ended June 30, 2002 increased $941, or 4.6%, to $21,457
as compared to $20,516 for the six months ended June 30, 2001.
Cost of sales for the six months ended June 30, 2002 increased $212, or
2.29%, to $9,483 from $9,271 in the prior comparable period. Cost of sales as a
percentage of net sales decreased to 44.2% from 45.2%. We revised the
merchandising of products in our catalogs, to retail chains 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 increased to 55.8% for the six
months ended June 30, 2002 as compared to a gross profit as a percentage of net
sales of 54.8% for the six months ended June 30, 2001. This increase in gross
profit margin occurred despite up-front enrollment costs, included in cost of
goods sold, associated with a high number of new members acquired in the first
six months of 2002 as a result of successful direct marketing efforts at Audio
Book Club. Principally due to improved margins on products, gross profit
increased $729 to $11,974 for the six months ended June 30, 2002 as compared to
$11,245 for the six months ended June 30, 2001.
Advertising and promotion expenses decreased $1,108 or 18.3% to $4,776 for
the six months ended June 30, 2002 as compared to $5,884 in the prior comparable
period. The decrease is principally due to the timing and size of new member
direct mail campaigns in both 2002 and 2001 and the write-down of deferred
member acquisition costs in the third quarter of 2001 resulting in lower
amortization of new member enrollment costs in 2002. In 2002, we made the
strategic decision to aggressively grow our Audio Book Club membership by
expanding our targeted direct mail campaigns and its Internet marketing efforts.
We have attracted
15
approximately 160,000 new members in the six months ended June 30, 2002 an
increase of 60% over the new members attracted in the six months ended June 30,
2001 of 100,000.
General and administrative expenses for the six months ended June 30, 2002
decreased $689 to $5,033 from $5,722 for the six months ended June 30, 2001.
General and administrative expense decreases are principally attributable to
decreases in payroll and related expenses due to the consolidation of certain of
our classic radio operations into our New Jersey facility and reductions in our
allowance for bad debts as our historical bad debt experience improves.
Depreciation and amortization expenses for the six months ended June 30,
2002 were $945, a decrease of $2,034, as compared to $2,979 for the prior
comparable period. The decrease is principally attributable to discontinuation
in 2002 of amortization of certain intangible assets acquired in our
acquisitions, which were fully amortized in 2001. We also implemented 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. We have
completed the transitional goodwill impairment test, which did not result in an
impairment loss.
Net interest expense for the six months ended June 30, 2002 increased $10
to $1,089 as compared to $1,079 for the six months ended June 30, 2001.
Preferred stock dividends of $102 for the six months ended June 30, 2002 were on
25,000 shares of Series A Preferred Stock.
Primarily due to increased gross sales, reductions in cost of sales as a
percentage of net sales, advertising expenses and general and administrative
expenses, as discussed above, our earnings (loss) before interest, taxes,
depreciation and amortization, (EBITDA) improved $2,526 to $2,165 for the six
months ended June 30, 2002 as compared to a loss of $(361) for the six months
ended June 30, 2001. EBITDA is not a recognized measure of performance under
generally accepted accounting principles, however we believe that EBITDA is a
relevant measure of our performance because it reflects our operations without
giving effect to costs associated with our acquisitions.
Principally due to increased net sales and the lower costs enumerated
above and decreased amortization of goodwill, the net income before taxes for
the six months ended June 30, 2002 increased $4,550 to $131, as compared to a
loss of $(4,419) for the six months ended June 30, 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 $8,581, or $.43 per fully diluted share for
the six months ended June 30, 2001, as compared to net income of $29, or $.00
per fully diluted share, for the six months ended June 30, 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 four 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.
Debt in the amount of $9,873 is payable within the next twelve months.
Payments of $224 per month are due through December 31, 2002. We anticipate
making the monthly payments in 2002 from cash flow
16
generated from operations. Our lenders have historically extended the due dates
of our loans and we are in discussions with a number of parties, including our
present lenders, regarding new or extended credit facilities.
For the six months ended June 30, 2002, our cash increased by $179, as we
had cash provided by operations of $756 and used net cash of $470 and $107 for
investing and financing activities, respectively. Net cash provided by
operations principally consisted of our net income of $29, increased by
depreciation and amortization of intangibles and deferred financing costs of
$1,316, a decrease in prepaid expenses of $617 and an increase in accounts
payable and accrued expenses of $2,007. Net cash provided by operations was
partially offset by increases in accounts receivable of $586, inventories of
$371, royalty advances of $226 and a net increase in deferred member acquisition
costs of $2,030.
The increase in receivables is principally due to increased sales at Audio
Book Club and large wholesale sales of our old time radio products in June
related to Father's Day promotions. The increase in inventory is primarily due
to the timing of purchases. The increase in royalty advances is primarily
attributable to the renewal and expansion of licensing agreements with our
significant publishers. The increase in deferred member acquisition cost is
principally due to expansion of our Audio Book Club new member acquisition
marketing both in direct mail and on the Internet. The increase in accounts
payable and accrued expenses is principally due to the timing of vendor
invoicing and payments. The decrease in prepaid expenses is principally due to
the timing of our marketing activities.
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 commenced on June 15, 2002. Other costs related to the asset
purchase are estimated at approximately $305.
The Company received proceeds from the exercise of stock options and
warrants in the amount of $212 in the second quarter of 2002. On February 22,
2002, as previously committed to on 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.
Recently Issued Accounting Standards
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS 144"). SFAS 144 develops a single accounting model for long-lived
assets to be disposed of by sale, addresses significant implementation issues
related to previous guidance, and requires that long-lived assets to be disposed
of by sale be measured at the lower of their carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The adoption of SFAS 144 did not have any impact on the Company's
financial position, results of operations, or cash flows.
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.
In July 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 146
will be effective for the Company for disposal activities initiated after
December 31, 2002. The Company is in the process of evaluating the effect that
adopting SFAS 146 will have on its financial statements.
17
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 $8,480 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.
18
Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds (Dollars in thousands, except
per share data)
During the three months ended June 30, 2002, we granted warrants to
purchase a total of 100,000 shares of our common stock to a consultant. The fair
value of $36, computed using accepted option-pricing model, has been included in
prepaid expenses and contributed capital and is being amortized to expense over
the period of service. The warrants vest one year from grant date and have an
exercise period of three years from date of vesting. Exercise prices range from
$4.00 to $7.00 per share. During the three months ended June 30, 2002, warrants
to purchase 75,000 shares of our common stock were cancelled.
During the three months ended June 30, 2002, the Company cancelled
five-year plan options to purchase a total of 254,750 shares of the Company's
common stock.
During the three months ended June 30, 2002, we issued 6,250 shares of our
common stock to consultants under consulting agreements and a total of 69,000
shares of common stock were issued as result of the exercise of options and
warrants in the second quarter of 2002, resulting in proceeds to us of $212.
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
19
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, MediaBay, Inc. has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MediaBay, Inc.
Dated: August 14, 2002 By: /s/ Michael Herrick
----------------------------------------
Michael Herrick
Chief Executive Officer and President
Dated August 14, 2002 By: /s/ John F. Levy
----------------------------------------
John F. Levy
Chief Financial and Accounting Officer
20