Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 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 November 11, 2002, there were 14,252,352 shares of the Registrant's Common
Stock outstanding.
1
MEDIABAY, INC.
Quarter Ended September 30, 2002
Form 10-Q
Index
Page
----
PART I: Financial Information
Item 1: Financial Statements
Consolidated Balance Sheets at September 30, 2002 and December 31,
2001 (unaudited) 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
September 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 14
Item 3: Quantitative and Qualitative Disclosures of Market Risk 20
Item 4: Controls and Procedures 20
PART II: Other Information
Item 2: Changes in Securities and Use of Proceeds 21
Item 6: Exhibits and Reports on Form 8-K 21
Signatures 22
Certification of Principal Executive Officer 22
Certification of Principal Financial Officer 23
2
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
MEDIABAY, INC.
Consolidated Balance Sheets
(Dollars in Thousands)
September 30,
2002 December 31,
(Unaudited) 2001
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 22 $ 64
Accounts receivable, net of allowances for sales returns and doubtful accounts
of $4,331 and $4,539 at September 30, 2002 and December 31, 2001, respectively 6,834 4,798
Inventory 5,502 4,061
Prepaid expenses and other current assets 2,034 1,831
Royalty advances 862 773
Deferred member acquisition costs - current 5,139 3,435
Deferred income taxes - current 550 550
------- -------
Total current assets 20,943 15,512
Fixed assets, net of accumulated depreciation of $630 and $450 at September 30, 2002
and December 31, 2001, respectively 387 467
Deferred member acquisition costs - non-current 2,478 1,433
Deferred income taxes - non-current 16,650 16,650
Other intangibles 1,347 2,292
Goodwill 9,879 8,649
------- -------
$51,684 $45,003
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 17,431 $13,891
Current portion - long-term debt 2,470 1,600
-------- -------
Total current liabilities 19,901 15,491
-------- -------
Long-term debt 15,097 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 September 30, 2002 and December 31, 2001,
respectively 2,500 --
Common stock; no par value, authorized 150,000,000 shares; issued and
outstanding 14,252,352 at September 30, 2002 and 13,861,866 at December 31, 2001 94,725 93,468
Contributed capital 4,519 4,094
Accumulated deficit (89,608) (89,664)
-------- -------
Total common stockholders' equity 12,136 7,898
-------- -------
$ 51,684 $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 Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
Sales $15,865 $ 12,513 $43,613 $ 39,426
Returns, discounts and allowances 4,598 2,634 10,889 9,031
------- -------- ------- --------
Net sales 11,267 9,879 32,724 30,395
Cost of sales 5,241 5,285 14,724 14,556
Cost of sales - write-downs -- 2,261 -- 2,261
Advertising and promotion 2,633 3,158 7,409 9,042
Advertising and promotion - write-downs -- 3,971 -- 3,971
General and administrative 2,499 2,814 7,532 8,536
Asset write-downs and strategic charges -- 7,044 -- 7,044
Depreciation and amortization 191 1,486 1,136 4,465
------- -------- ------- --------
Operating income (loss) 703 (16,140) 1,923 (19,480)
Interest expense 619 608 1,708 1,688
------- -------- ------- --------
Income (loss) before income taxes 84 (16,748) 215 (21,168)
Benefit for income taxes -- -- -- 13,000
------- -------- ------- --------
Net income (loss) 84 (16,748) 215 (8,168)
Dividends on preferred stock 57 -- 159 --
------- -------- ------- --------
Net income (loss) applicable to common shares $ 27 $(16,748) $ 56 $ (8,168)
======= ======== ======= ========
Basic and diluted earnings (loss) per share:
Basic earnings (loss) per common share $ .00 $ (1.21) $ .00 $ (.59)
======= ======== ======= ========
Diluted earnings (loss) per common share $ .00 $ (1.21) $ .00 $ (.59)
======= ======== ======= ========
See accompanying notes to consolidated financial statements.
4
MEDIABAY, INC.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
2002 2001
-------- --------
Cash flows from operating activities:
Net income (loss) $ 56 $ (8,168)
Adjustments to reconcile net income (loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 1,136 4,465
Amortization of deferred member acquisition costs 4,011 6,105
Non-current accrued interest and dividends 196 --
Amortization of deferred financing costs 605 316
Deferred income tax benefit -- (13,000)
Asset write-downs and strategic charges -- 13,276
Changes in asset and liability accounts, net of acquisitions and
asset write-downs and strategic charges:
(Increase) decrease in accounts receivable, net (2,036) 1,216
Increase in inventory (1,381) (90)
(Increase) decrease in prepaid expenses (275) 105
(Increase) decrease in royalty advances (78) 275
Increase in deferred member acquisition costs (6,761) (3,381)
Increase (decrease) in accounts payable and accrued expenses
4,766 (3,458)
------- --------
Net cash provided by (used in) operating activities 239 (2,339)
Cash flows from investing activities:
Acquisition of fixed assets (106) (147)
Cash paid for asset acquisition (675) --
Acquisition of intangible assets -- (110)
------- --------
Net cash used in investing activities (781) (257)
------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants 214 --
Net proceeds from issuance of long-term debt 1,500 2,800
Payment of long-term debt (1,150) (100)
Increase in deferred financing costs (64) (431)
------- --------
Net cash provided by financing activities 500 2,269
------- --------
Net (decrease) in cash and cash equivalents (42) (327)
Cash and cash equivalents at beginning of period 64 498
------- --------
Cash and cash equivalents at end of period $ 22 $ 171
======= ========
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) 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 at closing, 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
======
(5) Freeny Patent
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 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.
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 Company also received
a warrant to purchase 50,000 shares of E-Data common stock with an exercise
price of $.25. The transaction closed subsequent to September 30, 2002.
(6) 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. The Company 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 nine month results of the Company on a comparable basis:
For Three Months For Nine Months
Ended September 30, Ended September 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Net Income (Loss):
Reported net income (loss) applicable to common shares $ 27 $ (16,748) $ 56 $ (8,168)
Goodwill amortization -- 128 -- 382
--------- --------- --------- ---------
Adjusted net income (loss) applicable to common shares $ 27 $ (16,620) $ 56 $ (7,786)
========= ========= ========= =========
7
Basic Earnings (Loss) Per Common Share:
Reported basic net earnings (loss) per common share $ .00 $ (1.21) $ .00 $ (.59)
Goodwill amortization -- .01 -- .02
--------- --------- --------- ---------
Adjusted basic earnings (loss) per common share $ .00 $ (1.20) $ .00 $ (.57)
========= ========= ========= =========
Diluted (Loss) Earnings Per Common Share:
Reported diluted net earnings (loss) per common share $ .00 $ (1.21) $ .00 $ (.59)
Goodwill amortization -- .01 -- .02
--------- --------- --------- ---------
Adjusted diluted earnings (loss) per common share $ .00 $ (1.20) $ .00 $ (.57)
========= ========= ========= =========
The Company amortizes 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 $129 for the
three months ended September 30, 2002 and $950 for the nine months ended
September 30, 2002. The following table presents our estimate of intangible
amortization expenses for the three months ending December 31, 2002, and for
each of the five succeeding years:
For the years ending December 31,
2002 $ 129
2003 $ 436
2004 $ 338
2005 $ 329
2006 $ --
2007 $ --
The following table presents details of Other Intangibles at September 30, 2002
and December 31, 2001:
September 30, 2002 December 31, 2001
-------------------------------------- --------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
------ ------------ ------ ------ ------------ ------
Mailing Agreements $2,892 $1,720 $1,172 $2,892 $1,362 $1,530
Customer Lists 4,380 4,380 -- 4,380 3,818 562
Non-Compete Agreements 200 140 60 200 110 90
Licenses and other 115 -- 115 110 -- 110
------ ------ ------ ------ ------ ------
Total Other Intangibles $7,587 $6,240 $1,347 $7,582 $5,290 $2,292
====== ====== ====== ====== ====== ======
(7) Long-term Debt
Bank Debt
On April 1, 2002, the maturity date of the principal amount of the
revolving credit facility ("Credit Facility") was extended to January 15, 2003
and on October 3, 2002 maturity date of the principal amount was again extended
to January 15, 2004, with certain conditions and certain prepayments described
below. The interest rate for the revolving credit facility is the prime rate
plus 2 1/2%. The Company made payments of $200 in May and June 2002, monthly
payments of $150 in July, August and September 2002 and a monthly payment of
$160 in October 2002. Monthly payments of $160 are also required at November 30
and December 31, 2002. The Company is required in 2003 to make monthly principal
payments totaling $2,220.
8
Subordinated Debt
During the nine months ended September 30, 2002, an unaffiliated 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 September 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 the
Company 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 this
note, and is payable in additional Preferred Shares, shares of Common Stock or
cash, at the holder's option, provided that if the holder elects to receive
payment in cash, the payment will accrue until the Company 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 this 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 Norton
Herrick, was issued a $500 principal amount convertible senior promissory note
due June 30, 2003 as consideration of a $500 loan made to the Company by
Huntingdon. This note is convertible into shares of Common Stock at the rate of
$1.82 of principal per share. This note bears interest at the annual rate of the
prime rate plus two percent.
In August 2002, payment of interest on the $2,500, $800 and $500 principal
amount notes due to Huntingdon was extended to the later of January 15, 2004 and
ten days following repayment of the Credit Facility.
On October 3, 2002, each of the $2,500 and $500 principal amount
convertible notes previously issued to Huntingdon were amended to, among other
things, extend the maturity date to September 30, 2007, provided that the holder
of either note may demand repayment of the note on or after the Credit Facility
is repaid. The $800 principal amount convertible note issued to Huntingdon was
also amended on October 3, 2002 to, among other things, extend the maturity date
to September 30, 2007, provided that beginning on the 90th day after the Credit
Facility is repaid the holder may demand repayment.
Also on October 3, 2002, the $1,984 principal amount convertible promissory
note previously issued to Norton Herrick and the $500 principal amount
convertible promissory note issued to Evan Herrick, Norton Herrick's son and a
principal stockholder of the Company, were amended to, among other things,
extend the maturity dates to September 30, 2007; provided that the Holders may
demand repayment of the note on or after October 31, 2004 if the Credit Facility
has been repaid.
(8) Stockholders' Equity and Stock Options and Warrants
Stock Options and Warrants
During the nine months ended September 30, 2002, the Company granted plan
and non-plan options and warrants to purchase a total of 682,500 shares of the
Company's common stock to the Company's chairman, consultants and Board members.
The fair value of $543, 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 $7.00 per share. During the nine
months ended September 30, 2002, the Company granted plan options to purchase
155,500 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 $5.50 per share.
9
During the nine months ended September 30, 2002, plan and non-plan options
and warrants to purchase 2,098,750 shares of the Company's common stock were
either cancelled or expired and the value of the warrants of $125 was written
off.
Options and warrants to purchase 70,500 shares of the Company's common
stock were exercised during the nine months ended September 30, 2002, resulting
in proceeds to the Company of $214.
Common and Preferred Stock
During the nine months ended September 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 7 above.
During the nine months ended September 30, 2002, the Company issued 200,000
shares of common stock to an unrelated third party upon conversion of $1,000
principal amount of convertible subordinated debt.
(9) Net Earnings (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 nine months ended
September 30, 2002 of 14,218,640 and 14,025,157, respectively, and for the three
and nine months ended September 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
September 30, 2002 were due to the inclusion of 1,951,927 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 15,708,000 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 $271 for
the three months ended September 30, 2002. Differences in the weighted average
number of common shares outstanding for purposes of computing diluted earnings
per share for the nine months ended September 30, 2002 were due to the inclusion
of 2,168,755 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 15,654,000 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 $834 for the nine months ended September 30, 2002.
Common equivalent shares totaling 10,035,000, including 9,765,000 shares
associated with the conversion of $12,484 of convertible debt, and the related
reduction in interest expense for the nine months ended September 30, 2001 of
$771, were not included in the computation of diluted loss per share at
September 30, 2001 because they would have been anti-dilutive.
(10) Supplemental Cash Flow Information
Cash paid for interest expense was $564 and $840 for the nine months ended
September 30, 2002 and 2001, respectively.
During the nine months ended September 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.
10
(11) 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 nine months ended September 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.
Three Months Ended September 30, 2002
Corporate ABC RSI Mbay.com Intersegment Total
Net sales $ -- $ 8,792 $ 2,465 $ 46 $ (36) $ 11,267
Profit (loss) before asset write-downs and strategic
charges, depreciation and amortization, interest
and dividends (626) 1,516 121 (123) 6 894
Depreciation and amortization 129 31 31 -- -- 191
Net interest expense 603 -- 16 -- -- 618
Net (loss) income applicable to common shareholders (1,415) 1,485 74 (123) 6 27
Assets -- 31,134 20,606 3 (59) 51,684
Additions to fixed assets -- 14 -- -- -- 14
Three Months Ended September 30, 2001
Corporate ABC RSI Mbay.com Intersegment Total
Net sales $ -- $ 7,681 $ 2,242 $ 27 $ (71) $ 9,879
Profit (loss) before asset write-downs and strategic
charges, depreciation and amortization and interest (706) (483) 90 (263) (16) (1,378)
Asset write-downs and strategic charges 2,000 6,031 4,342 903 -- 13,276
Depreciation and amortization 1,310 32 45 99 -- 1,486
Net interest expense 606 -- 2 -- -- 608
Net loss applicable to common shareholders (4,622) (6,546) (4,299) (1,265) (16) (16,748)
Assets -- 25,014 17,008 10 (88) 41,944
Additions to fixed assets -- 14 74 -- -- 88
Nine Months Ended September 30, 2002
Corporate ABC RSI Mbay.com Intersegment Total
Net sales $ -- $ 25,920 $ 6,772 $ 154 $ (122) $ 32,724
Profit (loss) before asset write-downs and strategic
charges, depreciation and amortization and interest
and dividends (1,921) 4,417 900 (354) 17 3,059
Depreciation and amortization 950 95 91 -- -- 1,136
Net interest expense 1,647 -- 61 -- -- 1,708
Net income (loss) applicable to common shareholders (4,677) 4,322 748 (354) 17 56
Assets -- 31,134 20,606 3 (59) 51,684
Additions to fixed assets -- 88 18 -- -- 106
Nine Months Ended September 30, 2001
Corporate ABC RSI Mbay.com Intersegment Total
Net sales $ -- $ 23,538 $ 6,844 $ 230 $ (217) $ 30,395
Profit (loss) before asset write-downs and strategic
charges, depreciation and amortization and interest (1,553) 876 (38) (1,036) 12 (1,739)
Asset write-downs and strategic charges 2,000 6,031 4,342 903 -- 13,276
Depreciation and amortization 3,933 98 130 304 -- 4,465
Net interest expense 1,679 -- 9 -- -- 1,688
Net income (loss) applicable to common shareholders 3,835 (5,253) (4,519) (2,243) 12 (8,168)
Assets -- 25,014 17,008 10 (88) 41,944
Additions to fixed assets -- 22 109 16 -- 147
11
(12) 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.
(13) Subsequent Events
On October 3, 2002 the following events occurred:
o The maturity date of the principal amount of the Credit Facility
was further extended to January 15, 2004, with certain conditions
and certain prepayments described in Note 7 above.
o Each of the $2,500, $500 and $800 principal amount convertible
notes previously issued to Huntingdon were amended as more fully
described in Note 7 above.
o The $1,984 principal amount convertible promissory note issued to
Norton Herrick and the $500 principal amount convertible
promissory note issued to Evan Herrick, Norton Herrick's son and
a principal stockholder of the Company, were amended as more
fully described in Note 7 above.
o The Company issued to Huntingdon a $1,000 principal amount
convertible promissory note (the "Initial Note") in consideration
of a $1,000 of advances made to the Company in the third quarter.
The Initial Note bears interest at the prime rate plus 2 1/2 %,
is convertible into shares of common stock at a rate of $2.00 per
share and is due September 30, 2007, provided that the holder may
make a demand for repayment after the Company's existing credit
facility is repaid. In connection with the transaction, the
Company issued to Huntingdon a ten-year warrant to purchase
250,000 shares of Common Stock at an exercise price of $2.00 per
share.
On October 10, 2002, the Company issued to Huntingdon an additional $150
principal amount convertible promissory note to Huntingdon (the "Second Note").
The Second Note is convertible into shares of Common Stock at a rate of $2.00
per share. The remaining terms of the Second Note are similar to those of the
Initial Note. Warrants to purchase 37,500 of shares of Common Stock at an
exercise price of $2.00 were also issued to Huntingdon. The remaining terms of
this warrant are similar to those of the Initial Warrant.
12
The Company and Huntingdon have also agreed that Huntingdon will loan an
additional $350 to the Company on November 15, 2002, (the "Third Note"). The
Third Note will be convertible into shares of Common Stock at an initial rate
equal to the lower of $2.00 per share and the closing sale price of the Common
Stock on November 15, 2002. The remaining terms of the Third Note will be
similar to those of the Initial Note. At the time of the loan, warrants to
purchase a number of shares of Common Stock equal to 50% of the number of shares
of Common Stock into which the Third Note is convertible, at an exercise price
equal to the initial conversion price of the Third Note will be issued to
Huntingdon. The remaining terms of this warrant will be similar to those of the
Initial Warrant.
On October 18, 2002, Michael Herrick tendered his resignation as Chief
Executive Officer of the Company, effective January 1, 2003 and the Company
entered into a consulting agreement with MEH Consulting Services, Inc. ("MEH
Consulting"), of which Michael Herrick is the sole stockholder and officer. This
agreement effective as of January 1, 2003, has a one-year term and provides for
MEH Consulting to provide the services of Michael Herrick. MEH Consulting agreed
to cause Mr. Herrick to devote a minimum of 30 hours per week to the Company's
business and affairs for which MEH Consulting will receive a fee of $17 per
month, as well as payment or reimbursement of business expenses incurred in
connection with providing services and insurance and other benefits for Michael
Herrick.
Hakan Lindskog has agreed to serve as Chief Executive Officer of the
Company beginning January 1, 2003. In October 2002, the Company amended a
39-month employment agreement with Mr. Lindskog, which had been effective
October 1, 2001. Pursuant to the amendment, Mr. Lindskog's base salary for 2004
was increased from $375 to $400, Mr. Lindskog will receive a bonus of $25 if he
is employed by the Company on March 31, 2003 and Mr. Lindskog was granted
options to purchase (i) 100,000 shares of Common Stock at an exercise price of
$1.25 per share and (ii) 100,000 shares of Common Stock at $3.25 per share.
On October 30, 2002, the Company entered into an employment agreement with
Howard Herrick, which provides for an initial annual salary of $175, which
increases at the rate of 4% per annum and provides for a minimum bonus of $30
per year on each December 1, beginning on December 1, 2003. Mr. Herrick's prior
two-year employment agreement provided for a salary of $150 per year. The term
of the employment agreement ends on December 31, 2005. In connection with
entering into the employment agreement, Mr. Herrick was granted options to
purchase 100,000 shares of Common Stock at an exercise price of $1.04 per share.
13
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, successfully implement our Internet strategy, license content for
digital download, the growth of the digital download market and other advances
in technologies, dependence on third party providers and suppliers; competition;
the costs and success of our marketing strategies, product returns and member
attrition. Undue reference should not be placed on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to update any forward-looking statements.
Introduction
MediaBay 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, Wal-Mart, 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.
14
Results of Operations
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001
Gross sales for the three months ended September 30, 2002 were $15,865 an
increase of $3,352, or 26.8%, as compared to $12,513 for the three months ended
September 30, 2001. The increase in gross sales is principally attributable to
higher sales at Audio Book Club of $2,572, or 25.6%, to $12,623 for the three
months ended September 30, 2002, as compared to gross sales of $10,051 for the
three months ended September 30, 2001. The increase in gross sales at Audio Book
Club is principally due to increased membership and higher gross sales per
member. Gross sales in the quarter ended September 30, 2002 also included $410
of gross sales from two new continuity programs, which were rolled out in the
third quarter of 2002. Returns, discounts and allowances for the three months
ended September 30, 2002 increased $1,964 to $4,598 as compared to $2,634 for
the three months ended September 30, 2001. The increase in returns, discounts
and allowances is due to higher sales, increased wholesale sales at Radio
Spirits, with accompanying higher return rates, as a percentage of total Radio
Spirits sales, and increased gross sales of Audio Book Club "main selections"
with higher profitability and higher returns as a percentage of gross sales at
Audio Book Club as increased new member acquisitions has expanded the membership
receiving the main selection.
Principally as a result of increased gross sales at Audio Book Club and the
new continuity programs, net sales for the three months ended September 30, 2002
increased $1,388, or 14.1%, to $11,267 as compared to $9,879 for the three
months ended September 30, 2001.
Cost of sales for the three months ended September 30, 2002 was $5,241.
Cost of sales as a percentage of net sales was 46.5% for the three months ended
September 30, 2002. Cost of sales for the three months ended September 30, 2001
was $7,546, of which $2,261 represented a charge included in cost of sales as a
write-down in the third quarter of 2001. Cost of sales as a percentage of net
sales, excluding the aforementioned write-down, for the three months ended
September 30, 2001, was 53.5%. Principally due to higher net sales, as described
above, and an improved gross profit margin, gross profit increased $1,432 to
$6,026 for the three months ended September 30, 2002 as compared to $4,594,
excluding the aforementioned write-down, for the three months ended September
30, 2001. Gross profit as a percentage of net sales, excluding the
aforementioned write-down, increased to 53.5% from 46.5% in the three months
ended September 30, 2001. The improvement was most pronounced at Audio Book Club
where gross profit as percentage of net sales increased to 58.8% from 46.7%,
excluding the aforementioned write-down, for the three months ended September
30, 2001. The improvement is principally due to higher average selling prices
and reduced product costs. This increase in gross profit occurred despite
up-front enrollment costs, included in cost of goods sold, associated with an
increased number of new members acquired in the third 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 $525 or 16.6% to $2,633 for
the three months ended September 30, 2002 as compared to $3,158 in the prior
comparable period. The decrease in reported advertising expense is principally
due to lower advertising expenditures relating to Audio Book Club new member
acquisitions in 2001 as compared to 2000 and the write-down of deferred member
acquisition costs in the third quarter of 2001 of $3,971, which resulted in
lower amortization of new member acquisition costs in 2002 and thus lower
reported advertising expense in 2002. We have attracted approximately 31% more
new members to our Audio Book Club in the three months ended September 30, 2002
as compared to the three months ended September 30, 2001.
15
General and administrative expenses for the three months ended September
30, 2002 decreased $315 to $2,499 from $2,814 for the three months ended
September 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 staff reductions at MediaBay.com, our Internet maintenance and
development division.
Depreciation and amortization expenses for the three months ended September
30, 2002 were $191, a decrease of $1,295, as compared to $1,486 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 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.
We recorded $11,276 of strategic charges and a charge of $2,000 to
write-off our investment in I-Jam Multimedia LLC in the three months ended
September 30, 2001.
Interest expense for the three months ended September 30, 2002 increased
$11 to $619 as compared to $608 for the three months ended September 30, 2001.
The increase is principally due to increased borrowings offset by a decrease in
interest rates. Preferred dividends for the three months ended September 30,
2002 were $57 on the outstanding 25,000 shares of Series A Preferred Stock which
were issued in February 2002.
Principally due to higher sales, the lower costs enumerated above and
decreased amortization of goodwill, and the strategic charges and asset
write-downs recorded in the third quarter of 2001, the Company reported net
income applicable to common shares of $27, or $.00 per share of common stock, as
compared to a loss of $16,748, or $(1.21) per share of common stock for the
three months ended September 30, 2001.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended
September 30, 2001
Gross sales for the nine months ended September 30, 2002 were $43,613, an
increase of $4,187, or 10.6%, as compared to $39,426 for the nine months ended
September 30, 2001. The increase in gross sales is primarily attributable to
increased sales for the nine months ended September 30, 2002 at Audio Book Club
of $4,040, or 13.1%, to $34,883, as compared to $30,843 for the nine months
ended September 30, 2001. Audio Book Club has attracted over 232,500 new members
in the nine months ended September 30, 2002, an increase of 49%, as compared to
new members attracted in 2001. Returns, discounts and allowances for the nine
months ended September 30, 2002 increased $1,858 to $10,889, or 25.0% of gross
sales, as compared to $9,031, or 22.9% of gross sales for the nine months ended
September 30, 2001. The increase in returns, discounts and allowances is due to
higher sales, increased wholesale sales at Radio Spirits, with accompanying
higher return rates, as a percentage of total Radio Spirits sales, and increased
gross sales of Audio Book Club "main selections" with higher profitability and
higher returns as a percentage of total sales at Audio Book Club as increased
new member acquisitions has expanded the membership receiving the main
selection.
As a result of higher gross sales, partially offset by higher returns, net
sales for the nine months ended September 30, 2002 increased $2,329, or 7.7%, to
$32,724 as compared to $30,395 for the nine months ended September 30, 2001.
Cost of sales for the nine months ended September 30, 2002 was $14,724.
Cost of sales as a percentage of net sales was 45.0% for the nine months ended
September 30, 2002. Cost of sales for the nine months ended September 30, 2001
was $16,817, of which $2,261 represented a charge included in cost of sales as a
write-down in the third quarter of 2001. Cost of sales, for the nine months
ended September 30, 2001, as a percentage of net sales, excluding the
aforementioned write-down, was 47.9%. Principally due to higher sales and
improved margins on products at both Audio Book Club and Radio Spirits, gross
profit increased $2,161 to $18,000, or 55.0% of net sales, as compared to
$15,839, or 52.1%, of net sales excluding
16
the write-down, for the nine months ended September 30, 2001. This increase in
gross profit occurred despite up-front enrollment costs, included in cost of
goods sold, associated with an increased number of new members acquired in the
nine months ended September 30, 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 $1,633 or 18.1% to $7,409 for
the nine months ended September 30, 2002 as compared to $9,042 in the prior
comparable period. The decrease in reported advertising expense is principally
due to lower advertising expenditures relating to Audio Book Club new member
acquisitions in 2001 as compared to 2000 and the write-down of deferred member
acquisition costs in the third quarter of 2001 of $3,971, which resulted in
lower amortization of new member acquisition costs in 2002 and thus lower
reported advertising expense 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, resulting in the
increase in new Audio Book Club members referred to above.
General and administrative expenses for the nine months ended September 30,
2002 decreased $1,004 to $7,532 from $8,536 for the nine months ended September
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 staff reductions at MediaBay.com, our Internet maintenance and
development division.
Depreciation and amortization expenses for the nine months ended September
30, 2002 were $1,136 a decrease of $3,329, as compared to $4,465 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 nine months ended September 30, 2002 increased
$20 to $1,708 as compared to $1,688 for the nine months ended September 30,
2001. Preferred stock dividends of $159 for the nine months ended September 30,
2002 were on the outstanding 25,000 shares of Series A Preferred Stock, which
were issued in February 2002.
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.
Principally due to increased sales, the lower costs enumerated above,
decreased amortization of goodwill and strategic charges recorded in the nine
months ended September 2001, the net income applicable to common shares for the
nine months ended September 30, 2002 increased $8,224 to $56, or $.00 per common
share, as compared to a net loss applicable to common shares of $8,168, or $.59
per common share, for the nine months ended September 30, 2001.
17
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 resulted in the generation of cash from
operations of $239 for the nine months ended September 30, 2002, 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 nine months ended September 30, 2002, our cash decreased by $42, as
we had cash provided by operations of $239 and cash provided by financing
activities of $204 and used net cash of $485 for investing activities.
Net cash provided by operations principally consisted of our net income of
$56, increased by depreciation and amortization of intangibles and deferred
financing costs of $1,741, non-current accrued interest and dividends of $196,
and an increase in accounts payable and accrued expenses of $4,766. Net cash
provided by operations was partially offset by increases in accounts receivable
of $2,036, inventories of $1,381, prepaid expenses of $275, royalty advances of
$78 and a net increase in deferred member acquisition costs of $2,750.
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 September
related to Halloween and Holiday promotions. The increase in inventory is
primarily due to the increase in Radio Spirits' inventory for shipment to
wholesale accounts in October and November for the holiday season. 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 attendant with the growth
of the business and 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 Radio Spirits 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 have made payments, including costs,
of $379 at closing and have paid through Sept 30, 2002 a total of $675. We are
required to pay five additional monthly installments of $74. Other costs related
to the asset purchase are estimated at approximately $305.
We received proceeds from the exercise of stock options and warrants in the
amount of $214 during the nine months ended September 30, 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. For a further
description of this transaction, see Note 7 of the Notes to Consolidated
Financial Statements presented elsewhere in this Form 10-Q.
During August and September of 2002, our Chairman advanced $1,000 to us,
which was converted into a $1,000 principal amount convertible promissory note
payable to Huntingdon (the "Initial Note") on October 3, 2002. The Initial Note
bears interest at the prime rate plus 2 1/2 %, is convertible into shares of
common stock at a rate of $2.00 per share and is due September 30, 2007,
provided that the holder may make a demand for repayment after the Company's
existing credit facility is repaid. In connection with the transaction, we
issued to Huntingdon a ten-year warrant to purchase 250,000 shares of Common
Stock at an exercise price of $2.00 per share.
18
On October 10, 2002, we issued to Huntingdon an additional $150 principal
amount convertible promissory note to Huntingdon (the "Second Note"). The Second
Note is convertible into shares of Common Stock at a rate of $2.00 per share.
The remaining terms of the Second Note are similar to those of the Initial Note.
Warrants to purchase 37,500 of shares of Common Stock at an exercise price of
$2.00 were also issued to Huntingdon. The remaining terms of this warrant are
similar to those of the Initial Warrant.
We have also agreed with Huntingdon that Huntingdon will loan an additional
$350 to us on November 15, 2002, (the "Third Note"). The Third Note will be
convertible into shares of Common Stock at an initial rate equal to the lower of
$2.00 per share and the closing sale price of the Common Stock on November 15,
2002. The remaining terms of the Third Note will be similar to those of the
Initial Note. At the time of the loan, warrants to purchase a number of shares
of Common Stock equal to 50% of the number of shares of Common Stock into which
the Third Note is convertible, at an exercise price equal to the initial
conversion price of the Third Note will be issued to Huntingdon. The remaining
terms of this warrant will be similar to those of the Initial Warrant.
Also on October 3, 2002, the maturity date of the principal amount of our
credit facility was further extended to January 15, 2004 with certain conditions
and certain prepayments described below. The interest rate for the revolving
credit facility is the prime rate plus 2 1/2%. We made payments of $200 in May
and June 2002, monthly payments of $150 in July, August and September 2002 and a
monthly payment of $160 in October 2002. Monthly payments of $160 are also
required at November 30 and December 31, 2002. We are required in 2003 to make
monthly principal payments of $170 in the months January, February and March
2003; $180,000 in the months of April, May and June 2003; $190,000 in the months
of July, August and September 2003 and $200 in the months of October, November
and December 2003.
On October 3, 2002, each of the $2,500 and $500 principal amount
convertible notes previously issued to Huntingdon were amended to, among other
things, extend the maturity date to September 30, 2007, provided that the holder
of either note may demand repayment of the note on or after our credit facility
is repaid. The $800 principal amount convertible note issued to Huntingdon was
also amended on October 3, 2002 to, among other things, extend the maturity date
to September 30, 2007, provided that beginning on the 90th day after our credit
facility is repaid the holder may demand repayment.
Also on October 3, 2002, the $1,984 principal amount convertible promissory
note previously issued to Norton Herrick and the $500 principal amount
convertible promissory note issued to Evan Herrick, Norton Herrick's son and a
principal stockholder, were amended to, among other things, extend the maturity
dates to September 30, 2007; provided that the holder may demand repayment of
the note on or after October 31, 2004 if our credit facility has been repaid.
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"). We are in the process of evaluating the impact that
this statement will have on its financial position, results of operations and
cash flows.
19
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. We are in the process of evaluating the effect that adopting
SFAS 146 will have on its financial statements.
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 $9,030 of our long-term debt is payable at the prime
rate plus 2.5%. If the prime rate were to increase our interest expense would
increase.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of MediaBay's
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that MediaBay's disclosure controls and procedures are effective to
ensure that information required to be disclosed by MediaBay in reports that it
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
their evaluation, there were no significant changes in MediaBay's internal
controls or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
20
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 September 30, 2002, MediaBay issued plan
options and warrants to purchase 40,000 shares of its common stock at an
weighted average exercise price of $4.44 per share to officers, employees and
consultants. The options vest at various times and have exercise periods ranging
from one to five years. Certain of the warrants also include limitations on
exercise based on stock price and trading volumes.
The 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
10.1 Consulting Agreement, dated as of October 18, 2002 and effective
as of January 1, 2003 (the "Effective Date") between MEH
Consulting Services, Inc. (the "Consultant") and MediaBay, Inc.
("MediaBay" or the "Company").
10.2 Letter Agreement dated October 18, 2002 between Hakan Lindskog
and MediaBay amending the employment agreement dated October 1,
2001.
10.3 Employment Agreement between the Company and Howard Herrick dated
October 30, 2002.
99.1 Certification of Michael Herrick, Chief Executive Officer of
MediaBay, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Certification of John Levy, Executive Vice President and Chief
Financial Officer of MediaBay, Inc., Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
None
21
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, MediaBay, Inc. has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MediaBay, Inc.
Dated: November 13, 2002 By: /s/ Michael Herrick
--------------------------------------
Michael Herrick
Chief Executive Officer and President
Dated November 13, 2002 By: /s/ John F. Levy
--------------------------------------
John F. Levy
Chief Financial and Accounting Officer
MediaBay, Inc.
Certification of Principal Executive Officer
I, Michael Herrick, Chief Executive Officer of MediaBay, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of MediaBay, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Michael Herrick
-----------------------
Michael Herrick
Chief Executive Officer
22
MediaBay, Inc.
Certification of Principal Financial Officer
I, John F. Levy, Chief Financial Officer of MediaBay, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of MediaBay, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ John F. Levy
-----------------------
John F. Levy
Chief Financial Officer