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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO 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 |_|
Indicate by check mark whether the Registrant is an accelerated filer as defined
in Rule 12b-2 of the Securities Exchange Act of 1934. Yes |_| No |X|
As of November 6, 2003, there were 14,152,786 shares of the Registrant's Common
Stock outstanding.
1
MEDIABAY, INC.
Quarter ended September 30, 2003
Form 10-Q
Index
Page
----
PART I: Financial Information
Item 1: Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at September 30, 2003
and December 31, 2002, (unaudited) 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2003 and 2002, (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2003 and 2002, (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations. 15
Item 3: Quantitative and Qualitative Disclosures of Market Risk 22
Item 4. Controls and Procedures 22
Part II: Other Information
Item 2: Changes in Securities and Use of Proceeds 23
Item 6: Exhibits and Reports on Form 8-K 23
Signatures 24
2
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
MEDIABAY, INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited)
September 30, December 31,
2003 2002
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 975 $ 397
Accounts receivable, net of allowances for sales returns and doubtful accounts of
$4,900 and $5,325 at September 30, 2003 and December 31, 2002, respectively 6,071 7,460
Inventory 4,776 5,244
Prepaid expenses and other current assets 400 503
Royalty advances 1,071 1,044
-------- --------
Total current assets 13,293 14,648
Fixed assets, net of accumulated depreciation of $777 and $665 at September 30, 2003
and December 31, 2002, respectively 260 358
Deferred member acquisition costs 5,254 7,396
Deferred income taxes 16,224 16,224
Other intangibles, net 84 122
Goodwill 9,658 9,871
-------- --------
$ 44,773 $ 48,619
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 14,012 $ 16,616
Due to bridge loan investors 965 --
Current portion - long-term debt 3,150 2,368
-------- --------
Total current liabilities 18,127 18,984
-------- --------
Long-term debt and related accrued interest, net of original issue discount of $248 and
$567 at September 30, 2003 and December 31, 2002, respectively 13,496 14,680
Common stock subject to contingent put rights 1,100 4,550
Preferred stock, no par value, authorized 5,000,000 shares; 25,000 shares of
Series A issued and outstanding at September 30, 2003 and December 31, 2002
and 3,350 shares and no shares of Series B at September 30, 2003 and December 31, 2002,
respectively 2,828 2,500
Common stock; no par value, authorized 150,000,000 shares; issued and outstanding
14,137,401 at September 30, 2003 and 14,341,376 at December 31, 2002, respectively 94,567 94,800
Contributed capital 11,281 8,251
Accumulated deficit (96,626) (95,146)
-------- --------
Total stockholders' equity 12,050 10,405
-------- --------
$ 44,773 $ 48,619
======== ========
See accompanying notes to condensed consolidated financial statements.
3
MEDIABAY, INC.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Sales, net of returns, discounts and allowances of $4,753 and
$4,598, and $14,174 and $10,889 for the three and nine
months ended September 30, 2003 and 2002, respectively $ 9,572 $ 11,267 $ 29,677 $ 32,724
Cost of sales 4,252 5,241 13,611 14,724
---------- ---------- ---------- ----------
Gross profit 5,320 6,026 16,066 18,000
Advertising and promotion 2,069 2,633 7,528 7,409
Bad debt 931 641 2,734 1,682
General and administrative 1,613 1,868 5,491 5,850
Depreciation and amortization 65 191 263 1,136
---------- ---------- ---------- ----------
Operating income 642 703 50 1,923
Interest expense 295 833 1,347 2,371
---------- ---------- ---------- ----------
Income (loss) before income taxes 347 (130) (1,297) (448)
Income tax expense -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) 347 (130) (1,297) (448)
Dividends on preferred stock 62 57 183 159
---------- ---------- ---------- ----------
Net income (loss) applicable to common shares $ 285 $ (187) $ (1,480) $ (607)
========== ========== ========== ==========
Basic and diluted income (loss) per share:
Basic income (loss) per common share $ .02 $ (.01) $ (.10) $ (.04)
========== ========== ========== ==========
Diluted income (loss) per common share $ .02 $ (.01) $ (.10) $ (.04)
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
4
MEDIABAY, INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine months ended
September 30,
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss applicable to common shares (1,480) $ (607)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 263 1,136
Amortization of deferred member acquisition costs 4,525 4,011
Non-current accrued interest and dividends 818 196
Amortization of deferred financing costs and debt discount 379 1,268
Changes in asset and liability accounts, net of acquisitions and asset
write-downs and strategic charges:
Decrease (increase) in accounts receivable, net 1,389 (2,036)
Decrease (increase) in inventory 468 (1,381)
Decrease (increase) in prepaid expenses 78 (275)
(Increase) in royalty advances (26) (78)
Increase in deferred member acquisition costs (2,383) (6,761)
(Decrease) increase in accounts payable and accrued expenses (2,381) 4,766
--------- ---------
Net cash provided by (used in) operating activities 1,650 239
--------- ---------
Cash flows from investing activities:
Acquisition of fixed assets (15) (106)
Assets acquired, net of cash (148) (675)
Acquisition of intangible assets (102) --
--------- ---------
Net cash used in investing activities (265) (781)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants -- 214
Net proceeds from issuance of long-term debt -- 1,500
Payment of long-term debt (1,390) (1,150)
Increase in deferred financing costs (40) (64)
Proceeds from issuance of Preferred Stock 348 --
Payments made in connection with litigation settlement
recorded in contributed capital, net of cash received (690) --
Cash received from bridge loan investors 965 --
--------- ---------
Net cash (used in) provided by financing activities (807) 500
--------- ---------
Net increase (decrease) in cash and cash equivalents 578 (42)
Cash and cash equivalents at beginning of period 397 64
--------- ---------
Cash and cash equivalents at end of period $ 975 $ 22
========= =========
See accompanying notes to condensed consolidated financial statements.
5
MEDIABAY, INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share data)
(Unaudited)
(1) Organization
MediaBay, Inc. (the "Company" or "MediaBay"), a Florida corporation, was
formed on August 16, 1993. MediaBay is a marketer of spoken audio products,
including audiobooks and old-time radio shows, through direct response, retail
and Internet channels. The Company markets audiobooks primarily through its
Audio Book Club. Its old-time radio programs are marketed through direct-mail
catalogs, over the Internet at RadioSpirits.com and, on a wholesale basis, to
major retailers.
(2) Significant Accounting Policies
Basis of Presentation
The interim unaudited condensed consolidated financial statements should
be read in conjunction with the Company's audited consolidated financial
statements contained in its Annual Report on Form 10-K. 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.
Revenue Recognition
The Company derives its principal revenue through sales of audiobooks,
classic radio shows and other spoken word audio products directly to consumers
principally through direct mail. The Company also sells classic radio shows to
retailers either directly or through distributors. The Company derives
additional revenue through rental of its proprietary database of names and
addresses to non-competing third parties through list rental brokers. The
Company also derives a small amount of revenue from advertisers included in its
nationally syndicated classic radio shows. The Company recognizes sales to
consumers, retailers and distributors upon shipment of merchandise. List rental
revenue is recognized on notification by the list brokers of rental by a third
party when the lists are rented. The Company recognizes advertising revenue upon
notification of the airing of the advertisement by the media buying company
representing the Company. Allowances for future returns are based upon
historical experience and evaluation of current trends.
Shipping and Handling Revenue and Costs
Amounts paid to the Company for shipping and handling by customers is
included in sales. Amounts the Company incurs for shipping and handling costs
are included in cost of sales. The Company recognizes shipping and handling
revenue upon shipment of merchandise. Shipping and handling expenses are
recognized on a monthly basis from invoices from the third party fulfillment
houses, which provide the services.
Cost of Sales
Cost of sales includes the following:
o Product costs (including free audiobooks in the initial enrollment
offer to prospective members)
o Royalties to publishers and rightsholders
6
o Fulfillment costs, including shipping and handling
o Customer service
o Direct response billing, collection and accounts receivable
management.
Cooperative Advertising and Related Selling Expenses
The Company classifies the cost of certain credits, allowances,
adjustments and payments given to customers for the services or benefits
provided as a reduction of net sales.
Stock-Based Compensation
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees." In October 1995, SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued. SFAS 123, which prescribes the
recognition of compensation expense based on the fair value of options on the
grant date, allows companies to continue applying APB 25 if certain pro forma
disclosures are made assuming a hypothetical fair value method application. Had
compensation expense for the Company's stock options been recognized on the fair
value on the grant date under SFAS 123, the Company's net loss and net loss per
share for the three and nine months ended June 30, 2003 and 2002 would have been
as follows:
Three Months Ended Nine Months
September 30, Ended September 30,
------------------ -------------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) income applicable to common shares,
as reported $ 285 $ (187) $ (1,480) $ (607)
Add: Stock-based employee compensation expense
included in reported net loss applicable to common
shares, net of related tax effects -- -- -- --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (601) (132) (637) (445)
--------- --------- --------- ---------
Pro forma net (loss) income applicable to common shares $ (316) $ (319) $ (2,117) $ (1,052)
========= ========= ========= =========
Net (loss) income per share
Basic and diluted - as reported $ .02 $ (.01) $ (.10) $ (.04)
========= ========= ========= =========
Basic and diluted - pro forma $ (.02) $ (.02) $ (.15) $ (.08)
========= ========= ========= =========
No dividend yield and the following assumptions were used in the pro forma
calculation of compensation expense:
No. of Exercise Assumed Risk-free Fair Value
Date Shares Price Volatility Interest Rate per Share
---- ------ ----- ---------- ------------- ---------
First Nine Months 2002 290,000 $2.94 165% 4.49% $1.53
First Nine Months 2003 2,213,856 $0.97 165% 4.85% $ .29
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 those 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 enactment date.
7
Deferred Member Acquisition Costs
Promotional costs directed at current members are expensed on the date the
promotional materials are mailed. The cost of any premiums, gifts or the
discounted audiobooks in the promotional offer to new members is expensed as
incurred. The Company accounts for direct response advertising for the
acquisition of new members in accordance with AICPA Statement of Position 93-7,
"Reporting on Advertising Costs" ("SOP 93-7"). SOP 93-7 states that the cost of
direct response advertising (a) whose primary purpose is to elicit sales to
customers who could be shown to have responded specifically to the advertising
and (b) that results in probable future benefits should be reported as assets
net of accumulated amortization. Accordingly, the Company has capitalized direct
response advertising costs and amortizes these costs over the period of future
benefit, which has been determined to be generally 30 months. The costs are
being amortized on accelerated basis consistent with the recognition of related
revenue.
Royalties
The Company is liable for royalties to licensors based upon revenue earned
from the respective licensed product. The Company pays certain of its publishers
and other rightsholders advances for rights to products. Royalties earned on the
sale of the products are payable only in excess of the amount of the advance.
Advances, which have not been recovered through earned royalties, are recorded
as an asset. Advances not expected to be recovered through royalties on sales
are charged to royalty expense.
Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
(3) Goodwill and Other Intangibles
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). The Company adopted SFAS 142 on January 1,
2002. SFAS 142 changed the accounting for goodwill and indefinite-lived
intangible assets from an amortization method to an impairment-only approach.
Goodwill and indefinite-lived intangible assets are tested for impairment
annually or when certain triggering events require such tests and are written
down, with a resulting charge to operations, only in the period in which the
recorded value of goodwill and indefinite-lived intangible assets is more than
their fair value.
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 $28 and $129 and
$149 and $950 for the three and nine months ended September 30, 2003 and 2002,
respectively. The Company estimates intangible amortization expenses of the
following:
Three months ended December 31, 2003 $ 41
Year ended December 31, 2004 13
Year ended December 31, 2005 8
Year ended December 31, 2006 8
Year ended December 31, 2007 8
Year ended December 31, 2008 1
-----
Total $ 79
=====
8
The following table presents details of Other Intangibles at September 30,
2003 and December 31, 2002:
September 30, 2003 December 31, 2002
------------------------------------ ------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Mailing Agreements $ 592 $ 592 $ -- $ 592 $ 524 $ 68
Customer Lists 4,380 4380 -- 4,380 4,380 --
Non-Compete Agreements 313 234 79 200 151 49
Other 5 -- 5 5 -- 5
-------- -------- -------- -------- -------- --------
Total Other Intangibles $ 5,290 $ 5,204 $ 84 $ 5,177 $ 5,055 $ 122
======== ======== ======== ======== ======== ========
Goodwill of $9,658 and $9,871 as of September 30, 2003 and December 31,
2002 respectively is attributable to the Company's Radio Spirits business. The
change of $213 is related to the finalization of the acquisition of Great
American Audio, which occurred in March 2002.
(4) Long-term Debt
Bank Debt
As of November 1, 2003, the Company had $3,075 of indebtedness outstanding
under the Amended and Restated Credit Agreement dated as of October 3, 2002, as
amended, by and among the Company and Radio Spirits, Inc. and Audio Book Club,
Inc., wholly-owned subsidiaries of the Company, as co-borrowers, and ING (U.S.)
Capital LLC, as administrative agent, and the other lenders named therein (the
"Credit Agreement"). The maturity date of the Credit Agreement is April 30,
2004; provided however, that the Company is required to make monthly payments of
principal of $75 in November through March 2004. The Company is not permitted to
make any additional borrowings under the Credit Agreement. The interest rate on
the credit facility is equal to the prime rate plus 2 1/2%. The Company granted
the lenders under the Credit Agreement a security interest in substantially all
of the Company's assets and the assets of its subsidiaries and pledged the stock
of its subsidiaries.
The Company is required to maintain Minimum EBITDA, as defined below, of
the following:
1) $5,000,000 for the period beginning on January 1, 2001 and ending prior
to September 30, 2003;
2) $6,000,000 for the period beginning on January 1, 2001 and ending prior
to December 31, 2003.
3) $7,000,000 for the period beginning on January 1, 2001 and ending prior
to March 31, 2004.
Under the Credit Agreement, "EBITDA" means, for any period, the sum of (i)
net income, (ii) interest expense, (iii) income tax expense, (iv) depreciation
expense, (v) extraordinary and nonrecurring losses and (vi) amortization
expense, less extraordinary and nonrecurring gains (in each case, determined in
accordance with generally accepted accounting principles) plus adjustments for
(x) the pro forma effect of any Permitted Acquisition (as defined in the Credit
Agreement) and (y) non-cash stock compensation; provided that EBITDA shall be
adjusted for the effect of treating the Company's advertising expense and new
member acquisition costs as expensed as incurred.
The Company was in compliance with this covenant at September 30, 2003.
In addition to limiting the Company's ability to incur additional
indebtedness, the Credit Agreement prohibits the Company from, among other
things:
1) merging into or consolidating with another entity;
2) selling all or substantially all of its assets;
3) declaring or paying cash dividends; and
4) materially changing the nature of its business.
The Company anticipates making the principal payments from cash flow
generated from operations.
9
The balance of the Company's bank debt, after making the above payments,
of $2,700 is due April 30, 2004. We are currently seeking to refinance or extend
this debt. Historically we have been able to extend the maturity of this debt.
(5) Stockholders' Equity and Stock Options and Warrants
Stock Options and Warrants
From January 1, 2003 to September 30, 2003, the Company issued options to
purchase 210,000 shares of its common stock to certain directors, employees and
consultants to the Company under its 2000 Stock Option plan and 2,123,856 shares
of its common stock to certain directors, employees and consultants to the
Company under its 2001 Stock Option plan. The Company also cancelled options to
purchase 155,000 shares of its common stock and options to purchase 323,000
shares expired during the nine months ended September 30, 2003. The Company also
issued non-plan warrants to purchase 90,000 shares of its common stock to a
former employee and consultant at prices ranging from $1.50 to $3.00 per share
as part of non-competition agreements.
On July 31, 2003, a director exercised options to purchase 300,000 shares
of MediaBay common stock at an exercise price of $.50 per share pursuant to an
Option Agreement dated November 23, 2001. The options were due to expire based
on their terms. The options were exercised on a "cashless" basis and the closing
stock price on July 31, 2001 was $.78, accordingly, the Company issued to the
director a certificate for 107,692 shares of MediaBay common stock. The director
has not sold any of the stock received in the transaction.
Preferred Stock
On May 7, 2003, the Company sold 3,350 shares of a newly created Series B
Convertible Preferred Stock (the "Series B Stock") with a liquidation preference
of $100 per share for $335. Of the total sold, 1,400 shares ($140) were
purchased by Carl Wolf, Chairman and a director of the Company, and 200 shares
($20) were purchased by John Levy, Executive Vice President and Chief Financial
Officer of the Company. The holders of shares of Series B Convertible Preferred
Stock will receive dividends at the rate of $9.00 per share, payable quarterly,
in arrears, in cash on each March 31, June 30, September 30 and December 31;
provided that payment will accrue until the Company is permitted to make such
payment in cash under its Agreement with its senior lender.
The Series B Stock is convertible into shares of Common Stock into
MediaBay Common Stock at a conversion rate equal to a fraction, (i) the
numerator of which is equal to the number of Series B Stock times $100 plus
accrued and unpaid dividends though the date of conversion and (ii) the
denominator is $0.77, the average price of the Company's stock on May 6, 2003.
In the event of a liquidation, dissolution or winding up of the Company,
the holders of Series B Stock shall be entitled to receive out of the assets of
the Company, a sum in cash equal to $100.00 per share before any amounts are
paid to the holders of the Company common stock and on a pari passu with the
holders of the Series A Convertible Preferred Stock. The holders of Series B
Stock shall have no voting rights, except as required by law and except that the
vote or consent of the holders of a majority of the outstanding shares of Series
B Stock, voting separately as a class, will be required for any amendment,
alteration or repeal of the terms of the Series B Stock that adversely effects
the rights, preferences or privileges of the Series B Stock.
(6) Litigation Settlement
In December 1998 the Company acquired certain assets from a third party.
The parties also entered into certain other agreements including a mailing
agreement and a non-compete agreement. As consideration for the assets acquired
and the related transactions, including the mailing agreement and the
non-compete agreement, the third party received cash consideration of $30,750
and an aggregate of 325,000 shares of the Company's common stock (the "Shares")
and warrants to purchase an additional 100,000 shares of the Company's common
stock. The parties also entered into a Registration and Shareholder Rights
Agreement pursuant to which, the Company granted the third party the right under
certain circumstances,
10
commencing December 31, 2004, to require the Company to purchase from the third
party the Shares at a price of $15.00 per Share.
In 2001, the Company commenced litigation alleging, among other things,
that the Company was fraudulently induced to purchase certain of the assets. On
June 16, 2003, Audio Book Club, Inc. ("ABC"), a wholly owned subsidiary of
MediaBay entered into a settlement agreement with respect to the lawsuit.
Pursuant to the settlement agreement, ABC received $350 in cash, the return for
cancellation of 325,000 shares of MediaBay common stock issued in connection
with the acquisition and the termination of put rights granted to the seller in
the acquisition with respect to 230,000 of the shares (put rights with respect
to the remaining 95,000 shares had previously terminated). The termination of
the put rights terminated a $3,450 future contingent obligation of MediaBay and
results in a corresponding increase in stockholders' equity.
The calculation of the settlement of litigation recorded in Contributed
Capital is as follows:
Termination of contingent put rights $ 3,450
Return for cancellation of 325,000 shares of common stock 247
Cash received 350
--------
Total received in settlement of litigation 4,047
Legal and other costs incurred in connection with the litigation 1,040
--------
Settlement of litigation recorded in Contributed Capital $ 3,007
========
(7) Net Income (Loss) Per Share of Common Stock
Basic income (loss) earnings per share was computed using the weighted
average number of common shares outstanding for the three and nine months ended
September 30, 2003 of 14,128,179 and 14,269,529, respectively and for the three
and nine months ended September 30, 2002 of 14,218,640 and 14,025,157,
respectively.
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, 2003 were due to the inclusion of 591,000 common equivalent
shares, as calculated under the treasury stock method and 17,087,000 common
equivalent shares relating to convertible subordinated debt 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
$359 for the three months ended September 30, 2003. .
For the nine months ended September 30, 2003 common equivalent shares
which were not included in the computation of diluted loss per share because
they would have been anti-dilutive were 694,000 common equivalent shares, as
calculated under the treasury stock method and 16,884,000 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 applicable to common stockholders would have been $1,034 for the nine
months ended September 30, 2003.
Common equivalent shares totaling 17,659,927, including 15,708,000 shares
associated with the conversion of convertible debt, and the related reduction in
interest expense of $271 for the three months ended September 30, 2002, were not
included in the computation of diluted loss per share at September 30, 2002
because they would have been anti-dilutive. Common equivalent shares totaling
17,822,755, including 15,654,000 shares associated with the conversion of
convertible debt, and the related reduction in interest expense of $834 for the
nine months ended September 30, 2002, were not included in the computation of
diluted loss per share at September 30, 2002 because they would have been
anti-dilutive.
(8) Supplemental Cash Flow Information
Cash paid for interest expense was $412 and $564 for the nine months ended
September 30, 2003 and 2002, respectively.
11
During the nine months ended September 30, 2003, the Company issued 13,333
shares of the Company's common stock to consultants under consulting agreements.
The shares have been valued at $10 and are being amortized to expense over the
period of benefit.
(9) Segment Reporting
For 2003 and 2002, the Company has divided its operations into four
reportable segments: Corporate, Audio Book Club ("ABC") a membership-based club
selling audiobooks in direct mail and on the Internet; Radio Spirits ("RSI")
which produces, sells, licenses and syndicates old-time radio programs; and
MediaBay.com a media portal offering spoken word audio content in secure digital
download formats. Segment operating income is total segment revenue reduced by
operating expenses identifiable with that business segment. Corporate includes
general corporate administrative costs, professional fees, interest expenses and
amortization of acquisition related costs. The Company evaluates performance and
allocates resources among its three operating segments based on operating income
and opportunities for growth. The Company did not expend any funds or receive
any income in the nine months ended September 30, 2003 and 2002 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, 2003
Corporate ABC RSI Mbay.com Inter-segment Total
-------------------------------------------------------------------------
Sales, net of returns, discounts and allowances $ -- $ 6,493 $ 3,071 $ 42 $ (34) $ 9,572
Profit (loss) before depreciation and amortization,
interest and dividends (532) 541 813 (118) 3 707
Depreciation and amortization 30 25 10 -- -- 65
Interest expense 292 -- 3 -- -- 295
Dividends on preferred stock 62 -- -- -- -- 62
Net (loss) income applicable to common shares (916) 516 800 (118) 3 285
Total assets -- 28,397 16,441 3 (68) 44,773
Acquisition of fixed assets -- -- -- -- -- --
Three Months Ended September 30, 2002
Corporate ABC RSI Mbay.com Inter-segment Total
-------------------------------------------------------------------------
Sales, net of returns, discounts and allowances $ -- $ 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
Interest expense 817 -- 16 -- -- 833
Dividends on preferred stock 57 -- -- -- -- 57
Net (loss) income applicable to common shares (1,629) 1,485 74 (123) 6 (187)
Total assets -- 30,492 20,606 3 (59) 51,042
Acquisition of fixed assets -- 14 -- -- -- 14
Nine Months Ended September 30, 2003
Corporate ABC RSI Mbay.com Inter-segment Total
-------------------------------------------------------------------------
Sales, net of returns, discounts and allowances $ -- $ 21,873 $ 7,781 $ 94 $ (71) $ 29,677
Profit (loss) before depreciation and amortization,
interest and dividends (1,802) 1,351 1,172 (415) 7 313
Depreciation and amortization 151 79 33 -- -- 263
Interest expense 1,337 -- 10 -- -- 1,347
Dividends on preferred stock 183 -- -- -- -- 183
Net (loss) income applicable to common shares (3,473) 1,272 1,129 (415) 7 (1,480)
Total assets -- 28,397 16,441 3 (68) 44,773
Acquisition of fixed assets -- 13 2 -- -- 15
Nine Months Ended September 30, 2002
Corporate ABC RSI Mbay.com Inter-segment Total
-------------------------------------------------------------------------
Sales, net of returns, discounts and allowances $ -- $ 25,920 $ 6,772 $ 154 $ (122) $ 32,724
Profit (loss) before asset write-downs and strategic
charges, depreciation and amortization, interest and
dividends (1,921) 4,417 900 (354) 17 3,059
Depreciation and amortization 950 95 91 -- -- 1,136
Interest expense 2,310 -- 61 -- -- 2,371
Dividends on preferred stock 159 -- -- -- -- 159
Net income (loss) applicable to common shares (5,340) 4,322 748 (354) 17 (607)
Total assets -- 30,492 20,606 3 (59) 51,042
Acquisition of fixed assets -- 88 18 -- -- 106
12
(10) Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of FASB 150 had no impact on the Company's
operating results or financial condition.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities"("SFAS 149"). SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133. With certain
exceptions, SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. Management does not believe adoption of this standard will have a material
impact on the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The adoption of this statement is not expected
to have a material effect on the Company's financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" ("SFAS 148") which amends
SFAS No. 123. This statement provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No. 123.
The transition guidance and disclosure requirements are effective for fiscal
years ending after December 15, 2002. The Company has included the required
interim disclosure in Note 2 to these Financial Statements. The adoption of this
statement did not have a material effect on the Company's financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This interpretation requires a guarantor
to recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. It also enhances
guarantor's disclosure requirements to be made in its interim and annual
financial statements about its obligations under certain guarantees it has
issued. The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. In the normal course of business, the Company does not issue guarantees to
third parties; accordingly, this interpretation will not have an effect on the
Company's financial position or results of operations.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections", was approved
by the FASB. This statement is effective January 1, 2003. Among other things,
this statement requires that gains or losses on the extinguishment of debt will
generally be required to be reported as a component of income from continuing
operations and will no longer be classified as an extraordinary item. Therefore,
beginning in 2003, the Company's prior financial
13
statements will need to be reclassified to include those gains and losses
previously recorded as an extraordinary item as a component of income from
continuing operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" (SFAS 146"). SFAS 146 requires the recognition of a
liability for costs associated with an exit plan or disposal activity when
incurred and nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)", which allowed
recognition at the date of an entity's commitment to an exit plan. The
provisions of this statement are effective for exit or disposal activities that
are initiated by the Company after December 31, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. This statement addresses the diverse accounting practices for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of this statement did not have a material
effect on the Company's financial position or results of operations.
(11) Certain Transactions
During the three months ended September 30, 2003, Norton Herrick, a
director, provided a $100 guarantee to a vendor. The Company subsequently paid
the vendor and the guarantee expired. Mr. Herrick received no compensation and
did not profit from the transaction.
During the three months ended September 30, 2003, Mr. Herrick also loaned
the Company $100, the loan was subsequently included in the $1,065 financing
described below.
(12) Subsequent Events
On October 1, 2003, the Company completed a $1,065 financing consisting of
the notes due September 23, 2004. The notes bear interest at 18%, provided for
accrual of interest to maturity and have no prepayment penalty. In connection
with the issuance of the notes, the Company issued to the investors, five year
warrants to purchase 266,250 shares of MediaBay common stock at an exercise
price of $0.80, the closing price of the stock on September 30, 2003. The
Company has also agreed to issue the investors warrants to purchase an
additional 266,250 shares of MediaBay common stock on April 1, 2004, if the
notes have not been repaid. Purchasers of notes included Carl Wolf, Chairman of
MediaBay and a wholly owned affiliate of Norton Herrick, a Board member.
14
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 the Company's 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 the Company
believes 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 the Company's 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, without limitation, the Company's history of
losses; its ability to meet stock repurchase obligations, anticipate and respond
to changing customer preferences, license and produce desirable content, protect
its databases and other intellectual property from unauthorized access; pay
trade creditors and collect receivables; dependence on third-party providers,
suppliers and distribution channels; competition; the costs and success of its
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. The Company undertakes no obligation to update any
forward-looking statements.
Introduction
The Company is a marketer of spoken audio products, including audiobooks
and old-time radio shows, through direct response, retail and Internet channels.
The Company's content and products are sold in multiple formats, including
physical (cassette and compact disc) and secure digital download formats.
The Company reports financial results on the basis of four business
segments; Corporate, Audio Book Club ("ABC"), Radio Spirits ("Radio Spirits" or
"RSI") and MediaBay.com. A fifth division, Radio Classics, 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.
Results of Operations
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
Sales, net of returns, discounts and allowances for the three months ended
September 30, 2003 were $9,572 a decrease of $1,695, as compared to $11,267 for
the three months ended September 30, 2002. The decrease in sales is principally
due to decreased sales at our Audio Book Club of $2,343 in large part due to a
decrease in membership and new member sales. The Company has implemented a
series of initiatives to increase cash flow including significant reductions in
marketing and advertising expenditures to attract new members to its Audio Book
Club. The decline in revenue at Audio Book Club was partially offset by an
increase of $572 of sales in the three months ended September 30, 2003, of The
World's Greatest Old-Time Radio continuity program as compared to the three
months ended September 30, 2002. The World's Greatest Old-Time Radio continuity
program is a program introduced in the third quarter of 2002, which is similar
to Audio Book Club and offers old-time radio products.
Cost of sales for the three months ended September 30, 2003 decreased $949
to $4,252 from $5,241 in the prior comparable period. Cost of sales as a
percentage of net sales decreased to 44.4% for then three months ended September
30, 2003 from 46.5% for the three-month period ended September 30, 2002.
Principally due to lower sales, as described above, gross profit decreased $706,
to $5,320 for the three
15
months ended September 30, 2003 as compared to $6,026 for the three months ended
September 30, 2002. The decrease in cost of sales is principally due to lower
sales and fewer new members enrolled at Audio Book Club and fewer new customers
at The World's Greatest Old-Time Radio continuity program in the third quarter
of 2003 as compared to the third quarter of 2002, which resulted in fewer
introductory packages with heavily discounted products, which adversely affect
cost of sales. Gross profit as a percentage of net sales increased to 55.6% for
the three months ended September 30, 2003 as compared to 53.5% for the three
months ended September 30, 2002.
Advertising and promotion expenses decreased $564 to $2,069 for the three
months ended September 30, 2003 as compared to $2,633 in the prior comparable
period. The decrease is principally due to the acquisition of fewer new Audio
Book Club members and The World's Greatest Old-Time Radio continuity program
customers during the three months ended September 30, 2003 compared to the three
months ended September 30, 2002, which resulted in a fewer new member and
customer introductory packages, which include premiums that are expensed as new
members and customers enroll and lower expenses for catalogs mailed to Audio
Book Club members as a result of the Audio Book Club reduced active membership
and the timing of catalog mailings
Increases in bad debt expenses of $290 to $931, for the three months ended
September 30, 2003, as compared to $641 for the three months ended September 30,
2002, are principally due to an increase in new members in 2002 from the
Internet and our Passages Christian audiobook club whose non-pay rates have been
significantly higher than our traditional Audio Book Club members.
General and administrative expenses for the three months ended September
30, 2003 decreased $255 to $1,613 from $1,868 for the three months ended
September 30, 2002 principally due to decreases in payroll and related expenses
due to a restructuring of the Company, which when fully phased in by January 1,
2004, should result in annual savings in general and administrative costs of
$1,400 and lower public relations and investor relation expenses, partially
offset by an increase in insurance costs.
Depreciation and amortization expenses for the three months ended
September 30, 2003 were $65, a decrease of $126, as compared to $191 for the
prior comparable period. The decrease is principally attributable to reductions
in the amortization of intangibles, which had been fully amortized or written
off during the year ended December 31, 2002.
Interest expense for the three months ended September 30, 2003 decreased
$538 to $295 as compared to $833 for the three months ended September 30, 2002.
The decrease is principally due to the pay down of a portion of our senior
credit facility, a decrease in interest rates on our variable rate debt as
interest rates have declined, inclusion in the three months ended September 30,
2002 of $444 for amortization of debt discount and deferred financing fees as
compared to $106 for the three months ended September 30, 2003 and forgiveness
in September 2003 of $100 of interest recorded in 2002 to a vendor and reversal
of interest accrued in the first six months of 2003 to the same vendor..
Preferred dividends for the three months ended September 30, 2003 were $62 as
compared to $57 for the three months ended September 30, 2002.
Principally due lower sales partially offset by the lower costs enumerated
above and decreased amortization of goodwill and the Company reported a net
income applicable to common shares of $285, or $0.02 per diluted share of common
stock for the three months ended September 30, 2003, as compared to a net loss
applicable to common shares of $187, or $0.01 per diluted share of common stock
for the three months ended September 30, 2002.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
Sales, net of returns, discounts and allowances for the nine months ended
September 30, 2002 were $29,677, a decrease of $3,047, as compared to $32,724
for the nine months ended September 30, 2002. The decrease in sales is
principally due to decreased sales at our Audio Book Club of $4,274 due to
significant reductions in marketing and advertising expenditures to attract new
members and higher return rates from members acquired in 2002 and a decrease of
$1,396 in wholesale sales of our old-time radio products
16
partially offset by an increase of $2,158 of sales in the nine months ended
September 30, 2003, of The World's Greatest Old-Time Radio continuity program as
compared to the same period in 2002 and increases in our audiobook mystery
continuity program of $226 and in revenue from syndication of our old-time radio
shows to radio stations of $150.
Cost of sales for the nine months ended September 30, 2003 decreased
$1,113 to $13,651 from $14,724 in the prior comparable period. Cost of sales as
a percentage of net sales increased to 45.9% for the nine months ended September
30, 2003 compared to 45.0% for the nine months ended September 30, 2002. The
increase in cost of goods sold as a percentage of net sales is principally due
to an increase at the Radio Spirits operations as a result of discounting in the
direct mail business relating to a new customer acquisition program marketed
through a radio advertising campaign, increased returns in the wholesale
business resulting in higher fulfillment costs as a percentage of revenue and
increased provisions for obsolete inventory partially offset by lower cost of
sales as a percentage of sales at The World's Greatest Old-Time Radio continuity
as the program was rolled out. Principally due to lower sales, gross profit
decreased $1,933 to $16,066 for the nine months ended September 30, 2003 as
compared to $18,000 for the nine months ended September 30, 2002.
Advertising and promotion expenses increased $119 to $7,528 for the nine
months ended September 30, 2003 as compared to $7,409 in the prior comparable
period. The increase is principally due to more advertising expenditures during
the year ended December 31, 2002 compared to the year ended December 31, 2001,
which resulted in increased amortization of deferred member acquisition costs in
the nine months ended September 30, 2003 as compared to the nine months ended
September 30, 2002, and costs incurred in the testing of potential new products,
partially offset by the acquisition of fewer new Audio Book Club members and The
World's Greatest Old-Time Radio continuity program customers during the nine
months ended September 30, 2003 compared to the nine months ended September 30,
2002, which resulted in a fewer new member and customer introductory packages,
which include premiums that are expensed as new members and customers enroll and
lower expenses for catalogs mailed to Audio Book Club members as a result of the
Audio Book Club reduced active membership and the timing of catalog mailings
Increase in bad debt expenses of $1,052 to $2,734, for the nine months
ended September 30, 2003, as compared to $1,682 for the three months ended
September 30, 2002, are principally due to an increase in new members in 2002
from the Internet and our Passages Christian audiobook club whose non-pay rates
have been significantly higher than our traditional Audio Book Club members and
an increase in bad debt expense relating to The World's Greatest Old-Time Radio
continuity program as sales increased. The bad debt experience for The World's
Greatest Old-Time Radio continuity program has been what we anticipated.
General and administrative expenses for the nine months ended September
30, 2003 decreased $359 to $5,491 from $5,850 for the nine months ended
September 30, 2002. General and administrative expense decreases are principally
attributable to lower payroll and related costs, public and investor relations,
and travel and entertainment costs partially offset by higher insurance costs.
General and administrative expenses for the nine months ended September 30, 2002
also included certain one-time costs relating to the moving of our old-time
radio business from Illinois to New Jersey.
Depreciation and amortization expenses for the nine months ended September
30, 2003 were $263, a decrease of $873, as compared to $1,136 for the prior
comparable period. The decrease is principally attributable to reductions in the
amortization of intangibles, which had been fully amortized or written off
during the year ended December 31, 2002.
Net interest expense for the nine months ended September 30, 2003
decreased $1,024 to $1,347 as compared to $2,371 for the nine months ended
September 30, 2002. The decrease is principally due to the pay down of a portion
of our senior credit facility, a decrease in interest rates on our variable rate
debt as interest rates have declined, inclusion in net interest expense of $319
and $663 for the nine months ended September 30, 2003 and 2002, respectively,
for amortization of debt discount related to warrants and beneficial conversion
features related to our financings and forgiveness in September 2003 of $100 of
interest recorded in 2002 to a vendor. Preferred stock dividends were $183 and
$159 for the nine months
17
ended September 30, 2003 and 2002, respectively. The increase in preferred stock
dividends is due to the issuance in May 2003 of 3,350 shares of a newly created
Series B Convertible Preferred Stock (the "Series B Stock") with a liquidation
preference of $100 per share for $335.
Due to the lower sales and related gross profit, and higher bad debt
expense, partially offset by lower general and administrative expenses,
amortization, depreciation and interest expense, the Company reported a net loss
applicable to common shares of $1,480, or $0.10 per diluted share of common
stock for the nine months ended September 30, 2003, as compared to a net loss
applicable to common shares for the nine months ended September 30, 2002 of
$607, or $.04 per diluted share.
Liquidity and Capital Resources
Historically, the Company has funded its cash requirements through sales
of equity and debt securities and borrowings from financial institutions and the
Company's principal shareholders.
At September 30, 2003, the Company owed approximately $10,680 to trade and
other creditors. Approximately $6,160 of these accounts payable were more than
60 days past due. If the Company does not make satisfactory payments to its
vendors they may refuse to continue to provide it products or services on
credit, which could interrupt the Company's supply of products or services.
The Company has implemented a series of initiatives to increase cash flow
including significant reductions in marketing and advertising expenditures to
attract new members to its Audio Book Club. There can be no assurance that the
Company will not in the future require additional capital to pay its creditors,
fund the expansion of operations, make acquisitions or for working capital.
Management believes that additional sources of capital are available if
required.
For the nine months ended September 30, 2003, cash increased by $578, as
the Company had net cash provided by operating activities of $1,650 and used net
cash of $265 and $807 for investing and financing activities, respectively. Net
cash provided by operating activities principally consisted of net loss of
$1,480, depreciation and amortization expenses of $263, amortization of deferred
financing costs and original issue discount of $379, non-current accrued
interest and dividends payable of $817, decreases in accounts receivable,
inventory and prepaid expenses of $1,389, $468 and $78, respectively, and a net
decrease in deferred member acquisition costs of $2,142, partially offset by an
increase in royalty advances of $26 and decreases in accounts payable and
accrued expenses of $2,383.
The decrease in accounts receivable was primarily attributable to lower
sales. The decrease in inventory is principally due to lower sales .The decrease
in deferred member acquisition cost is due to changes in the timing and
reduction of the size of marketing campaigns to attract new members due both to
an attempt to target the best performing members and cash constraints which have
limited our ability to execute planned campaigns. The Company actually spent
$5,386 on advertising in the nine months ended September 30, 2003; a reduction
of $4,773, as compared to $10,159 spent on advertising in the nine months ended
September 30, 2002. The increase in prepaid expenses is principally due to the
timing of marketing activities.
Net cash used in investing activities consists of acquisition of fixed
assets of $15, principally computer equipment and the acquisition of intangible
assets and goodwill, including legal fees and other costs incurred in obtaining
covenants not to compete from a former employee and a former consultant of $102,
and the acquisition of certain old-time radio assets of $148.
In accordance with the terms of its senior credit facility, the Company
repaid $1,390 of principal on its senior credit facility during the nine months
ended September 30, 2003. On April 9, 2003, the maturity date of the principal
amount of the senior credit facility of $4,030 was extended to April 30, 2004
with certain conditions. The Company is required to make payments of $75 per
month for the months of October 2003 through March 2004. The interest rate for
the revolving credit facility is the prime rate plus 2.5%.
18
On June 16, 2003, Audio Book Club, Inc. ("ABC"), a wholly owned subsidiary
of MediaBay entered into a settlement agreement with respect to a lawsuit in
which ABC was the plaintiff and arising out of an acquisition made by ABC.
Pursuant to the settlement agreement, ABC received $350 in cash, the return for
cancellation of 325,000 shares of MediaBay common stock issued in connection
with the acquisition and the termination of put rights granted to the seller in
the acquisition with respect to 230,000 of the shares (put rights with respect
to the remaining 95,000 shares had previously terminated). The termination of
the puts rights terminates a $3,450 future contingent obligation of MediaBay and
results in a corresponding increase in stockholders' equity.
The calculation of the settlement of litigation is as follows:
Termination of contingent put rights $ 3,450
Return for cancellation of 325,000 shares of common stock 247
Legal and other costs incurred in connection with the litigation, net of cash
received of $350 690
--------
Net settlement of litigation recorded in Contributed Capital $ 3,007
========
On October 1, 2003, the Company completed a $1,065 financing consisting of
the notes due September 23, 2004. The notes bear interest at 18%, provided for
accrual of interest to maturity and have no prepayment penalty. In connection
with the issuance of the notes, the Company issued to the investors, five year
warrants to purchase 266,250 shares of MediaBay common stock at an exercise
price of $0.80, the closing price of the stock on September 30, 2003. The
Company has also agreed to issue the investors warrants to purchase an
additional 266,250 shares of MediaBay common stock on April 1, 2004, if the
notes have not been repaid. Purchasers of notes included Carl Wolf, Chairman of
MediaBay and a wholly owned affiliate of Norton Herrick, a Board member. As of
September 30, 2003, the Company had received $965 of the bridge financing.
During the three months ended September 30, 2003, Norton Herrick, a
director, provided a $100 guarantee to a vendor. The Company subsequently paid
the vendor and the guarantee expired. Mr. Herrick received no compensation and
did not profit from the transaction.
During the three months ended September 30, 2003, Mr. Herrick also loaned
the Company $100, the loan was subsequently included in the $1,065 financing
described above. On May 7, 2003, the Company sold 3,350 shares of a newly
created Series B Convertible Preferred Stock (the "Series B Stock") with a
liquidation preference of $100 per share for $335. Of the total sold, 1,400
shares ($140) were purchased by Carl Wolf, Chairman and a director of the
Company, and 200 shares ($20) were purchased by John Levy, Executive Vice
President and Chief Financial Officer of the Company. The holders of shares of
Series B Convertible Preferred Stock will receive dividends at the rate of $9.00
per share, payable quarterly, in arrears, in cash on each March 31, June 30,
September 30 and December 31; provided that payment will accrue until the
Company is permitted to make such payment in cash under its Agreement with its
senior lender.
The Series B Stock is convertible into shares of Common Stock into
MediaBay Common Stock at a conversion rate equal to a fraction, (i) the
numerator of which is equal to the number of Series B Stock times $100 plus
accrued and unpaid dividends though the date of conversion and (ii) the
denominator is the $0.77, the closing sale price of the Company's stock on May
6, 2003.
In the event of a liquidation, dissolution or winding up of MediaBay, the
holders of Series B Stock shall be entitled to receive out of the assets of
MediaBay, a sum in cash equal to $100.00 per share before any amounts are paid
to the holders of MediaBay common stock and on a pari passu with the holders of
the Series A Convertible Preferred Stock. The holders of Series B Stock shall
have no voting rights, except as required by law and except that the vote or
consent of the holders of a majority of the outstanding shares of
19
Series B Stock, voting separately as a class, will be required for any
amendment, alteration or repeal of the terms of the Series B Stock that
adversely effects the rights, preferences or privileges of the Series B Stock.
On May 1, 2003, the Company entered into a two-year consulting agreement
with XNH Consulting Services, Inc. ("XNH"), a company wholly-owned by Norton
Herrick, the Company's former Chairman. The agreement provides, among other
things that XNH will provide consulting and advisory services to MediaBay and
that XNH will be under the direct supervision of the Company's Board of
Directors. For its services, the Company has agreed to pay XNH a fee of $8 per
month and to provide Mr. Herrick with health insurance and other benefits
applicable to the Company's officers to the extent such benefits may be provided
under the Company's benefit plans. The consulting agreement provides that the
indemnification agreement with Mr. Herrick entered into on November 15, 2002
pursuant to which, the Company agreed to indemnify Mr. Herrick to the maximum
extent permitted by the corporate laws of the State of Florida or, if more
favorable, the Company's Articles of Incorporation and By-Laws in effect at the
time the agreement was executed, against all claims (as defined in the
agreement) arising from or out of or related to Mr. Herrick's services as an
officer, director, employee, consultant or agent of the Company or any
subsidiary or in any other capacity shall remain in full force and effect and to
also indemnify XNH on the same basis. Mr. Herrick resigned as Chairman of
MediaBay, Inc. effective May 1, 2003 and the Company and Mr. Herrick terminated
the employment agreement signed as of November 2, 2002 on May 1, 2003.
On April 18, 2003 the Company signed a sixty-six month extension of its
lease on its office space in Cedar Knolls, New Jersey. Minimum annual lease
commitments including capital improvement payments under all non-cancelable
operating leases are as follows:
Year ending December 31,
2003 ....................... $ 156
2004 ....................... 168
2005 ....................... 192
2006 ....................... 198
2007 ....................... 204
Thereafter ................. 310
------
Total lease commitments .... $1,228
======
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). This Statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of FASB 150 had no impact on the Company's
operating results or financial condition.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities"("SFAS 149"). SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133. With certain
exceptions, SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. Management does not believe adoption of this standard will have a material
impact on the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to entities in which an enterprise holds
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a variable interest that it acquired before February 1, 2003. The adoption of
this statement is not expected to have a material effect on the Company's
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" ("SFAS 148") which amends
SFAS No. 123. This statement provides alternative methods of transition for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No. 123.
The transition guidance and disclosure requirements are effective for fiscal
years ending after December 15, 2002. The Company has included the required
interim disclosure in Note 2 to these Financial Statements. The adoption of this
statement did not have a material effect on the Company's financial position or
results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This interpretation requires a guarantor
to recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken in issuing the guarantee. It also enhances
guarantor's disclosure requirements to be made in its interim and annual
financial statements about its obligations under certain guarantees it has
issued. The initial recognition and initial measurement provisions of this
interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. In the normal course of business, the Company does not issue guarantees to
third parties; accordingly, this interpretation will not have an effect on the
Company's financial position or results of operations.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections", was approved
by the FASB. This statement is effective January 1, 2003. Among other things,
this statement requires that gains or losses on the extinguishment of debt will
generally be required to be reported as a component of income from continuing
operations and will no longer be classified as an extraordinary item. Therefore,
beginning in 2003, the Company's prior financial statements will need to be
reclassified to include those gains and losses previously recorded as an
extraordinary item as a component of income from continuing operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" (SFAS 146"). SFAS 146 requires the recognition of a
liability for costs associated with an exit plan or disposal activity when
incurred and nullifies Emerging Issues Task Force (EITF) Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)", which allowed
recognition at the date of an entity's commitment to an exit plan. The
provisions of this statement are effective for exit or disposal activities that
are initiated by the Company after December 31, 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. This statement addresses the diverse accounting practices for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The adoption of this statement did not have a material
effect on the Company's financial position or results of operations.
Quarterly Fluctuations
Our operating results vary from period to period as a result of purchasing
patterns of members, the timing, costs, magnitude and success of direct mail
campaigns and Internet initiatives and other new member recruitment advertising,
member attrition, the timing and popularity of new audiobook releases and
product returns.
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.
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Item 3. Quantitative and Qualitative Disclosure of Market Risk
The Company is exposed to market risk for the impact of interest rate
changes. As a matter of policy the Company does not enter into derivative
transactions for hedging, trading or speculative purposes.
The Company's exposure to market risk for changes in interest rates
relates to its variable rate debt. The Company has total debt outstanding as of
September 30, 2003, net of original issue discount of $, of $16,646 of which
interest on $7,650 principal amount of this debt is payable at the prime rate
plus 2.5%. If the prime rate were to increase our interest expense would
increase, however a hypothetical 10% change in interest rates would not have had
a material impact on our fair values, cash flows, or earnings for the three and
nine months ended September 30, 2002. All of our other debt is at fixed rates of
interest.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of our management,
including the Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), of the effectiveness of our disclosure controls and procedures. Based
on that evaluation, the CEO and CFO have concluded that our disclosure controls
and procedures are effective at the reasonable assurance level to timely alert
them of information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934. During the quarter ended
September 30, 2003 there were no changes in our internal controls over financial
reporting that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
Item 2: Change in Securities and Use of Proceeds. (Dollars in thousands, except
per shares data)
From January 1, 2003 to September 30, 2003, the Company issued options to
purchase 210,000 shares of its common stock to certain directors, employees and
consultants to the Company under its 2000 Stock Option plan and 2,123,856 shares
of its common stock to certain directors, employees and consultants to the
Company under its 2001 Stock Option plan. The Company also cancelled options to
purchase 155,000 shares of its common stock and options to purchase 323,000
shares expired during the nine months ended September 30, 2003. The Company also
issued non-plan warrants to purchase 90,000 shares of its common stock to a
former employee and consultant at prices ranging from $1.50 to $3.00 per share
as part of non-competition agreements.
On May 7, 2003, the Company sold 3,350 shares of a newly created Series B
Convertible Preferred Stock (the "Series B Stock") with a liquidation preference
of $100 per share for $335. Of the total sold, 1,400 shares ($140) were
purchased by Carl Wolf, Chairman and a director of the Company, and 200 shares
($20) were purchased by John Levy, Executive Vice President and Chief Financial
Officer of the Company. The Series B Stock is convertible into shares of Common
Stock into MediaBay Common Stock at a conversion rate equal to a fraction, (i)
the numerator of which is equal to the number of Series B Stock times $100 plus
accrued and unpaid dividends though the date of conversion and (ii) the
denominator is the $0.77, the closing sale price of the Company's stock on May
6, 2003.
On July 31, 2003, a director exercised options to purchase 300,000 shares
of MediaBay common stock at an exercise price of $.50 per share pursuant to an
Option Agreement dated November 23, 2001. The options were exercised on a
"cash-less" basis and the closing stock price on July 31, 2001 was $.78,
accordingly, the Company issued to the director a certificate for 107,692 shares
of MediaBay common stock.
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
31.1 Rule 13a-14(a) Certificate of Principal Executive Officer
31.2 Rule 13a-14(a) Certificate of Principal Financial Officer
32.1 Certification of Ronald Celmer, 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
32.2 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
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, MediaBay, Inc. has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
MediaBay, Inc.
Dated:November 6, 2003 By: /s/ Ronald Celmer
--------------------------------------------
Ronald Celmer
Chief Executive Officer
Dated:November 6, 2003 By: /s/ John F. Levy
--------------------------------------------
John F. Levy
Chief Financial Officer
(principal accounting and financial officer)
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