Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 1999
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.
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(Exact name of Small Business Issuer as specified in its charter)
Florida 65-0429858
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(State or other jurisdiction of (I.R.S. Employment
incorporation or organization) Identification No.)
2295 Corporate Blvd., N.W., Suite 222, Boca Raton, Florida 33431
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (561) 241-1426
- ----------------------------------------------- --------------
Audio Book Club, Inc
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the Issuer (1) 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 report) and (2) has been subject
to such filing requirement for the past 90 days.
Yes _X_ No___
As of November 8, 1999, there were 9,158,497 shares of the Issuer's Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
<PAGE>
MediaBay, Inc.
Quarter ended September 30, 1999
Form 10-QSB
Index
Page
----
PART I: Financial Information
Item 1: Financial Statements
Consolidated Balance Sheet at September 30, 1999 (unaudited) 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1999 and 1998 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998 (unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II: Other Information
Item 1: Legal Proceedings 19
Item 2: Changes in Securities and Use of Proceeds 19
Item 4: Submission of Matters to a Vote of Security Holders 20
Item 6: Exhibits and Reports on Form 8-K 20
Signatures 21
Financial Data Schedule 22
2
<PAGE>
Part I: Financial Information
Item 1: Financial Statements
MEDIABAY, INC.
Consolidated Balance Sheet
September 30, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
Assets
<S> <C>
Current assets:
Cash and cash equivalents $ 865
Short-term investments to be held to maturity 100
Accounts receivable, net of allowances for sales returns and doubtful
accounts of $3,983 6,874
Inventory 5,564
Royalty advances 3,414
Prepaid expenses 1,787
Deferred member acquisition costs - current 2,945
--------
Total current assets 21,549
Fixed assets, at cost, net of accumulated
depreciation of $744 1,349
Deferred member acquisition costs - non-current 3,585
Deferred financing costs 1,814
Prepaid expenses - non-current 233
Other intangibles, net 13,779
Goodwill, net 47,008
--------
$ 89,317
========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 4,939
Accrued expenses 5,754
Current portion of long-term debt 3,120
--------
Total current liabilities 13,813
--------
Long-term debt 39,313
--------
Commitments and contingencies
Preferred stock, no par value, authorized 5,000,000 shares; no shares
issued and outstanding
Common stock subject to contingent put 4,283
Common stock; no par value, authorized 75,000,000 shares; 9,136,897 issued
and outstanding 57,576
Contributed capital 2,323
Accumulated deficit (27,991)
--------
Total common stockholders' equity 31,908
--------
$ 89,317
========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MEDIABAY, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 16,614 $ 5,778 $ 41,986 $ 16,190
Returns, discounts and allowances 4,817 1,903 11,297 4,655
-------- -------- -------- --------
Sales, net 11,797 3,875 30,689 11,535
Cost of sales 5,729 2,448 15,037 7,558
-------- -------- -------- --------
Gross profit 6,068 1,427 15,652 3,977
Expenses:
Advertising and promotion 2,259 2,423 5,356 6,108
General and administrative 2,565 691 6,604 1,878
Depreciation and Amortization 1,997 222 4,862 233
-------- -------- -------- --------
Operating loss (753) (1,909) (1,170) (4,242)
Interest (expense) income, net of interest income of $31 and
$118 for three and nine months ended September 30,1999,
respectively (1,190) 58 (3,362) 249
-------- -------- -------- --------
Net loss $ (1,943) $ (1,851) $ (4,532) $ (3,993)
======== ======== ======== ========
Net loss per share of common stock
(basic and diluted) $ (.22) $ (.30) $ (.57) $ (.65)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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MEDIABAY, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,532) $ (3,993)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 4,862 233
Amortization of deferred member acquisition costs 807 --
Amortization of deferred financing fees 273 --
Changes in asset and liability accounts:
Increase in accounts receivable, net (1,951) (1,373)
Increase in inventory (234) (242)
Increase in prepaid expenses (811) (582)
Increase in royalty advances (1,167) (407)
Increase in deferred member acquisition costs (7,337) --
Increase in accounts payable and accrued expenses 4,288 1,049
-------- --------
Net cash used in operating activities (5,802) (5,315)
-------- --------
Cash flows from investing activities:
Acquisition of fixed assets, software and Internet
development costs (404) (788)
Maturity of short-term investment 500 5,135
Purchase of short-term investment (100) (500)
Acquisition of Audiobooks Direct (18,875) --
Additions to goodwill relating to acquisitions (850) --
-------- --------
Net cash (used in) provided by investing activities (19,729) 3,847
-------- --------
Cash flows from financing activities:
Increase in borrowings under amended credit agreement 11,080 --
Net proceeds from issuance of common stock 23,840 --
Proceeds from issuance of long-term debt 4,350 --
Payments of long-term debt (14,797) --
Increase in deferred financing costs (763) --
Proceeds from issuance of options -- 75
-------- --------
Net cash provided by financing activities 23,710 75
-------- --------
Net decrease in cash and cash equivalents (1,821) (1,393)
Cash and cash equivalents at beginning of period 2,686 3,655
-------- --------
Cash and cash equivalents at end of period $ 865 $ 2,262
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MEDIABAY, INC.
(Dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(Unaudited)
(1) Organization
MediaBay, Inc. (formerly Audio Book Club, Inc.) (the "Company"), a Florida
corporation, was formed on August 16, 1993. MediaBay, Inc. is a leading marketer
of premium spoken word content, including audiobooks and old time radio and
classic video programs. The Company markets audiobooks primarily through its
Audio Book Club, the largest membership-based club of its kind. Our old time
radio and classic video programs are marketed through direct-mail catalogues
and, on a wholesale basis, to major retailers. All of the Company's products are
also available for purchase over the Internet through its content-rich media
portal at MediaBay.com and its community of sites, including audiobookclub.com,
audiobook.com, radiospirits.com, videoyesteryear. com and downloadbay.com.
(2) Significant Accounting Policies
Basis of Presentation
The interim unaudited financial statements should be read in conjunction
with the Company's audited financial statements contained in its Annual Report
on Form 10-KSB for the year ended December 31, 1998. The preparation of
financial statements in accordance with generally accepted accounting principles
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.
Advertising and Promotional 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
6
<PAGE>
reported as assets net of accumulated amortization. Prior to 1999, the Company
had expensed these costs as incurred. Beginning in 1999, the Company must
capitalize such direct response advertising costs and amortize these costs over
the period of future benefit, which has been determined to be 30 months, in
accordance with SOP 93-7 because the Company, after five years of operations,
now has a sufficient historical pattern of results. The costs are being
amortized on a straight-line basis. If the Company had expensed the cost of
direct response advertising, which resulted in new members in the Company's
Audio Book Club who will generate revenue in the future, as incurred contrary to
SOP 93-7, the Company would have reported a net loss of $ 4,022 and $11,062 and
a net loss per share of common stock of $.46 and $1.40 for the three and nine
months ended September 30, 1999, respectively. The majority of this loss would
have been primarily due to the direct response advertising, which resulted in
new members in the Company's Audio Book Club who will generate revenue in the
future, amortization of goodwill and other intangibles of $1,858 and $4,479 and
net interest expense of $1,190 and $3,362 for the three and nine months ended
September 30, 1999, respectively, in connection with the Company's various
acquisitions.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(3) Acquisition
On June 15, 1999, a wholly-owned subsidiary of the Company acquired from
Doubleday Direct, Inc. ("Doubleday") its business of direct marketing and
distribution of audiobooks and related products through Doubleday's Audiobooks
Direct Club ("Audiobooks Direct"). At the time of the acquisition, Audiobooks
Direct was one of the industry's leading direct marketers of audiobooks using a
membership club format.
As part of the acquisition, the Company acquired Audiobooks Direct's total
membership file of over 500,000 members as well as some other assets relating
exclusively to the Audiobooks Direct Club. The Company also entered into a
reciprocal marketing arrangement with Doubleday pursuant to which it received
the exclusive rights, with respect to audiobooks, for three years, subject to a
one-year extension, at no additional cost and an additional three years, at
market rates, to insert its new member acquisition materials into the member
mailings of Doubleday's consumer book clubs and Doubleday Select's professional
book clubs, as well as rights to distribute its member solicitation packages via
direct mail campaigns to the Doubleday and Doubleday Select book club membership
lists. Subject to exceptions, we will also be Doubleday's exclusive source for
audiobooks.
In addition, the Company entered into a non-compete agreement whereby
Doubleday agreed not to engage in designated activities which compete with the
operation of the Company's Audio Book Club for five years. Moreover, the Company
entered into a transitional services agreement with Doubleday.
At the time of the acquisition, together with Doubleday, the Company
announced the launch of a co-branded website to be coupled with an online
cross-marketing and advertising campaign. The website at bestbookclubs.com was
launched on September 15, 1999.
7
<PAGE>
As consideration for the acquisition and the related transactions,
including the mailing, non-compete, and transitional services agreements,
Doubleday received from the Company cash consideration of $18,615.
The Company also incurred cash costs and fees of $320 and estimates
additional costs and fees of approximately $115. The Company has accounted for
the acquisition using the purchase method of accounting. The total purchase
price of approximately $19,050 has been allocated on a preliminary basis as
follows: royalty advances ($1,286), identifiable intangible assets ($5,400,
representing customer lists, covenant not to compete and certain agreements
acquired in the acquisition) and goodwill ($12,364). Identifiable intangible
assets will be amortized over their estimated useful lives (ranging from 3 to 5
years) and goodwill will be amortized over a period not to exceed 20 years.
The following unaudited combined pro forma results of operations for the
nine months ended September 30, 1999 and 1998 assume that the acquisition of
Doubleday occurred as of January 1, 1998. Additionally, the unaudited pro forma
consolidated results of operations for the nine months ended September 30, 1998
assumes that the following transactions also occurred as of January 1, 1998:
(1) The acquisitions of Radio Spirits, Inc., certain assets of an
affiliated company, Buffalo Productions, Inc. and a 50% interest in a
joint venture owned by the sole shareholder of Radio Spirits on
December 14, 1998.
(2) The acquisition of substantially all of the assets used by Metacom,
Inc. in connection with its Adventures in Cassettes business on
December 14, 1998.
(3) The acquisition of substantially all of the assets used by Premier
Electronic Laboratories, Inc. in connection with its business of
producing, marketing, and selling old time radio and classic videos
programs on December 14, 1998
(4) The acquisition of substantially all of the assets used by The
Columbia House Company in its Audio Book Club on December 31, 1998.
Nine Months Ended
September 30, 1999
-------------------------
1999 1998
------- --------
Net sales $39,410 $ 41,122
======= ========
Net loss $(7,181) $(15,969)
======= ========
Loss per share
(basic and diluted) $ (.91) $ (2.26)
======= ========
(4) Financings
In June 1999, in connection with the acquisition of Audiobooks Direct, the
Company, Fleet National Bank and ING (U.S.) Capital Corporation amended the
terms of the Company's existing credit agreement to provide for an additional
$6,000 of term loans. The interest rate under the credit agreement is currently
3.75% above LIBOR and interest is payable at the expiration of the respective
LIBOR contracts.
8
<PAGE>
At September 30, 1999, an aggregate of $28,633 principal amount of
indebtedness was outstanding under the credit agreement, $21,553 as a term loan
and $7,080 under a revolving line of credit. The principal amount outstanding
under the term advance is payable in quarterly installments as follows: a
quarterly payment of $330 on December 31, 1999, four quarterly payments of $930
in the year 2000, four quarterly payments of $1,550 in the year 2001, four
quarterly payments of $2,170 in the year 2002 and the balance on due on March
31, 2003.
In connection with the additional loan in June 1999, the Company granted
the lenders three-year warrants to purchase up to 119,941 shares of the
Company's common stock at an exercise price of $14.20, subject to adjustment.
The warrants have been valued at $2.63 using the Black-Scholes valuation model
and have been included in deferred financing costs.
The Company also obtained a portion of the financing for the acquisition of
Audio Books Direct by borrowing $4,350 from Norton Herrick, Chairman of the
Board and Co-Chief Executive Officer, under a bridge convertible senior
subordinated promissory note. In a separate letter agreement, the Company
agreed, that if the Company refinanced or replaced this note with debt or equity
financing provided by anyone other than Mr. Herrick or a family member or
affiliate of Mr. Herrick, the Company would issue to Mr. Herrick warrants to
purchase an additional 125,000 shares of common stock at $8.41 per share, which
warrants will also be identical to the warrants issued to him in connection with
the initial note issued to Mr. Herrick in December 1998. In July 1999, this
promissory note was repaid and the warrants were issued upon receipt of
stockholder approval in September 1999.
As a result of recent acquisition activity and sales of common stock, the
Company, Fleet National Bank and ING (U.S.) Capital Corporation amended the
terms of the Company's existing credit agreement whereby certain covenants under
the agreement were adjusted. In connection therewith the Company paid legal
expenses and fees of $317.
In August 1999, Norton Herrick, Chairman of the Board and Co-Chief
Executive Officer sold $5,000 of the remaining $14,000 9% convertible senior
subordinated promissory note due December 31, 2004 issued to him in December
1998 in connection with various acquisitions by the Company to ABC Investment,
L.L.C., an unaffiliated third party. The $5,000 promissory note has
substantially the same terms and conditions as the original promissory note
bearing interest at 9% per annum and convertible at $11.125 per share.
(5) Stockholders' Equity and Stock Options and Warrants
In March 1999, the Company's stockholders approved (i) an amendment to the
Company's Articles of Incorporation to increase the Company's authorized common
stock to 75,000,000 shares and (ii) the adoption of the Company's 1999 Stock
Incentive Plan. The 1999 Stock Incentive Plan provides for grants of awards of
stock options, restricted stock, deferred stock or other stock based awards. A
total of 2,500,000 shares of common stock have been reserved for issuance
pursuant to the plan.
9
<PAGE>
In April and June 1999, the Company sold 800,000 shares of its common stock
for gross proceeds of $8,800 to qualified institutional buyers as such term is
defined in Rule 144A of the Securities Act of 1933.
In July and August 1999, the Company sold 1,240,000 shares of its common
stock for gross proceeds of $16,120 to qualified institutional buyers as such
term is defined in Rule 144A of the Securities Act of 1933. Fees paid to an
unaffiliated third party in connection with the August 1999 sale were $273.
In addition to 244,941 warrants granted in connection with the various
financings described in footnote (4) above, during the nine months ended
September 30, 1999, the Company granted both plan and non-plan options and
warrants to purchase a total of 1,478,050 shares of the Company's common stock
to officers, directors, Advisory Board members, employees and consultants. The
options and warrants vest at various times and have exercise periods of five and
ten years. Exercise prices range from $8.00 to $13.50 per share except for 8,000
warrants which have an exercise price of $.10 per share. In addition, the
Company canceled five-year options to purchase a total of 29,500 shares of the
Company's common stock.
(6) Net Loss Per Share of Common Stock
The weighted average number of common shares used in the net loss per share
computations for the three and nine months ended September 30, 1999 were
8,794,455 and 7,882,324, respectively and 6,153,920 for each of the comparable
periods of the prior year.
Common equivalent shares that could potentially dilute basic earnings per
share in the future and that were not included in the computation of diluted
loss per share because of antidilution were 6,212,290 at September 30, 1999 and
1,742,100 at September 30, 1998. Included in the September 30, 1999 common share
equivalents are 1,240,450 shares assuming the conversion of $13,800 in
convertible senior subordinated promissory notes.
(7) Supplemental Cash Flow Information
In March 1998, the Company granted options to purchase 21,600 shares of the
Company's common stock at $4.40 per share to a company as compensation for the
costs incurred in transferring to the Company the toll free phone numbers, (800)
AUDIOBOOK and (888) AUDIOBOOK. Such options were immediately vested and
exercisable and have a five-year term. The Company has recorded an asset in the
amount of $54, the negotiated cost of transferring the phone numbers and is
amortizing the asset over six years. Subsequent to September 30, 1999 these
options were exercised yielding proceeds of $95.
During the nine months ended September 30, 1999, 8,000 of the options and
warrants granted were granted to an officer of the Company below the current
market price at the date of grant. These options have been valued at $7.16 each
using the Black-Scholes valuation model and have been included in prepaid
expenses and are being amortized over the term of the related employment
agreement.
10
<PAGE>
In April 1999, the Company formed a Technology Advisory Board ("Advisory
Board") to further enhance its Internet strategy. The Advisory Board consists of
five members. The Advisory Board will work with the Company to increase its
online business and its strategic alliances on the Internet. Included in the
total options and warrants granted during the nine months ended September 30,
1999 were options and warrants granted to the Internet Advisory Board members.
These options were valued at $113 using the Black-Scholes valuation model and
have been included in prepaid expenses and are being amortized over the period
of service.
Included in the total options and warrants granted during the nine months
ended September 30, 1999 were warrants granted to a law firm as partial payment
for legal services provided in connection with the Company's various
acquisitions. The warrants have been valued at $50 using the Black-Scholes
valuation model and have been included in the cost of the acquisitions.
In August 1999, ABC Investment LLP, the holder of a $5,000 9% convertible
senior subordinated promissory note due December 31, 2004 converted $200 of the
note into 17,977 shares of the Company's common stock.
Cash paid for interest expense was $2,739 for the nine months ended
September 30, 1999.
(8) Subsequent Events
Subsequent to September 30, 1999, the Company granted plan options to
purchase 62,600 shares of the Company's common stock to officers, employees and
consultants at exercise prices ranging from $11.375 to $13.3125. The options
have an exercise period of five years and vest over various periods. The Company
canceled five-year plan options to purchase a total of 1,000 shares of common
stock. Additionally, non-plan options to purchase 21,600 shares of common stock
were exercised yielding proceeds of $95.
11
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Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Dollars in thousands, except per share data)
Introduction
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995: The statements which are not historical facts contained in this
quarterly report are forward looking statements that involve risks and
uncertainties, including but not limited to, the Company's ability to
successfully implement a strategy of continued growth and other risks described
in the Company's Registration Statement on Form S-3. The Company's actual
results may differ materially from the results discussed in any forward-looking
statement.
MediaBay, Inc. (formerly Audio Book Club, Inc.) is a leading marketer of
spoken word content, including audiobooks and old time radio and classic video
programs. Audiobooks are primarily marketed through the Audio Book Club, and old
time radio and classic video programs are primarily marketed through direct-mail
catalogues and, on a wholesale basis, to other retailers. All of the Company's
products are also available for purchase over the Internet through its
content-rich media portal at MediaBay.com and its community of sites.
Since the Company's inception, its has engaged in an aggressive marketing
program to increase the membership base of the Audio Book Club. The Company's
marketing programs have consisted primarily of direct mail, media advertising
and marketing on the Internet. Direct response marketing costs to current
members are expensed on the date the promotional materials are mailed. Direct
response costs for any premiums, gifts or discounted audiobooks in the
promotional offer to new members are expensed as incurred. Beginning in January
1999, the Company was required to capitalize direct response marketing costs for
the acquisition of new members in accordance with AICPA Statement of Position
93-7 and amortize these costs over the period of future benefit which was
estimated at 30 months based on historical experience over the last five years.
The Company has also grown its membership base through acquisitions. On
December 14, 1998, the Company completed a series of acquisitions and combined
the acquired businesses within the old time radio and classic video programs
area. On December 31, 1998, the Company acquired from Columbia House
substantially all of the assets of its Audiobook Club and on June 15, 1999, the
Company acquired Audiobooks Direct from Doubleday Direct. When reading the
following results of operations, please note:
o The Company's results of operations for the nine months ended
September 30, 1998 reflect the operations of the Company's Audio Book
Club.
o The Company's results of operations for the nine months ended
September 30, 1999 reflect the operations of the Audio Book Club,
including Columbia House's Audiobook Club, and the old time radio and
classic video programs area for the nine months, and the operations of
Audiobooks Direct from June 16, 1999 through September 30, 1999.
12
<PAGE>
As a result of the timing of marketing activities within a given quarter,
the impact of capitalizing new member direct response marketing costs and the
timing of these acquisitions and related costs, including increased interest
expense and goodwill and other intangible asset amortization expense,
comparisons of historical operating results from period to period may not be
meaningful.
Results of Operations
(Dollars in thousands except per share data)
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Gross sales increased $10,836 or 187.5% to $16,614 for the three months
ended September 30, 1999 from $5,778 for the three months ended September 30,
1998. The increase in gross sales was primarily attributable to (1) increased
sales of audiobooks resulting from the continued expansion of Audio Book Club's
membership base, (2) sales from the Columbia House Audiobook Club and Audiobooks
Direct for the full three months ended September 30, 1999, and (3) sales from
the acquired old time radio and classic video programs area.
Returns, discounts and allowances for the three months ended September 30,
1999 were $4,817 or 29.0% of gross sales as compared to $1,903 or 32.9% of gross
sales for the prior comparable period. The decrease in returns as a percentage
of gross sales is due to historically lower return rates from sales of old time
radio and classic video programs and lower returns from sales to members of the
Columbia House Audiobook Club. The dollar increase in returns, discounts and
allowances was primarily due to the increased gross sales.
Principally as a result of higher gross sales, net sales for the three
months ended September 30, 1999 increased $7,922 or 204.4% to $11,797 from
$3,875.
Cost of sales increased $3,281 or 134.0% to $5,729 for the three months
ended September 30, 1999 from $2,448 in the prior comparable period. Cost of
sales as a percentage of net sales decreased to 48.6% from 63.2%. Gross profit
increased $4,641 or 325.2% to $6,068 for the three months ended September 30,
1999 from $1,427 in the prior comparable period. Gross profit as a percentage of
net sales increased to 51.4% from 36.8% due to improvement in the price being
paid for product for the Audio Book Club based on increased volume purchases as
a result of recent acquisitions, better fulfillment arrangements and higher
gross profit as a percentage of net sales of old time radio and classic video
product.
Advertising and promotion expenses (for acquisition and retention of
members) decreased $164 or 6.8% to $2,259 for the three months ended September
30, 1999 as compared to $2,423 in the prior comparable period. The decrease is
due to the capitalization of direct response advertising as required by SOP 93-7
in the three months ended September 30, 1999, partially offset by a higher
dollar amount of advertising expenses to existing Audio Book Club members, as a
result of increased Audio Book Club sales through continued expansion and
acquisitions, and to the acquired old time radio and classic video customers
which are expensed in the period incurred.
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General and administrative expenses increased $1,874 or 271.2% to $2,565
for the three months ended September 30, 1999 from $691 for the prior comparable
period. General and administrative expense increases are principally
attributable to the acquisition and integration of the old time radio and
classic video operations, including its personnel and facilities, an increase in
the dollar amount of bad debt expense as a result of Audio Book Club sales
increases and increased personnel and related costs as the Company continues to
grow and internalize services previously performed by outside vendors. The
Company did not retain any personnel from the acquisitions of the Columbia House
Audiobook Club and Audiobooks Direct.
Depreciation and amortization expenses increased $1,775 for the three
months ended September 30, 1999 to $1,997 from $222 for the prior comparable
period. The increase in depreciation expense relates to the acquisition of fixed
assets of our old time radio and classic video operations and the depreciation
of Internet development costs. The increase in amortization is attributable to
the amortization of goodwill and other intangible assets in connection with the
Company's various acquisitions.
Net interest expense for the three months ended September 30, 1999 was
$1,190 as compared to net interest income of $58 for the three months ended
September 30, 1998. The interest expense in 1999 is primarily attributable to
debt incurred in connection with the Company's various acquisitions.
Primarily due to increased gross sales of $10,836, improvements in gross
profit as a percentage of net sales and the capitalization of direct response
advertising as required by SOP 93-7, the Company's earnings before interest,
taxes, depreciation and amortization, ("EBITDA") increased $2,873 to $1,244 for
the three months ended September 30, 1999. Net loss for the three months ended
September 30, 1999 was $1,943 or $.22 per share of common stock as compared to a
net loss of $1,851 or $.30 per share of common stock for the three months ended
September 30, 1998. The increase in net loss was primarily attributable to
increased interest expense and amortization of goodwill and other intangibles in
connection with the Company's various acquisitions partially offset by
improvements described above.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Gross sales increased $25,796 or 159.3% to $41,986 for the nine months
ended September 30, 1999 from $16,190 for the nine months ended September 30,
1998. The increase in gross sales was primarily attributable to (1) increased
sales of audiobooks resulting from the continued expansion of Audio Book Club's
membership base, (2) sales from the Columbia House Audiobook Club for the full
nine months ended September 30, 1999, (3) sales from the acquired old time radio
and classic video programs area, and (4) the inclusion of sales from Audiobooks
Direct since its acquisition on June 15, 1999.
Returns, discounts and allowances for the nine months ended September 30,
1999 were $11,297 or 26.9% of gross sales as compared to $4,655 or 28.8% of
gross sales for the prior comparable period. The decrease in returns as a
percentage of gross sales is due to historically lower return rates from sales
of old time radio and classic video programs and lower returns from sales to
members of the Columbia House Audiobook Club partially offset by an increase in
returns at the Audio Book Club for the nine month
14
<PAGE>
period ended September 30, 1999. The dollar increase in returns, discounts and
allowances was primarily due to the increased gross sales.
Principally as a result of higher gross sales, net sales for the nine
months ended September 30, 1999 increased $19,154 or 166.1% to $30,689 from
$11,535.
Cost of sales increased $7,479 or 99.0% to $15,037 for the nine months
ended September 30, 1999 from $7,558 in the prior comparable period. Cost of
sales as a percentage of net sales decreased to 49.0% from 65.5%. Gross profit
increased $11,675 or 293.6% to $15,652 for the nine months ended September 30,
1999 from $3,977 in the prior comparable period. Gross profit as a percentage of
net sales increased to 51.0% from 34.5% due to improvement in the price being
paid for product for the Audio Book Club based on increased volume purchases as
a result of recent acquisitions, better fulfillment arrangements and higher
gross profit as a percentage of net sales of old time radio and classic video
product.
Advertising and promotion expenses (for acquisition and retention of
members) decreased $752 or 12.3% to $5,356 for the nine months ended September
30, 1999 as compared to $6,108 in the prior comparable period. The decrease is
due to the capitalization of direct response advertising as required by SOP 93-7
in the three months ended September 30, 1999, partially offset by a higher
dollar amount of advertising expenses to existing Audio Book Club members, as a
result of increased Audio Book Club sales through continued expansion and
acquisitions, and to the acquired old time radio and classic video customers
which are expensed in the period incurred.
General and administrative expenses increased $4,726 or 251.7% to $6,604
for the nine months ended September 30, 1999 from $1,878 for the prior
comparable period. General and administrative expense increases are principally
attributable to the acquisition and integration of the old time radio and
classic video operations, including its personnel and facilities, an increase in
the dollar amount of bad debt expense as a result of Audio Book Club sales
increases and increased personnel and related costs as the Company continues to
grow and internalize services previously performed by outside vendors. The
Company did not retain any personnel from the acquisitions of the Columbia House
Audiobook Club and Audiobooks Direct.
Depreciation and amortization expenses increased $4,629 for the nine months
ended September 30, 1999 to $4,862 from $233 for the prior comparable period.
The increase in depreciation expense relates to the acquisition of fixed assets
of our old time radio and classic video operations and the depreciation of
Internet development costs. The increase in amortization is attributable to the
amortization of goodwill and other intangible assets in connection with the
Company's various acquisitions.
Net interest expense for the nine months ended September 30, 1999 was
$3,362 as compared to net interest income of $249 for the three months ended
September 30, 1998. The interest expense in 1999 is primarily attributable to
debt incurred in connection with the Company's various acquisitions.
Primarily due to increased gross sales of $25,796, improvements in gross
profit as a percentage of net sales and the capitalization of direct response
advertising as required by SOP 93-7, the Company's EBITDA increased $7,452 to
$3,692 for the nine months
15
<PAGE>
ended September 30, 1999. Net loss for the nine months ended September 30, 1999
was $4,532 or $.57 per share of common stock as compared to a net loss of $3,993
or $.65 per share of common stock for the nine months ended September 30, 1998.
The increase in net loss was primarily attributable to increased interest
expense and amortization of goodwill and other intangibles in connection with
the Company's various acquisitions partially offset by improvements discussed
above.
Liquidity and Capital Resources
Historically, the Company has funded its cash requirements through sales of
its equity and debt securities and borrowings from financial institutions and
its principal Stockholders. The Companies capital requirements have been and
will continue to be significant due to expanded operations, costs associated
with direct mail campaigns, other new member recruitment advertising, promotion
and brand building, expanding Internet operations and debt service related to
the Company's various acquisitions. Accordingly, the Company is exploring
financing alternatives.
For the nine months ended September 30, 1999, the Company's cash decreased
by $1,821 as the Company used net cash of $5,802 for operating and $19,729 for
investing activities and had cash provided by financing activities of $23,710.
Net cash used in operations principally consisted of the net loss of $4,532, an
increase in accounts receivable of $1,951, an increase in prepaid expenses of
$811, an increase in royalty advances of $1,167 and an increase in deferred
member acquisition costs of $7,337, partially offset by an increase in accounts
payable and accrued expenses of $4,288. Net cash used in operations was
partially offset by depreciation and amortization expenses of $5,942 included in
the net loss. The increase in accounts receivable during the nine months ended
September 30, 1999 is principally due to higher sales. The increase in prepaid
expenses is principally attributable to both direct mail and Internet
advertising expenses paid in advance of the related campaigns. The increase in
royalty advances relates to the advance payment to publishers and right holders
of our various licensed products and is attributable to the growth of the
Company's businesses. Deferred member acquisition costs relate to the Company's
method of accounting for direct response advertising as described above. The
increase in accounts payable and accrued expenses was primarily attributable to
the timing of vendor invoicing and payments.
Cash used in investing activities for the nine months ended September 30,
1999 was primarily attributable to the acquisition of Audiobooks Direct. For the
nine months ended September 30, 1999, net cash provided by financing activities
consisted of increased borrowings under the Company's credit agreement for the
acquisition of Audiobooks Direct, proceeds from the sales of common stock and
the issuance of a related party subordinated note in connection with the
acquisition of Audiobooks Direct. These increases were partially offset by
principal payments on the Company's long-term bank debt and payments on the
related party subordinated loans.
Recent Acquisition and Financings
In June 1999, the Company acquired from Doubleday Direct the assets of
Audiobooks Direct, including its membership file of over 500,000 members. The
Company also entered into a marketing agreement with Doubleday Direct in which
we received access to Doubleday Direct's club mailing lists, which currently
consist of over
16
<PAGE>
14 million names. In addition, Doubleday Direct entered into a non-competition
agreement and a transitional services agreement with us. As consideration for
the acquisition, we paid Doubleday Direct $18,615 in cash. We also incurred cash
costs and fees of $260 and estimated additional costs and fees of approximately
$175.
In connection with the acquisition of Audiobooks Direct, the Company, Fleet
National Bank and ING (U.S.) Capital Corporation amended the terms of the
Company's existing credit agreement to provide for an additional $6,000 of term
loans. The interest rate under the credit is currently 3.75% above LIBOR and
interest is payable at the expiration of the respective LIBOR contracts. In
connection with this additional loan the Company granted the lenders three-year
warrants to purchase up to 119,941 shares of the Company's common stock at an
exercise price of $14.20, subject to adjustment.
The Company also obtained a portion of the financing for the acquisition of
Audio Books Direct by borrowing $4,350 from Norton Herrick, Chairman of the
Board and Co-Chief Executive Officer, under a bridge convertible senior
subordinated promissory note. In a separate letter agreement, the Company
agreed, that if the Company refinanced or replaced this note with debt or equity
financing provided by anyone other than Mr. Herrick or a family member or
affiliate of Mr. Herrick, the Company would issue to Mr. Herrick warrants to
purchase an additional 125,000 shares of common stock at $8.41 per share, which
warrants will also be identical to the warrants issued to him in connection with
the initial note issued to Mr. Herrick in December 1998. In July 1999, this
promissory note was repaid and the warrants were issued upon receipt of
stockholder approval in September 1999.
In April and June 1999, the Company sold 800,000 shares of its common stock
for gross proceeds of $8,800 to qualified institutional buyers as such term is
defined in Rule 144A of the Securities Act of 1933.
In July and August 1999, the Company sold 1,240,000 shares of its common
stock for gross proceeds of $16,120 to qualified institutional buyers as such
term is defined in Rule 144A of the Securities Act of 1933. Fees associated with
the August sale were $273 and were paid to an unaffiliated third party.
In August 1999, Norton Herrick, Chairman of the Board and Co-Chief
Executive Officer sold $5,000 of the remaining $14,000 9% convertible senior
subordinated promissory note due December 31, 2004 issued to him in December
1998 in connection with various acquisitions by the Company to ABC Investment,
L.L.C., an unaffiliated third party. The $5,000 promissory note has
substantially the same terms and conditions as the original promissory note
bearing interest at 9% per annum and convertible at $11.125 per share.
As a result of recent acquisition activity and sales of common stock, the
Company, Fleet National Bank and ING (U.S.) Capital Corporation amended the
terms of the Company's existing credit agreement whereby certain covenants under
the agreement were adjusted. In connection therewith the Company paid legal
expenses and fees of $317.
At September 30, 1999, an aggregate of $28,633 principal amount of
indebtedness was outstanding under the credit agreement $21,553 as a term loan
and $7,080 under a revolving line of credit. The principal amount outstanding
under the term
17
<PAGE>
advance is payable in quarterly installments as follows: a quarterly payment of
$330 on December 31, 1999, four quarterly payments of $930 in the year 2000,
four quarterly payments of $1,550 in the year 2001, four quarterly payments of
$2,170 in the year 2002 and the balance on due on March 31, 2003.
Under the terms of a letter agreement entered into in December 1998, the
Company issued to Mr. Herrick warrants to purchase an additional 140,000 shares
of common stock at $8.41 per share in September 1999 upon receipt of shareholder
approval.
Impact of Year 2000 Issue
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. This Year 2000 issue
potentially affects all individuals and companies including the Company, its
customers, business partners, vendors, suppliers, service providers and banks.
Management believes its systems, and those of its primary service providers
are Year 2000 compliant and has received notification of such from our primary
service providers. Management is continuing its communications with its
principal vendors to ensure that they are Year 2000 compliant. Management does
not anticipate that the Company will incur significant operating expenses or be
required to invest in computer system improvements to be Year 2000 compliant.
Management is developing contingency plans that identify alternative
vendors, suppliers and service providers in the event current vendors, suppliers
or service providers suffer significant disruption as a result of Year 2000
compliance failures.
Should some of the Company's systems or those of its service providers or
vendors not be available due to Year 2000 problems, in a reasonably likely worst
case scenario, the Company may experience delays in its ability to perform
certain functions, but does not expect an inability to perform critical
functions or to otherwise conduct its business.
Quarterly Fluctuations
The Company's 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.
18
<PAGE>
The Company's gross profit margin is affected by the percentage of new
Audio Book Club member enrollment purchases. Initial purchases by new members
are at substantially reduced prices to encourage enrollment. These offers, which
are typically four audiobooks for either $.99 or $.01 plus shipping and
handling, result in an initial loss to us which is expected to be recovered
through additional member purchases at regular prices. New member enrollment
purchases typically account for a higher percentage of sales following
significant Audio Book Club direct marketing activities.
The Company believes that a significant portion of its sales of old time
radio and classic video programs are gift purchases by consumers. Therefore, the
Company tends 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.
Part II - Other Information
Item 1. Legal Proceedings.
The Company has been named as a co-defendant together with a collection
agency used by the Company, in a lawsuit in the United States District Court for
the Northern District of Illinois, alleging violations by such collection agency
and the Company of the Fair Debt Collection Practices Act. Such lawsuit has been
brought by a Class Action on behalf of individuals, limited to those who were
sent certain collection letters within the state of Illinois during the one year
period preceding the filing of the lawsuit. The lawsuit has not yet been
certified as a Class Action. The collection agency has agreed to indemnify the
Company and therefore the Company believes that the outcome of the action will
not have a material adverse impact on the Company.
Item 2. Changes in Securities and Use of Proceeds.
In July 1999, the Company sold 540,000 shares of its common stock for gross
proceeds of $7,020 to a "qualified institutional buyer" as such term is defined
in Rule 144A of the Securities Act of 1933. The proceeds were used to repay
indebtedness and for working capital purposes.
In August 1999, the Company sold 700,000 shares of its common stock for
gross proceeds of $9,100 to a "qualified institutional buyer" as such term is
defined in Rule 144A of the Securities Act of 1933. Fees associated with the
transaction were $273 and were paid to an unaffiliated third party. The proceeds
were used to repay indebtedness and for working capital purposes.
In September 1999, the Company issued warrants to purchase 265,000 shares
of its common stock to Norton Herrick, the Company's Chairman of the Board and
Co-Chief Officer, pursuant to agreements entered into in December 1998 and June
1999. The warrants are exercisable until December 31, 2003 at an exercise price
of $8.41 per share, subject to adjustment.
During the three months ended September 30, 1999, the Company granted plan
options to purchase a total of 152,750 shares of the Company's common stock to
officers, directors, employees and consultants. The options vest at various
times and have an exercise period of five years. Exercise prices range from
$8.625 to $13.50 per share. In
19
<PAGE>
addition, the Company canceled five-year options to purchase a total of 17,700
shares of the Company's common stock.
Item 4. Submission of Matters to Vote of Security Holders
An Annual Meeting of Shareholders was held on September 27, 1999, at which
time Mr. Michael Herrick and Mr. Roy Abrams were reappointed to serve as Class
II directors and Mr. Carl Amari was appointed to serve as a Class II director,
in each case, until the Annual Meeting of Shareholders of the Company to be held
in 2002. Shareholder voting for these directors was as follows:
Director Votes For Votes Withheld
-------- --------- --------------
Michael Herrick 6,088,628 9,024
Roy Abrams 6,088,278 9,374
Carl Amari 6,089,457 8,195
The following directors continue to serve as directors for the term
indicated opposite their respective names:
Director Class Expiration of Term
-------- ----- ------------------
Norton Herrick I 2001
Jesse Faber I 2001
Howard Herrick III 2000
Carl Wolf III 2000
In addition at the Meeting, the Company's shareholders approved the
following matters:
(i) an amendment to the Company's Articles of Incorporation to effect a
change in the Company's name to "MediaBay, Inc." by a vote of 6,083,036 for and
9,916 against;
(ii) certain terms of a letter agreement dated December 31, 1998 between
the Company and Norton Herrick, relating to a loan made to the Company by Mr.
Herrick to help finance the Company's acquisition of The Columbia House
Audiobook Club by a vote of 4,232,027 in favor, 25,642 against and 20,505
abstaining; and
(iii) certain terms of a letter agreement dated June 11, 1998 between the
Company and Norton Herrick relating to a loan made by Mr. Herrick to help
finance the Company's acquisition of Doubleday Direct Inc.'s Audiobooks Direct
club by a vote of 4,015,532 for, 242,517 against and 20,125 abstaining.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Report dated July 2, 1999 reporting the sale of common stock and the
repayment of indebtedness.
Report dated July 20, 1999 amending the 8-K reporting the acquisition from
Doubleday Direct Inc. its Audio Books Direct Club to include pro forma and
historical financial statements.
20
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Audio Book Club, Inc. has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
MediaBay, Inc.
Dated: November 15, 1999 By: /s/ Michael Herrick
---------------------------------------
Michael Herrick
Co-Chief Executive Officer
Dated November 15, 1999 By: /s/ John F. Levy
---------------------------------------
John F. Levy
Chief Financial and Accounting Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the Company's
financial statements included in this quarterly report on Form 10-QSB, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 865
<SECURITIES> 100
<RECEIVABLES> 10,857
<ALLOWANCES> 3,983
<INVENTORY> 5,564
<CURRENT-ASSETS> 21,549
<PP&E> 2,093
<DEPRECIATION> 744
<TOTAL-ASSETS> 89,317
<CURRENT-LIABILITIES> 13,813
<BONDS> 42,433
0
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<COMMON> 57,576
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<TOTAL-LIABILITY-AND-EQUITY> 89,317
<SALES> 30,689
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<CGS> 15,037
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<OTHER-EXPENSES> 16,822
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</TABLE>
