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 June 30, 2000
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to ________
Commission file number 1-13469
MediaBay, Inc.
(Exact name of Small Business Issuer 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, Suite 300, Cedar Knolls, New Jersey 07927
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (973) 539-9528
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 August 9, 2000, there were 13,421,866 shares of the Issuer's Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one):
Yes _____ No __X__
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MediaBay, Inc.
Quarter ended June 30, 2000
Form 10-QSB
Index
Page
PART I: Financial Information.
Item 1: Financial Statements.
Consolidated Balance Sheet at June 30, 2000 (unaudited) 3
Consolidated Statements of Operations for the three and six months
ended June 30, 1999 and 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 2000 (unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
PART II: Other Information
Item 2: Changes in Securities and Use of Proceeds 17
Item 4. Submission of Matters to Vote of Security Holders 17
Item 6: Exhibits and Reports on Form 8-K. 18
Signatures 19
Articles of Amendment to Articles of Incorporation 20
Financial Data Schedule 22
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MEDIABAY, INC.
Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited)
Assets June 30, 2000
-------------
Current assets:
Cash and cash equivalents $ 134
Accounts receivable, net of allowances for sales returns and
doubtful accounts of $3,933 6,122
Inventory 7,674
Prepaid expenses and other current assets 1,201
Royalty advances 4,098
Deferred member acquisition costs - current 6,497
--------
Total current assets 25,726
Fixed assets, net of accumulated depreciation of $1,221 1,903
Deferred member acquisition costs - non-current 6,569
Non-current prepaid expenses 360
Investment in I-Jam Multimedia LLC 2,000
Other intangibles, net 9,246
Goodwill, net 48,653
--------
$ 94,457
========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 15,767
Short-term debt 6,580
--------
Total current liabilities 22,347
--------
Long-term debt 9,976
--------
Commitments and contingencies
Preferred stock, no par value, authorized 5,000,000 shares; no
shares issued and outstanding
Common stock subject to contingent puts 3,639
Common stock; no par value, authorized 150,000,000 shares;
13,421,866 issued and outstanding 93,642
Contributed capital 3,791
Accumulated deficit (38,938)
--------
Total common shareholders' equity 58,495
--------
$ 94,457
========
See accompanying notes to consolidated financial statements.
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MEDIABAY, INC.
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 12,545 $ 16,175 $ 25,372 $ 32,302
Returns, discounts and allowances 3,582 3,699 6,480 8,880
-------- -------- -------- --------
Sales, net 8,963 12,476 18,892 23,422
Cost of sales 4,682 6,547 9,308 12,297
-------- -------- -------- --------
Gross profit 4,281 5,929 9,584 11,125
Expenses:
Advertising and promotion 1,611 3,136 3,097 5,576
General and administrative 2,024 3,462 4,039 6,644
Depreciation and amortization 1,451 1,964 2,865 3,947
-------- -------- -------- --------
Operating loss (805) (2,633) (417) (5,042)
Interest expense, net of interest income of $64 and $42 for
three months ended June 30, 1999 and 2000 and $87 and $96 for
the six months ended June 30,1999 and 2000, respectively 1,119 510 2,172 1,578
-------- -------- -------- --------
Loss before extraordinary item (1,924) (3,143) (2,589) (6,620)
Extraordinary loss on early extinguishment of debt (2,152) (2,152)
-------- -------- -------- --------
Net loss $ (1,924) $ (5,295) $ (2,589) $ (8,772)
======== ======== ======== ========
Basic and diluted loss per share:
Loss before extraordinary item $ (.25) $ (.23) $ (.35) $ (.56)
Extraordinary item (.16) (.18)
-------- -------- -------- --------
Net loss $ (.25) $ (.39) $ (.35) $ (.74)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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MEDIABAY, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,589) $ (8,772)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 2,865 3,947
Amortization of deferred member acquisition costs 299 2,528
Amortization of deferred financing fees 152 222
Extraordinary loss on early extinguishment of debt -- 2,152
Changes in asset and liability accounts:
(Increase) decrease in accounts receivable, net (1,578) 2,770
(Increase) in inventory (546) (491)
(Increase) decrease in prepaid expenses (598) 109
(Increase) in royalty advances (563) (1,163)
(Increase) in deferred member acquisition costs (4,750) (6,298)
Increase (decrease) in accounts payable
and accrued expenses 2,863 (789)
-------- --------
Net cash used in operating activities (4,445) (5,785)
-------- --------
Cash flows from investing activities:
Capital expenditures (276) (711)
Maturity of short-term investment 500 100
Purchase of short-term investment (100) --
Acquisition of Audiobooks Direct (18,799) --
Investment in I-Jam -- (2,000)
Additions to goodwill relating to acquisitions (596) (1,207)
-------- --------
Net cash used in investing activities (19,271) (3,818)
-------- --------
Cash flows from financing activities:
Increase in borrowings under amended credit agreement 10,750 --
Net proceeds from issuance of common stock 8,367 29,432
Net proceeds from issuance of long-term debt 4,350 2,000
Payments of long-term debt (1,500) (21,723)
Increase in deferred financing costs (343) (170)
-------- --------
Net cash provided by financing activities 21,624 9,539
-------- --------
Net decrease in cash and cash equivalents (2,092) (64)
Cash and cash equivalents at beginning of period 2,686 198
-------- --------
Cash and cash equivalents at end of period $ 594 $ 134
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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MEDIABAY, INC.
(Dollars in thousands, except per share data)
Notes to Consolidated Financial Statements
(Unaudited)
(1) Organization
MediaBay, Inc. (the "Company"), a Florida corporation, was formed on August
16, 1993. MediaBay, Inc. is a leading marketer of premium spoken word audio
content, including audiobooks and old time radio programs in hard goods and
digital download formats via the Internet and traditional offline methods. The
Company markets audiobooks primarily through its Audio Book Club membership club
and its website at www.audiobookclub.com. Its old time radio and classic video
programs are marketed through direct-mail catalogue, on a wholesale basis to
major retailers and via the old-time radio channel on MediaBay.com. The
Company's products are also available for purchase over the Internet through its
content-rich media portal at www.MediaBay.com in both hard goods and secure
digital download formats.
(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, 1999. 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(3) Investment in I-Jam Multimedia LLC
The Company invested $2,000 in I-Jam MultiMedia LLC, a pioneer in the
development of portable digital audio devices. The Company acquired a 4% equity
interest in I-Jam with an option to purchase an additional equity interest in
I-Jam.
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(4) Debt and Extraordinary Item
In April 2000, the Company repaid $20,293 of its bank debt out of the net
proceeds from its follow-on primary offering, representing the remaining term
portion of such debt. Accordingly, the Company recorded an extraordinary loss of
$2,152 relating to the write-off of deferred financing fees incurred in
connection with such debt. The Company also repaid $500 of its revolving term
debt and amended the terms of its remaining revolving debt with its lenders to
calculate the amount available to be borrowed based on a formula of eligible
receivables and inventory, as defined and to include covenants relative to the
Company's operating performance. The revolving credit facility bears interest at
prime plus an applicable margin. At June 30, 2000 the interest rate was 12.00%.
The facility matures on November 30, 2000. The Company is currently working to
replace this revolving credit facility.
In January and February 2000, Norton Herrick sold an additional $4,224
principal amount of the note issued to him in December 1998 to two unaffiliated
third parties which was converted into 379,662 shares of the Company's common
stock. Under the December 1998 letter agreement, the Company issued to Norton
Herrick warrants to purchase an additional 98,554 shares of its common stock at
an exercise price of $8.41 per share. No compensation has been recognized in
relation to this transaction. In February 2000, the unaffiliated third-party
holder of the $4,800 9% promissory note converted $600 of the note into 53,932
shares of the Company's common stock.
In January and February 2000, Evan Herrick, son of the Company's Chairman,
loaned the Company an additional $2,000 for which he received $2,000 principal
amount 9% convertible promissory notes due December 31, 2004. The notes were
initially convertible into shares of the Company's common stock at $11.125 per
share, which was the market value on the date the note was issued. The loans
evidenced by the notes were intended to be short-term and serve as a "bridge" to
replacement financing. At the time of issuance of the convertible notes, the
Company's board of directors resolved to seek to replace or refinance the
convertible notes and accept a proposal for refinancing, whether or not (i) as
favorable as the convertible notes including, without limitation, providing for
a higher interest rate or lower conversion price, (ii) requiring the issuance of
equity securities and/or (iii) requiring the payment of fees.
In April 2000, the Company's Board of Directors determined that reducing
the conversion price of the $3,000 principal amount 9% convertible notes due
December 31, 2004 issued to Evan Herrick to the then current market value of the
Company's common stock would be more favorable to the Company than accepting the
alternatives available to the Company to refinance or replace the notes. The
Company revised the terms of the $3,000 principal amount 9% convertible
promissory notes due December 31, 2004 to Evan Herrick. The note is currently
convertible into shares of the Company's common stock at $4.00 per share, which
was the market value on the date the terms were revised.
7
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(5) Shareholders' Equity and Stock Options and Warrants
Sale of Equity
The Company's Registration Statement on Form SB-2 for a follow-on primary
offering was declared effective by the Securities and Exchange Commission on
March 15, 2000. On March 20, 2000, the Company closed its offering of 3,650,000
shares of Common stock at a price of $9.00 per share for gross proceeds of
$32,850. The Company incurred expenses of $3,418 related to the offering,
including the underwriting discount and accountable expenses, legal and
accounting fees and printing expenses.
Changes in Shareholders Equity
In June 2000, the Company's shareholders approved an amendment to the
Company's Articles of Incorporation to increase the Company's authorized common
stock to 150,000,000 shares.
Stock Options and Warrants
In June 2000, the Company's shareholders adopted the Company's 2000 Stock
Incentive Plan which provides for grants of awards of stock options, restricted
stock, deferred stock or other stock based awards. A total of 3,500,000 shares
of common stock have been reserved for issuance pursuant to the plan.
During the six months ended June 30, 2000, the Company granted both plan
and non-plan options and warrants to purchase a total of 5,366,500 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 ranging from one to ten years. Exercise prices range from $4.00
to $14.875 per share. In addition, the Company canceled five-year options to
purchase a total of 666,850 shares of the Company's common stock.
Termination of Contingent Put Rights
In January 2000, rights to sell back to the Company 50,000 shares, valued
at $644, issued to one of the sellers in connection with the acquisitions,
terminated due to the Company's common stock exceeding the price agreed to in
the acquisition agreement for the period specified in the acquisition agreement.
(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 six months ended June 30, 2000 were 13,421,866
and 11,837,473, respectively, and 7,762,986 and 7,418,699, respectively, for 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 2,004,431 at June 30, 2000 and
1,428,931 at June 30, 1999.
8
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(7) Supplemental Cash Flow Information
Cash paid for interest expense was $1,756 and $2,176 for the six months
ended June 30, 2000 and 1999, respectively.
Included in the total options and warrants granted during the six months
ended June 30, 2000 were options and warrants granted to various consultants.
These options were valued at $335 using the Black-Scholes valuation model, have
been included in prepaid expenses and are being amortized over the period of
service.
(8) Subsequent Events
Subsequent to June 30, 2000, the Company granted both plan and non-plan
options and warrants to purchase a total of 13,500 shares of the Company's
common stock to consultants. The options vest at various times, have an exercise
period of five years and an average exercise price of $2.06 per share. In
addition, the Company cancelled options and warrants to purchase 308,250 shares
of the Company's common stock.
9
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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 SB-2 (No. 333-95793). The
Company's actual results may differ materially from the results discussed in any
forward looking statement.
The Company is a leading provider of premium spoken word audio content and
products in hard goods and digital download formats via the Internet and various
offline methods. The Company markets its audiobooks through Audio Book Club, the
largest membership-based club of its kind with approximately 1.9 million
members, and the Company's audiobookclub.com web site. The Company sells
audiobooks in a club format through its Audio Book Club and via the Internet
through its audiobookclub.com site, and on a retail basis through the audiobook
channel on MediaBay.com. The Company sells its old time radio and classic video
programs on a retail basis through direct marketing and via the Internet,
through the old time radio and classic video channels on MediaBay.com, as well
as on a wholesale basis to major retailers. The Company offers downloads of
audiobooks, old-time radio shows and current and archived newspapers and
magazines at MediaBay.com.
The Company has undertaken a significant review of its strategic objectives
and operations. While the Company remains committed to growth and believes
strongly in both the potential of its core markets and the future of digital
downloads of premium spoken word content, its priorities for the next eighteen
months are to operate its core businesses on a more profitable basis and to
improve cash flow. To this end, the Company has implemented a number of key
initiatives. As a result of implementing a standardized merchandising program in
its catalogs, the Company has begun to reduce the numbers of SKUs (Store Keeping
Units) in its inventory. The Company has revised the logic used in determining
customer shipments which it believes will reduce the level of customer returns
and decrease the level of required inventory. The Company has revised its
marketing strategies to focus on the acquisition of members who generate higher
profits and will therefore substantially reduce the amounts expended on
advertising both on the Internet and in direct mail. The Company believes these
initiatives will substantially increase the profitability and improve the cash
flow of its operations without reducing current sales levels.
As a result of the timing of the Company's marketing activities within a
given year or quarter, the impact of capitalizing new member direct response
marketing costs and the timing of acquisitions and related costs, including
increased interest expense and goodwill
10
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and other intangible asset amortization expense, comparisons of the Company's
historical operating results from period to period may not be meaningful.
Results of Operations
(Dollars in thousands except per share data)
Three Months Ended June 30, 2000 Compared to Three Months Ended
June 30, 1999
Gross sales for the three months ended June 30, 2000 were $16,175, an
increase of $3,630 or 28.9% as compared to $12,545 for the three months ended
June 30, 1999. The increase in gross sales was primarily attributable to
increased sales of audiobooks resulting from the continued expansion of Audio
Book Club's membership base and sales to members of Doubleday Direct's
Audiobooks Direct for the three months ended June 30, 2000. Doubleday Direct's
Audiobooks Direct was acquired in June 1999.
In addition, the Company recorded $1,000 of marketing revenue from I-Jam
Multimedia LLC for promotion of the I-Jam digital audio player. I-Jam has agreed
to create and promote an exclusive special edition Win-Jam digital audio player,
the first player to exclusively support the Microsoft Windows Media Format, to
MediaBay's millions of customers and monthly Web site visitors. I-Jam has agreed
to pay MediaBay $2,000 for promotion and marketing of I-Jam products and the
I-Jam brand through MediaBay's extensive online and offline-marketing channels.
Under the terms of the agreement and based on services provided, the Company has
recorded $1,000 through June 30, 2000.
Returns, discounts and allowances for the three months ended June 30, 2000
were $3,699 or 22.9% of gross sales as compared to $3,582 or 28.6% of gross
sales for the prior comparable period. The decrease in returns as a percentage
of gross sales is primarily due to decreased returns from Audio Book Club
members.
Principally as a result of higher gross sales, net sales for the three
months ended June 30, 2000 increased $3,513 or 39.2% to $12,476.
Cost of sales for the three months ended June 30, 2000 increased $1,866 to
$6,548 from $4,682 in the prior comparable period. Gross profit increased $1,648
to $5,929 for the three months ended June 30, 2000 from $4,281 in the prior
comparable period. Gross profit as a percentage of net sales was relatively
constant for both periods.
Advertising and promotion expenses (for acquisition and retention of
members) increased $1,525 or 94.7% to $3,136, for the three months ended June
30, 2000 as compared $1,611 in the prior comparable period. 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 "Reporting on Advertising Costs" and amortize these costs over the period
of future benefit which was estimated at 30 months based on the Company's
historical experience over the preceding five years. The increase in advertising
and promotion expenses resulted primarily from the increased amortization
expense related to previously capitalized advertising costs.
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General and administrative expenses for the three months ended June 30,
2000 increased $1,438 to $3,462 from $2,024 for the three months ended June 30,
1999. General and administrative expense increases are principally attributable
to the increase in sales and a corresponding increase in bad debt expense and
increased personnel and related costs as the Company continues to grow and
expand MediaBay.com and its commitment to downloadable spoken word.
Depreciation and amortization expenses for the three months ended June 30,
2000 were $1,964, an increase of $513, as compared to $1,451 for the prior
comparable period. The increase in depreciation expense relates to computer
equipment and amortization of web development costs as the Company continues to
increase its web presence and expand its digital download capabilities. The
increase in amortization is attributable to the amortization of goodwill and
other intangible assets in connection with the Company's acquisition of
Doubleday Direct's Audiobooks Direct.
Net interest expense for the three months ended June 30, 2000 was $511 as
compared to $1,119 for the three months ended June 30, 1999. The Company has
reduced its debt by $39,044 since June 30, 1999.
Net loss before an extraordinary item for the three months ended June 30,
2000 was $3,143 or $.23 per share compared to a net loss of $1,924 or $.25 per
share for the three months ended June 30, 1999.
In April 2000, the Company repaid $20,293 of its bank debt out of the net
proceeds from its follow-on primary offering, representing the remaining term
portion of such debt. Accordingly, the Company recorded an extraordinary loss of
$2,152 relating to the write-off of deferred financing fees incurred in
connection with such debt.
Net loss for the three months ended June 30, 2000 was $5,295 or $.39 per
share compared to the net loss of $1,924 or $.25 per share for the three months
ended June 30, 1999.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Gross sales for the six months ended June 30, 2000 were $32,302 an increase
of $6,930 or 27.3%, as compared to $25,372 for the six months ended June 30,
1999. The increase in gross sales was primarily attributable to increased sales
of audiobooks resulting from the continued expansion of Audio Book Club's
membership base, sales to members of Doubleday Direct's Audiobooks Direct for
the six months ended June 30, 2000 and the marketing revenue from I-Jam.
Returns, discounts and allowances for the six months ended June 30, 2000
were $8,880 or 27.5% of gross sales as compared to $6,480 or 25.5% of gross
sales for the prior comparable period. The increase in returns as a percentage
of gross sales is primarily due to an increase in Audio Book Club gross sales
which have a historically higher return rate than the Company's radio and video
products. The 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 six months
ended June 30, 2000 increased $4,530 or 24% to $23,422.
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Cost of sales for the six months ended June 30, 2000 increased $2,989 to
$12,297 from $9,308 in the prior comparable period. Gross profit increased
$1,541 to $11,125 for the six months ended June 30, 2000 from $9,584 in the
prior comparable period. Gross profit as a percentage of net sales declined
principally as a result of a change in the product and customer mix of sales
among the product lines including the promotion of discounted products in 2000.
Such promotions are expected to be less significant in the future.
Advertising and promotion expenses (for acquisition and retention of
members) increased $2,479 to $5,576, for the six months ended June 30, 2000 as
compared to $3,097 in the prior comparable period. 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
"Reporting on Advertising Costs" and amortize these costs over the period of
future benefit which was estimated at 30 months based on the Company's
historical experience over the preceding five years. The increase in advertising
and promotion expenses resulted primarily from the increased amortization
expense related to previously capitalized advertising costs.
General and administrative expenses for the six months ended June 30, 2000
increased $2,605 to $6,644 from $4,039 for the six months ended June 30, 1999.
General and administrative expense increases are principally attributable to the
increase in sales and a corresponding increase in bad debt expense and increased
personnel and related costs as the Company continues to grow and expand
MediaBay.com and its commitment to the digital age of spoken word delivery.
Depreciation and amortization expenses for the six months ended June 30,
2000 were $3,947, an increase of $1,082, as compared to $2,854 for the prior
comparable period. The increase in depreciation expense relates to computer
equipment and amortization of web development costs as the Company continues to
increase its web presence and expand its digital download capabilities. The
increase in amortization is attributable to the amortization of goodwill and
other intangible assets in connection with the Company's acquisition of
Doubleday Direct's Audiobooks Direct.
Net interest expense for the six months ended June 30, 2000 was $1,578 as
compared to $2,172 for the six months ended June 30, 1999. The Company has
reduced its debt by $39,044 since June 30, 1999.
Net loss before an extraordinary item for the six months ended June 30,
2000 was $6,620 or $.56 per share compared to a net loss of $2,589 or $.35 per
share for the six months ended June 30, 1999.
In April 2000, the Company repaid $20,293 of its bank debt out of the net
proceeds from its follow-on primary offering, representing the remaining term
portion of such debt. Accordingly, the Company recorded an extraordinary loss of
$2,152 relating to the write-off of deferred financing fees incurred in
connection with such debt.
Net loss for the six months ended June 30, 2000 was $8,772 or $.74 per
share compared to the net loss of $2,589 or $.35 per share for the three months
ended June 30, 1999.
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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 our
principle shareholders. Our capital requirements have been and will continue to
be significant due to, among other things, expansion of operations, costs
associated with direct mail campaigns, other new member recruitment advertising
and promotion and brand building, expanding Internet operations and investments
in content and infrastructure to support the digital downloads of premium spoken
word content. Historically, the Company's cash requirements have exceeded cash
flows from operations.
During the six months ended June 30, 2000, the Company's cash decreased
$64, as the Company used net cash of $5,785 for operating activities and $3,818
for investing activities and provided cash from financing activities of $9,539.
Net cash used in operations for the six months ended June 30, 2000
principally consisted of the net loss of $8,772, partially offset by
depreciation and amortization of $3,947 and an extraordinary write-off of
deferred financing fees of $2,152 relating to the repayment of $21,723 in bank
debt, and decreases in accounts receivable of $2,770 and prepaid expenses of
$109, respectively. Cash flow used in operations was also effected by increases
in inventories of $491, royalty advances of $1,163 and a net increase in
deferred member acquisition costs of $3,770.
The increase in inventory in the six months ended June 30, 2000 is
primarily due to the timing of purchases. The increase in royalty advances is
primarily attributable to renewal and expansion (to include digital downloads)
of a licensing agreement with one of the Company's significant publishers, as
well as continued licensing of both audiobook club rights and digital
downloadable content. The decrease in accounts receivable was primarily
attributable to the timing of sales and related collections among the Company's
businesses including the collection of wholesale receivables from the sale of
radio programs during the Holiday selling season. The increase in deferred
member acquisition costs is attributable to both the Audio Book Club and old
time radio Spring direct response advertising campaigns.
Cash used in investing activities during the six months ended June 30, 2000
was for the acquisition of fixed assets, principally for computer equipment,
audio equipment for the Radio Group and web development and additions to
goodwill for additional costs incurred in the acquisitions. The Company invested
$2,000 in I-Jam MultiMedia LLC, a pioneer in the development of portable digital
audio devices. The Company acquired a 4% equity interest in I-Jam with an option
to purchase an additional equity interest.
In March 2000, the Company closed its offering of 3,650,000 shares of its
Common stock at a price of $9.00 per share for gross proceeds of $32,850. Net
proceeds after expenses of $3,418, including the underwriting discount and
accountable expenses, legal and accounting fees and printing expenses, were
$29,432.
In January and February 2000, Evan Herrick, the son of the Company's
chairman, loaned the Company an additional $2,000 in the form of 9% convertible
promissory notes due December 31, 2004. The loans evidenced by the notes were
intended to be short-term
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and serve as a "bridge" to replacement financing. At the time of issuance of the
convertible notes, the Company's board of directors resolved to seek to replace
or refinance the convertible notes and accept a proposal for refinancing,
whether or not (i) as favorable as the convertible notes including, without
limitation, providing for a higher interest rate or lower conversion price, (ii)
requiring the issuance of equity securities and/or (iii) requiring the payment
of fees.
In January and February 2000, two unaffiliated third parties converted
$4,224 principal amount of convertible promissory notes into 379,662 shares of
the Company's common stock.
In March 2000, the Company made a quarterly payment of principal on its
term debt of $930. In April 2000, the Company repaid $20,293 of its bank debt
out of the net proceeds from the follow-on primary offering, representing the
remaining term portion of such debt.
In April 2000, the Company amended the terms of its remaining revolving
debt with its lenders to calculate the amount available to be borrowed based on
a formula of eligible receivables and inventory, as defined. The revolving
credit facility bears interest at prime plus an applicable margin. At June 30,
2000 the interest rate was 12.00%. In June 2000, the Company paid down its
short-term bank debt by $500. In August 2000, the Company further amended its
loan agreement. The revolving debt currently matures on November 30, 2000 and
includes covenants relative to the Company's operating performance. The Company
is currently working to replace this revolving credit facility.
In April 2000, the Company's Board of Directors determined that reducing
the conversion price of the $3,000 principal amount 9% convertible notes due
December 31, 2004 issued to Evan Herrick to the then current market value of the
Company's common stock would be more favorable to the Company than accepting the
alternatives available to the Company to refinance or replace the notes. The
Company revised the terms of the $3,000 principal amount 9% convertible
promissory notes due December 31, 2004 to Evan Herrick. The notes are currently
convertible into shares of the Company's common stock at $4.00 per share, which
was the market value on the date the terms were revised.
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. 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 the
Company 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.
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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.
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Part II - Other Information
Item 2. Changes in Securities and Use of Proceeds.
During the three months ended June 30, 2000, we issued options under our
1999 Stock Incentive Plan to purchase a total of 550,250 shares of common stock
to certain individuals, including officers and consultants. We also issued
options under our 2000 Stock Incentive Plan to purchase 2,400,250 of common
stock to certain individuals including officers and, in addition, we granted
warrants to acquire 850,000 shares of common stock. We relied on the exemptions
provided in Section 4(2) of the Securities Act of 1933 in connection with the
issuance of such options.
Item 4. Submission of Matters to Vote of Security Holders
An Annual Meeting of Shareholders was held on June 23, 2000, at which time
Mr. Howard Herrick and Mr. Carl Wolf were reappointed to serve as Class III
directors, in each case, until the Annual Meeting of Shareholders of the Company
to be held in 2003. Shareholder voting for these directors was as follows:
Director Votes For Votes Withheld
-------- --------- --------------
Howard Herrick 9,579,738 226,484
Carl Wolf 9,585,888 220,334
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
Michael Herrick II 2002
Roy Abrams II 2002
Carl Amari II 2002
In addition at the Meeting, the Company's shareholders approved the
following matters:
(i) an amendment to the Company's Articles of Incorporation to increase the
authorized common stock from 75,000,000 to 150,000,000 by a vote of 9,292,058
and 496,804 against and 17,360 abstaining; and
(ii) the adoption and approval of the Company's 2000 Stock Incentive Plan
by a vote of 4,824,201 for, 624,526 against and 41,100 abstaining.
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Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 3.1 Articles of Amendment to Articles of Incorporation of the
Company
Exhibit 27 Financial Data Schedule
(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: August 14, 2000 By: /s/ Michael Herrick
----------------------------------
Michael Herrick
Chief Executive Officer
Dated August 14, 2000 By: /s/ John F. Levy
----------------------------------
John F. Levy
Chief Financial and
Accounting Officer
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