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, 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 November 13, 2000, there were 13,861,866 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, 2000
Form 10-QSB
Index
Page
----
PART I: Financial Information
Item 1: Financial Statements
Consolidated Balance Sheet at September 30, 2000 (unaudited) 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 1999 and 2000 (unaudited) 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 2000 (unaudited) 5
Notes to Consolidated 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 16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
Financial Data Schedule 18
2
<PAGE>
Part I: Financial Information
Item 1: Financial Statements
MEDIABAY, INC.
Consolidated Balance Sheet
September 30, 2000
(Dollars in thousands)
(Unaudited)
Assets
<TABLE>
<CAPTION>
<S> <C>
Current assets:
Cash and cash equivalents $ 31
Accounts receivable, net of allowances for sales returns and
doubtful accounts of $3,997 4,661
Inventory 6,596
Prepaid expenses and other current assets 1,237
Royalty advances 4,209
Deferred member acquisition costs - current 7,225
--------
Total current assets 23,959
Fixed assets, at cost, net of accumulated
depreciation of $1,386 1,834
Deferred member acquisition costs - non-current 5,682
Non-current prepaid expenses 255
Investment in I-Jam Multimedia LLC 2,000
Other intangibles, net 8,069
Goodwill, net 48,020
--------
$ 89,819
========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 15,280
Short-term debt 6,580
--------
Total current liabilities 21,860
--------
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 put 3,639
Common stock; no par value, authorized 150,000,000 shares;
13,421,866 issued and outstanding 93,620
Contributed capital 3,791
Accumulated deficit (43,067)
--------
Total common stockholders' equity 54,344
--------
$ 89,819
========
</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 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales $ 16,614 $ 12,854 $ 41,986 $ 45,156
Returns, discounts and allowances 4,817 3,125 11,297 12,005
-------- -------- -------- --------
Sales, net 11,797 9,729 30,689 33,151
Cost of sales 5,729 5,452 15,037 17,749
-------- -------- -------- --------
Gross profit 6,068 4,277 15,652 15,402
Expenses:
Advertising and promotion 2,259 2,520 5,356 8,096
General and administrative 2,565 3,365 6,604 10,009
Depreciation and Amortization 1,997 1,980 4,862 5,927
-------- -------- -------- --------
Operating loss (753) (3,588) (1,170) (8,630)
Interest expense, net of interest income of $31 and $10 for
the three months ended September 30, 1999 and 2000 and $118
and $106 for the nine months ended September 30,1999 and
2000, respectively (1,190) (541) (3,362) (2,119)
-------- -------- -------- --------
Loss before extraordinary item (1,943) (4,129) (4,532) (10,749)
Extraordinary loss on early extinguishment of debt (2,152)
-------- -------- -------- --------
Net loss $ (1,943) $ (4,129) $ (4,532) $(12,901)
======== ======== ======== ========
Basic and diluted loss per share
Loss before extraordinary item $ (.22) $ (.31) $ (.57) $ (.87)
Extraordinary loss on early extinguishment of debt (.17)
-------- -------- -------- --------
Net loss $ (.22) $ (.31) $ (.57) $ (1.04)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MEDIABAY, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,532) $(12,901)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 4,862 5,927
Amortization of deferred member acquisition costs 807 4,195
Amortization of deferred financing fees 273 325
Extraordinary loss on early extinguishment of debt -- 2,152
Changes in asset and liability accounts:
(Increase) decrease in accounts receivable, net (1,951) 4,231
(Increase) decrease in inventory (234) 587
(Increase) decrease in prepaid expenses (811) 101
Increase in royalty advances (1,167) (1,274)
Increase in deferred member acquisition costs (7,337) (7,807)
Increase (decrease) in accounts payable and accrued expenses 4,288 (1,275)
-------- --------
Net cash used in operating activities (5,802) (5,739)
-------- --------
Cash flows from investing activities:
Capital expenditures (404) (805)
Maturity of short-term investment 500 100
Purchase of short-term investment (100) --
Acquisition of Audiobooks Direct (18,875) --
Investment in I-Jam -- (2,000)
Additions to goodwill relating to acquisitions (850) (1,207)
-------- --------
Net cash used in investing activities (19,729) (3,912)
-------- --------
Cash flows from financing activities:
Increase in borrowings under amended credit agreement 11,080 --
Net proceeds from issuance of common stock 23,840 29,410
Proceeds from issuance of long-term debt 4,350 2,000
Payments of long-term debt (14,797) (21,723)
Increase in deferred financing costs (763) (203)
-------- --------
Net cash provided by financing activities 23,710 9,484
-------- --------
Net decrease in cash and cash equivalents (1,821) (167)
Cash and cash equivalents at beginning of period 2,686 198
-------- --------
Cash and cash equivalents at end of period $ 865 $ 31
======== ========
</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. (the "Company"), a Florida corporation, was formed on August
16, 1993. 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 sells audiobooks in a club format through
its Audio Book Club, the largest membership-based club of its kind with
approximately 1.9 million members, 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.
(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.
6
<PAGE>
(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.
(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, of $6,580
principal amount, bears interest at prime plus an applicable margin. At
September 30, 2000 the interest rate was 12.0%. The facility matures on November
30, 2000. The Company is currently in discussions with its lenders to extend the
terms of this debt and also in discussions with other lenders to replace this
facility.
In January and February 2000, Norton Herrick sold $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 August 2000, Mr. Herrick sold the remaining $2,776 principal amount of
the note issued to him in December 1998 to two unaffiliated third parties. The
terms of subordinated debt were modified so that the third parties agreed to
waive any interest due to them and convert the entire subordinated debt by
December 31, 2000, and the conversion price was fixed at $1.80 per share of
common stock. Under a December 1998 letter agreement, the Company issued to
Norton Herrick warrants to purchase an additional 64,779 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 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
7
<PAGE>
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 and August 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 $1.75 per
share, which was the market value on the date the terms were revised. Evan
Herrick has waived interest on the notes from July 1, 2000 to December 31, 2000
and after December 31, 2000 has agreed to accept payment of interest in cash or
common stock at the Company's option.
(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 $3,440 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 nine months ended September 30, 2000, the Company granted both
plan and non-plan options and warrants to purchase a total of 5,652,000 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
$1.625 to $14.875 per share. In addition, the Company cancelled options and
warrants to purchase a total of 1,459,350 shares of the Company's common stock.
8
<PAGE>
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 nine months ended September 30, 2000 were
13,421,866 and 12,369,459, respectively, and 8,794,455 and 7,882,324,
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 1,018,262 at September 30, 2000 and
1,387,430 at September 30, 1999.
(7) Supplemental Cash Flow Information
Cash paid for interest expense was $1,955 and $2,739 for the nine months
ended September 30, 2000 and 1999, respectively.
Included in the total options and warrants granted during the nine months
ended September 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 benefit.
(8) Subsequent Events
Subsequent to September 30, 2000, the Company granted plan options to
purchase a total of 112,000 shares of the Company's common stock to employees.
The options vest at various times, have an exercise period of five years.
Exercise prices range from $2.25 to $5.00 per share. In addition, the Company
cancelled options and warrants to purchase 86,000 shares of the Company's common
stock.
Subsequent to September 30, 2000, an unaffiliated third party converted
$792 principal amount of the convertible subordinated notes into 440,000 shares
of the Company's common stock.
9
<PAGE>
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.
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.
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 and other intangible asset amortization
expense, comparisons of the Company's historical operating results from period
to period may not be meaningful.
10
<PAGE>
Results of Operations
(Dollars in thousands except per share data)
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
Gross sales decreased to $12,854 for the three months ended September 30,
2000 from $16,614 for the three months ended September 30, 1999. The decrease in
gross sales was partially attributable to a review of the Company's operations
which led to the elimination of sales that did not provide margins and returns
acceptable to the Company. The Company also revised the logic used in
determining customer shipments as described above, which while reducing sales of
audiobooks, also reduced the level of customer returns and decreased the level
of required inventory. The average selling price of an audiobook sold was also
lower due to an implementation in January 2000 of everyday low prices, with
discounts on all audiobook titles of at least 20%, and discounting and special
promotions to sell audiobook titles no longer sold in its catalogs. The Company
is eliminating everyday low pricing and has sold the bulk of audiobook titles no
longer offered in its catalogs.
Returns, discounts and allowances for the three months ended September 30,
2000 were $3,125 or 24.3% of gross sales as compared to $4,817 or 29.0% of gross
sales for the prior comparable period. The decrease in returns as a percentage
of gross sales is principally due to lower returns from sales to members of the
Audiobook Club as a result of the initiatives described above.
Principally as a result of lower gross sales partially offset by lower
returns, net sales for the three months ended September 30, 2000 decreased to
$9,729 from $11,797.
Cost of sales decreased $277 to $5,452 for the three months ended September
30, 2000 from $5,729 in the prior comparable period. Gross profit was $4,277 for
the three months ended September 30, 2000 as compared to $6,068 for the three
months ended September 30, 1999. The reduction in gross profit is due to reduced
sales of audiobooks and a reduction in the average price of an audiobook sold
due to the implementation of everyday low prices in January 2000, discounting
and special promotions to sell audiobook titles no longer offered in Audio Book
Club catalogs and discounts and special promotions at the old-time radio
businesses. The Company is eliminating everyday low pricing and has sold the
bulk of its no longer offered audiobook titles. The Company has substantially
reduced the discounts and special promotions for its old-time radio products.
Advertising and promotion expenses (for acquisition and retention of
members) increased $261 to $2,520 for the three months ended September 30, 2000
as compared to $2,259 in the prior comparable period. The Company reduced its
spending on new customer acquisitions by $1,124 in the third quarter of 2000 to
$1,536 from $2,660 in the third quarter of 1999. The reduction in advertising
expenditures did not substantially reduce the members acquired, as the Company
was able to reduce the cost to acquire new members by 38.6%. 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. Since 1999 was the first year the Company capitalized
new member acquisitions costs the Company capitalized a very large portion of
direct response advertising expenditures. In the third quarter of 1999, the
Company had a
11
<PAGE>
net increase in deferred member acquisition costs of $2,079 as compared to a net
decrease in deferred member acquisition costs of $158 in the third quarter of
2000. This created a difference in reported advertising expenses of $2,237
between the two years. The difference between amounts expended for direct
response advertising and the amounts recorded as expenses should be less in
beginning in the first quarter of 2001 which will result in improved
comparability between periods.
General and administrative expenses increased to $3,365 for the three
months ended September 30, 2000 from $2,565 for the prior comparable period.
General and administrative expense increases are principally attributable to
increased personnel and related costs. The Company has taken several steps to
reduce general and administrative expenses including reducing personnel,
investor and public relation expenses and consulting expenses, including outside
Internet development and maintenance expenses.
Depreciation and amortization expenses decreased $17 for the three months
ended September 30, 2000 to $1,980 from $1,997 for the prior comparable period.
Net interest expense for the three months ended September 30, 2000 was $541
as compared to net interest expense of $1,190 for the three months ended
September 30, 1999. The Company has reduced its debt by $25,877 since September
30, 1999.
Net loss for the three months ended September 30, 2000 was $4,129 or $.31
per share compared to the net loss of $1,943 or $.22 per share for the three
months ended September 30, 1999.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
Gross sales increased $3,170 to $45,156 for the nine months ended September
30, 2000 from $41,986 for the nine months ended September 30, 1999. The increase
in gross sales was primarily attributable to sales to former members of
Audiobooks Direct in the first six months of 2000 and marketing revenue from
I-Jam Multimedia LLC, partially offset by intentional reductions in sales based
on a Company review of operations and by reductions in audiobooks sold and the
average selling price of audiobooks, as described above. Audiobooks Direct was
acquired in June 1999. Through September 30, 2000, the Company has recorded
$1,100 of revenue from I-Jam for promotion of and marketing of I-Jam products
and the I-Jam brand through MediaBay's extensive online and offline marketing
channels.
Returns, discounts and allowances for the nine months ended September 30,
2000 were $12,005 or 26.6% of gross sales as compared to $11,297 or 26.9% of
gross sales for the prior comparable period. The decrease in returns as a
percentage of gross sales is principally due to the initiatives described above.
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, 2000 increased $2,462 to $33,151 from $30,689.
Cost of sales increased $2,712 to $17,749 for the nine months ended
September 30, 2000 from $15,037 in the prior comparable period. Gross profit
decreased $250 to $15,402 for the nine months ended September 30, 2000 from
$15,652 in the prior comparable period. The reduction in gross profit is due to
reduced sales of audiobooks and a reduction in the average price of an audiobook
sold due to implementation of everyday low prices and special promotions to sell
audiobook titles no longer offered in
12
<PAGE>
Audio Book Club catalogs and discounts and special promotions at the old-time
radio businesses. The Company is eliminating everyday low pricing and has sold
the bulk of its no longer offered audiobook titles. The Company has
substantially reduced the discounts and special promotions for its old-time
radio product.
Advertising and promotion expenses (for acquisition and retention of
members) increased $2,740 to $8,096 for the nine months ended September 30, 2000
as compared to $5,356 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 increased $3,405 to $10,009 for the
nine months ended September 30, 2000 from $6,604 for the prior comparable
period. General and administrative expense increases are principally
attributable to 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.
Depreciation and amortization expenses increased $1,065 for the nine months
ended September 30, 2000 to $5,927 from $4,862 for the prior comparable period.
The increase in depreciation expense relates to computer equipment and
amortization of web development costs. 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 nine months ended September 30, 2000 decreased
$1,243 to $2,119 as compared to $3,362 for the nine months ended September 30,
1999. The reduction in interest expense is attributable to the reduction in the
Company's debt by $39,044 since June 30, 1999.
Net loss before an extraordinary item for the nine months ended September
30, 2000 was $10,749 or $.87 per share as compared to a net loss of $4,532 or
$.57 per share for the nine months ended September 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. 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 nine months ended September 30, 2000 was $12,901 or $1.04
per share compared to the net loss of $4,532 or $.57 per share for the nine
months ended September 30, 1999.
Liquidity and Capital Resources
Since its founding, the Company has funded its cash requirements through
sales of equity and debt securities and borrowings from financial institutions
and its principal shareholders. The Company's capital requirements have been and
will continue to be significant due to among other things, expansion of
operations, cost associated with acquisition of new customers and investments in
content and infrastructure to support the digital downloads of spoken word
content. Historically, the Company's cash requirements
13
<PAGE>
have exceeded cash flows from operations and there can be no assurance that
future cash flows from operations will be sufficient to meet the Company's cash
flow requirements.
During the nine months ended September 30, 2000, the Company's cash
decreased by $167, as the Company used net cash of $5,739 for operating
activities and $3,912 for investing activities and had cash provided from
financing activities of $9,484.
Net cash used in operations for the nine months ended September 30, 2000
principally resulted from the net loss of $12,901, partially offset by
depreciation and amortization of $5,927 and an extraordinary write-off of
deferred financing fees of $2,152 relating to the repayment of $21,723 in bank
debt. Cash flow used in operations was also effected by decreases in accounts
receivable of $4,231, inventory of $587 and prepaid expenses of $101 and
increases in royalty advances of $1,274, a net increase in deferred member
acquisition costs of $3,612 and a decrease in accounts payable and accrued
expenses of $1,274.
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 decrease in inventory is due to the
implementation of a standardized merchandising program in the Company's Audio
Book Club catalogs, which has resulted in a reduction in the numbers of SKUs
(Store Keeping Units) in its inventory. The increase in deferred member
acquisition costs is attributable to amounts expended for both the Audio Book
Club and old time radio direct response advertising campaigns. 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.
Cash used in investing activities during the nine months ended September
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
$29,410.
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 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.
14
<PAGE>
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 September 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 in the
principal amount of $6,580 currently matures on November 30, 2000. The Company
is currently in discussions with its lenders to extend the terms of this debt
and also in discussions with other lenders to replace this facility.
In April and August 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 $1.75 per
share, which was the market value on the date the terms were revised.
In August 2000, Mr. Norton Herrick sold his $2,776 convertible note to two
unaffiliated third parties. The terms of subordinated debt were modified so that
the two third parties agreed to waive any interest due to them and they also
agreed to convert the entire subordinated debt by December 31, 2000. In October
and November of 2000, one of the third parties converted $792 principal amount
of the notes into 440,000 shares of common stock.
Quarterly Fluctuations
The Company's operating results vary from period to period as a result of
seasonal buying by old time radio customers, the timing of Audio Book Club
member mailings, purchasing patterns of members, the impact of capitalizing
direct response advertising, 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.
15
<PAGE>
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 2. Changes in Securities and Use of Proceeds.
During the three months ended September 30, 2000, we issued options under
our 2000 Stock Incentive Plan to purchase a total of 112,000 shares of common
stock to employees. 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 6: Exhibits and Reports on Form 8-K.
(a) Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
16
<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 13, 2000 By: /s/ Michael Herrick
-----------------------------------
Michael Herrick
Chief Executive Officer
Dated November 13, 2000 By: /s/ John F. Levy
-----------------------------------
John F. Levy
Chief Financial and Accounting Officer
17
